It is income tax season; the April 15th filing deadline is less than two months away. Many people have already filed and may even have spent their return at one of the many Valentine's Day, President’s Day, or just because sales already.
If you were a surrogate or an egg donor in 2016 and received compensation you need to be aware of your obligation to report the compensation as gross income. I have heard many donors and carriers state that the compensation was for “pain and suffering” or that they did not receive a 1099, so they do not have to claim the money as income. This is not correct. The 2015 case of Perez v. Commissioner, 144 T.C. 4 (2015), made it clear that an egg donor is required to report the compensation she received for the egg donation process. The Court made this ruling even though the contracts Perez signed with both the agency and the intended parents specifically stated that she was not being paid for her eggs and that the donor fee was for her “time, effort, inconvenience, pain and suffering.” In reaching this conclusion the Court found that in order for income to be tax-free due to “pain and suffering” that it had to be the result of damages arising out of an injury (a tort). The Court further stated that Perez’s physical pain was a voluntary act; “a byproduct of performing a service contract, and…not to compensate her for some unwanted invasion against her bodily integrity.”
Although there is not a specific case at this time relative to gestational carriers or surrogates, the analysis is likely to be the same. Like egg donors surrogates enter into contracts with agencies and intended parents about the service they will provide. Like egg donors surrogates undergo medical procedures as part of that agreement. If a pregnancy results, the pregnancy itself may be difficult and involve additional medical procedures, but even under the best of circumstances pregnancy is rarely comfortable. Many surrogates argue they should not have to pay an income tax on the money they receive for compensation of their services due to “pain and suffering.” Reading the Perez case it is easy to see why this argument would likely fail if an individual was audited.
As a result of the Perez case more agencies than before are issuing 1099 forms to surrogates and egg donors. However, it is important to remember that receiving a 1099 does not trigger the obligation to report income; receiving income triggers the obligation. I recommend that anyone who was a surrogate or an egg donor consult with a tax professional and suggest that you share a copy of Perez with that professional. If you are planning to be a donor or surrogate you may also want to consult with a tax professional in advance of negotiating your compensation, so that you may plan for what could be a significant tax liability.
Chrissy Hanisco is an attorney who practices in New Hampshire and Massachusetts with a focus on third party assisted reproductive law and adoption. Chrissy’s entire legal career has been focused on assisting others in difficult situations. After personally battling infertility she decided to use her legal skills to help others build their families. She is an active member of RESOLVE New England, the American Bar Association’s Assisted Reproductive Technologies Committee, and Parents Via Egg Donation. Locally, she is a Board member of Capital Region Mothers of Multiples. She lives in Concord, New Hampshire with her partner, their twin fraternal boys, her stepson, and their faithful, yet slightly neurotic Labrador retriever, Luke. The Stein Law Firm, PLLC