IRS finds Congress did not contemplate reassignment procedure as medical necessity
The Office of Chief Counsel of the Internal Revenue Service has ruled in a staff memorandum that expenses associated with a transsexual taxpayer’s gender-reassignment surgery are not deductible as medical expenses under of the Internal Revenue Code. The memo, dated October 14, 2005, was released to the public with the name of the taxpayer removed on January 20.
The chief counsel was responding to a request for advice on how to handle an actual taxpayer’s case posed by an IRS branch office. According to the ruling, the taxpayer’s case was under consideration by the Office of Appeals after IRS staff had denied the deduction.
The opinion states that the taxpayer, born male, “had gender issues dating back to childhood.” During a six year period, the taxpayer was diagnosed with gender identity disorder (GID) while in psychotherapy, began hormone therapy under the care of an endocrinologist, and by the fifth year began living full-time as a woman and obtained a legal name change, and latter received a social worker’s recommendation that she receive gender reassignment surgery (GRS), based on prevailing medical standards. The taxpayer met with a doctor expert in the area, who found her GID to be “profound” and that “the taxpayer was in need of GRS.”
When the taxpayer sought to deduct expenses associated with the treatment and procedures to the extent they exceeded the statutory exclusion of 7.5 percent of gross income, the IRS disallowed the attempt.
The IRS ruling that the Code defines “medical care” as amounts paid for “the diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function of the body.” Treasury regulations interpreting the Code provide that deductions for expenditures for medical care “will be confined strictly to expenses incurred primarily for the prevention or alleviation of a physical or mental defect or illness.” Expenditures generally beneficial for health but not related to a specific medical condition are not allowed as deductions.
The IRS Code specifically provides that “medical care” does not include cosmetic surgery or other similar procedures, unless necessary to “ameliorate a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or a disfiguring disease.” Cosmetic surgery is described as related to the improvement of a patient’s appearance in a way that does not meaningfully promote the proper function of the body or treat illness or disease.
These portions of the Code were enacted by Congress in response to perceived abuses by people deducting expenses for purely elective cosmetic surgery that was in no sense medically necessary, such as nose jobs and face lifts. The IRS memo reviews legislative history, with a particular focus on a Senate Report addressing this issue and making clear that only surgery necessary to correct a medical condition should be deductible.
“From the material submitted the taxpayer has not satisfactorily demonstrated that the expenses incurred for the taxpayer’s GRS fit within the strict boundaries discussed above,” the memo states. “There is nothing to substantiate that these expenses were incurred to promote the proper function of the taxpayer’s body and only incidentally affect the taxpayer’s appearance. The expenses also were not incurred for treatment of a disfiguring condition arising from a congenital abnormality, personal injury, or disease (such as reconstructive surgery following the removal of a malignancy).”
The IRS described the question over whether GRS is “a treatment for an illness or disease.” as “controversial.” To date there is no case law, regulation, or revenue ruling deciding this question in the tax context. “Only an unequivocal expression of Congressional intent that expenses of this type qualify… would justify the allowance of the deduction in this case.”
Surprisingly, the IRS opinion does not discuss court rulings on other aspects of transgender law that would shed light on whether GRS is a treatment for a medical condition. The issue has been litigated in the context of refusal by insurers, most frequently state Medicaid programs, to provide coverage, and the refusal of prisons to provide hormone therapy or surgery for transgender inmates. While the court rulings in those cases are mixed, there is at least a consensus in the prison cases that gender identity disorder is a serious medical condition, such that it would violate the constitutional rights of a transsexual prisoner to refuse any sort of treatment, although inmates do not necessarily have a constitutional right to the surgical procedure at government expense while incarcerated. Although most federal courts have upheld refusals to pay for GRS under Medicaid programs, many of these opinions also concede that this is not merely cosmetic surgery.