The United States Tax Court’s recent memorandum opinion in Kramarenko v. Commissioner, T.C. Memo. 2025-61, provides a crucial analysis for tax professionals concerning the interpretation and application of tax treaty provisions, particularly those related to exemptions for students, trainees, and researchers. This case reinforces the distinction between taxable compensation for services and tax-exempt grants, emphasizing the "quid pro quo" doctrine as a cornerstone of the analysis.

Background of the Case

The petitioner, Inga I. Kramarenko, held a Ph.D. in Biophysics and worked full-time as a postdoctoral researcher (post-doc) at a university’s medical institution, the Medical University of South Carolina (MUSC). In this capacity, she performed laboratory work, received further training in laboratory techniques under the direction of scientist supervisors, and was compensated with a salary and various other benefits incidental to employment.

Dr. Kramarenko, originally from Russia, began her post-doc fellowship at MUSC in 2006 on a J-1 "Exchange Visitor" visa. Although she was a Russian resident at the beginning of her stay in the United States, she subsequently became a U.S. resident alien prior to the tax years at issue, 2010 and 2011, a fact she conceded. Her employment at MUSC spanned several laboratories, including Dr. Maria Garnovskaya’s (pre-2010), Dr. Lisa L. Cunningham’s (August 2008-December 2010), and Dr. Natalia Krupenko’s (January 2011-December 2012). Her positions in Dr. Cunningham’s and Dr. Krupenko’s laboratories were funded by Research Project grants (R01 grants) from the National Institutes of Health (NIH) received by the principal investigators, not directly by Dr. Kramarenko. MUSC consistently documented Dr. Kramarenko’s payments as "salary" on Assignment Information Sheets, which also detailed her terms of employment, including salary, leave, insurance, and retirement benefits. She worked between 40 to 70 hours per week.

For the taxable years 2010 and 2011, Dr. Kramarenko filed Form 1040NR-EZ, "U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents," reporting her salary as tax-exempt under Article 18 of the Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on Income and Capital, Russ.-U.S. (U.S.-Russia Tax Treaty). She also made several misrepresentations on her returns, including her filing status (single nonresident alien versus married resident alien) and her tax home (Russia versus the United States), despite having married an American citizen in 2008 and continuously residing in South Carolina with him.

The Internal Revenue Service (IRS) subsequently issued a Notice of Deficiency (NOD) to Dr. Kramarenko, determining that her salary income was not exempt from federal income taxation and asserting accuracy-related penalties under I.R.C. § 6662(a) and (b)(2). Dr. Kramarenko then filed a timely Petition with the Tax Court to redetermine these deficiencies.

The Taxpayer’s Assertions for Relief

Dr. Kramarenko primarily contended that her salary from MUSC qualified as a "grant" under Article 18 of the U.S.-Russia Tax Treaty and was therefore exempt from U.S. income tax. She specifically argued that her payments were "with respect to the grant, allowance, or other similar payments" as stipulated in the Treaty. While she conceded her status as a resident alien for the years in question, the Respondent conceded that she might still be eligible for exemption under Article 18 if its conditions were met.

She posited that her activities at MUSC could be characterized as "securing training" under Article 18(1)(b) or "doing research" under Article 18(1)(c). She further suggested that if her purpose was "securing training" under 18(1)(b), the payments might not need to explicitly constitute a "grant" for the exemption to apply, unlike "doing research" under 18(1)(c).

Legal Framework and Treaty Interpretation

The Tax Court began its analysis by affirming that, as a resident alien, Dr. Kramarenko was generally subject to U.S. income tax, and compensation for services, such as wages, is includable in gross income under I.R.C. § 61(a). The crucial element, therefore, was whether the Treaty provided an exception.

The interpretation of treaty provisions traditionally begins with the wording of the treaty itself, aiming to give effect to its underlying intent or purpose. The Court examined two key articles of the U.S.-Russia Tax Treaty:

Article 14 (Salaries, Wages, and Other Similar Remuneration): This article generally permits the host country (in this case, the United States) to tax "salaries, wages, and other similar remuneration derived . . . in respect of an employment" when the employment is exercised in that State.
Article 18 (Students, Trainees and Researchers): This article provides for an exemption from tax for an individual who was a resident of a Contracting State (Russia) at the beginning of their visit to the other Contracting State (U.S.) and is temporarily present for specific primary purposes. These purposes include studying, securing training for a profession, or studying or doing research as a recipient of a "grant, allowance, or other similar payments" from certain organizations. The exemption applies to payments from abroad or "with respect to the grant, allowance, or other similar payments".

The Court clarified that for payments to be exempt under Article 18, they must constitute a "grant, allowance, or other similar payments" regardless of whether the individual’s activity is "securing training" or "doing research". This means the nature of the payment is the decisive factor for exemption under Article 18.

Crucially, the Court, following Baturin v. Commissioner, 31 F.4th 170 (4th Cir. 2022), emphasized that the categories of taxable "salaries, wages, and other similar remuneration" under Article 14 and tax-exempt "grant[s], allowance[s], [and] other similar payments" under Article 18 are mutually exclusive. As stated in Baturin, "a grant paid as a salary is an oxymoron".

Given that the Treaty does not explicitly define these terms, Article 3(2) of the Treaty directs reliance on the meaning of such terms under the laws of the Contracting State concerning the taxes to which the Convention applies. Therefore, the Court turned to U.S. tax law principles, specifically I.R.C. § 117 concerning qualified scholarships and fellowship grants, and its implementing regulations, particularly Treas. Reg. § 1.117-4.

Treas. Reg. § 1.117-4 specifies that amounts representing compensation for services or paid primarily for the benefit of the grantor are not considered scholarship or fellowship grants. This regulation provides that a payment is a scholarship or fellowship grant if its primary purpose is to further the recipient’s education and training, and it does not represent compensation or payment for services.

The Supreme Court’s decision in Bingler v. Johnson, 394 U.S. 741 (1969), provided the guiding principle. Johnson characterized "scholarships" and "fellowships" as "relatively disinterested, ’no-strings’ educational grants, with no requirement of any substantial quid pro quo from the recipients". Conversely, payments for which the grantor "unquestionably extracted a quid pro quo" are considered taxable compensation. This "substantial quid pro quo" framework directly parallels the Treaty’s distinction between taxable employment remuneration and tax-exempt grants.

**The Baturin Factors in Practice**

To determine whether Dr. Kramarenko’s payments constituted taxable salary or a non-taxable grant, the Court applied the factual questions outlined by the Fourth Circuit in Baturin v. Commissioner. These factors, often referred to as the "Baturin factors," are critical in assessing the presence of a "substantial quid pro quo":

If not the taxpayer, would the organization have brought someone else to work on the project?
Did the projects the taxpayer worked on pre- and/or post-date their tenure at the labs, or were they dependent on their presence?
Did the labs retain the rights to the product of the taxpayer’s research?
How much discretion did the taxpayer have to direct the day-to-day performance of their work?
Was there a "substantial quid pro quo"?

Application of the Law to the Facts

The Tax Court concluded that all the Baturin factors favored classifying Dr. Kramarenko’s payments as compensation for services rather than grants. The Court first addressed two non-dispositive considerations:

Labeling: While MUSC consistently referred to Dr. Kramarenko’s payments as "salary," the Court acknowledged that labeling is not determinative; the nature of the payments is paramount.
Source of Funds: The fact that Dr. Kramarenko’s payments came from NIH grants awarded to MUSC did not transform her payments into "grants" to her directly. MUSC received the grants, and it was MUSC that paid her a salary, akin to how other university staff might be paid from grant funds.

Applying the Baturin factors, the Court found:

Substitution of Personnel: Dr. Cunningham, the principal investigator, would have hired someone else to perform the research if Dr. Kramarenko had not been available. Indeed, graduate students had previously filled the position Dr. Kramarenko occupied.
Project Dependence: Dr. Cunningham’s research project significantly predated Dr. Kramarenko’s tenure. Had Dr. Kramarenko left, the grant would not have terminated; Dr. Cunningham would have continued the work with other scientists.
Retention of Rights: MUSC, not Dr. Kramarenko, retained patent rights arising from the research. Her contributions, such as presentations and co-authored papers, advanced the careers of the MUSC scientists and MUSC’s overall research mission, but she had no rights to the publications or the research they described.
Discretion in Work: Dr. Kramarenko exercised only a modest amount of discretion. While she gained experience and worked more independently over time, her work was consistently performed at Dr. Cunningham’s direction and remained subordinate to the principal investigator’s overall project. She was not free to pursue her own initiatives or work in other labs without permission, and all experiments had to be within the confines of the principal researcher’s grant.
Substantial Quid Pro Quo: The Court found a clear "substantial quid pro quo" in the arrangement. Dr. Kramarenko provided her "techniques and expertise" (skilled labor) to MUSC, and in return, MUSC provided her with a "mentor training experience" and a salary. Her research directly benefited MUSC, constituting a service for which she was compensated. This aligns with Revenue Ruling 80-36, which states that tax exemption does not typically extend to professional researchers receiving compensation for performing research services under supervision primarily for the grantor’s benefit.

Based on this analysis, the Court determined that Dr. Kramarenko was "performing valuable research services under the supervision of the grantor [MUSC] that are primarily for the benefit of the grantor of the payments," thereby making the payments subject to tax.

Accuracy-Related Penalties

The Tax Court also upheld the accuracy-related penalties under I.R.C. § 6662(a) and (b)(2). The IRS met its burden of production by demonstrating that Dr. Kramarenko’s understatements of income tax for both years exceeded the statutory threshold of $5,000, thus constituting "substantial understatements". The burden then shifted to Dr. Kramarenko to prove any defense of reasonable cause and good faith under I.R.C. § 6664(c)(1).

Dr. Kramarenko failed to meet this burden. While she claimed her mistakes were innocent, the Court found a lack of "good faith" and "reasonable cause". She received Forms W-2 from MUSC indicating taxable wages but chose to disregard them, relying solely on her own interpretation of the Treaty and conversations with colleagues, without consulting a tax professional. Furthermore, she made several misrepresentations on her returns, including her filing status and tax home, despite her marital and residency circumstances. Her admission at trial that she was unsure whether claiming the exemption for 2011 was proper, especially after her visa status changed, further undermined her claim of reasonable cause.

Conclusion

The Tax Court ultimately held that Dr. Kramarenko’s compensation from MUSC for 2010 and 2011 was not exempt from federal income tax under Treaty Article 18. The payments were characterized as compensation arising from an employer-employee relationship and a substantial "quid pro quo" for her labor, rather than tax-exempt grants. Consequently, Dr. Kramarenko was also found liable for the accuracy-related penalties on the resulting underpayments.

This decision serves as a critical reminder for tax professionals concerning the stringent requirements for tax treaty exemptions, particularly the distinction between genuine educational grants and compensation for services. The case underscores the importance of a detailed factual analysis, guided by the Baturin factors and the "quid pro quo" doctrine derived from Bingler v. Johnson, to correctly classify payments received by researchers and trainees from foreign countries. It also highlights the taxpayer’s responsibility to exercise reasonable cause and good faith, including seeking professional tax advice, when interpreting complex tax provisions and treaty benefits.

Prepared with assistance from NotebookLM.