## Facts

- Nichelle G. Perez, a 29-year-old California taxpayer, entered contracts with a for-profit egg-donation agency to undergo medical procedures to retrieve unfertilized eggs for intended parents.
- The procedures required hormone injections and surgical retrieval and involved pain and medical risk.
- In 2009, Perez completed two donation cycles and received $20,000 ($10,000 per cycle).
- The contracts stated the payments were for “pain and suffering” from the procedures and not for the sale of eggs.
- Payment was not dependent on the number or quality of eggs retrieved and was owed even if no eggs were obtained.
- Perez did not report the $20,000 as income, treating it as excluded from gross income as damages for physical injury or sickness.
- The IRS issued a notice of deficiency, including the $20,000 in gross income and asserting an accuracy-related penalty; Perez petitioned the Tax Court for redetermination.

## Issues

1. Whether payments received under an egg-donation contract, described as compensation for “pain and suffering,” are excludable “damages” received on account of personal physical injuries or physical sickness under I.R.C. § 104(a)(2).
2. Whether the payments instead constitute taxable gross income as compensation for services under I.R.C. § 61.

## Decision

- The Tax Court held that the $20,000 was taxable and not excludable under I.R.C. § 104(a)(2).
- The court reasoned that § 104(a)(2) applies to “damages” that compensate for a prior, unwanted physical injury or sickness, not amounts paid under a consensual service contract in advance of anticipated pain.
- The court treated the payments as consideration for Perez’s voluntary performance of agreed medical procedures, i.e., compensation for services.
- Contract language labeling the amounts as for “pain and suffering” did not control the federal tax characterization; the nature and cause of the payment governed.

## Legal Principles

- Gross income under I.R.C. § 61 includes compensation for services, even when the work entails expected pain, discomfort, or physical risk.
- The I.R.C. § 104(a)(2) exclusion is limited to “damages” received because of personal physical injuries or physical sickness and generally requires compensation for a prior, unwanted harm.
- Payments for risks and pain voluntarily assumed as part of a bargain (including advance consent to invasive procedures) are taxable compensation rather than excludable damages.
- Labels used in private contracts do not determine federal tax consequences when inconsistent with the substance of the transaction.

## Conclusion

The Tax Court concluded that amounts paid to an egg donor under a voluntary service contract—even if described as compensation for “pain and suffering”—are taxable income and are not excluded as damages for physical injuries or sickness under I.R.C. § 104(a)(2).


Perez v. Commissioner, 144 T.C. 51 (2015)