No, not Betty MacDonald’s 1945 humorous account of chicken-ranching in Chimacum, Washington (wherever that is).
Today we have the story of Suffering Nichelle G. Perez, 144 T. C. 4, filed 1/22/15. And it’s quite a story.
Who better to tell it than The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Implacable, Imperturbable, Irrefragable, Illustrious, Indomitable, Indefatigable (but never Impetuous or Inconsiderate) Foe of the Partitive Genitive, His Honor Judge Mark V. Holmes?
Suffering Nichelle’s suffering has induced an outpouring of legal talent rarely seen in a five-figure unreported income case. From left to right, we have “Professor Bridget Crawford of Pace University School of Law; Professor Lisa Milot of University of Georgia School of Law; and Professor Timothy M. Todd of Liberty University School of Law.” 144 T. C. 4, at p. 2. Judge Holmes thanks these renowned scholars for their “outstanding pro bono work on the unprecedented question this case raised.” Idem, as my high-priced colleagues would say; that means “in the same place as the last-cited item”, for those of you who are human beings and not lawyers.
Suffering Nichelle claims her egg dealings caused her suffering. And they literally are her eggs.
Suffering Nichelle donated human ova, of her very own manufacture, to a for-profit called Donor Source International, LLC. Suffering Nichelle was able to pass the strict scrutiny of DSI, LLC.
“…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 a consultation to go over the time commitment, needed medications, and risks of egg donation. They are also subjected to a series of psychological and physical evaluations, including blood tests, pap smears, breast exams, and pregnancy tests. Once approved, the potential donor creates an online profile that includes a picture, a description of her family history, and other personal details for prospective parents to view.” 144 T. C. 4, at p. 3.
Suffering Nichelle does this to relieve the suffering of persons unable to conceive a child, and provide the happy outcome described in Psalm 113:9.
Except Nichelle got $20K during the year at issue, and a 1099 therefor. Now the contract she signed with DSI, LLC and the intended recipients clearly state she is being paid for her “…time, effort, inconvenience, pain, and suffering in donating her eggs. This fee is for Donor’s good faith and full compliance with the donor egg procedure, not in exchange for or purchase of eggs and the quantity or quality of eggs retrieved will not affect the Donor Fee.” 144 T. C. 4, at p. 5.
The contract also states that Nichelle is not being paid for the eggs, she isn’t selling body parts and she assumes all medical and physical risks. She signed a similar contract with prospective donees. DSI, LLC swears they can sue Nichelle for breach of contract if she didn’t follow the procedures, which included blood draws, hormone injections and invasive ultrasound examinations.
Finally, Nichelle had to have a massive hormone injection, be anaesthetized, and suffer various physical symptoms, the details of which I’ll spare you.
As this is a non-political blog, I refrain from making a personal comment about women’s rights over their own bodies, which usually takes the form of telling men (myself included) to shut up. I now return to the tax aspects.
Nichelle went online, talked to fellow donors, and decided that, as she was paid for pain and suffering (and she did suffer), the payment wasn’t taxable.
Of course both DSI, LLC and the prospective donees disclaimed all tax advice of whatever kind.
Judge Holmes agrees that this isn’t a case of a sale or exchange. “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.” 144, T. C. 4, at p. 5 (Footnote omitted, but read it; one of the amici, Prof. Milot, has authored a disquisition entitled “What Are We–Laborers, Factories or Spare Parts? The Tax Treatment of Transfers of Human Body Materials,” for the Washington & Lee Law Review. I cannot imagine what General Lee, asleep on the campus of that illustrious university, would say).
So here we don’t have a sale. But was Suffering Nichelle paid for services or for suffering?
She had to go through the entire process. “… 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.” 144 T. C. 4,
Of course, payment for personal services is taxable. But payment of damages for physical sickness or injury isn’t.
The magic word in Section 104 is “damages.”
Going back in time, the exclusion from tax required a tort-type claim and recovery, but that got changed. The current Reg (1.104-1(c)(1)) says “Section 104(a)(2) 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.” 144 T. C. 4, at p. 12.
But as they say in The City of Light, “plus ca change, plus que c’est le meme chose.” The word “damages” is still around.
Nichelle claims that the Reg exceeds the statutory limits of Section 104(a)(2).
So Judge Holmes has to “pull into the Chevron Station”, 144 T. C. 4, at p. 13. In doing so, Judge Holmes sideswipes Mayo Clinic. See my blogpost “Carpenter, Colony, Chevron and Mayo”, 4/26/11.
Nichelle claims Congress hasn’t spoken, because Congress hasn’t defined “damages”, so we next go to the “arbitrary or capricious or manifestly contrary to the statute” Chevron text that Mayo applied to taxation.
OK, says Judge Holmes, but the cases Nichelle and amici cite go to settlements of claims, whether commonlaw or statutory. Here, however, there was no claim to settle: Nichelle agreed she waived all claims for medical or physical injury. In advance. Now if she had waived after the fact, maybe she might have had a better shot. But I can’t think DSI, LLC would play “trust me, trust me”, much less the donees.
“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.” 144 T. C. 4, at pp. 16-17.
But what about the 1996 Small Business Job Protection Act, which supposedly got rid of tort-type recovery as a predicate for Section 104 relief? That was for no-fault recoveries, like Workers’ Comp or automobile no-fault recoveries, where the injured party gets paid regardless of an affirmative finding against the party inflicting the injury.
It’s in advance of litigation, or in lieu of litigation. Further, the amendment “…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’.” 144 T. C. 4, at pp. 19-20.
And, looking forward to Super Sunday, Judge Holmes turns to the sports pages.
“We conclude by noting that the result we reach today by taking a close look at the language and history of section 104 is also a reasonable one. We see no limit on the mischief that ruling in Perez’s favor might cause: 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 and the less-noticed bodily damage daily endured by working men and women on farms and ranches, in mines, or on fishing boats. We don’t doubt that some portion of the compensation paid all these people reflects the risk that they will feel pain and suffering, but it’s a risk of pain and suffering that they agree to before they begin their work. And that makes it taxable compensation and not excludable damages.” 144 T. C. 4, at p.20.