Definition — Tax Turtles and Body Materials

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Image source: Betta.1 (Own work) [GFDL (http://www.gnu.org/copyleft/fdl.html) or CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons

Image source: Betta.1 (Own work) [GFDL (http://www.gnu.org/copyleft/fdl.html) or CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons

This week the court discussed tax turtles in one case and decided in another not to figure out how to allocate basis in the human body, or the holding period for human-body parts, or the character of the gain from the sale of those parts.

1.

In T.C. Summary Opinion 2015-3 (Jacobs), the court said the taxpayer was a “tax turtle”—someone with no fixed residence who carries her “home” with her.

In this case, the taxpayer was a long-haul truck driver who lived with friends in Minnesota when he wasn’t on the road. He said the Minnesota residence was his home, and that he was entitled to a deduction for travel expenses.

The IRS said the taxpayer was an itinerant with no tax home, living on the road.

To reach a decision, the court applied the factors in Revenue Ruling 73-529, which deals specifically with taxpayers who live on the road. Those factors are

— the business connection to the locale of the claimed home;

— the duplicative nature of the taxpayer’s living expenses while traveling and at the claimed home; and

— personal attachments to the claimed home.

The taxpayer’s records indicated he spent more time in California than he did in Minnesota. He contributed approximately $10,000 to his friend’s Minnesota household, and he had no business reason for living there.

What do you think the court decided in the case of the tax turtle?

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THE COURT’S DECISION

2.

In 144 T.C. No. 4 (Perez), the taxpayer received $20,000 in exchange for undergoing procedures to donate her eggs to infertile couples. The contracts she voluntarily signed in advance of the procedures stated the sums she received were designated compensation for pain and suffering. She did not report these amounts on her 2009 tax return. The IRS issued a notice of deficiency.

The taxpayer says the payments were in exchange for the pain, suffering, and physical injuries she endured as part of the egg-retrieval process. Since the internal revenue code says damages for pain and suffering are not taxable, she argued she did not have to include the payments as income.

The IRS says the taxpayer was compensated for services rendered.

The taxpayer and the IRS agree the payments were not for the sale of her eggs.

Instead of deciding issues of whether human eggs are capital assets, how to allocate basis in the human body, the holding period for human-body parts, or the character of the gain from the sale of those parts, the court determined the proper question that would decide the case was whether the $20,000 the taxpayer received were “damages.”

The court looked to federal income tax regulation 1.104-1(c)(1), which excludes from gross income the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness.

The history of the regulation addresses situations where a taxpayer settles a claim for physical injuries or physical sickness before–or at least in lieu of–seeing litigation through to its conclusion.

However, the taxpayer believes the term “damages”, which is not defined in the tax code, should be interpreted broadly to mean compensation in money received for a loss regardless of any legal suit or action.

What would you decide?

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THE COURT’S DECISION

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Note: Taxing Lessons provides a summarized version of sometimes lengthy court decisions. The full case may include facts and issues not presented here. Please use the link provided to read the entire case.

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Sorry, wrong answer :(
Right answer!
For the IRS.

Cases decided over many decades give us the answer–a taxpayer who’s constantly in motion is a “tax turtle”–that is, someone with no fixed residence who carries his “home” with him. Such a taxpayer is not entitled to business deductions for traveling expenses under section 162.

We find that Jacobs is an itinerant worker–a tax turtle–whose tax home followed him on the road.

Sorry, wrong answer :(
Right answer!
For the IRS.

The taxpayer very clearly has a legally recognized interest against bodily invasion. But we must hold that when she forgoes that interest–and consents to such intimate invasion for payment–any amount she receives must be included in her taxable income. Had the injury exceeded the scope of her consent, she may have had a claim for damages.

But the injury here, as painful as it was to the taxpayer, was exactly within the scope of the medical procedures to which she contractually consented. Her physical pain was a byproduct of performing a service contract, and we find the payments were made not to compensate her for some unwanted invasion against her bodily integrity but to compensate her for services rendered.

We completely believe the taxpayer’s utterly sincere and credible testimony that the series of medical procedures that culminated in the retrieval of her eggs was painful and dangerous to her present and future health. But what matters is that she voluntarily signed a contract to be paid to endure them. This means that the money she received was not “damages.”

Because the compensation was not damages under section 104(a)(2), we must rule against the taxpayer on the main issue in the case.

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