Can the government tax income received to compensate an egg donor for her pain and suffering? The United States Tax Court sought to answer that question in their opinion from January 22, 2015 in Perez v. Commissioner of the IRS.
Nichelle Perez, a California resident learned about egg donation when she was in her early twenties. Looking to earn some extra money, Perez decided to try out the process and donate her eggs to couples having trouble conceiving naturally.
The term “egg donation” as used here is actually a bit of a misnomer as most women, including Perez, are compensated, often quite generously, for their donations. In Perez’s case, she signed contracts for two rounds of donations in which she was compensated a total of $20,000 for her services. The contracts explicitly stated that Perez was not being paid for the eggs themselves, but was being compensated for the “time, effort, inconvenience, pain, and suffering in donating her eggs.” The pain and suffering referenced in the contracts was very real for Perez, who had to undergo numerous physical exams, hormonal injunctions, and surgery to extract the eggs.
When the time came to pay her taxes, Perez consulted friends in the donor community and determined that she would not have to pay taxes on the $20,000 received because the money constituted damages for pain and suffering. Perez argued that her income was excluded from the tax code’s definition of gross income as it fell under the exclusion for damages received for personal injuries or physical sickness.
The IRS disagreed with Perez’s contention and sent her a notice of deficiency, resulting in the instant case. The IRS contended that Perez was not being paid damages, but that she was simply being compensated for providing a service under a traditional services contract.
Ultimately, the tax court sided with the IRS and held that the $20,000 received by Perez was taxable as compensation for services rendered. Though she certainly endured pain and suffering related to the donation process, the pain was exactly within the scope of the medical procedures to which she had explicitly contractually consented to undergo.
This decision has far reaching tax consequences as all future egg donors may now have to report money received for their donations as a part of their gross income. Please consult a tax advisor if you are receiving income for egg donation.