Proshey v. Commissioner, 51 T. C. 918 (1969)

The burden of proof lies with the taxpayer to demonstrate that they have not exhausted the 36-month lifetime exclusion for fellowship grants under Section 117 of the Internal Revenue Code.

Summary

In Proshey v. Commissioner, the petitioner attempted to exclude $1,500 received from an NSF grant from his 1964 gross income under Section 117, which allows exclusion for fellowship grants up to 36 months. The court ruled against the petitioner because he failed to prove that he had not already exhausted his 36-month exclusion limit, particularly due to a prior grant from Berkeley between 1952 and 1957. The decision highlights the importance of the taxpayer’s burden of proof in establishing eligibility for tax exclusions and the strict interpretation of the 36-month limit.

Facts

Aloysius J. Proshey sought to exclude $1,500 received from an NSF grant (NSF-G21507) in 1964 from his gross income under Section 117 of the Internal Revenue Code. He was not a candidate for a degree in 1964. Proshey had previously utilized the exclusion for 15 months between 1960 and 1963 and received payments under another NSF grant (NSF-G9104) in 1959. During the trial, it emerged that Proshey had also received a grant from Berkeley between 1952 and 1957, but he could not provide details about its tax status.

Procedural History

Proshey filed a petition in the U. S. Tax Court to challenge the Commissioner’s determination that he could not exclude the $1,500 from his 1964 gross income. The case proceeded to trial, where the primary focus was on whether the payments from NSF-G21507 qualified as a fellowship grant. However, the court found it unnecessary to address this issue due to Proshey’s failure to prove he had not exhausted his 36-month exclusion limit.

Issue(s)

1. Whether the petitioner, Aloysius J. Proshey, could exclude $1,500 received from an NSF grant in 1964 from his gross income under Section 117 of the Internal Revenue Code?

Holding

1. No, because the petitioner failed to prove that he had not exhausted his 36-month lifetime exclusion for fellowship grants prior to 1964.

Court’s Reasoning

The court’s decision hinged on the interpretation of Section 117(b)(2)(B) of the Internal Revenue Code, which limits the exclusion of fellowship grants to 36 months in a recipient’s lifetime. The court emphasized that the burden of proof was on the petitioner to show that he had not exhausted this limit. Proshey’s inability to provide clear evidence about the tax status of a prior grant from Berkeley between 1952 and 1957 was crucial. The court noted that if the Berkeley grant was excludable, it could have used up to 24 months of the 36-month exclusion, leaving no room for further exclusion in 1964. The court also referenced the regulation’s language, which states that “no exclusion shall be allowed under subsection (a) after the recipient has been entitled to exclude under this section for a period of 36 months,” underscoring the strict application of this rule.

Practical Implications

This decision reinforces the strict enforcement of the 36-month lifetime exclusion for fellowship grants under Section 117. Taxpayers must maintain detailed records of all grants received to substantiate their eligibility for exclusions. The ruling emphasizes the importance of the burden of proof on the taxpayer to demonstrate that they have not exceeded the exclusion limit. For legal practitioners, this case underscores the need to thoroughly document and verify the tax status of all past grants when advising clients on potential exclusions. The decision also serves as a reminder to taxpayers and their advisors to be cautious about claiming exclusions without comprehensive evidence, as failure to do so can result in denied exclusions.