Taxing the Human Body

—by Kelly Pare

Perez v. Comm’r, 144 T.C. No. 4 (2015)


Advances in modern medicine have brought new meaning to the idea of selling one’s body. Surrogacy arrangements, egg and sperm donations, and even black market kidney transactions are commonplace in today’s society. From a tax perspective, these types of commercial transactions are very interesting.


Perez v. Comm’r, a 2015 United States Tax Court case, seems to raise more questions than it answers about the tax treatment of income derived from egg donations.  Nichelle Perez contracted with Donor Source, a for-profit California company, to donate eggs. See Perez v. Comm’r, 144 T.C. No. 4 (2015). Nichelle received $20,000 in 2009 for the pain, suffering, time, and inconvenience that the egg donation caused her. Id. Donor Source sent Nichelle a 1099 in the amount of $20,000. Id. Instead of reporting this income on her tax return, Nichelle concluded that the money was excluded from gross income under section 104(a) of the Tax Code. I.R.C. 104(a) (2014) (excluding from gross income damages received on account of personal physical injuries or physical illness).

The tax court rejected Nichelle’s argument, reasoning that the payments, although in compensation for physical pain and suffering, arose out of a consensual contract between Nichelle and Donor Source and did not merit exclusion from gross income. See Perez v. Comm’r, 144 T.C. No. 4 (2015).  Consequently, Nichelle had to pay income tax on the money she received by Donor Source. The court was adamant in addressing only the particular issue and facts before it, and expressly stated what the case was not about.  The court refrained from deciding whether human eggs are capital assets, figuring out how to allocate basis in the human body, determining the holding period for human body parts, or deciding the character of the gain from the sale of human body parts. Id. at 9.

The decision in Perez is narrowly confined to the facts of the case and decided only the tax liability of the particular individual at issue.  Moreover, current law is ambiguous as to the tax treatment of transfers in human body parts and the IRS offers little guidance. See Lisa Milot, What Are We—Laborers, Factories, or Spare Parts? The Tax Treatment of Transfers of Human Body Materials, 67 Wash. & Lee L. Rev. 1053, 1053 (2010).  This lack of clarity surrounding the taxability of transfers in human body parts makes tax planning and compliance difficult. Id. at 1108. Given the increasing volume of these types of transactions, perhaps the time is ripe for Congress to legislate in this area.

Unfortunately, the questions left unanswered by the court in Perez are more thought provoking and interesting from a tax standpoint than the questions on which the court focused.  Do human body parts properties constitute capital assets?  Is your basis in your body zero, or does it adjust upward and downward?  If for example, you sell a kidney that you have stored outside your body for more than a year, can the proceeds of that sale be characterized as a capital gain?  At the very least, the unanswered questions posed by the court in Perez would surely make for an interesting conversation at a bar, and the facts in Perez provide ideas for a great law school exam hypothetical.

For a more comprehensive overview of the taxation of transfers of human body parts and a framework of how these transactions should be taxed, see Lisa Milot, What Are We—Laborers, Factories, or Spare Parts? The Tax Treatment of Transfers of Human Body Materials, 67 Wash. & Lee L. Rev. 1053 (2010) and Bridget J. Crawford, Our Bodies, Our (Tax) Selves, 31 Va. Tax Rev. 695 (2012).