[IMGCAP(1)]In the first Tax Court case that addressed the tax consequences of human egg donations, the court concluded that the compensation received by an egg donor for two donations of eggs was includible in her income.

In her contract with Donor Source, a California-based egg donation agency, the donor, Nichelle Perez, agreed that the fee to be paid her was for “Donor’s good faith and full compliance with the donor egg procedure, not in exchange for or purchase of eggs and the quantity or quality of eggs retrieved will not affect the Donor Fee.”

Also, the contract said, her payment was “in consideration for all of her pain, suffering, time, inconvenience, and efforts.

Although Donor Source sent Perez a 1099 for $20,000, Perez concluded that the money was not taxable because it compensated her for pain and suffering. The IRS disagreed and sent her a notice of deficiency.

The only issue before the court was whether, under section 104(a)(2) of the Tax Code, a taxpayer who suffers physical pain or injury while performing a contract for personal services may exclude the amounts paid under that service contract as “damages received on account of personal physical injuries or physical sickness,” even though the taxpayer knew that such injury or sickness might occur and consented to it, the court stated.

In Perez v. Commissioner, 144 T.C. No. 4, 1/22/2015, the court held that the compensation was not damages under the terms of the statute and must be included in Perez’s income.

“We see no limit on the mischief that ruling in Perez’s favor might cause,” the court said. “A professional boxer could argue that some part of the payments he received for his latest fight is excludable because they are payments for his bruises, cuts, and nosebleeds. A hockey player could argue that a portion of his million-dollar salary is allocable to the chipped teeth he invariably suffers during his career. And the same would go for the brain injuries suffered by football players and the less-noticed bodily damage daily endured by working men and women on farms and ranches, in mines, or on fishing boats. We don’t doubt that some portion of the compensation paid all these people reflects the risk that they will feel pain and suffering, but it’s a risk of pain and suffering that they agree to before they begin their work. And that makes it taxable compensation and not excludable damages.”

“The Tax Court got it exactly correct,” said Timothy M. Todd, CPA, Esq., a professor at Liberty University School of Law.

Todd, who filed an amicus brief in support of the IRS, said that the main issue was the meaning of “damages” under Code section 104(a)(2). “The word ‘damages’ ordinarily connotes that there is some underlying tortious or wrongful conduct, and here that was not the case because the taxpayer consented to the medical procedure in advance. Section 104(a)(2) does not exclude money received. It excludes damages, and the amount she received was not damages.”

”Donors are typically paid money for their time and effort, rather than for the eggs themselves, since selling the eggs would be illegal in most states,” he said.

Could the result be any different if a donor/taxpayer argued that the money she receives constitutes a gift?

“That’s an interesting issue, but it was not before the court,” Todd said. “It would be an uphill argument, given the Duberstein case, which held that gifts need to be from ‘detached and disinterested generosity.’”

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