Many, many thanks to our fabulous tax bloggers Bridget Crawford, Lisa Milot, Paul Stephan, and Larry Zelenak for joining in the discussion of Perez v. Commissioner yesterday. I wanted to take a stab at recapping/synthesizing some of the points that have emerged from the discussion, ask a few more questions, and play devil’s advocate (as any good moderator should.)
First, the point on which all of our experts seem united is the weakness of the 104(a)(2) claim – that is, the payments to Perez are not taxable because they are compensation for her pain and suffering. Yet, this is precisely the ground on which the IRS has apparently allowed Perez and other egg donors to exclude such income in the past. Why have they allowed this if the argument is so weak? This question largely stems from my lack of knowledge of how the IRS works “on the ground” in such matters. Are these just independent (and, perhaps, isolated) decisions from low-level bureaucrats, in which case we shouldn’t read too much into them? Or does this suggest some sort of IRS informal policy decision that has perhaps changed during the time when Perez was an egg donor (2007-2009)?
Second is the sale of bodily property versus compensation for service question. Paul treats the contract as controlling, concluding that the transaction is one for services. Lisa treats the transaction as a sale of eggs, while Larry believes that the question is “anybody’s guess.” Bridget argues that, because the egg provider is paid a lump sum that “will be reduced if no eggs are retrieved,” then it is proper to think of the compensation as “one amount for taking the medicines in preparation for egg provision” and an “additional amount must be for the sale of the egg itself.”
So here we have much less unity of opinion and I’m wondering why that is. What is the source of the disagreement among you on this point? What are the types of things that a court would analyze in making this determination and what weight is likely to be given to each?
And let me just play devil’s advocate with Bridget here for just a minute, in part because she is the one who gave the most explanation for her position. Here is what the transcript says about what occurs in the event of non-retrieval of eggs:
Q: Under the contract, is the individual going through the stimulation and retrieval process paid whether or not the eggs are retrieved?
A: As long as they get to the retrieval process, yes.
Q: And can you explain that?
A: They can start taking stimulating hormones . . .and if for some reason they don’t stimulate well and the fertility doctor’s not pleased with the outcome [the fertility doctor can instruct the donor to stop the medication.]
Q: Would she still be compensated at that point?
A: She would be compensated but on a lower scale.
Q: And if she were to go through the entire procedure, and everything appeared fine, and yet no eggs were retrieved, would she still be paid?
A: Yes, as long as there was no fault found from her for not taking the medications properly.
Q: And has that ever happened?
A: Yes, a couple of times.
[Counsel then asks whether the donor is paid even if only low quality unusable eggs are retrieved and the answer is yes.]
So, it seems to me that this could just as easily be characterized as payments for a series of services, culminating in the retrieval process, and that so long as that final service – retrieval -- is performed full compensation is awarded regardless of whether eggs are transferred. My question for Bridget then is, how are you so sure that this is a sale of an egg rather than the provision of a service (egg retrieval)?
Thanks again to our expert tax panel – all of whom are invited to respond to this recap with further posts or comments, but are in no way obligated to do so. We’ve taken enough of your time already and are grateful for the insights that you’ve shared so far. In any event, I will be back later with a wrap-up and concluding thoughts about what the Perez case teaches us regarding egg donor practice and other matters.
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
Kim, in products liability, there are often questions about whether a defendant has sold a service or a product. These cases don't seem to have a lot of rhyme or reason, either, but maybe reflect the political power of the provider (doctors v. hair stylists).
Posted by: Christine Hurt | February 27, 2014 at 01:57 PM
Interesting Christine! We law professors often want to find reason and structure where there is none, I suppose.
Posted by: Kim Krawiec | February 27, 2014 at 03:29 PM