Tax Court Allows Medical Deduction for Sex Change Operation

By Alistair M. Nevius, J.D.

In a case of first impression, the Tax Court has held that a taxpayer can take a medical expense deduction for the costs of her sex change operation (O’Donnabhain, 134 T.C. No. 10). However, the Tax Court disallowed the taxpayer’s expenses for breast augmentation surgery as cosmetic surgery.

The taxpayer was born male but was diagnosed with gender identity disorder. As a result of this condition, the taxpayer suffered persistent psychological discomfort with her gender. In a three-part treatment regimen, the taxpayer took feminizing hormones from 1997 through 2001, began presenting herself as a female in public starting in 2000, and underwent gender reassignment surgery (including breast augmentation) in 2001. For tax year 2001, the taxpayer claimed a $21,741 deduction for the costs of the feminizing hormones, the surgeries, and transportation and other related expenses. The IRS disallowed the deduction.

Sec. 213 allows taxpayers to deduct the costs of medical care paid during a tax year to the extent they exceed 7.5% of the taxpayer’s adjusted gross income (and if they are not reimbursed by insurance). The Tax Court reviewed the definition of medical care, which under Sec. 213(d)(1)(A) has two prongs:(1) amounts paidfor the “diagnosis, cure, mitigation,treatment, orpreventionof disease” and (2) amounts paid “for the purpose of affecting any structure or function of the body.” The court noted that it has long been settled law that “disease” for these purposes includes mental disorders. The court also noted that, under Sec. 213(d) (9), cosmetic surgery is specifically excluded from the definition of medical care.

In disallowing the deduction, the IRS argued that the taxpayer’s hormone therapy, sex reassignment surgery, and breast augmentation surgery all qualified as cosmetic surgery. The IRS maintained that these procedures were directed at improving the taxpayer’s appearance and not treatment for an illness or disease. Although the IRS conceded that gender identity disorder is a mental disorder, it argued that it is not a disease because it does not “arise from an organic pathology within the human body.” The IRS further argued that there was no evidence that procedures the taxpayer underwent were effective in treating gender identity disorder.

The Tax Court reviewed medical literature and prior case law to come to the conclusion that gender identity disorder is a disease for purposes of Sec. 213. The court rejected the IRS’s position that to qualify as a disease under Sec. 213, a condition must have a demonstrated organic origin. The court determined that the taxpayer suffered significant impairment from the disease. Finally, the court also concluded that the taxpayer’s three-part treatment regimen, culminating in sex reassignment surgery, was generally accepted by the medical community (and by the experts who testified in the case) as effective treatment for gender identity disorder.

The court held that as treatment for a disease, the hormone therapy and sex reassignment surgery were not cosmetic surgery. However, it also held that the taxpayer’s breast augmentation surgery was cosmetic because it was directed at improving her appearance and did not promote proper function of the body or treat disease.

The court allowed the taxpayer’s deductions for the costs of the hormone therapy and the sex reassignment surgery as costs for medical care under Sec. 213 and disallowed the deduction for the cost of the breast augmentation surgery.

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