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  • Tax Court Denies Treaty Benefits to Pakistani Medical Resident
    December 2015

    A recent decision of the Tax Court[1] considers the scope of Article XII of the 1959 Pakistan-U.S. Income Tax Convention (the “1959 Pakistan Treaty”), which exempts from taxation, by the source state, certain income earned by professors and teachers. The Tax Court concluded that Article XII did not apply to income earned by a citizen of Pakistan who was present in the United States in connection with a training program for medical residents at a U.S. university.
    Usman Bhutta (“Bhutta”) is a citizen of Pakistan and a graduate of the Allama Iqbal Medical College in Lahore, Pakistan.  In 2009, Bhutta was accepted into the medical residency training program at the University of Oklahoma’s College of Medicine. As part of the program, Bhutta was entitled to an annual salary of approximately $45,000 per year. Whether this salary was taxable by the United States for the 2010 taxable year was at issue in the case.
    Bhutta’s duties as a medical resident included treating patients under faculty supervision, conducting and presenting clinical research, and supervising and training third and fourth-year medical students. The Tax Court notes that Bhutta “was able to treat patients and train the medical students simultaneously because, at that point in the medical students’ education, they spend most of their time in the hospital on the ward teams with the residents.” Bhutta also prepared the students for monthly examinations and evaluated the students on a monthly basis.
    Article XII of the 1959 Pakistan Treaty provides:
    “A professor or teacher, resident in one of the contracting states, who temporarily visits the other contracting state for the purpose of teaching for a period not exceeding two years at a university, college, school or other educational institution in the other contracting state, shall be exempted from tax by such other contracting state in respect of remuneration for such teaching.”
    Bhutta filed U.S. federal income tax returns (Form 1040 NR) for the years he was a medical resident. On his return, Bhutta stated his occupation was “research physician.” On Form 9210, Alien Status Questionnaire, Bhutta stated that his primary purpose in visiting United States was “teaching/research/training in internal medicine.”  Bhutta excluded his salary from his U.S. taxable income on the basis that such income was exempt from U.S. tax under Article XII of the 1959 Pakistan Treaty.
    Opinion of the Tax Court
    The Tax Court begins by observing that the exemption in Article XII is dependent upon the professor or teacher being present in the United States “for the purpose of teaching.” The court ultimately concludes that Bhutta came the United States for the purpose of obtaining medical training and not to teach.
    The term “for the purpose of teaching” is not defined in the treaty, and the parties did not point to a definition in either the legislative history of the treaty, or the negotiators’ notes. Under Article II (2) of the 1959 Pakistan Treaty an undefined term has “the meaning which it has under the laws of that contracting state relating to the taxes which are the subject of the present Convention.” Thus, the Tax Court determines it should use the “ordinary, contemporaneous understanding” of the term “for the purpose of.” Consulting various dictionaries, the court concludes that “purpose” means “objective, goal or end” or an “aim or goal.”
    The court then notes “we recognize that the better indicator of an individual’s purpose is his conduct and not the individual’s self-serving representations regarding his purpose.” The court rejects Bhutta’s contention that he spent 70 percent of his time in education-related activities.  The court focuses on the fact that such activities occurred while Bhutta was treating patients. Also, Bhutta was required to conduct and present research as part of the medical residency program. The court also notes that Bhutta did not hold a faculty or teaching position at the University of Oklahoma, nor did he hold such a position in Pakistan before coming to the United States. Perhaps most damaging to Bhutta’s case in the eyes of the court was his statement on the record that he believed medical training in the United States to be “far superior” to the training he received in Pakistan.
    This case is a good example of a court interpreting an income tax treaty to reach a result clearly intended by both contracting states.
    [1] Usman Bhutta v. Commissioner, 145 T.C. 14 (December 22, 2015).