Are Wages Paid to Foreign Researcher Taxable in the U.S.?

Published Categorized as International Tax, Tax
Are Wages Paid to Foreign Researcher Taxable in the U.S.

If a researcher comes to the U.S. on an Exchange Visitor J-1 Status visa and is paid wages for research, are the wages taxable income? The answer is “maybe” according to Baturin v. Commissioner, 153 T.C. 10 (2019).

Facts & Procedural History

The taxpayer is a Russian citizen. He earned $75,000 of wages for performing research in the U.S. The court described his employment arrangement as follows:

Jefferson Science Associates, LLC (JSA), offered petitioner a two-year position as a 12 GeV Upgrade Research Scientist in the Physics Division at the Thomas Jefferson National Accelerator Facility (Jefferson Lab). JSA manages and operates the Jefferson Lab for the U.S. Department of Energy’s Office of Science. JSA’s work is primarily research for the public interest, not for private benefit. JSA personally invited petitioner to join the Jefferson Lab and perform his research; there was no application process.

The taxpayer was in the U.S. with a Exchange Visitor J-1 Status visa. The employer had set aside funds for the taxpayer’s wages before the taxpayer came to the U.S. per the State Department requirements for the visa.

The taxpayer filed a Form 1040NR, U.S. Nonresident Alien Income Tax Return, for 2010 and 2011. He received a refund for 2010, but not 2011. The IRS assessed tax for 2010 and 2011 for the $75,000 of wages. The IRS also assessed tax penalties.

Tax litigation ensued. The question for the court was whether the $75,000 wages were taxable in the U.S.

Are Research Wages Taxable

Wages are typically taxable in the U.S. But the U.S. tax treaties override the normal tax rules.

Article 18 of the U.S.-Russia Treaty was at issue in this case. Here is the language:

An individual who is a resident of a Contracting State at the beginning of his visit to the other Contracting State and who is temporarily present in that other State for the primary purpose of:* * * * * * *

c) studying or doing research as a recipient of a grant, allowance, or other similar payments from a governmental, religious, charitable, scientific, literary, or educational organization, shall be exempt from tax by that other State with respect to payments from abroad for the purpose of his maintenance, education, study, research, or training, and with respect to the grant, allowance, or other similar payments.

The exemption does not apply to income from research “undertaken not in the public interest but primarily for the private benefit of a specific person or persons.” The exemption for research cannot “extend for a period exceeding five years.”

Are Wages Paid to a Researcher a Grant?

The more narrow question was whether wages paid to a researcher are a “grant, allowance, or other similar payments” under this treaty provision.

The phrase “”grant, allowance, or other similar payments” is not defined in the treaty. The IRS argued that it does not include wages.

The court considered the common definition and the policy for the treaty exemption. In doing so, it concluded that the exception applied in this case as the research was in the public interest and the grant specifically named the taxpayer.

The court said this ruling only applies to situations where the taxpayer is named in the grant. If the grant is broad and only names an organization or entity for which the taxpayer works, the treaty exclusion does not apply.

This provides much needed clarity for the tax rules for researchers in the U.S. on a Exchange Visitor J-1 Status visa.

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