Tax Court rules on medical necessities.

• Author: Jones, Lynn Comer

Since the 1990 enactment of Sec. 213(d)(9), (1) which stipulates that expenses for cosmetic surgery are not deductible, the IRS has subjected medical expense deductions to increased scrutiny. Nonetheless, over the past decade the definition of "deductible medical expenses" has expanded to include breast reconstruction subsequent to mastectomy (cancer); laser eye surgery (myopia); nonprescription medical supplies; and expenses for obtaining an egg donor (infertility treatment). (2) In O'Donnabhain (3) the Tax Court has expanded the list of deductible medical expenses to include hormone therapy and sex reassignment expenses for the treatment of gender identity disorder (GID).

On her 2001 tax return, Rhiannon G. O'Donnabhain claimed itemized medical deductions for GID treatment. The IRS denied the deductions in January 2006 via a statutory notice of deficiency, and the taxpayer petitioned the Tax Court in March 2006. (4) Nearly four years later, on February 2, 2010, the Tax Court ruled in favor of O'Donnabhain. The 90-day appeal period passed without an appeal by the IRS.

Background

O'Donnabhain was born a male; however, from an early age she experienced discomfort with her gender identity and had a history of secretly wearing women's clothing. As an adult, she earned an engineering degree, served in the U.S. Coast Guard, was married, and fathered children. (5) In 1996, she consulted psychotherapist Diane Ellaborn, a specialist in the diagnosis and treatment of gender-related disorders. After approximately 20 sessions, Ellaborn diagnosed O'Donnabhain with gender identity disorder (GID). GID is listed in the Diagnostic and Statistical Manual of Mental Disorders (6) (DSM-IV-TR); its severity is ranked as mild, moderate, or severe. A regimen of treatment for the disorder has been documented since 1979 in the Benjamin standards of care, a widely accepted medical protocol. (7)

Ellaborn determined that the taxpayer suffered from severe GID and prescribed a three-step treatment plan recommended by the Benjamin standards: hormonal sex reassignment (hormone therapy requires one psychotherapist recommendation); real-life experience (living as the opposite gender for at least 12 months); and sex reassignment surgery (subsequent to the real-life experience; requires two psychotherapist recommendations).

Under the treatment plan, O'Donnabhain received feminizing hormones from 1997 to 2001 and initiated the real-life experience in 2000. In July 2001, Ellaborn and a second psychotherapist recommended gender reassignment surgery. (8) O'Donnabhain completed sex reassignment surgery (including breast augmentation) in October 2001 and claimed a $21,741 itemized deduction for the unreimbursed GID medical care expenses.

Issue and Law

At issue was whether O'Donnabhain's expenses for hormone therapy, sex reassignment surgery, and breast augmentation surgery were deductible medical expenses. The Tax Court analyzed Sec. 213 and the related regulation regarding medical care expenses. Specifically, it distinguished medically necessary procedures versus cosmetic procedures, focusing on the definition of a disease and its related treatment.

Taxpayers are allowed an itemized deduction for uncompensated medical care expenses that exceed 7.5% of adjusted gross income. (9) Medical care expenses include the diagnosis, cure, mitigation, treatment, or prevention of disease or expenses incurred for affecting any structure or function of the body. (10) The expenses must be primarily for the prevention or alleviation of a physical or mental defect or illness. (11)

In 1990, Sec. 213 was amended to exclude cosmetic surgery from the medical care definition. (12) Cosmetic surgery merely improves appearance; it does not promote proper body function or prevent or treat illness or disease. (13) However, cosmetic surgery expenses are allowed if the procedure is necessary to improve a deformity due to a congenital abnormality, personal injury (via accident or trauma), or disfiguring disease. (14)

Expert Witness Testimony

The taxpayer's expert witness was Dr. George R. Brown, a licensed, board-certified adult psychiatrist who has published articles and book chapters on GID topics and has seen nearly 500 GID patients in clinical and academic settings. (15) Brown asserted that "GID is a legitimate mental disorder" (recognized in DSM-IV-TR) but that "there are no biological or laboratory tests that may be used" for diagnosis--as is the case for most other mental disorders per DSM-IV-TR. According to Brown, GID treatment includes psychotherapy and at least one of the three steps in the Benjamin standards of care (emphasizing psychotherapy alone has not been documented as an effective treatment for severe GID). Brown testified that sex reassignment surgery is generally medically necessary to treat severe GID, that the surgery is not cosmetic (i.e., not done to improve appearance), and that "positive therapeutic outcomes" have been documented in the scientific...