Baturin v. Comm'r of Internal Revenue

31 F.4th 170

Vitaly Nikolaevich BATURIN, Petitioner – Appellee,

v.COMMISSIONER OF INTERNAL REVENUE, Respondent – Appellant.

Aaron Z. Roper, Court-Assigned Amicus Counsel.

No. 20-1648

United States Court of Appeals, Fourth Circuit.

Argued: March 8, 2022

Decided: April 6, 2022

ARGUED: Ivan C. Dale, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellant. Aaron Z. Roper, WILLIAMS & CONNOLLY LLP, Washington, D.C., for Court-Assigned Amicus Counsel. Vitaly Nikolaevich Baturin, Appellee Pro Se. ON BRIEF: David A. Hubbert, Acting Assistant Attorney General, Joan I. Oppenheimer, Tax Division, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellant.

Before MOTZ and DIAZ, Circuit Judges, and KEENAN, Senior Circuit Judge.

Reversed and remanded by published opinion. Judge Motz wrote the opinion, in which Judge Diaz and Senior Judge Keenan joined.

DIANA GRIBBON MOTZ, Circuit Judge:

The Tax Court held that payments to a Russian scientist working in the United States were exempt from taxation under the United States-Russia Tax Treaty.¹ In doing so, the Tax Court misunderstood the basis of the Treaty's distinction between a tax-exempt "grant, allowance, or other similar payments" and taxable "salaries, wages, and other similar remuneration." For this reason, we reverse and remand for further proceedings consistent with this opinion.

I.

In 2010 and 2011 (the two years at issue here), Dr. Vitaly Baturin, a Russian national and physicist, worked at Jefferson Lab, a Department of Energy facility in Newport News, Virginia. Jefferson Lab operates a particle accelerator, which smashes particles together to help researchers learn about the structure of the universe. Dr. Baturin's work involved a detector that would better enable researchers to see what happens at the sub-atomic level inside the accelerator.

During this period, Dr. Baturin held a J-1 exchange visitor visa as a researcher sponsored by Jefferson Lab. He received W-2s from Jefferson Lab that reflected income of $76,729 and $79,061, in 2010 and 2011, respectively, for "wages, tips, [or] other comp[ensation]." He filed 1040-NR (nonresident) forms with the IRS, which claimed an exemption as to the entire amount he earned from Jefferson Lab each year pursuant to the United States-Russia Tax Treaty. In 2014, the IRS issued Dr. Baturin a Notice of Deficiency, stating that he owed a total of $22,229 in income taxes on his payments from Jefferson Lab for 2010 and 2011. After some administrative discussions, Dr. Baturin pro se petitioned the Tax Court, arguing that the Treaty exempted his income from taxation.

The Tax Court agreed with Dr. Baturin, holding that the Treaty shielded from taxation his entire income in 2010 and 2011 as "a grant, allowance, or similar payments." The Tax Court rejected the argument of the Commissioner of Internal Revenue that wages are categorically ineligible for exemption from taxation under the Treaty, reasoning that "wages may be eligible for exemption so long as they are similar to a grant or allowance." Tax Ct. Op. at 19.

The Commissioner then noted this appeal, over which we have jurisdiction pursuant to I.R.C. § 7482(a)(1).² "Decisions of the tax court are subject on appeal to the same standard we apply to civil bench trials on appeal from the district courts. Under this standard, we review factual findings for clear error, legal questions de novo, and mixed questions of law and fact de novo." QinetiQ US Holdings, Inc. v. Comm'r , 845 F.3d 555, 562 (4th Cir. 2017) (internal citations omitted). "Interpretation of an international treaty is an issue of law subject to de novo review." United States v. Al-Hamdi , 356 F.3d 564, 569 (4th Cir. 2004). And "[t]he general rule ... is that a taxpayer claiming immunity from a tax has the burden of establishing his exemption." Norton Co. v. Dep't of Rev. , 340 U.S. 534, 537, 71 S.Ct. 377, 95 L.Ed. 517 (1951).

II.

Ordinarily, any income that a nonresident alien receives for personal services in the United States is taxable in this country. See I.R.C. §§ 864(b)(1) ; 872(a). However, "[t]he provisions of [the tax code] shall be applied to any taxpayer with due regard to any treaty obligation of the United States which applies to such taxpayer." Id. § 894(a)(1). Thus, to resolve the case at hand, we must consider the United States-Russia Tax Treaty.

"The interpretation of a treaty, like the interpretation of a statute, begins with its text." Medellín v. Texas , 552 U.S. 491, 506, 128 S.Ct. 1346, 170 L.Ed.2d 190 (2008). Two articles of that Treaty are particularly relevant here. On the one hand, Article 14 of the Treaty provides:

Subject to the provisions of Articles 15 (Directors' Fees), 16 (Government Service), and 17 (Pensions), salaries, wages, and other similar remuneration derived by a resident of a Contracting State [i.e. , the United States or Russia] in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State.

Art. 14(1) (emphasis added). On the other hand, Article 18 provides:

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 ... scientific ... organization, shall be exempt from tax by that other State ... with respect to the grant, allowance, or other similar payments.

Art. 18(1).³

The text of the Treaty does not define what differentiates "salaries, wages, and other similar remuneration" in Article 14 from a "grant, allowance, or other similar payments" in Article 18. But the text does tell us that these categories are mutually exclusive, given the simple fact that one is taxable and the other is not.

The legislative history of the Treaty's ratification reinforces our conclusion that salaries and grants are exclusive categories. See United States v. Stuart , 489 U.S. 353, 366–67, 109 S.Ct. 1183, 103 L.Ed.2d 388 (1989) (using legislative history of Senate ratification to establish a treaty's meaning). Before the Senate ratified the Treaty, the Assistant Secretary for Tax Policy testified to the Senate Foreign Relations Committee that although "[s]pecial tax relief applies to grants ... received by ... researchers ... the new treaty does not preserve the [predecessor Convention With the Union of Soviet Socialist Republics on Matters of Taxation, U.S.-U.S.S.R., June 20, 1973, 27 U.S.T. 3 (hereinafter "United States-Soviet Union Tax Treaty")] two year exemption of personal service income earned by ... researchers .... It is not the policy of ... either of the two countries to provide special exemptions of the compensation earned by ... researchers." See Tax Conventions With: The Russian Federation, Treaty Doc. 102-39; United Mexican States, Treaty Doc. 103-7; the Czech Republic, Treaty Doc. 103-17; the Slovak Republic, Treaty Doc. 103-18; and the Netherlands, Treaty Doc. 103-6. Protocols Amending Tax Conventions With: Israel, Treaty Doc. 103-16; the Netherlands, Treaty Doc. 103-19; and Barbados, Treaty Doc. 102-41, Before the Sen. Foreign Relations Comm. , 103rd Cong., S. Hrg. 103-335, at 26 (1993) (statement of Leslie B. Samuels, Assistant Sec'y for Tax Pol'y, Treasury Dep't) [hereinafter "Senate Hearing"].⁴ In short, the United States and Russia intentionally drafted the Tax Treaty to narrow a prior exemption that had covered a much broader swathe of researchers' compensation.

Thus, given the Treaty's text and history, we must reject the Tax Court's holding that under the Treaty, "wages may be eligible for exemption so long as they are similar to a grant or allowance." Tax Ct. Op. at 19. The argument of amicus in support of this theory that "[g]rants are routinely paid out as salaries" misses the mark for the same reason. Amicus Br. at 28. Grants may be dispersed periodically , but for purposes of the Treaty, a grant paid as a salary is an oxymoron. The two are dichotomous and mutually exclusive. Either payments are Article 14 wages, salaries, or similar remuneration (and taxable); or they are Article 18 grants, allowances, or other similar payments (and thus tax-exempt). They cannot be both.

The central question in this case is thus whether Jefferson Lab's payments to Dr. Baturin are taxable as "salar[y], wages, [or] other similar remuneration" under Article 14, or tax-exempt as "grant, allowance, or other similar payments" under Article 18.

III.

A.

Beyond establishing mutual exclusivity, however, the United States-Russia Tax Treaty is not very helpful in defining what distinguishes salaries and wages from grants and allowances. But Article 3(2) of the Treaty gives some guidance. It provides:

As regards the application of the Convention by a Contracting State, any term not defined therein shall, unless the context otherwise requires or the competent authorities agree to a common meaning pursuant to [an inapplicable section], have the meaning which it has under the laws of that State concerning the taxes to which this Convention applies.

Art. 3(2) (emphasis added); see also Rebecca M. Kysar, Interpreting Tax Treaties , 101 Iowa L. Rev. 1387, 1412 (2016) ("Tax treaties ... invoke domestic law concepts by leaving terms vague .... The characterization of income is one such area, the outcome of which has a profound effect on tax liability.").

We turn, then, to the law of the United States. As the closest domestic tax law analogue, the Commissioner points us to I.R.C. § 117, which exempts from taxation as a " ‘qualified scholarship’ ... any amount received by an individual as a scholarship or fellowship grant. " I.R.C. § 117(b) (emphasis added). The implementing regulations provide: "[a] fellowship grant generally means an amount paid or allowed to, or for the benefit of, an...