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Income “From Whatever Source Derived”

One of the first principles an American tax professional learns is that Uncle Sam gets to share in income “from whatever source derived.”

The Tax Code specifies that gross income includes income from any source not specifically exempted by statute. This makes the law flexible enough to encompass all sorts of ways of earning money that the code’s drafters could not have foreseen. And it means that in order to successfully argue that money you receive should not be taxed, you should be able to logically categorize it as a gift, return of capital, or another known exception to the rule.

Nichelle Perez is trying to do just that. Perez twice donated her eggs through Donor Source International LLC, each time receiving $10,000. She did not report the payments on her tax return and subsequently received a notice from the Internal Revenue Service. Perez challenged the IRS. In a court filing, she wrote, “I feel like I am being penalized for doing something good for another person.”

The bottom line, however, is that the IRS is right. Absent a specific statutory exemption in the tax code, selling a body part or bodily product is simply the sale of an item. Despite the fact that the transaction is usually called a “donation,” women are generously compensated for the time and discomfort egg donation entails. The Today Show spoke last fall with a woman who had donated three times, receiving between $8,000 and $10,000 for each donation. While women who donate may genuinely wish to help other couples conceive, it is only a “donation” if the donor is not compensated for the value of what she gave up.

From a broader perspective, if you donate blood and the government sets standards as to how that blood can enter the stream of commerce (as it does through the Food and Drug Administration), it is self-evident that the blood enters that commerce stream. In the U.S., most whole blood donors have been volunteers since the government required blood banks to label blood from paid donors differently than blood obtained from volunteers. But plasma donors are still sometimes compensated, especially by pharmaceutical companies. The Tax Court ruled in 1980 that a Florida woman, Margaret Kramer Green, who had a rare blood type that made her a frequent plasma donor was in the trade or business of selling blood. Not only was Ms. Green’s income from the plasma sales taxable, she was permitted to deduct costs related to her travel to the blood center, along with some “high-protein foods,” as business expenses.

Are there moral, humanitarian or public policy reasons why those who donate eggs or sperm should not have to pay income taxes on money they receive in return? Possibly. I do not have strong personal feelings either way, but it is not up to me. It is not up to the IRS either. It’s up to Congress. If Congress wants to exempt such sales, set a lower tax rate on them, or write other special rules for this situation, it can do so. Lawmakers could also outlaw compensation altogether, as they did for organ donors in the National Organ Transplant Act of 1984. This may or may not be a conversation we need to have, but it’s a conversation we need to have with our legislators, not with IRS agents.

In the meantime, income is income, from whatever source derived.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us” and Chapter 4, “The Family Business."

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