Perez v. Commissioner
144 T.C. 51, 2015 U.S. Tax Ct. LEXIS 3, 144 T.C. No. 4 (2015)
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Rule of Law:
Payments received under a contract for services are taxable compensation, not excludable "damages" under IRC § 104(a)(2), even if the services require the provider to endure physical pain and suffering to which they consented in advance.
Facts:
- Nichelle Perez entered into contracts with The Donor Source, an egg-donation agency, and with intended parents to serve as an egg donor.
- The contracts specified that Perez would receive a fee for her "time, effort, inconvenience, pain, and suffering," not for the purchase of her eggs.
- Perez's payment was contingent on her compliance with the medical procedures, not on the quantity or quality of eggs retrieved.
- To fulfill the contract, Perez underwent a series of painful medical procedures, including dozens of self-administered hormonal injections that caused bruising and discomfort.
- The process culminated in a surgical procedure under anesthesia to retrieve the eggs, which involved known medical risks and caused post-operative pain and fatigue.
- Perez completed this process twice in 2009, receiving $10,000 for each cycle, for a total of $20,000.
- The contracts included clauses where Perez assumed all medical risks and waived liability for any physical harm resulting from the procedures.
Procedural Posture:
- The Donor Source issued Nichelle Perez a Form 1099 for $20,000 for the 2009 tax year.
- Perez did not include the $20,000 on her 2009 federal income tax return, believing it was non-taxable.
- The Commissioner of Internal Revenue (respondent) audited Perez's return and issued a notice of deficiency.
- Perez (petitioner) timely filed a petition with the United States Tax Court to challenge the Commissioner's determination.
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Issue:
Does a payment received under a contract for providing egg-donation services, which is explicitly labeled as compensation for pain and suffering, qualify as excludable 'damages received on account of personal physical injuries or physical sickness' under Internal Revenue Code § 104(a)(2)?
Opinions:
Majority - Holmes, J.
No. The payments Perez received do not qualify as excludable damages under IRC § 104(a)(2) because they constitute compensation for services rendered, not a settlement for an unwanted personal injury. The court determined that Perez was compensated for her services—undergoing the donation process—rather than for the sale of property, as her payment was not dependent on the outcome of the retrieval. The controlling Treasury Regulation defines excludable "damages" as amounts received through a lawsuit or a settlement in lieu of one. Perez did not receive the money from a legal claim; instead, she received it for prospectively consenting to undergo a painful procedure under a service contract. Citing precedent like Starrels v. Commissioner, the court reasoned that payments for an advance waiver of possible future injuries are taxable income because they do not make a taxpayer whole from a prior, unwanted loss. The recent amendment to the regulation removing the "tort or tort-type" requirement was meant to include awards from no-fault statutory schemes, not to reclassify payments made under a service contract where physical pain is an anticipated part of performance.
Analysis:
This decision solidifies the distinction between taxable compensation for services and non-taxable damages for personal injuries under IRC § 104(a)(2). It establishes that when an individual contractually consents to endure physical pain or risk as part of a service, the resulting payment is for that service and is therefore taxable. The ruling prevents the § 104(a)(2) exclusion from being expanded to cover compensation for inherently risky or physically demanding occupations, such as professional sports or mining. By distinguishing between a pre-injury consent-for-payment arrangement and a post-injury settlement, the court provides a clear line for future cases involving remuneration for activities that cause physical distress.
