The Court (as summarized by Tax Analysts) has addressed the deductability of medical expenses related to sex reassignment surgery.
There's also an interesting twist to the opinion.
The Tax Court, in a case of first impression, has held that gender identity disorder (GID) is a disease within the meaning of section 213 and that an individual's expenses for sex reassignment surgery and hormone replacement treatment are deductible medical expenses, but expenses for breast augmentation are cosmetic and not deductible.
Rhiannon G. O'Donnabhain was born genetically male. In 1997 O'Donnabhain's therapist concluded that she was suffering from severe GID. After receiving the diagnosis, O'Donnabhain began feminizing hormone therapy, began living as a female, had surgery to feminize facial features, and in 2001 underwent sex reassignment and breast augmentation surgeries. O'Donnabhain deducted $21,471 as medical expenses, the cost of her hormone therapy, and reassignment surgery and breast augmentation on her 2001 income tax return. The IRS disallowed the medical expense deductions, arguing that O'Donnabhain did not suffer from a disease and that the treatments she received were to improve physical appearance. While conceding that GID is a mental disorder, the IRS argued that it was not a disease within the meaning of section 213.
The Tax Court, in an opinion by Judge Joseph H. Gale, found that most of the expenses were deductible. In determining whether sex reassignment procedures are deductible medical care for purposes of section 213, the court first indicated that it must examine the meanings of treatment and disease in that section. The court indicated that expenses for treatment of a disease are deductible and that a procedure that treats a disease cannot fall within the exclusion of section 213(d)(9) for cosmetic procedures.
The court rejected the IRS's argument that GID wasn't a disease based on its expert's testimony, indicating that it is generally improper to use expert testimony to define statutory terms. Looking to statutory construction, regulations, legislative history, and precedent, the court found that disease is more properly defined as a physical or mental defect with no requirement of a demonstrated etiology as posited by the IRS.
Judge Gale went on to conclude that GID is a disease because it is widely recognized in the psychiatric field, and he noted the serious impairment suffered by O'Donnabhain.
The Tax Court went on to discuss whether the sex reassignment, hormone therapy, and breast augmentation constituted treatment for the disease and found that two of the procedures are prescribed interventions to treat GID based on widely accepted standards of care. Judge Gale wrote that "the evidence is clear that a substantial segment of the psychiatric profession has been persuaded of the advisability and efficacy of hormone therapy and sex reassignment surgery as treatment for GID, as have many courts."
However, the court concluded that the breast augmentation surgery was cosmetic in nature because O'Donnabhain already had normal breasts due to hormone therapy. The augmentation simply improved the appearance and was therefore not a treatment for GID and was excludable from medical expense deduction under section 213(d)(9) as cosmetic surgery.
The Tax Court concluded that GID is a disease that falls within section 213 concerning the deductibility of medical expenses, and as such O'Donnabhain was entitled to deduct the expenses incurred in her hormone therapy and sex reassignment surgery for treatment of the disorder.
In a concurring opinion, Judge James Halpern agreed that the breast augmentation surgery should be disallowed as a medical deduction. Offering his own view on objections to the majority opinion offered by colleagues, he disagreed that the court should have relied on a congressional report to find that deductible surgery costs had to address a physical malady, rather than mental illness. He also argued that the sex reassignment surgery was not excludable as a procedure similar to cosmetic surgery, because the former treats a disease.
Judge Mark V. Holmes also agreed with the majority opinion, but he limited his concurrence in the result to the taxpayer at issue, rather than a broad holding that sex reassignment is the proper treatment for all individuals who suffer from GID. Looking to whether a treatment is therapeutic is a key question to whether the medical care at issue is a section 213(d)(1) exception to the general prohibition on personal expenses, he said.
Concurring in the result only, Judge Joseph Robert Goeke said section 213(d)(9) and legislative history made it clear that the cosmetic surgery exception for treatment of illness required addressing a physical ailment.
Also writing separately, Judge Maurice B. Foley agreed with the majority only in its conclusion that the taxpayer's breast augmentation surgery is cosmetic, even using a footnote to indicate that his opinion is a concurrence only by technicality. Foley argued that the section 213(d)(9) definition of cosmetic surgery is disjunctive, meaning that promoting proper bodily function and treating disease are separate standards.
Like Judge Foley, Judge David Gustafson concurred with the majority only on its disallowance of a deduction for breast augmentation surgery expenses. After noting that not everything that is medically appropriate is deductible under section 213(d)(9), Gustafson wrote that the statute lacks a clear provision permitting deduction of expenses for sex reassignment surgery. The crux of Gustafson's argument was that the taxpayer's expenses were not a result of procedures that treated her disease.
