Perez v. Commissioner - 144 T.C. 51 (2015)

Rule:

Any person very clearly has a legally recognized interest against bodily invasion. But when that person forgoes that interest--and consents to an intimate invasion for payment--any amount she receives must be included in her taxable income.

Facts:

In 2009, Perez, a 29-year old single woman, signed two separate contracts with Donor Source, a for-profit California company that was recruiting egg donors by advertisement. Each contract stipulated that Perez would be paid $10,000 in consideration for all of her pain, suffering, time, inconvenience, and efforts. The Donor Source sent a Form 1099 to Perez for $20,000 for tax year 2009. After consulting other egg donors online, Perez concluded that the money was not taxable because it compensated her only for pain and suffering, and the Tax Code said that damages for pain and suffering were not taxable; therefore, she left it off her tax return. The Commissioner of Internal Revenue disagreed and sent Perez a notice of deficiency. Perez timely filed a petition.

Issue:

Under the circumstances, was the compensation Perez received from Donor Source taxable?

Answer:

Yes.

Conclusion:

The court held that the payment that Perez received as compensation for undergoing procedures to donate her eggs to infertile couples was not "damages" under I.R.C. § 104(a)(2) because the pain and suffering she endured was within the scope of the medical procedures to which she consented, and therefore the payment had to be included in gross income under I.R.C. § 61(a)(1). According to the court, Perez’s physical pain was a byproduct of performing a service contract, and the payments were made not to compensate her for some unwanted invasion against her bodily integrity but to compensate her for services rendered.