144 T.C. No. 4
T.C.2015Background
- Perez received $20,000 under contracts with a donor agency and intended parents for egg donation procedures, designated as compensation for pain and suffering.
- Contracts stated compensation was for pain, suffering, and compliance with the procedure, not for the eggs themselves.
- The payments were made regardless of egg quality or retrieval success and included liability waivers and risk assumptions by Perez.
- Form 1099 reported $20,000 for 2009; Perez omitted it from her return believing it was nontaxable under 104(a)(2).
- The Tax Court must decide whether the payments qualify as damages excluded from gross income as compensation for personal physical injuries or physical sickness.
- The court ultimately held the payments were compensation for services, not damages, and taxable.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Are the payments damages under 104(a)(2) and excluded from gross income? | Perez argues payments are damages for personal injury. | Commissioner argues payments are taxable compensation for services. | No; not damages; include in gross income. |
| Is the Secretary's regulation defining damages valid under Chevron? | Regulation improperly conditions damages exclusion on litigation. | Regulation reasonable interpretation guiding damages definition. | Regulation upheld; not arbitrary. |
| Does the 2012 regulatory amendment removing tort-type rights affect Perez? | Amendment broadens damages exclusion. | Amendment does not change outcome here. | Amendment does not favor Perez; payments are taxable. |
Key Cases Cited
- Green v. Commissioner, 74 T.C. 1229 (1980) (taxable income vs. sale of property; tort-type distinction discussed)
- United States v. Garber, 607 F.2d 92 (5th Cir. 1979) (no-fault context; possible service vs. property sale discussion)
- Simpson v. Commissioner, 141 T.C. 331 (2013) (revisions to 104(a)(2) no tort-type requirement; no-fault damages context)
- Starrels v. Commissioner, 35 T.C. 646 (1961) (pre-suit payments for invasion of privacy treated as income)
- Roosevelt v. Commissioner, 43 T.C. 77 (1964) (advance damages for potential injuries treated as taxable)
- United States v. Burke, 504 U.S. 229 (1992) (no-fault backpay settlement; tort-type requirement historically influential)
- Schleier, 515 U.S. 323 (1995) (no-fault settlements; reinforces tort-type discussion in 104(a)(2))