Breaking News: Court Rules that Sex Change Operations are Tax Deductible

By Ric Joyner, MBA, CEBS, GBA, CFCI

Harry Beker Chief, Health & welfare Branch Office of the Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities) confirmed today that sex change operations are considered qualified expenses for section 213d and can be reimbursed in HRAs, FSAs, and HSAs. If an employer wishes to prevent this type of reimbursement in the future the plan document must specifically exclude the procedure.

Following is Mr. Beker’s confirmation email.

Question posed by Ric Joyner:

From: Ric Joyner [mailto:ric.joyner@eflexgroup.com]
Sent: Wednesday, February 03, 2010 4:07 PM
To: Beker Harry
Cc: Jamie Johnson
Subject: sex Change operations

Does this mean FSA, HRA, HSA too?

Sex-Change Costs Are Tax-Deductible, U.S. Court Rules

Answer

From: Beker Harry [mailto:Harry.Beker@XXXXXXXX.TREAS.GOV]
Sent: Thursday, February 04, 2010 7:07 AM
To: Ric Joyner
Subject: RE: sex Change operations

Yes

Court’s decision and discussion is provided for background:

Sex-Change Costs Are Tax-Deductible, U.S. Court Rules

Ryan J. Donmoyer Ryan J. Donmoyer

1 hr 14 mins ago

Feb. 3 (Bloomberg) — Costs incurred in sex-change operations and procedures are tax-deductible, the U.S. Tax Court ruled.

The Washington-based court decided yesterday that hormone therapies and sex reassignment surgeries are necessary to treat gender identity disorder, a disease, in the case of a Boston- area man who became a woman named Rhiannon O’Donnabhain.

“The Court is persuaded that petitioner’s sex reassignment surgery was medically necessary,” Judge Joseph Gale wrote in a 69-page decision for the majority.

The decision is the first to rule that sex-change operations qualify as medical care and overturns a 2005 Internal Revenue Service policy denying medical expense deductions in such operations on the grounds they are ‘cosmetic.’’

The case involves a $5,679 tax bill assessed by the IRS, which denied medical deductions claimed by O’Donnabhain after she underwent sex reassignment-surgery in 2000. O’Donnabhain, a civil engineer who joined the U.S. Coast Guard during the Vietnam War, was diagnosed with gender identity disorder in 1997.

O’Donnabhain sued the IRS after it denied her deduction of $25,000 in out-of-pocket medical costs associated with the surgeries and other care such as hormone treatments and counseling, according to Boston-based Gay & Lesbian Advocates & Defenders, which represented her in court.

Deduction Rules

Medical expenses are deductible after they exceed 7.5 percent of adjusted gross income. Cosmetic surgery generally doesn’t qualify.

O’Donnabhain, who became a woman after 20 years of marriage that produced three children while simultaneously struggling with her gender identity, argued her medical costs were no different than heart surgery.

Yesterday, a majority of the court sided with her, ruling the IRS was wrong to deny her deductions.

The contention that O’Donnabhain “undertook the surgery and hormone treatments to improve appearance is at best a superficial characterization of the circumstances that is thoroughly rebutted by the medical evidence,” Gale wrote.

The decision “recognizes that expenses related to medical care for transgender people should be treated no differently than expenses related to an appendectomy or chemotherapy,” said Karen Loewy, a lawyer with Gay & Lesbian Advocates & Defenders in Boston who represented O’Donnabhain. “The dismissal of these medical expenses as illegitimate and not deductible was discrimination, pure and simple.”

Differing Opinion

In an opinion that dissented in part, Judge David Gustafson said that O’Donnabhain may have suffered a “serious mental condition.” Still, he said her condition met a strict definition of non-deductible “cosmetic surgery.”

“Congress did not provide that an appearance-improving procedure will nonetheless be deductible if it merely ‘mitigates a disease,’” Gustafson wrote.

The decision was first reported by the TaxProf Blog, run by University of Cincinnati law professor Paul Caron.

The case is O’Donnabhain v. Commissioner, 134 T.C. No. 4 (Feb. 2, 2010).

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Sources: Selected from yahoo news 2-2-10 at 11.59am CST Original source: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=alx_Ag1iU8Q8: Retrieved 12.09 pm 2-4-10 EST

Harry Beker email received 2-4-10 at 7.07am EST sent to ric.joynerATeflexgroup.com

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