Medical-injury settlement excluded from gross income

Plain-English summary

A taxpayer sued a fertility clinic after an embryo created with an anonymous donor egg resulted in a child born with a genetic condition causing physical, cognitive, and behavioral disabilities. The complaint sought damages for the child's physical injuries and sickness and for the taxpayer's related emotional distress. The taxpayer accepted a single lump-sum settlement. The IRS ruled that the settlement was excluded from gross income under section 104(a)(2) because it compensated for physical injuries or sickness and emotional distress attributable to those injuries, except to the extent it reimbursed previously deducted medical expenses.

Ruling snapshot

• Question: Was the settlement received for the child's physical injuries and the taxpayer's related emotional distress excluded from gross income?
• Outcome: Approved, except for amounts reimbursing previously deducted medical expenses.
• Key authorities: IRC §§ 61, 104(a)(2), and 213; Treas. Reg. § 1.104-1(c)(1).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201950004 [Third Party Communication:
Release Date: 12/13/2019 Date of Communication: Month DD, YYYY]
Index Number: 104.00-00, 104.00-03
Person To Contact:
------------------------------- ------------------------, ID No. ------------------
--------------------------------- ----------------------------------------------------
------------ Telephone Number:
---------------------------- ----------------------
Refer Reply To:
CC:ITA:B05
PLR-107009-19
Date:
September 13, 2019

Taxpayer =
--------------------------
Clinic =
--------------------------------------------------------------------------
Date 1 =
----------------------
Date 2 =
---------------------------
=
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Date 3 =
---------------------
Date 4 =
----------------------
Genetic =
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Condition -----------------------------------------------------------------------
$x = -----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
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State X Court = --------------------------------------

Dear --------------------:

This letter responds to your letter requesting a ruling that the $x settlement amount
received by Taxpayer on Date 4 is excluded from Taxpayer’s gross income pursuant to
§ 104(a)(2) of the Internal Revenue code.

                                      FACTS

Taxpayer contracted with Clinic to provide her with a suitable anonymous donor egg
and perform an embryo transfer via in vitro fertilization. On Date 1, Clinic implanted into
Taxpayer an embryo that was developed using an anonymous donor’s egg. As a result
of that implantation, Taxpayer conceived ---------. Prior to this procedure and
unbeknownst to Taxpayer, Clinic did not test the donor egg or embryo implanted in
Taxpayer for genetic mutations. Specifically, Clinic did not test the donor egg or embryo
PLR-107009-19 2

to determine if either carried the gene that causes Genetic Condition. On Date 2,
Taxpayer gave birth to ---------.

Some months after ------ birth, --------- underwent a medical examination and genetic
testing. The testing revealed that --------- suffered from Genetic Condition. At no point
prior to the birth of --------- did Clinic inform Taxpayer that the donor egg and/or donor
carried, or was at risk for carrying, the gene that causes Genetic Condition. Because of
being born with Genetic Condition, --------- suffer from multiple physical, cognitive, and
behavioral disabilities.

On Date 3, the Taxpayer, individually and on behalf of ---------, filed a complaint in State
X Court against Clinic seeking damages for the above described physical injuries and
physical sickness that --------- suffered. Taxpayer’s complaint states that after Taxpayer
informed Clinic of the results of testing that revealed that --------- suffer from Genetic
Condition, Taxpayer was provided with genetic testing results of the anonymous donor
egg which showed that it was positive for the gene causing Genetic Condition.
Taxpayer’s complaint claimed that ----------physical injuries and physical sickness was
the result of Clinic using a donor egg carrying the gene that causes Genetic Condition
for the embryo that Clinic implanted into Taxpayer, and that Clinic failed to test the
donor egg or embryo for the gene that causes Genetic Condition prior to the implanting
procedure. The damages Taxpayer sought also included damages for emotional
distress that Taxpayer suffered as a result of-----------physical injuries and physical
sickness. On Date 4, Taxpayer accepted a settlement of her lawsuit claims against
Clinic for a single lump sum amount of $x.

                              LAW AND ANALYSIS

Section 61 provides that gross income includes all income from whatever source
derived, except as otherwise excluded in subtitle A.

Section 104(a)(2) provides that gross income does not include the amount of any
damages received (whether by suit or agreement) on account of personal physical
injuries or physical sickness, except for amounts attributable to (and not in excess of)
deductions allowed under § 213 (relating to medical, etc., expenses) for any prior
taxable year.

Section 1.104-1(c)(1) of the Income Tax Regulations provides that damages for
emotional distress attributable to a physical injury or physical sickness are excluded
from gross income under § 104(a)(2). For purposes of § 1.104-1(c), the term damages
means an amount received (other than workers' compensation) through prosecution of
a legal suit or action, or through a settlement agreement entered into in lieu of
prosecution.
PLR-107009-19 3

In her complaint against Clinic, Taxpayer claimed that ---------suffer physical, cognitive,
and behavioral disabilities because the donor egg that Clinic used for the embryo that
was implanted in Taxpayer carried the gene that causes Genetic Condition. Taxpayer
further claims in her complaint that Clinic should have tested the donor egg for Genetic
Condition. By failing to test and then implanting into Taxpayer the embryo developed
with the donor egg carrying Genetic Condition gene, Clinic caused --------- to suffer
injuries and disabilities resulting from Genetic Condition. The injuries and disabilities ---
--------- suffer have resulted from Genetic Condition and can be characterized as
physical injuries or physical sickness within the meaning of § 104(a)(2). Under § 1.104-
1(c)(1), $x that Taxpayer received through the settlement of her claims against Clinic on
Date 4 was to compensate for actual damages that are attributable to the personal
physical injuries and/or physical sickness. Thus, $x was received on account of
personal physical injuries and/or within the meaning of § 104(a)(2).

                                CONCLUSION

Based strictly on the information submitted and the representations made, we conclude
that the $x Taxpayer received in settlement for personal physical injuries suffered by ----
--------, including Taxpayer’s emotional distress attributable to those injuries, is excluded
from Taxpayer’s gross income under § 104(a)(2), other than the amounts that
reimbursed Taxpayer for medical expenses that were incurred and previously deducted.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

The ruling contained in this letter is based upon information and representations
submitted by Taxpayer and accompanied by a penalty of perjury statement executed by
an appropriate party. While this office has not verified any of the material submitted in
support of the request for the ruling, it is subject to verification on examination.

                                   Sincerely,

                                   William A. Jackson
                                   Office of Associate Chief Counsel
                                   Branch Chief, Branch 5
                                   (Income Tax & Accounting)