I have already introduced Bridget Crawford (Pace) and special guest blogger Lisa Milot (Georgia) as tax experts who will join us in the Lounge for this mini-symposium on Perez v. Commissioner. But I’m happy to report that other guests have decided to join us throughout the day as well. First up is Paul B. Stephan, the John C. Jeffries, Jr., Distinguished Professor of Law and David H. Ibbeken '71 Research Professor at the University of Virginia School of Law. In addition to his tax interests, Paul is an expert on international business and Soviet and post-Soviet legal systems, who has advised governments and international organizations, organized conferences, edited books and lectured on a variety of issues raised by the globalization of the world economy and the transition away from Soviet-style socialism.
Below is Paul’s post.
Thirty years ago I wrote an article on human capital and federal income taxation. [Ed. Note: “Federal Income Taxation and Human Capital," 70 Va. L. Rev. 1357 (1984)] One of the claims advanced by the article is that the conceptual tools that the human capital concept gives us can help in the interpreting of problems raised by the application of the Code to novel fact patterns, including the sale of body parts. The article is old, but I think it still has something to say about the taxation of egg donation.
A case kicking around back them was United States v. Garber, a criminal prosecution of a woman who had failed to declare as income the substantial sums received for the extraction of an extremely rare and valuable enzyme from her blood plasma. The courts overturned her conviction on procedural grounds (improper exclusion of experts), but the majority of an en banc Fifth Circuit speculated both that bodily parts could be considered property and might have a tax basis equal to market value. Were this true, Ms. Garber would have had no gain, and thus no taxable income. My article was agnostic on the question of body-parts-as-property, but argued that the human-capital concept suggests reasons why a zero basis would be more appropriate in these transactions.
One of the points I considered was the analogous treatment of compensation for personal injuries, then excluded by the Code from the tax base. I argued that this exclusion should be interpreted narrowly so as not to apply to nonbodily injuries or noncompensatory damages. Congress later amended the statute to confirm this outcome, and several Supreme Court decisions reached similar results applying the pre-amendment statute.
I also argued that the involuntary nature of the events that led to such injuries might justify the statutory exclusion, but that courts should resist an analogy between a post-injury contract to accept compensation and a pre-injury contract to consent to a proposed battery in return for payment. We normally do not regard tort law as setting a price for voluntary contracts. To the extent Ms. Perez would argue that her payments should enjoy exemption under Section 104(a)(2) of the Code, she misses the distinction between an “injury” (the language of the Code) and the benefits of a voluntary exchange.
Since I wrote, and since the Fifth Circuit decided Garber, California law has become clearer that bodily parts cannot constitute property. One might argue that this state law result need not determine what qualifies as property for purposes of federal tax law, and that Ms. Perez therefore ought to receive the benefit of the capital gains preference, even if all the money she got is taxable gain. A reasonable response, however, is that even if we were to interpret to the Code as creating a federal law of property, that law might limit this category to items for which the concept of a basis makes sense, and that physical endowments thus do not come in.
As a matter of tax practice, none of these arguments might matter. Ms. Perez signed a contract that explicitly and purposefully characterized the transaction as a sale of service rather than of property. Normally, taxpayers must live with the characterization they choose, exactly because they have so much discretion to choose characterizations that generate tax benefits. One might reply that this general rule ought to apply only to sophisticated parties, and not to a person who lacks business experience and has no ability to bargain over the terms of the agreement. I take the point, but wonder if something in the tax law’s relentless positivism is not valuable. An approach that allows each of us to negotiate a distinct tax treatment based on our qualities might undermine the fundamentally egalitarian message of our largely formalist tax system. Put differently, there already is too much special treatment in our tax law, created expressly by Congress. The courts don’t need to add to the problem.
If Ms. Perez had made money by babysitting, or won a prize for advancing social justice, or sold a work of art she had created, all the money she received would be taxable income. Neither current doctrine nor broader conceptions of justice, utility or fairness can justify a different result here.