Tax Court Rules: Egg Donor’s Compensation Must be Taxed

On January 22, 2015 the US Tax Court, in Perez v. Commissioner of Internal Revenue (144 T.C. No.4), ruled that an egg donor’s compensation for pain & suffering must be included in gross income and therefore taxed. The conclusion was that egg donors must report any compensation earned for their donation.

The plaintiff is a two-time donor who was donating through an agency. She decided not to report her compensation from either donation. Her belief, like that of many, was that the payments were “damages” for her pain and suffering, not compensation as income for her role in the donation.Gavel Pic

Section 104 (a)(2) of the Tax Code excludes damages from taxable income. It excludes from gross income, “… the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness.”

The Court referred to a number of cases and reasoned that damages are derived from a tort claim, legal action, and/or a settlement. Donor compensation is given in return for a waiver of the pain and suffering that is expected to occur as evidenced in the agency contract. The contract states, “This fee is for Donor’s good faith and full compliance” so the court held that the fee was compensation for services rendered and not damages for pain and suffering.

Those persons acting as egg donors are now on notice that payments arising from a donation are taxable. The question remains whether an agency or an intended parent must issue a 1099 to a donor, as well, as whether this case applies to gestational carriers as well. The case does not specifically address these issues, so we can only speculate.