Taxing Eggs: An Introduction to Perez v. Commissioner

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 . . .

Related Posts:

Taxing Eggs: A Mini-Symposium

Taxing Eggs: Introduction to Perez v. Commissioner

Taxing Eggs: Paul Stephan

Taxing Eggs: Lisa Milot

Taxing Eggs: Lawrence A. Zelenak

Taxing Eggs: Bridget Crawford and Crawford, Part II

Taxing Eggs: What Have We Learned?

Taxing Eggs: Bridget Crawford III

Taxing Eggs: Lisa Milot Responds

Taxing Eggs: About That Other Case

Taxing Eggs: The Wrap-up

Comments

[Nancy Staudt]

The Commander would like to weigh in!

In my opinion, this arrangement seems a whole lot like every employment contract with which I am familiar: Compensation for the time, inconvenience, and discomfort associated with the work performed. Given that the law bars the sale of organs or body parts--courts are apt to find this composition for services rendered and not a sale.

[Lisa Milot]

Hi Nancy - While it's often phrased that way (and in the trial transcript that's how both witnesses explained why this couldn't be a sale of eggs), US law doesn't bar the sale of body parts generally.

Federal law makes it illegal to buy "organs" for "transplant" purposes, but gametes aren't organs. (I'm also not convinced a post-fertilization embryo transfer is a "transplant" but haven't researched this point.) Some state laws make it illegal to buy human eggs in at least some instances (for example, it is illegal in CA to buy eggs for research purposes), but there's no general ban on buying or selling human body materials.

But even if someone is engaged in an illegal activity, taxes are still due on the income, so the question remains: what's the character of the income?

[Lisa Milot]

Is income from a commissioned painting conceptualized the same as a sale by an artist of a non-commissioned painting? (I.e., is the income "service" income in the former case and "property" in the latter, are both property, or is the income on the commissioned painting part-service & part-sale?)

There might not be much authority on this given that self-created artistic works are classified as ordinary income property so the property/service distinction makes no difference to the Federal tax treatment, but if there is, this could be a useful analogy.

(I suspect there are various state tax provisions that could speak to this - e.g., sales tax treatment, whether employment law protections apply if the working conditions of the commissioning are controlled by the buyer - but I'm wondering if we can get to this answer on the federal tax level.)

[Kim Krawiec]

Commander! Thank you for joining us.

Lisa, on the legality of egg sale question, is 367f the controlling statute here? "(1) "Human organ" includes, but is not limited to, a human kidney, liver, heart, lung, pancreas, or any other human organ or
nonrenewable or nonregenerative tissue except plasma and sperm." I suppose the language "not limited to" could mean that eggs have been or could be included within the intended definition through judicial interpretation. But I am not aware of any cases on point (but then I haven't looked).

I do not know what the recent CA legislative efforts regarding eggs used for research purposes tell us, if anything, about the status of sales of eggs themselves (as opposed to payment for the service) of eggs used for fertility treatments, but perhaps you've followed that more closely than I have.

[Lisa Milot]

On the federal level, 42 USC 274e prohibits the transfer of human organs for valuable consideration for use in human transplantation and defines human organ to mean: “the human (including fetal) kidney, liver, heart, lung, pancreas, bone marrow, cornea, eye, bone, and skin or any subpart thereof and any other human organ (or any subpart thereof, including that derived from a fetus)". So eggs aren't covered there.

I've just started looking at the CA state issue, honestly, so I could be wrong here. My reading though is that 125350 prohibits the sale of oocytes for medical research or development of medical therapies and 24185 prohibits the purchase of ovum for cloning purposes, while 125325 explicitly contemplates financial payments/compensation for eggs for fertility treatment.

The recent legislative efforts with respect to this area of the Code were, I believe, an effort to allow compensation for eggs for research purposes. Relevantly, the associated legislative history contemplates these sorts of payments for fertility purposes (the Assembly Bill, for example, states that "The best source of available embryos for research comes from embryos created for fertility using a compensated donor...Due to the ban on compensation [for eggs for research purposes], oocytes and embryos not needed for fertility will be unsuitable for research and will likely be discarded.")

While not entirely clear (what exactly is the compensation for fertility purposes for - the eggs themselves or the services?), the lack of a prohibition for payment for eggs for fertility purposes equivalent to the explicit ban for such payments for research & cloning purposes suggests to me that the payments for the eggs themselves are legal in CA.

You're right, though, that 367(f) of the CA Penal Code states that "(a) Except as provided in subdivisions (d) and (e), it shall be unlawful for any person to knowingly acquire, receive, sell, promote the transfer of, or otherwise transfer any human organ, for purposes of transplantation, for valuable consideration." and (c)(1) seems to include eggs as nonrenewable or nonregenerative tissue.

However, 367(e) provides: "This section shall not apply to the person from whom the organ is removed, nor to the person who receives the transplant, or those persons' next-of-kin who assisted in obtaining the organ for purposes of transplantations."

Thus, if egg retrieval, fertilization, and embryo transfer add up to a "transplant" (which I'm not sure they do), I think (but could be wrong) that the woman producing the egg and the woman receiving it (although not a clinic in the middle) are exempt from the coverage of 367(f) because of subsection (e).

(I suspect this is why the clinics structure the contract between the donor and the intended parents, even though I expect that the $10,000 (or whatever) payment is made form the intended parents to the clinic who then cuts the check for the donor (and the clinic most likely issues the Form 990, not the intended parents.))

I also haven't researched the caselaw though...anyone else out there more up to speed on the CA law provisions?

[Lisa Milot]

Too many lettered sections and subsections for a Saturday morning :-)

"However, 367(e) provides: " should read "However, 367f(e) provides..." and my references to "367(f)" should all be to "367f".

[Kim Krawiec]

Thanks Lisa! All very helpful. And, yes, I should have specified that my reference was to the CA penal code, but you managed to divine that anyway. As you say, too many statutes w/o sufficient coffee this morning!