On the Perez case and the tax treatment of gamete transfers, Kim Krawiec asks (here, in Taxing Eggs: What Have We Learned?) an important question about the characterization of the taxpayer's activities. Is the taxpayer providing a service or is she selling property? I had reasoned (here) that because the taxpayer receives a base amount for taking medications and preparing for egg retrieval and then a supplemental amount for the actual egg retrieval, it must be that the supplemental amount is payment for the egg itself. Professor Krawiec suggests that the payment might be characterized instead as for a "final service" of egg retrieval. Professor Christine Hurt notes helpfully in the comments (here) that, in the products liability context, the distinction between "property" versus "service" is not always obvious.
At the initial level, whether the taxpayer is providing a service or selling property is irrelevant to the question of whether she recognizes income. But for determining the rate of taxation, the distinction is important. Income from services will be taxed at ordinary rates. Income from the sale of property might be eligible for taxation at lower capital gains rates. Furthermore, in the case of a truly donative transfer (which the Perez transfer was not; Ms. Perez was compensated), a transfer of property to a charity might give rise to an income tax charitable deduction. The transfer is services is never deductible.
So what have the IRS and courts said about similar transactions in the past? In 1942, the IRS was asked whether a blood donation could qualify for the income tax charitable deduction. After significant internal disagreement, the IRS denied the deduction in GCM 23310, A-37321 (July 6, 1942). The IRS affirmed the characterization of blood as a service in Rev. Rul. 162, 1953-2 C.B. 127. But in 1975, an IRS General Counsel Memorandum characterized human breast milk as property for purposes of the income tax charitable contribution deduction. The Fifth Circuit has ruled that income from a taxpayer's sale of blood is taxable, without reaching the question of whether provision of blood is a service or property. The Tax Court has ruled that a taxpayer who sells her blood plasma is selling a product, not performing a service. The Eleventh Circuit has declined to rule on whether blood donation constitutes a service or a property transaction. As recently as 1988, the IRS declined to say in Priv. Ltr. Rul. 88-14-010 whether amounts received for the sale of blood was income from services or property. The Perez case presents an opportunity to resolve the question in a way that provides clear guidance for taxpayers and tax officials.
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