Payments Received for Donating Human Eggs Is Taxable Income

Court decides that payments egg donors receive are for the egg donors’ personal services and are fully taxable income.

If a woman is paid for donating her eggs to others as part of fertility treatments, is the money taxable income? In the first case of its kind, the U.S. Tax Court says “yes.” (Perez v. Comm’r, 144 T.C. 4 (2015).)

Nichele Perez contracted with an egg donation agency to provide her eggs to women who couldn’t conceive on their own. She made two separate egg donations, undergoing a months-long process that included a series of painful injections, medical exams, and operations. She was paid $20,000.

If the agency had paid Perez expressly in return for her eggs, or for her personal services in providing them, the money clearly would have been taxable income to Perez. However, the agency designated the payment as a “fee” that was paid to compensate Perez for the “time, effort, inconvenience, pain, and suffering in donating her eggs.” The contract expressly provided that Perez was not being paid for her eggs, and she would be paid even if she didn’t produce any useable eggs.

Perez claimed that the money she was paid by the agency was not taxable because it compensated her only for her pain and suffering, not for services rendered; therefore, she left the money off her tax return. The IRS disagreed, claiming the $20,000 was taxable income because it was a payment for Perez’s personal services. The Tax Court agreed with the IRS.

The tax law has long provided that monetary damages or settlement proceeds paid to compensate someone one for personal injuries or physical sickness are not taxable. (IRC Sec. 104(a)(2).) However, the Tax Court held that this rule applies only where someone brings (or threatens) a lawsuit that she wins or settles. Perez did not do this. Moreover, she was paid before her injuries occurred, and she expressly consented to undergo the procedures that caused her pain and suffering. The Tax Court concluded that her physical pain was a byproduct of performing a service contract. The payments were not made to compensate her for an unwanted invasion against her bodily integrity, but to compensate her for services rendered.

The Tax Court noted holding otherwise would establish a dangerous precedent: “A professional boxer could argue that some part of the payments he received for his latest fight is excludable because they are payments for his bruises, cuts, and nosebleeds. A hockey player could argue that a portion of his million-dollar salary is allocable to the chipped teeth he invariably suffers during his career. And the same would go for the brain injuries suffered by football players.”

This case has received much attention in the egg donation community. Many egg donors have entered into agreements similar to those of Perez. It’s clear now that simply calling the payments egg donors receive “damages” for pain and suffering doesn’t make them so. Instead, such payments are made for the egg donors’ personal services and are fully taxable.

Since this case involved the sale an egg donor’s services—not the eggs themselves—the Tax Court didn’t need to decide the many tax issues that would be involved where a person sells a body part like a human egg--for example, whether human eggs are capital assets, or how to determine their value for tax purposes. These are issues that have yet to be resolved.

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