Hello Loungers! Welcome to our mini-symposium on Taxing Eggs. As I mentioned in my first post, we’ll be joined by tax experts during this online symposium in order to discuss Perez v. Commissioner, No. 9103-12 (Feb. 14, 2014) (Holmes, J.) the first case addressing the inclusion in taxable income (and perhaps the proper characterization) of compensation received for the sale or donation of human eggs and related services. The case may provide guidance, not only on the tax treatment of compensated egg “donation,” but on the compensated provision of other bodily materials such as sperm and plasma, as well.
I wanted to start us off with a bit of background on egg donation generally and the laws governing it, some factual background on the Perez case, and some questions that I have regarding the case on which our tax experts may be able to shed some light.
On two separate occasions in the 2009 tax year, Perez agreed to provide eggs to an anonymous intended couple through The Donor Source, a California-based egg donor agency. Perez received $10,000 on each occasion and, according to The Donor Source, was issued a 1099 in the amount of $20,000. Perez did not include this $20,000 on her federal income tax return in 2009, instead listing only the roughly $43,000 she earned that year at her full-time job.
However, 2009 was not the first year in which Perez acted as an egg donor through Donor Source. According to the trial transcript, Perez has been an egg donor through Donor Source a total of five times, once in 2007, twice in 2008, and twice in 2009. Interestingly, in 2008 Perez received a notice from the IRS that she would be taxed on her income earned as an egg donor. And I find this part of the transcript fascinating:
Q: What happened? What did you do?
A: I pretty much took the advice that I found online from other donors, what they had done, what they had said, stating that the income was from pain and suffering, and sent the page of the contract that stated that. And their case was dismissed and I received a similar letter, and that was the end of it for 2008.
I’d be interested to know from any of our tax experts what this means. Did the IRS change its position (either formally or informally) on the taxability of egg donor payments between 2008 and 2009? Is it true that egg donors were not, as a matter of practice, being taxed on egg donation proceeds before that time if they contested the inclusion in taxable income?
The account seems plausible based on the descriptions of other egg donors. For example, one eight-time egg donor gives advice at weareeggdonors.com about how to appeal taxes owed on egg donation income (thank you Ed Kleinbard!) “Elizabeth” advises egg donors to:
Be proactive with the IRS! If you have 1099 income that you think should be excluded from tax take the steps to draft a comprehensive appeal for reconsideration. . . .
Make sure that your contract clearly outlines the facts that you are being compensated for physical injury, in consideration of future medical complications, and emotional suffering in addition to any economic losses endured.
Elizabeth even provides a sample letter to the IRS. Comments on the site from other egg donors suggest that others are following this technique.
That brings us to the question of the contract itself. As is standard, Perez’s contract with The Donor Source stated that she would be paid a fee in recognition of her “time, effort, inconvenience, pain and suffering in donating her eggs” and that the fee “was not given in exchange for or purchase of eggs.” Indeed, the American Society for Reproductive Medicine requires that, in order for an egg donor agency to be listed as an ASRM approved agency (as The Donor Source apparently is), those agencies must agree to abide by the ASRM guidelines regarding the ethical compensation of egg donors. (This requirement has landed ASRM a federal class action antitrust suit – I’ll return to this point in a later post).
Those guidelines specify that “payments to women providing oocytes should be fair and not so substantial that they become undue inducements that will lead donors to discount risks. Monetary compensation should reflect the time, inconvenience, and physical and emotional demands associated with the oocyte donation process.” They also state that “compensation based on a reasonable assessment of the time, inconvenience, and discomfort associated with oocyte retrieval can and should be distinguished from payment for the oocytes themselves.” This characterization of payments is also convenient under state laws, many of which prohibit the sale of organs or other body parts, and include gametes within that definition.
So, here are some questions on which I hope our experts can shed some light during our mini-symposium. Does Perez have any justification for the claim that her compensation, because it was for “pain and suffering” is not taxable? If so, what about boxers and football players who suffer pain and injury (not to mention BigLaw junior associates suffering sleep deprivation and emotional distress)? If she is wrong, and the payments are taxable, are they income from the provision of a service or the sale of a good? What does the difference mean, in monetary terms, for someone like Perez? Is the IRS at least partially responsible for any confusion on this issue, assuming it is true that they allowed such claims from egg donors in prior years?
Stay tuned as our tax experts weigh in throughout the day . . .