I have read and reviewed the opinion in the case Nichelle G. Perez v. Commissioner of Internal Revenue, Docket No. 9103-12 from the United States Tax Court. In that case Ms. Nunez was a typical Egg Donor who entered into a contract with the Donor Source and Intended Recipients. She received compensation of $10,000.00 on two occasions in 2009 for two donations with two different recipient couples. At the end of the tax year the Donor Source issued a 1099 for $20,000.00. The contracts between Perez and the Recipients were typical, in that they referred to the payments made to the donor as reimbursement for pain and suffering, and specifically noted that the payment was not for the sale of eggs or body parts. The contracts also stated that “the agreement does not instruct any of the parties on the issue of taxation of any payment made or received…”
I make the following conclusions and recommendations:
The seminal question before the court was reduced to this: “Whether a taxpayer who suffers physical pain or injury while performing a contract for personal services may exclude the amounts paid under that contract as ‘damages’ received ***on account of personal injuries or physical sickness even though the taxpayer knew that such injury or sickness might occur and consented to it in advance?” That answer is no, the monies may not be excluded and are taxable.
1) The exemption referred to is contained within Internal Revenue Code (IRC) 104(a)(2) which excludes from gross income “the amount of any damages received (whether by suit or agreement and whether in lump sums or as periodic payments) on account of personal physical injuries or physical sickness.”
2) The term “damages” is defined as an amount received through prosecution of a legal suit or action, or through settlement entered in lieu of prosecution. Perez argued that the definition of “damages” was invalid because it requires litigation, or the threat thereof, as a prerequisite to the income exclusion. The court disagreed and noted that the exemption was created to account for monies received by a taxpayer to make them whole from tortious injury.
3) The court flatly rejected the notion that the monies were for reimbursement of pain and suffering. The court agreed that the donor did endure pain and suffering from an invasive procedure, but concluded it did not arise from a “tort or tort-like” claim, nor from any type of settlement. It was a known factor contemplated by the parties prior to the contract being entered into.
4) The court concluded that Perez had a legally recognized interest against bodily invasions but gave up that interest and consented to such intimate invasion for payment, i.e. a by-product of performing the service contract. The court analogized it to professional athletes who accept the risk of injury in exchange for a negotiated salary. Football players, hockey players all get injured but their salary cannot be partially exempted when they do get injured.
Interestingly, there was one case (Green) where a person offered blood plasma in exchange for compensation (payment was “by the pint”) and another case (Garber) where the taxpayer’s compensation was based upon the concentration of antibodies in the plasma. The findings in those cases was that the taxpayers were engaged in the sale of property, rather than the performance of services. The court contrasted those two cases against Ms. Perez’s case by noting that unlike the “taxpayers in Green and Garber, who were paid by the quantity and quality of plasma produced, Perez’s compensation depended on neither the quantity or quality of the eggs retrieved, but solely how far into the egg-retrieval process she went.” Based thereon, the tax court concluded that Perez was clearly compensated for services rendered and not for the sale of property. Was the court suggesting that if the contracts were re-written and clearly stated that the compensation is for the sale of eggs that Perez would have won? If language was added that compensation is dependent upon the quality and quantity of eggs retrieved would it make a difference? Would any egg donor agree to such terms? Isn’t revenue from the sale of property and goods taxable anyway? Does the sale of single-cell genomes fall within the exception regarding the sale of body parts? These are all interesting questions to which we have no answers. We are not tax experts, and therefore can neither answer these questions nor opine on a solution to the tax issue. Logic seems that if the eggs were sold as property, it would still create a taxable event for the donor, but there would be no 1099 as an independent contractor. It would simply open another Pandora’s box of tax implications, licensing, costs of goods, etc.
The bottom line is we see no way around the ruling and believe that the fees paid to donors is taxable. That will likely lead to higher donor fees. It also begs the question of who is responsible to issue the 1099. Normally a 1099 is issued by a taxpayer to reduce its taxable income, and they report to the IRS with a 1099 where the money went and the IRS follows the trail. However, if the recipient couple as the payor were so obligated, their anonymity would be compromised. Based upon the court ruling in Perez, and the fact that the Donor Source Agency issued the 1099, I would assert that the agency has the duty. That would make sense because the agency “controls” the account in that they direct when payments are due, and we do not want to compromise anonymity.
As you can see they utterly reject the entire pain and suffering aspect to it. I just don’t see a way around it.