Issue
Do the monies or amounts received by an egg donor in exchange for her eggs constitute taxable income?
Related Tax Rules or Regulations
Internal Revenue Code Section 61 provides that gross income includes all income from whatever sources derived, including compensation for services.
Internal Revenue Code Section 104(a)(2) excludes from taxable income the amount of any damages (other than punitive damages) received on account of personal injuries or physical sickness.
Income Tax Regs sec. 1.104-1(c)(1) defines the term “damages” as “an amount received (other than workers’ compensation” through prosecution of a legal suit or action, or through a settlement agreement entered into in lieu of prosecution.”
Facts
Perez contracted with a company to sell her eggs to women who had difficulty conceiving on their own. Perez went through two donation cycles during the taxable year and was paid a total of $20,000. Although Perez entered into two separate contracts for each donation cycle, both contracts read the same, stating that payment was not for her eggs but rather, “in consideration for all of her pain, suffering, time, inconvenience, and efforts.” Based upon this language in the contract, and despite receiving a Form 1099 from one of the companies for which she supplied eggs, Perez believed that the $20,000 she received was compensation for the physical injuries she suffered as part of donating the eggs, and thus within the purview of Section 104, excludable from taxable income.
Decision:
The IRS disagreed with Perez and argued that regardless of the contractual language, the monies received were in exchange for services provided – in this case those related to the process of providing eggs. The Tax Court considered whether the $20,000 Perez received was taxable compensation, or if it represented a tax-free recovery for physical damages. The issue was simple and straightforward: in other words, is the payment compensation, or damages for physical injury? The contracts were clear that Perez was not selling her eggs and that she would be compensated whether she produced any viable eggs or not.
The court looked to the language of the Section 104 regulations; specifically, were the amounts received by Perez ”damages” under the meaning of the tax regulations? Reg. Section 1.104-1(c)(1) defines the term “damages” as “an amount received (other than workers’ compensation” through prosecution of a legal suit or action, or through a settlement agreement entered into in lieu of prosecution.”
Perez argued that “damages” should extend to situations where a taxpayer received compensation in money for a loss regardless of legal suit or action. According to Perez, the IRS did not have the power to limit “damages” to amounts received in a lawsuit or due to the threat of one. This argument was presented mainly out of necessity as she conceded that she had neither sued nor settled with either of the other two contracting parties.
Because she did not receive the $20,000 as a result of a legal suit or action. More importantly, she did not receive the amounts from any type of action — legal or otherwise– taken after the physical injuries occurred; to the contrary, she entered into a contract providing for $20,000 of payment before the alleged injuries took place. Also, and to no help to Perez, the Court found that the injuries were both anticipated and consensual. They were of the exact nature that Perez was advised to expect when she entered into her contract. Thus, the amounts paid to Perez, represented taxable income.
What It Means
Amounts received by a donor in this situation represent taxable compensation income. The tax consequences of dealing in the human body are largely unsettled. Any precedent that establishes that a part of the body is property, or can be sold or donated, presents the opportunity for a multitude of potential abuses to say the least. It is therefore no surprise, then, that until the Tax Court decided Perez v. Commissioner, 144 T.C. 4, (2015), there was no answer to the question whether income derived from a good or service related to the human body, like the donation of eggs, constitutes taxable income. The Court in Perez concluded definitively that, at least in this case and under these facts, the amounts paid for such represent taxable income.
If you have questions about what constitutes taxable income, call THE TAX EXPERTS AT THE Thorgood Law Firm www.thorgoodlaw.com. For a FREE consultation call 212-490-0704.
