IRS Lets Transgender Taxpayers Deduct Sex Change Operation

Tuesday, November 15, 2011 Print Email

The Internal Revenue Service has decided to go along with a U.S. Tax Court decision last year allowing a transgender person to deduct the cost of their sex reassignment surgery.

The Tax Court case involved a Massachusetts taxpayer named Rhiannon G. O’Donnabhain, a 65-year-old civil engineer who was born Robert Donovan. She sued the IRS after it disallowed the $5,679 medical expense deduction she took on her 2001 taxes for the $21,741 she had spent on hormone therapy, sex reassignment and breast augmentation surgery. The IRS disallowed the deduction, claiming the surgery was merely cosmetic and not surgically necessary. But last February, Judge Joseph Gale ruled that the expenses for sex reassignment surgery and hormone therapy could be deducted (see Tax Court Allows Deduction for Sex Change). However, he agreed with the IRS on disallowing the costs of breast augmentation surgery as the hormone therapy had already produced some of the desired characteristics.

Earlier this month, according to the TaxProf blog, the IRS issued a “notice of acquiescence,” in effect telling the Tax Court that it would not contest the decision.

“Ms. O’Donnabhain paid expenses for hormone therapy and sex reassignment surgery to treat her gender identity disorder disease and deducted the costs of the treatment as medical expenses,” said the document. ”The IRS disallowed her deduction based on the view that hormone therapy and sex reassignment surgery did not treat a medically recognized disease or promote the proper function of the body…Ms. O’Donnabhain petitioned the Tax Court to reverse the IRS administrative determination and allow her deduction for the expenses of hormone therapy and sex reassignment surgery.

“The Tax Court agreed with Ms. O’Donnabhain that her gender identity disorder is a disease within the meaning of Sections 213(d)(1)(A) and (9)(B). The court cited four bases for its conclusion: 1) the disorder is widely recognized in diagnostic and psychiatric reference texts; 2) the texts and all three experts testifying in the case consider the disorder a serious medical condition; 3) the mental health professionals who examined Ms. O’Donnabhain found that her disorder was a severe impairment; and, 4) the Courts of Appeal generally consider gender identity disorder a serious medical condition. The 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.

“The Tax Court rejected the IRS administrative position reflected in CCA [Chief Counsel Advice] 200603025. The Service will follow the O’Donnabhain decision. The Service will no longer take the position reflected in CCA 200603025.”

However, the IRS noted that the acquiescence document “is not to be relied upon or otherwise cited as precedent by taxpayers.”

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