The U.S. Tax Court recently found that Nichelle Perez, a 29-year-old single woman, performed a service for infertile couples when she donated her eggs. Therefore, the compensation she received was taxable income to her.
The facts of the case reveal that Perez, after discovering The Donor Source International, LLC, website, became a prospective egg donor. The Donor Source is a for-profit California company that has been in business since 2003, supervising egg donation cycles for its customers.
Perez went through an initial screening process and passed. She became a potential donor with an online profile, which included a picture, a description of her family history and other personal data.
After a couple selects a donor from the profiles, the donor signs two contracts. One contract is signed with The Donor Source, the agent. The other contract is signed with the intended parents.
These contracts give the parents the right to terminate the relationship with the donor up until the time the donor begins receiving egg-stimulation medication. If the contract is terminated at this point, the donor is owed no compensation.
The contract Perez signed with The Donor Source in February 2009 read as follows: “Donor and intended parents will agree upon a Donor Fee for Donor’s time, effort, inconvenience, pain, and suffering in donating her eggs. This fee is for Donor’s good faith and full compliance with the donor egg procedure, not in exchange for or purchase of eggs, and the quantity or quality of eggs retrieved will not affect the Donor fee.”
This contract meant that, if Perez kept her side of the deal, but produced unusable eggs or no eggs at all, she would still be paid the contract price. The parties agreed that the funds would not in any way constitute payment to the donor for her eggs.
The agreement did not instruct any of the parties on the issue of taxation of any payment made or received under this agreement or any agreement with The Donor Source.
Perez went through a number of painful procedures in March 2009. The process included stomach injections of hormones.
On the retrieval date in March 2009, 15 to 20 of Perez’s eggs were removed. She was paid her promised fee of $10,000. In August 2009, she signed a second $10,000 contract to go through the process again.
At the end of the year, Perez received a Form 1099 from The Donor Source for $20,000. Despite receiving the 1099, Perez did not claim the $20,000 as income on her 2009 income tax return.
She received a notice of deficiency from the IRS and ended up in Tax Court.
Perez argued that the $20,000 she had received from The Donor Source was in exchange for the pain, suffering and physical injuries she endured as part of the process. The IRS argued that Perez received taxable compensation.
According to Perez, she had relied on Section 104 of the Internal Revenue Code, which excludes from gross income the amount of money paid that is considered damages received because of physical injuries.
The court disagreed with Perez’s interpretation of the code and found that the physical pain and injuries were a byproduct of performing a service contract. It found that the payments were made, not to compensate her for an unwanted invasion against her bodily integrity, but to compensate her for services rendered (Nichelle G. Perez v. Commissioner, U.S. Tax Court, Jan. 22, 2015).
The $20,000 is taxable compensation.