March 3, 2014

The Broad Reach of the Internal Revenue Code’s Taxing Power

Holland & Knight Tax Compliance Blog
Kevin E. Packman

Two interesting stories coming out of California were reported in the media last week, both of which dealt with the issue of what constitutes taxable income. Generally speaking Internal Revenue Code Section 61 defines what gross income is, and unless there is an exception, then it is taxable. Section 61 states "gross income means all income from whatever source derived."

Taxability of Fee Received for Donating Eggs. The first situation, as was reported by Bloomberg,1 deals with payments a woman, Nichelle Perez, received for donating her eggs to a fertility clinic. In 2009 Perez donated eggs on two different occasions, and received $10,000 for each donation. The fertility clinic, The Donor Source, issued a Form 1099 for $20,000 to Perez, which she did not include as taxable income on the theory that the payments were for pain and suffering. The IRS issued a notice to Perez, which she challenged on the theory that the payment was not from business earnings.  The IRS, of course, took the position that the receipt of funds was taxable income.

The dispute eventually led to Tax Court, where the case, Perez v. Commissioner, No. 9103-12 (Feb. 14, 2014), is before Judge Mark Holmes, who set a May 9, 2014 date for receipt of briefs from experts and interested parties.2 This is an issue that has an impact on tens of thousands of people who donate eggs, sperm, blood and other bodily fluids or organs and who may receive payment in exchange for such items. Bloomberg cites the Society for Assisted Reproductive Technologies for the proposition that in 2012 16,858 women attempted to get pregnant relying on eggs that had been contributed to fertility clinics, which was a 5.5% increase from 2011.

According to the trial transcript, Perez had previously donated eggs to the Donor Source, once in 2007 and twice in 2008. In those instances she also failed to include the payment she received in her taxable income. The transcript reflects that 2008 Perez received an IRS notice in 2008 that she was going to be taxed on the income she received for donating her eggs. She indicated that "I pretty much took the advice that I found online from other donors, what they had done, what they had said, stating that the income was from pain and suffering, and sent the page of the contract that stated that. And their case was dismissed and I received a similar letter, and that was the end of it for 2008."3 Consequently, it would appear that either the IRS has changed their views on the taxability of such payments or the 2008 case was incorrectly dismissed.

The Bloomberg article reflects that for each egg donation, Perez endured a month long process that included numerous injections and medical exams. However, the article minimizes what is involved in egg donation as well as the timing. According to a February 2013 article titled, The Business of Egg and Sperm Donation, "egg donors must inject themselves with powerful fertility medications for several weeks before undergoing outpatient surgery."4

Taxability of Found Property. The second case deals with a Northern California couple who live in California's Gold Country. They were taking a walk on their property with their dog, when during the walk they noticed a rusty metal can sticking out of the ground near an old tree.5 It turns out that there were eight cans in all, which contained more than 1400 gold coins, 1,427 to be exact, from 1847 to 1894. While the coins are in $5, $10 and $20 denominations, the face value of the coins totals approximately $28,000.6 However, David Hall, co founder of Professional Coin Grading Service of Newport Beach, who authenticated the coins, indicated that if the coins were melted the gold would be worth $2 million.7 Notwithstanding, experts state that because the coins are in mint condition and so rare, they could be worth $10 million in total.

Don Kagin of Kagin's Inc., an 81 year old family business that deals with rare coins, is representing the couple. He indicted that "they plan to put most of the coins up for sale through Amazon while holding onto a few keepsakes. They'll use the money to pay off bills and quietly donate to local charities."

Unfortunately, whether the couple sell the coins or keep them, they will be subjected to both federal and state tax. IRS Publication 17 titled 2013 Tax Guide, indicates that found property is taxable. It states that "if you find and keep property that does not belong to you that has been lost or abandoned (treasure-trove), it is taxable to you at its fair market value in the first year it is your undisputed possession."8 This is consistent with Treasury Regulations, which provide that a "treasure trove, to the extent of its value in United States currency, constitutes gross income for the taxable year in which it is reduced to undisputed possession."9

It is not clear when this first became the law, but it appears that this has been the law since at least 1953.10 In Cesarini v. United States, the taxpayers found $4,467 hidden in a piano they bought at an auction for $15.11 They took the money to a bank to convert to new currency and reported the $4,467 on their 1964 tax return as ordinary income from other sources. They later filed an amended return eliminating these funds from gross income and requested a refund. The IRS rejected the refund claim, and the taxpayers filed a lawsuit.  The taxpayers argued that the funds did not constitute gross income and if it did, then it was income due in 1954 when the piano was purchased, not 1964. The benefit of the second argument is the statute of limitations was closed. The District Court held that the funds were taxable when found in 1964, not when the piano was purchased in 1957. Furthermore, the Court cited a 1953 Revenue Ruling which stated, "[t]he finder of treasure trove is in receipt of taxable income, for Federal income tax purposes, to the extent of its value in United States currency, for the taxable year in which it is reduced to undisputed possession." Rev. Rul. 61, 1953-1, Cum. Bull. 17."12

9 Treas. Reg. §1.61-14.
10 Rev. Rul. 61, 1953-1, Cum. Bull. 17
11 Cesarini, Ermenegildo v. U.S., (1970, CA6) 26 AFTR 2d 70-5107, 428 F2d 812, 70-2 USTC ¶9509, affg (1969, DC OH) 23 AFTR 2d 69-997, 296 F Supp 3, 69-1 USTC ¶9270.

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