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Egg Donor IRS Challenge Offers Future Sperm Tax Certainty

Photographer: Lex Van Lieshout/AFP via Getty Images

A vessel containing women's frozen egg cells. Close

A vessel containing women's frozen egg cells.

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Photographer: Lex Van Lieshout/AFP via Getty Images

A vessel containing women's frozen egg cells.

To Nichelle Perez, the $20,000 she received for donating her eggs for fertility treatments was a tax-exempt payment for pain and suffering.

Not so, said the U.S. Internal Revenue Service, which considers it income.

The California woman and the government are arguing over whether egg donation is an act of commerce that should be taxed. A U.S. Tax Court judge will determine the outcome in what is seen as a precedent-setting case that could provide certainty for people who donate eggs, sperm and blood plasma.

“Settling this would settle the law for an awful lot of people,” said Lisa Milot, an associate law professor at the University of Georgia who studies the regulation of the human body. “Right now, the status is that people’s understandings and practices are just all over the place.”

Nationally, women made 16,858 attempts to conceive using donated eggs in 2012, according to the Society for Assisted Reproductive Technologies. That’s a 5.5 percent increase from 2011.

In 2009, Perez twice donated eggs through the Donor Source International LLC, each time receiving $10,000 after a months-long process that included injections and medical exams.

She didn’t report the income on her tax return and received a notice from the IRS. The tax agency acted after receiving an informational return from The Donor Source saying that Perez had been paid.

Perez then challenged the IRS, contending that the payment was more like a settlement from a personal-injury lawsuit than business earnings.

‘Being Penalized’

“This is in no way considered self-employment since I did not sell a product or service,” she wrote in a 2012 court filing. “I feel like I am being penalized for doing something good for another person.”

The IRS said Perez owed $4,998 in taxes, plus interest. In court filings, the agency noted Perez’s voluntary consent and pointed to her agreement with The Donor Source, which described the payment as a “fee.”

Milot, the law professor, said Perez’s argument about damages probably won’t succeed because she consented to the medical procedures.

“If that was the standard,” Milot said, “there’s not a single professional athlete who would ever have taxable income” because getting injured is a routine part of their jobs.

Milot said Perez could have a partial victory if the court considers the donation to be a sale of property that is subject to capital gains rules. In that case, she wouldn’t owe the self-employment tax of 15.3 percent.

Egg Sale

Also, Perez could pay lower tax rates on the income if it were treated as long-term capital gains. Eggs could be considered property she had possessed since birth, in which case the sale could be seen as a long-term capital gain.

If they’re not considered property until removed from her body, the eggs could be seen as generating short-term gains.

Richard Carpenter, Perez’s San Diego-based attorney, said the judge said after the trial that the capital gains questions wouldn’t apply in this case.

Carpenter said Perez’s contract with The Donor Source specified that she wasn’t selling her eggs.

Perez, now 29, donated eggs before 2009, according to court filings. She hasn’t done so since, Carpenter said.

Grant Williams, an IRS spokesman, declined to comment on the case beyond the agency’s court filings. The Donor Source didn’t respond to a request for comment.

Tax Court Judge Mark Holmes is seeking briefs from outside experts and interested parties. Holmes set a May 9 deadline to submit briefs, meaning the decision would come after that.

Carpenter said he expects a decision by the end of the year.

The case is Perez v. Commissioner, U.S. Tax Court, 009103-12.

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net

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