Scope of the medical expense deduction clarified and broadened by new tax court decision

Journal of Taxation

Volumn 112, Issue 6, 2010, Pages 353-364

  Megaard, Susan L ^a  

^a EASTERN WASHINGTON UNIVERSITY   (United States)

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EID: 77954527219     PISSN: 00224863     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (61)

1. See. e.g., Pinneke v. Preisser, 623 F2d 546 (CA-8 1980);
2. J.D. v. Lackner, 80 Cal. App. 3d 90 (1978)
3. G.B. v. Lackner, 80 Cal. App. 3d 64 (1978);
4. and Doe v. Minn. Dept. of Public Welfare, 257 N.W.2d 816 (Minn., 1977).
5. See, e.g., De'Lonta v. Angelone, 330 F.3d 630 (CA4, 2003)
6. Farmer v. Haas, 990 F2d 319 (CA-7 7993);
7. White v. Farrier, 849 F2d 322 (CA-8, 1988).
8. See In re Heilig, 816 A.2d 68 (Md., 2003).
9. See, e.g., Schroer v. Billington, 424 F.Supp.2d 203 (DC DC, 2006);
10. Doe v. Boeing Co., 846 R2d 531 (Wash., 1993);
11. Enriquez v. West Jersey Health Systems, 777 A.2d 365 (N.J. Super., App. Div., 2001).
12. See the discussion on the website for the American Psychological Association (www. apa.org/topics/transgender.html).
13. Id. Other transgender groups include transvestites, who dress as members of the opposite sex; individuals who present parttime as members of the opposite sex primarily to perform or entertain; and people who consider themselves androgynous or bigendered.
14. See the definitions of GID in the Diagnostic and Statistical Manual of Mental Disorders (4th ed., 2000) (DSM-IV-TR), section 302.85, published by the American Psychiatric Association and reproduced electronically at www.mental-health-today.com and the International Classification of Diseases (10th Revision) (ICD-10), F64, published by the World Health Organization.
15. See the discussion of the treatment of GID on the website for the American Psychological Association, supra note 5; Psychology Today's Diagnosis Dictionary ( www.psychologytoday.com);
16. and the World Professional Association for Transgender Health Clarification on Medical Necessity of Treatment, Sex Reassignment, and Insurance Coverage in the USA June 17, 2008 ( www.tgender.net/taw/WPATHMedNecofSRS.pdf).
17. See the discussion of the prevalence of transgender people in western countries on the website for the American Psychological Association, supra note 5. Based on data from smaller countries in Europe found on the website at www.mental-health-today.com, it is estimated that one in 30,000 adult males and one in 100,000 adult females actually seek sex reassignment surgery.
18. See "Woman Suing IRS for Sex-Change Deduction" (7/16/07), at www.msnbc.msn.com;
19. and "Woman Suing IRS over Sex-Change Tax Claims" (10/1/07), at www.washingtonpost.com.
20. The taxpayer in CCA 200603025 was O'Donnabhain.
21. See "Sex Change Operation Case Dwells on Medical Testimony and Emotion," 116 Tax Notes 348 (7/30/07).
22. See American Medical Association, "Resolution 122, Removing Financial Barriers to Care for Transgender Patients" (www.ama-assn.org), June 2008;
23. Chang, "Unusual Perks: Goldman Sachs Covers Sex Changes" (www.cnnmoney), 2/8/08;
24. and Human Rights Campaign, "Transgender Inclusion in the Workplace: Introduction and Business Case" ( www.hrc.org/issues/transgender), 2008.
25. Section 162(1) allows a self-employed person to deduct costs of medical insurance for the taxpayer and his or her spouse and dependents, not to exceed the person's earned income from the business that maintains the plan under which the insurance is provided. Similar treatment is allowed to a greater than 2% shareholder of an S corporation who receives wages from the corporation. The Section 162(1) deduction is not subject to the nondeductible floor for Section 213 and allows a tax benefit for selfemployed persons that is equivalent to the exclusion from an employee's income for employer-paid health insurance premiums. To prevent double-dipping, an expense deducted under Section 162(1) may not be deducted as a medical expense under Section 213, and the deduction is disallowed altogether if either the taxpayer or the taxpayer's spouse is eligible to participate as an employee in an employer-subsidized health plan. See Bittker and Lokken, Federal Taxation of Income, Estates, and Gifts, Third Edition (Thomson Reuters/WG&L, 2000), Vol. 2, ¶ 36.1.4.
26. It is unclear whether surgical costs to treat GID were involved in Ltr. Rul. 200324011, since the redacted facts stated only that a taxpayer diagnosed with a "disorder" was planning to undergo an unspecified surgery. The Service ruled that the surgery was deductible medical care because it affected a structure or function of the taxpayer's body similar to a vasectomy, abortion, or tubal ligation, and was not cosmetic because it was not directed primarily at improving the taxpayer's appearance.
27. See note 11, supra.
28. See S. Rep't No. 3209. There was no formal report printed separately because the bill was brought to the Senate floor before a report could be printed. Instead, the report of the Senate Finance Committee, consisting of reports from various committees to the Senate Budget Committee, was printed directly in the Congressional Record at 136 Cong. Rec. S15711 (1990).
29. See McHugh, "Surgical Sex," 2004 First Things 147 (November 2004), available on the website for Catholic Education ( www.cathohceducation. org/articles).
30. See note 12, supra.
31. The Benjamin Standards of Care (named for an endocrinologist who did pioneering work in the study of transsexualism) generally prescribe a triadic treatment sequence for GID, including hormone therapy, real-life experience living in the opposite gender role for a least a year, and sex-reassignment surgery, which can consist of genital and non-genital procedures.
32. Between 1997 and 2000, O'Donnabhain also underwent a series of facial procedures that were not at issue in the case, including electrolysis, a face lift, a tracheal shave, a nose reshaping, and Botox injections.
33. The observations of O'Donnabhain's significant breast development after hormone therapy were made in a letter of referral for surgery from the taxpayer's second therapist and in preoperative notes from the taxpayer's surgeon.
34. The feminine pronoun is used to refer to the taxpayer following her genital and breast surgeries.
35. See the discussion of various types of intersex conditions and their treatment in the Medical Encyclopedia published by the National Library of Medicine (updated 2/22/09), which can be found at www.nlmnih.gov/medlineplus/ ency.
36. See the discussion of different causes of tooth discoloration on the websites for the American Dental Association (www.ada.org) and the National Institutes of Health's Medical Encyclopedia published by the National Library of Medicine.
37. www.nlm.nih.gov/medlineplus/ency). Nevertheless, in Rev. Rul. 2003-57, 2003-1 CB 959, the IRS ruled that a teeth-whitening procedure on teeth that were discolored due to normal aging was not deductible because it only improved appearance and did not treat any physical disease or promote any bodily function.
38. See S. Rep't 3209, supra note 16.
39. Although this was a Tax Court summary opinion, which is not appealable and generally cannot be relied on as precedent, it does provide practical guidance as to how the Tax Court would rule in such a case and leaves the door open to deductions for liposuction and related surgeries to treat conditions associated with a person's obesity.
40. Such surgery promotes weight loss by restricting food intake and, in some operations, interrupting the digestive process by restricting the amount of calories and nutrients the body absorbs. See NIH Publication No. 084006, March 2009 (published electronically at www.win.niddk.nih.gov). Recent medical research indicates that bariatric surgery to reduce obesity also may be effective to eliminate Type 2 diabetes for such patients.
41. See Buchwald, Estok, Fahrbach, Banel, Jensen, Pories, Bantle, and Sledge, "Weight and Type 2 Diabetes after Bariatric Surgery: Systematic Review and Meta-Analysis," 122 Am. J. of Medicine No. 3 (March 2009).
42. See S. Rep't 3209, supra note 16.
43. Botox is the brand name for medicinal botulinum toxin type A, a purified low concentration form of the toxin produced by the bactena that causes food poisoning botulism. When Botox is injected in small doses into specific muscles, it blocks the chemical signals that cause muscles to contract. When the muscles cannot tighten, the skin flattens and appears smoother and less wrinkled. See the discussion of Botox injections on the website for the Mayo Clinic (www.mayoclinic.com.com).
44. See the discussion of features and disorders associated with GID in DSM-IV-TR, supra note 7
45. Rev. Rul. 75-187, 1975-1 CB 92.
46. See Fay, 76 TC 408 (1981) (part of private school costs to treat children's learning disabilities and emotional problems were deductible but regular tuition was nondeductible); Fischer, 50TC 164 (1968) (portion of private academy costs to treat son's mental and emotional problems were deductible but educational expenses were nondeductible); Hendrick, 35TC 1223 (1961) (amounts paid to special school for psychiatric care of son's mental and emotional illness were deductible but costs of son's education and recreation were nondeductible); Sims, TCM 1979499 (amounts paid to private schools to treat son's emotional problems and learning disability were deductible but educational costs were nondeductible); and Rev. Rul. 58-533, 1958-2 CB 108, Rev. Rul. 58-280,1958-1 CB 157 and Rev. Rul. 55-261, 1955-1 CB 307 (amounts paid to special schools for psychiatric care to treat children's mental illnesses were deductible but not the cost of education).
47. See the discussion of physical treatments for mental illness on the websites for the National Institutes on Mental Health (www. nimh.nih.gov) and Merck (www.merck.com).
48. See also Mashour, Walker, and Martuza, "Psycho-Surgery: Past, Present, and Future," 48 Brain Research Reviews (June 2005), reproduced at www.dura.stanford.edu.
49. See the definition of medically necessary on the website for Medicare ( www.medicare http://www.medicare.gov).
50. See Jacobs, 62TC 813 (1974); Magdalin.TCM 2008-293, aff'd 105 AFTR2d 2010442 (CA-1, 2009).
51. Rev. Rul. 73-201, 1973-1 CB 140.
52. Rev. Rul. 73-200, 1973-1 CB 140.
53. Rev. Rul. 73-603, 1973-2 CB 76.
54. Ltr. Rul. 200318017.
55. See Rev. Rul. 2003-57, supra note 24, and Ltr. Ruls. 9625049 and 200226003.
56. For a discussion of HRAs and how they compare with FSAs under a cafeteria plan,
57. see Baum, "Health Reimbursement Arrangements Who Will Benefit From the Service's Newest Healthcare Plan?," 97 JTAX 162 (September 2002).
58. For a more recent discussion comparing HRAs and FSAs with HSAs,
59. see Baum, "Congress Makes Health Savings Accounts More Attractive to Employers, Employees," 106 JTAX 159 (March 2007).
60. An HSA is a tax-exempt trust created exclusively for the purpose of paying the qualified medical expenses of the account holder with trust distributions that are nontaxable to the recipient. Thus, amounts contributed to and held in an HSA can grow and be distributed tax free.
61. See the discussion of health insurance discrimination against transgender people on the website for the Human Rights Campaign (www.hrc.org).