Nichelle Perez received $20,000 under contracts that she signed with a clinic before she underwent a prolonged series of painful injections and operations to retrieve her unfertilized eggs for transfer to infertile couples. The contracts said that she was being paid in compensation for her pain and suffering. The Code says that damages for pain and suffering are not taxable.
Was the $20,000 Perez received "damages"?
FINDINGS OF FACT
Perez is a 29-year-old single woman from Orange County, California. She is a high-school graduate and worked as a full-time sales associate for Sprint. In her early 20s Perez learned about egg donation. Her Internet search soon led her to the website of the Donor Source International, LLC—an egg-donation agency in Orange County that matches egg donors with women and couples struggling to conceive on their own.
A. The Donor Source
The Donor Source is a for-profit California company that has been in business since 2003. It is one of approximately 30 donor agencies in California and in 2009 supervised roughly 250 egg-donation cycles for its customers. The Donor Source recruits donors by advertising on Craigslist, in magazines, and by word of mouth. While any woman can apply to donate, only nonsmokers between the ages of 21 and 30 who have no family history of cancer or personal history of infertility or mental disorders will pass the initial screening. For those who pass, the donation process begins with an online application; and, if selected, potential donors are invited for
This is all called egg "donation", but the term is a misnomer—the participant in the egg-stimulation and retrieval is compensated. (There are a small number of true donors—women who undergo the rigors of the process for an infertile relative or friend without compensation. This opinion isn't about them.) The Donor Source fixes the fee for first-time egg donors based on where the donor lives. For Southern California women, first-time donors are promised $5,500—and the price goes up with each subsequent donation. The Donor Source is registered with the American Society for Reproductive Medicine, which caps the compensation for egg donors at $5,000 to $10,000.
B. The Contracts
But such promises of future payments all depend on prospective parents' picking a particular donor. Once they do, the donor signs two contracts—one with the Donor Source and one with the anonymous intended parents. These contracts let the Donor Source—with the approval of the intended parents—terminate the relationship with the donor up until the time the donor begins receiving egg-stimulation medication—a series of hormone injections formulated to maximize egg production.
Perez signed one contract with the Donor Source in February 2009. It promised her money:
This meant that if Perez kept her side of the deal, but produced unusable eggs or no eggs at all, she would still be paid the contract price. The contract plainly provides that it is not for the sale of body parts:
It also allocates foreseeable risk. It states that the donor assumes "all medical risks and agree[s] to hold The Donor Source harmless from any and all liability for any and all physical or medical harm to herself * * *." The Donor Source takes its deals seriously, and its representative credibly testified that the company could sue Perez for breach of contract if she did not strictly comply with all the requirements.
The contract between Perez and the intended parents is in all ways consistent with the contract with the Donor Source. It provides that Perez's payment is "in consideration for all of her pain, suffering, time, inconvenience, and efforts." The contract waives any and all parental or custodial rights Perez may have over the donated eggs. Once the eggs are removed, they immediately become the property of the intended parents and are fertilized almost immediately. It also states:
After signing the contracts, the Donor Source told Perez to take birth-control pills for approximately a month to synch her menstrual cycle with that of the intended mother. Then, up until March 27, 2009—the egg-retrieval date—Perez underwent a series of intrusive physical examinations. She frequently had to travel to a fertility clinic, submit to pregnancy tests, endure invasive internal ultrasound examinations, and have a syringe stuck into her arm to draw four to five vials of blood.
The needlework followed Perez home. She had to self-administer hormonal injections using a one-inch needle.
As the retrieval date approached, the injection schedule increased. Between March 16 and 25, she had to self-administer anywhere from one to three daily injections of Lupron, Follistim, and Menopur. She made around 22 injections into her stomach during this period. Every time she had to administer another dose of the hormones, she had to search for a part of her stomach not already covered in bruises.
Then on March 25 Perez administered to herself—under the observation of a professional at a fertility clinic—the final "trigger shot" of hCG.
On the retrieval date, Perez was required to undergo anesthesia for the procedure. Doctors informed her that anesthesia carries with it a risk of possible death, and so she had to sign another liability waiver just before she went under. Egg removal is a type of surgery, during which the doctor worked his way into an anesthetized Perez with an ultrasound needle, and then penetrated her ovaries to harvest any viable eggs. The unnatural amount of hormones she'd taken had done their job, and the doctors were able to retrieve between 15 and 20 eggs—rather than the body's normal production of just one—from her. After it was over, Perez felt cramped and bloated; she had mood swings, headaches, nausea, and fatigue.
But she'd kept the promises she made and got a check for $10,000.
Perez went back for a second round that year. On August 31 she again contracted with the Donor Source. She again signed a written agreement with the intended parents. Both
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; therefore, she left it off her tax return. The Commissioner disagreed and sent her a notice of deficiency. Perez timely filed a petition, and we tried the case in California, where Perez still lives.
We acknowledge that this case has received some publicity in tax and nontax publications, which is why it is important to state clearly what it does not concern. It does not require us to decide whether human eggs are capital assets. It does not require us to figure out how to allocate basis in the human body, or the holding period for human-body parts, or the character of the gain from the sale of those parts.
A. Nature of the Compensation
So what is this case about? Both parties agree that payments Perez received were not for the sale of her eggs. Perez argues that they were in exchange for the pain, suffering, and physical injuries she endured as part of the egg-retrieval process; the Commissioner, on the other hand, argues Perez was simply compensated for services rendered. The only two cases we have found that are anywhere near this issue are Green v. Commissioner, 74 T.C. 1229 (1980), and United States v. Garber, 607 F.2d 92 (5th Cir. 1979). Both involved the exchange of blood plasma for compensation. In Green, the taxpayer was paid by the pint, and we found her to be engaged in the sale of tangible property rather than the
Both of Perez's 2009 contracts with the Donor Source specify that her compensation is in exchange for her "good faith and compliance with the donor egg procedure." Unlike the taxpayers in Green and Garber, who were paid by the quantity and the quality of plasma produced, Perez's compensation depended on neither the quantity nor the quality of the eggs retrieved, but solely on how far into the egg-retrieval process she went. On this key point, the testimony of both parties to the contracts agrees with the contract language. We have to find that Perez was compensated for services rendered and not for the sale of property.
And, as we know, "gross income means all income from whatever source derived, including * * * compensation for services." Sec. 61(a)(1).
But the Secretary has amended these regulations and abandoned the Schleier language requiring a "tort or tort-type right." See Simpson v. Commissioner, 141 T.C. 331, 345 (2013); see also O'Connor v. Commissioner, T.C. Memo. 2012-317. The regulation now states:
Despite the change in the language, the new requirements look a lot like the old ones: (1) damages received (2) on account of personal physical injuries or physical sickness.
B. Damages Requirement
The regulations define the term "damages" as "an amount received (other than workers' compensation) through prosecution of a legal suit or action, or through a settlement agreement entered into in lieu of prosecution." Sec. 1.104-1(c)(1), Income Tax Regs. Perez questions whether the Secretary's regulatory interpretation of "damages" is permissible—whether the word "damages" in the Code allows the Secretary
We first ask if Congress has spoken directly to the question at issue. Chevron, 467 U.S. at 842. If not, we consider instead whether the Commissioner's regulation is a "reasonable interpretation" of Congress' intent. Id. at 843-44. The Code doesn't define "damages", and so we can swiftly hop up onto Chevron's step two.
On this step, we find a regulation invalid only if it is "`arbitrary or capricious in substance or manifestly contrary to the statute.'" Mayo Found., 562 U.S. at 53 (quoting Household Credit Servs., Inc. v. Pfennig, 541 U.S. 232, 242 (2004)). Perez argues that the definition of "damages" in the regulation is invalid because it requires prosecution (or threat of prosecution) of a legal suit as a prerequisite for a payment's exclusion from income. A walk through the regulation's history seems in order here.
From the beginning of tax time, awards or settlement proceeds for personal injuries have been excluded from taxation. See, e.g., Revenue Act of 1918, ch. 18, sec. 213(b)(6), 40 Stat. at 1066 (1919). The first section 104 regulations, enacted in 1960, required damages to be linked to a tort or tort-type right. See T.D. 6500, 25 Fed. Reg. 11402, 11490 (Nov. 26, 1960). And this "tort or tort-type right" was the focus of the regulations for half a century but, as Perez correctly points out, it is no longer. Perez cites several cases in support of her argument that we should interpret "damages" in section 104(a)(2) broadly to mean compensation in money received for a loss regardless of any legal suit or action.
We start with her reliance on Simpson. Simpson arose from a settlement between a taxpayer and her former
In Starrels v. Commissioner, 35 T.C. 646 (1961), aff'd, 304 F.2d 574 (9th Cir. 1962), we held that amounts contracted in advance for a consent to an invasion of privacy were taxable income and weren't excluded by section 104(a)(2). The Ninth Circuit agreed with us, and held that the section "reads most naturally in terms of payment for injuries sustained prior to a suit or settlement agreement." Id. at 576 (emphasis added). The court went on to note that these types of payments for personal injuries are excluded from gross income "because they make the taxpayer whole from a previous loss of personal rights." Id.
Again in Roosevelt v. Commissioner, 43 T.C. 77 (1964), we held that amounts FDR Jr. received for his share of the proceeds from a play about the life of his father were not excluded by section 104(a)(2). We reasoned that "moneys paid to any taxpayer as compensation for an advance waiver of possible future damages for personal injuries, would constitute taxable income to him under section 61 of the 1954
Perez very clearly has a legally recognized interest against bodily invasion. But we must hold that when she forgoes that interest—and consents to such intimate invasion for payment—any amount she receives must be included in her taxable income. Had the Donor Source or the clinic exceeded the scope of Perez's consent, Perez may have had a claim for damages. But the injury here, as painful as it was to Perez, was exactly within the scope of the medical procedures to which she contractually consented. Twice. Her physical pain was a byproduct of performing a service contract, and we find that the payments were made not to compensate her for some unwanted invasion against her bodily integrity but to compensate her for services rendered.
But what is one to make of the regulation's amendment to remove the "tort and tort-type right" requirement? One should always pause before holding that an amendment didn't change anything. But here the reason is clear—the amendment did change the law—it just didn't change the law for people like Perez. In 1992 the Supreme Court decided United States v. Burke, 504 U.S. 229 (1992). It held that title VII backpay settlement awards were not excludable from income under section 104(a)(2). Id. at 242. At the time the statute read "damages received * * * on account of personal injuries," and the taxpayer pounced on the argument that her settlement with the Tennessee Valley Authority for unlawfully discriminating against her because she was a woman fit that requirement. Not so, said the Supreme Court. The Court emphasized that since the 1960s the Commissioner has formally linked the section 104(a)(2) exclusion to "tort or tort-type rights." Id. at 234. It pronounced:
A few years later, in Schleier, the Supreme Court reinforced the tort or tort-type right standard when it held that payments received in an Age Discrimination in Employment Act
Shortly after the restrictive decisions in Burke and Schleier, Congress amended the Code in the Small Business Job Protection Act of 1996, Pub. L. No. 104-188, 110 Stat. 1755, and the Secretary in 2009 rewrote his regulations. This amended Code section and regulation let taxpayers who recovered under no-fault statutes exclude the "damages" that they received, even if they did not receive them for a "tort-type" claim. As we said in Simpson, the effect of removing the tort requirement from the regulation was to reverse the result in Burke and allow the exclusion for damages awarded under no-fault statutes. See Simpson, 141 T.C. at 346.
In 2012 the Commissioner officially explained that the "tort-type rights test was intended to distinguish damages for personal injuries from, for example, damages for breach of contract." T.D. 9573, 77 Fed. Reg. at 3107. The change in the section 104 regulation reflected a profusion of remedies for persons who are physically injured and recover under no-fault statutes, so that they are treated like those who are physically injured and recover through more traditional actions in tort. But that regulation still addresses situations where a taxpayer settles a claim for physical injuries or physical sickness before—or at least in lieu of—seeing litigation through to its conclusion.
This small change just helped tax regulation keep up with a bit of a shift in American law toward administrative or statutory remedies and away from common-law tort for some kinds of personal injuries. It is not at all arbitrary, capricious, or manifestly contrary to the Code. But it also doesn't help Perez. We completely believe Perez's utterly sincere and credible testimony that the series of medical procedures that culminated in the retrieval of her eggs was painful and dangerous to her present and future health. But what matters is that she voluntarily signed a contract to be paid to endure them. This means that the money she received was not "damages".
We conclude by noting that the result we reach today by taking a close look at the language and history of section 104
Because Perez's compensation was not "damages" under section 104(a)(2), we must rule against her on the main issue in the case.
Decision will be entered for respondent.