There has been much speculation recently about whether or not a recent US Tax Court ruling ordering an egg donor to pay taxes on her egg donation compensation also applies to surrogacy arrangements. The short answer is that this ruling, as it resulted from an analysis related specifically and only to egg donation is, therefore, not directly applicable. Does that mean that therefore the moneys paid to a surrogate are absolutely exempt from tax liability? No, we cannot make that assumption from this ruling either. In fact, many Assisted Reproductive Attorneys believe that the ruling should and will apply.
In the egg donation matter, NICHELLE G. PEREZ, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent, the court analyzed the terms of the donor’s egg donation agreement in coming to its decision. The court did not include surrogacy arrangements in their analysis; the ruling is therefore limited to the analysis discussed in the opinion. Shared below is an excellent article written by Attorney Nidhi Desai discussing the Perez ruling, it should be read and understood as only referring to the egg donation agreement Ms. Perez signed.
Typically, an agreement signed between intended parents and a gestational carrier will have a clause that states that the matter of tax liability has not been addressed in the agreement. The reason for this language is that an attorney expert in assisted family building will have drafted the agreement, that attorney is not likely to also be expert in tax law. The parties to the agreement are counseled to seek tax counsel from their tax preparer or an attorney specializing in taxation matters.
At Gifted Journeys we are in regular contact with those with whom we consult on legal matters. We are, of course, also talking with colleagues about the Perez ruling. At that time when or if a definitive policy is released by the IRS on taxation of gestational carrier compensation, we will be sure that the attorneys drafting agreements for our surrogacy clients are informed of the ruling.
On January 22nd, 2015, the United States Tax Court held that an egg donor’s compensation, despite being characterized as “pain and suffering,” is not excludable from income but is taxable gross income as defined under the IRS code (“I.RC.”). The full opinion can be accessed at: https://www.ustaxcourt.gov/InOpHistoric/PerezDiv.Holmes.TC.WPD.pdf
Nicole Perez, the Petitioner in this case, underwent two egg donation cycles in 2009. Ms. Perez was matched with Intended Parents through the Donor Source, an egg donation matching entity. Ms. Perez received compensation of $10,000 for each donation, for a total of $20,000 during that year. Each agreement stated that the donor’s compensation was for her “time, effort, inconvenience, pain, and suffering in donating her eggs.”
Prior to its tax analysis, the Court was very clear in stating that is was not considering any ancillary issues, such as whether human eggs are capital assets or how one would characterize basis or gain from the sale of body parts, as this donor was clearly compensated pursuant to a services contract. Therefore those questions were not relevant to the issues before the Court.
The Petitioner argued that the income was not taxable because it fell under an I.R.C. Code exclusion for income. That exclusion, Section 104(a)(2) of the I.R.C. excludes from gross income the amount of any damages *** received *** on account of physical injuries or physical sickness (Sec. 1.104-1(c)(1), Income Tax Regs). However, the Regulations define “damages” as “an amount received (other than workers’ compensation) though prosecution of a legal suit or action, or through a settlement entered into in lieu of prosecution.”
The Court considered and rejected Petitioner’s argument that the fact that her egg donation involved pain and suffering made it subject to exclusion from income. It went through a careful analysis of the contracts that she signed and the scope of Ms. Perez’s consent to the necessary procedures involved in an egg donation. The court in fact specifically acknowledged that the process undoubtedly involved painful elements. However, it also noted that although Ms. Perez had a “legally recognizable interest against bodily invasion,” she chose to specifically consent to that very invasion for payment. Analyzing the relevant precedent, the Court found that while she may have had a claim for damages if her injuries had exceeded the scope of her consent, the injuries she suffered were within the scope of procedures to which she consented in exchange for her compensation. Her pain was a byproduct of performing a service, and her payment was compensation for those services. The court made the observation that “We see no limit on the mischief that ruling in Perez’s favor might cause.” It went on to observe that under the Petitioner’s argument, a professional boxer might argue that some percentage of income could be excludable due to any injury he may endure.
The court therefore held that compensation for consensual performance of a service contract is not “damages” as defined under I.R.C. section 104(a)(2) and is therefore part of Petitioner’s gross income.