The IRS announced in Action on Decision (AOD) 2011-03 that it has acquiesced to a 2010 Tax Court ruling that these expenses are deductible. The AOD appeared in the Nov. 21 Internal Revenue Bulletin.
The IRS announcement is a reversal of its earlier position on the matter, which was that expenses incurred for hormone therapy and sex reassignment surgery were not deductible because they did not treat a medically recognized disease or promote the proper function of the body. The IRS‘ most recent formal expression of that position came in Chief Counsel Advice (CCA) 200603025.
Court Ruling the Catalyst
The O’Donnabhain v. Commissioner litigation prompted this reversal. In 2003, the IRS disallowed deductions that a taxpayer whose last name is O’Donnabhain had claimed for gender reassignment surgery and hormone therapy to treat gender identity disorder. A suit was filed in the Tax Court against the IRS over the disallowance. O’Donnabhain filed suit in the Tax Court to reverse the IRS’ administrative determination and allow her deduction for the expenses of hormone therapy and gender reassignment surgery.
On Feb. 2, 2010, in O’Donnabhain v. Commissioner, 134 T.C. 34 (2010), the Tax Court agreed with O’Donnabhain that her gender identity disorder is a disease under Section 213(d)(1)(A) and (9)(B). The court cited four bases for its conclusion:
- the disorder is widely recognized in diagnostic and psychiatric reference texts;
- the texts and all three experts testifying in the case consider the disorder a serious medical condition;
- the mental health professionals who examined O’Donnabhain found that the disorder was a severe impairment; and
- the Courts of Appeal generally consider gender identity disorder a serious medical condition.
The Tax Court held that because hormone therapy and sex reassignment surgery treat the taxpayer’s disease they are medical care, and the expenses for that medical care are deductible under Section 213.
What This Means
The IRS said in the AOD that as a result of the O’Donnabhain decision, it will no longer take the position it had articulated in CCA 200603025 and will follow the Tax Court ruling.
This means that as far as the IRS is concerned, a taxpayer can deduct expenses incurred for gender reassignment surgery and hormone therapy. And expenses that are deductible under Section 213 can be covered by employer-provided health plans.