Amounts had been received because of the personal physical injuries which are excluded from taxable income.
It would seem like that a tax burden would be the insult which is added to the injury.
But what is the meaning of “personal physical injury?” Like in many phrases which are found in tax law, the meaning can be counterintuitive to many average taxpayers.
A California woman who is in her 20s read about the opportunity to receive payment for providing unfertilized eggs to some infertile couples. She had applied at the company, and at first completed a battery of physical and psychological tests.
If it got matched with a couple, and if all the tasks had been successfully completed, it would be possible to receive around $10,000 of compensation for providing the eggs. This had been the maximum allowed by the American Society for the Reproductive Medicine.
The woman had successfully completed two rounds of egg retrieval. She had received a Form 1099 reporting around $20,000 of the compensation for her efforts in all of it.
Tax people can find these cases interesting because they can imagine many alternatives for the proper tax reporting. Some might argue with no income, others compensation income, still can be others capital gain income.
The Tax Court has quickly disposed of being the capital gain option. To have a capital gain, one must have to sell a capital asset. Past cases of law suggested that a sale of plasma might be a sale of a capital asset for someone. So, why not the eggs as a capital asset?
The payments were said to be made for “pain, suffering, time, inconvenience, and efforts.” The facts had been described by the court supported the existence of all of these items.
The woman had self-injected three drugs in her stomach. The drugs had burned throughout the procedure. Her belly got bruised. She had to search for non-bruised parts of her belly for receiving future injections.
Eggs were being recovered through surgery that anesthesia required. She was able to produce around 15-20 eggs due to her medication she had been provided. Her body was been bloated.
The contract between the woman and the company had allowed the Tax Court to dodge the issue of a sale of an capital asset. I suspect that the issue will return to the court in a very different fact pattern.
The court’s decision does not require any determination of applicability of the self-employment tax. The years at issue had been pre-dated the 20% deduction for qualified business income.