Russian Scientist's Salary Was Not Exempt from U.S. Tax Under U.S. - Russia Treaty

(Parker Tax Publishing June 2025)

The Tax Court held that a taxpayer, a trained Ph.D. with high technical skills, who worked full time in laboratories at a university's medical institution and received a salary and benefits, in addition to further training in laboratory techniques, could not exclude her salary as a grant under the U.S. - Russia tax treaty. The court found that under Baturin v. Comm'r, 2022 PTC 96 (4th Cir. 2022), the taxpayer's salary was earned through an employer-employee relationship as part of a substantial "quid pro quo" for her labor and therefore was not exempt from U.S. income tax. Kramarenko v. Comm'r, T.C. Memo. 2025-61.

Background

Dr. Inga Kramarenko is originally from Russia, where she studied and received in 2001 her M.S. in Medical Biophysics and in 2006 her Ph.D. in Biophysics.

In 2008 Dr. Kramarenko took a post-doc fellowship position at Medical University of South Carolina (MUSC) in Dr. Lisa Cunningham's laboratory to study signal transduction in highly specialized cells. Until Dr. Cunningham hired Dr. Kramarenko, the position had been filled by graduate students. For the time that Dr. Kramarenko worked in Dr. Cunningham's laboratory (including 2010, the first of the two years at issue in this case), Dr. Cunningham was solely responsible for applying for extramural grants to secure the majority of the funding for her own salary and her laboratory. If Dr. Cunningham had not obtained grants to fund her laboratory, then her laboratory would have been closed. Dr. Cunningham received a grant from the National Institutes of Health (NIH) that funded research for her laboratory at MUSC through December 2010. Dr. Kramarenko signed an Assignment Information Sheet setting forth the "terms of [her] employment", including position, salary, leave benefits, insurance benefits, and retirement benefits. Dr. Kramarenko's salary was funded by the NIH grant.

During the period of Dr. Kramarenko's post-doc fellowship, she received support from principal researchers to enhance her research skills and to train her as a scientist who herself could become a principal researcher in the future. When Dr. Kramarenko initially joined Dr. Cunningham's laboratory, Dr. Cunningham supervised her more closely while she learned new techniques; but once Dr. Kramarenko's skills had developed, she and Dr. Cunningham would discuss what the experiment was going to be, then Dr. Kramarenko could run the experiment independently. After Dr. Kramarenko carried out an experiment independently, she and Dr. Cunningham would discuss the results and the next experiment. Occasionally, Dr. Kramarenko traveled to attend conferences at which she presented findings that the laboratory had reached to date. She also co-authored multiple published papers about the research she and the scientists she worked for performed.

In January 2011 Dr. Kramarenko transferred to a new position at MUSC with the laboratory of Dr. Natalia Krupenko, where Dr. Kramarenko worked for the rest of that year (and continuing into 2012), performing biochemistry and molecular biology experiments. This position was also funded by a grant that Dr. Krupenko received from the NIH. The paperwork having to do with Dr. Kramarenko's transfer from Dr. Cunningham's laboratory to Dr. Krupenko's laboratory consistently described her as an employee. Internal emails at MUSC discussed Dr. Kramarenko's compensation as "salary." In addition, Dr. Kramarenko signed an Assignment Information Sheet that provided the "terms of employment" including position, salary, and benefits. The Assignment Information Sheet consistently described Dr. Kramarenko as an "employee," and it was signed by Dr. Kramarenko as "Employee" and with an illegible signature for her "Employer."

Dr. Kramarenko filed Form 1040NR - EZ, U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents, for years 2010 and 2011. On these returns, Dr. Kramarenko misrepresented that she was a single nonresident alien when in fact she was married and was a resident alien in both years. Dr. Kramarenko reported on her returns that her tax home was Russia, that she had a closer connection to Russia than to the United States, and that all of her income for tax years 2010 and 2011 was exempt from taxation under the U.S. - Russia Tax Treaty (Treaty). The IRS examined the returns and sent Dr. Kramarenko a notice of deficiency (NOD), determining that she had received taxable income of $41,681 in 2010 and $42,885 in 2011. The NOD determined the resulting tax liabilities and the corresponding penalties under Code Sec. 6662(a) and (b)(2). Dr. Kramarenko took her case to the Tax Court. She contended that her salary was in the nature of a "grant" and was therefore exempt from tax under Article 18 of the Treaty. The IRS contended that the Article 18 exclusion did not apply because the subject payments constituted compensation from employment - that is, salary that was taxable by the United States under Article 14 of the Treaty.

In Baturin v. Comm'r, 2022 PTC 96 (4th Cir. 2022), rev'g and remanding 153 T.C. 231 (2019), the Fourth Circuit set forth a multi-factor test for determining whether payments received by a Russian scientist working in the United States were exempt from tax as "grant, allowance, or similar payments" or whether they were taxable as "salary, wages, and other similar remuneration." The factors are: (1) whether, if not the taxpayer, the organization would have brought someone else to work on the project; (2) whether the projects the taxpayer worked on pre- and/or post-dated his tenure at the organization, or were they dependent on his presence; (3) whether organization retained the rights to the product of the taxpayer's research; (4) how much discretion the taxpayer had to direct the day-to-day performance of his work; and (5) in short, was there a "substantial quid pro quo" in the arrangement.

Analysis

The Tax Court held that Dr. Kramarenko was not entitled to exclude her compensation from MUSC from taxable income under Treaty Article 18, and she did not have reasonable cause to relieve her from penalty liability for the resulting understatements.

The court agreed with the IRS's position that all of the Baturin factors favored the classification of Dr. Kramarenko's salary payments not as grants but rather as compensation for her services to the MUSC departments at which she worked. The court found that Dr. Cunningham could have brought someone on instead of Dr. Kramarenko to perform research for the project and would have done so if Dr. Kramarenko had not been available. The court also noted that Dr. Cunningham's project pre-dated Dr. Kramarenko's tenure. The court observed that MUSC, rather than Dr. Kramarenko, retained the patent rights arising from Dr. Cunningham's laboratory. While Dr. Kramarenko did give a presentation about her research at a conference and co-authored multiple published papers about the research she and the scientists she worked for performed, the court found that such activities were part of MUSC's regular business as a research university, and Dr. Kramarenko did not appear to have had any rights to those publications nor the research they described. In addition, the court found that Dr. Kramarenko had only a modest amount of discretion in her day-to-day work in Dr. Cunningham's laboratory. The court said that as she gained experience and gained the respect of Dr. Cunningham, Dr. Kramarenko was supervised less intensively and worked more independently, but she was always working at Dr. Cunningham's direction on tasks subordinate to Dr. Cunningham's overall project.

The court further found that there was a "substantial quid pro quo" in Dr. Kramarenko's arrangement with MUSC. The court reasoned that Dr. Kramarenko provided to MUSC her "techniques and expertise" and MUSC provided to her a "mentor training experience" as well as a salary. The court acknowledged that Dr. Kramarenko's role was not to create a product or service that benefited MUSC and agreed that the arrangement had the intended benefit of giving training to Dr. Kramarenko. However, the court thought it was also clear - and critical to the arrangement - that Dr. Kramarenko did provide a service, i.e., research, that benefited MUSC.

Dr. Kramarenko did not, in the court's view, qualify for the reasonable cause and good faith exception to accuracy-related penalties under Code Sec. 6664(c)(1). The court found that although Dr. Kramarenko received a Form W-2 reporting taxable wages, she determined on the sole basis of her reading of the treaty and on her conservations with her colleagues, and without the advice of a tax professional, that her entire salary from MUSC was excluded from income. The court also noted that Dr. Kramarenko made several misrepresentations on her tax returns, including her filing status and that her tax home was Russia.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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