Egg Donation: Settlement or Taxable Service?

A U.S. Tax Court will soon decide whether the donation of human bodily materials such as eggs, sperm and blood plasma constitutes an act of commerce that should be taxed.

This precedent-setting case arose after the IRS sent a California woman a notice stating that she owed $4,998.00 in back taxes and interest for the $20,000.00 in payments she received for two egg donations back in 2009.  The IRS acted after receiving notification from the donation bank that the woman had received payment for her donated eggs.

Egg donation is a process whereby a woman (donor) gives her eggs to another woman (recipient) to allow the recipient to have a baby.  To donate eggs, the donor must be given medications that will cause her to develop multiple eggs over a single cycle.  The eggs are then removed from the donor.  Once the eggs are removed, sperm from the male partner or sperm bank is placed around or injected into each egg to create an embryo.  This process is called in vitro fertilization (IVF).

In the instant case, the egg donor challenged the IRS’ finding of owed taxes on the premise that her payment was more like a settlement from a personal injury lawsuit for “pain and suffering” than business earnings.  According to her counsel, she did not sell a product or a service; rather, she acted benevolently by undergoing extensive procedures to help others who could not otherwise conceive children on their own.  According to certain academic critics, this argument is not likely to hold much merit with the court.

Nationally, women made 16,858 attempts to conceive using donated eggs in 2012 – a 5.5 percent increase from 2011.

The case also raises interesting questions about whether eggs and other genetic material are considered “property” that can be sold and are subject to capital gains or whether the services rendered by the donor are considered self-employment subject to additional self-employment tax rates.

A final determination on this issue will settle the law for multiple areas of donated genetic material, although it may result in the creation of what some are calling a “sperm tax.”  Indeed, some critics speculate that such a tax would have the potential of chilling future donors as a consequence of the tax implications of receiving compensation for such donations.

Statistical Information Courtesy of the Society for Assisted Reproductive Technology’s website: www.sart.org