Below is an excellent follow-up from Lisa Milot, responding to some of the questions I posed to the tax gurus earlier today. Lisa’s first post can be found here.
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I think those are great questions, Kim, in part because I’m not sure there are definitive answers for the most part. I could speculate about why the § 104(a)(2) argument has made it as far as it has, but my guesses aren’t any better than anyone else’s—I’d love it if someone with actual knowledge of the inner workings of IRS audits in this area weighed in. So I’ll focus on how I reached the conclusion that (at least a substantial part of) the payments in question are for the eggs themselves (not for services).
As a starting point, I agree with Bridget that some portion of the payment is for services. The total payment due to Ms. Perez upon completion of the egg donation process was $10,000. If she did not complete the donation cycle, she would receive $500 (if she had taken injectable medications before cancellation), $1,200 (if she had taken stimulation medications), or $1,500 (if she had taken the HCG/trigger shot) (Donor Agreement at 7). Because these amounts would be paid if the appropriate stage of the cycle had been reached and in the absence of egg retrieval, I think up to $1,500 should probably be characterized as for performance of a service.
However, at least most of the remainder of the fee seems to be for the eggs themselves. While Ms. Perez was paid $5,000 for her first donation, in 2009 she received $10,000 per cycle because of her prior “experience” (Trial Transcript at 56-57). It would be helpful to have more information about the track records of the donors who receive the increased fees as compared to those who do not, but my guess is that the relevant experience is that of a successful prior cycle: one in which a sufficient number and quality of eggs are retrieved. If only a few eggs are retrieved in an initial cycle or the eggs are of low quality, I suspect a clinic would not use the donor again or, if it did, intended parents would not be willing to pay a $5,000 premium for that donor’s eggs. If all of this is right, the increased fee for repeated successful cycles seems like a payment for a tested donor’s more desirable eggs.
That still leaves $3,500 of the total fee unallocated. Some portion of that is no doubt allocable to the donor’s time in coming to the clinic for the retrieval, but I think that probably only a small portion of it. The Donor Source, the egg donor agency that contracted with Ms. Perez, advertises on its website that:
The procedure takes approximately 30 minutes. You will stay in a recovery room to ensure that you have no unusual side effects from the medication. In most cases, you will be able to get dressed and go home about 2 hours after the procedure. (http://www.thedonorsource.com/egg_ret.htm)
It seems unlikely to me that much of the $3,500 could be compensation for this 2½ hours of time, given that the daily appointments and injections for several weeks prior paid, at most, $1,500.
Now, the Agreement and the testimony at trial are both clear that Ms. Perez would be paid the complete fee if the retrieval was completed, regardless of the number or quality of the eggs retrieved. However, the catch with this approach is that it is unusual for a clinic to schedule a retrieval unless it is pretty confident it will be able to harvest a sufficient number of mature eggs. As you note, the clinic’s COO testified at trial that the clinic has paid a donor the full contract fee even though no eggs were retrieved “a couple times”. While on its face this fact supports the argument that the income is not tied to the eggs themselves, The Donor Source (http://www.thedonorsource.com/) reports that it has “over 2,000 satisfied Intended Parents since inception” in 2003. This means that out of thousands of retrievals, in only a few instances has payment been made without an accompanying transfer of eggs. Instead, Ms. Perez’s experience is far more typical, as evidenced in this exchange at trial between Judge Holmes and the clinic COO:
THE COURT: Hmm. We learned from Ms. Perez that she had been told at least that in each of her cycles in 2009, between 15 and 20 potentially viable eggs were harvested. Is that typical in your experience?
THE WITNESS: It is. (Trial Transcript at 94)
My general understanding of usual fertility clinic practices backs this up. The monitoring required during the stimulation phase of an IVF cycle tracks the number and size of follicles being produced by the donor’s ovaries. While there isn't a 1:1 relationship between follicles and eggs (for example, some follicles don’t contain any eggs while others might contain multiple), the cycle is usually cancelled if there are an insufficient number of follicles or they are not progressing as expected. In the case of a donor cycle (as opposed to one in which an intended mother undergoes stimulation), I would be surprised if the cycle were not always cancelled if few follicles develop as anticipated. But that’s just a guess.
Assuming all my assumptions are correct (a neat trick available to law professors but not practicing attorneys), this means that most of the amount (close to $8,500 per cycle) received by Ms. Perez was in exchange for her eggs. Now, I could be convinced otherwise if, for example, the clinic still worked with the donors who didn’t produce eggs despite going through the entire cycle or if intended parents selected those donors at the same rate as the more productive ones. But I don’t expect that’s the case.
The other question, of course, is whether a woman's rights in relation to her eggs under state law (here CA law) are sufficient so that eggs are property for Federal tax purposes. (My previous Article discusses this issue with respect to state law generally, but not specifically for CA.) But this post is long enough, and posting my thoughts on this matter here would make my Tuesday Property class—when we’re discussing property rights to human body materials—far less interesting if any of my students are visitors here.
Related Posts:
Taxing Eggs: Introduction to Perez v. Commissioner
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
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