Professor Katherine Pratt of Loyola Law School – Los Angeles posted to the TaxProf listserv the following analysis of the income tax deductibility of sex change operations, previously blogged here. She makes an argument for tax deductibility based on the fact that gender-reassignment surgery is “medical care,” not a cosmetic enhancement. [Caution: Non-tax folks may find this post tough going.]
The Tax Court should rule that the costs of GRS are deductible under section 213. For purposes of section 213, GRS is not similar to cosmetic surgery, in part because GRS is within the 1st prong of the 213(d)(1)(A) definition of medical care. From the perspective of medical necessity, the medical care in this case is absolutely not similar to a nose job or teeth whitening.
The 1990 cosmetic surgery amendment was designed to correct the overinclusive 2nd prong of the 213(d)(1)(A) definition of medical expenses (costs incurred for the purpose of affecting any structure or function of the body). Cosmetic surgery that does not affect normal biological functioning is not with the 1st definitional prong of 213 (costs incurred for the diagnosis, cure, mitigation, treatment, or prevention of a disease, condition, disorder, or injury). The legislative history of the cosmetic surgery amendment is clear that cosmetic surgery that satisfies the 1st prong of the definition (e.g., breast reconstruction surgery after mastectomy) is medical care for purposes of section 213. The Service has ruled that the cost of laser vision correction surgery is a medical expense, even though the procedure improves the taxpayer’s appearance, because the surgery improves the biological functioning of the taxpayer’s eyes. On the other hand, the cosmetic surgery amendment has been applied correctly to deny a deduction for the costs of procedures that are”similar”to cosmetic surgery, such as teeth whitening, that do not affect normal biological functioning and are not within the 1st prong of the 213 definition.
The 213 baseline is normal biological functioning and the 213(d)(1)(A) definition must be interpreted in light of this benchmark. Courts have held that GRS to treat medically documented gender identity disorder is a”medical necessity;”the costs of GRS thus are within the 1st prong of the 213 definition and are not limited by the cosmetic surgery amendment.
Also, structurally, 213(d)(1)(A) defines medical care generally; the cosmetic surgery rule is an exception to the general definition. Where, as in this GRS case, the taxpayer can make a strong argument that the medical care is within the 213 definition (in this case, under the 1st prong), Congress should have to specifically exclude such care from the 213 definition (as Congress did in 1990 with the cosmetic surgery amendment) if it intends to deny taxpayers the deduction. Expressio unius est exclusio alterius.
See the following excerpts from Inconceivable? Deducting the Costs of Fertility Treatment, 89 CORNELL L. REV. 1121 (2004):
Section 213 provides that medical expenses include costs incurred for “the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of [*1140] the body.” 107 The first prong of this two-part definition is potentially underinclusive; if read literally and narrowly, it might fail to characterize as medical expenses the costs of medically treating injuries, conditions, and defects. The Department of the Treasury (Treasury Department) has resolved some of this underinclusiveness problem by broadly interpreting the term “disease” to cover conditions (including those caused by personal injury), impairments, and disorders. 108
The potential underinclusiveness of the first prong of the definition is, to some extent, offset by the broader language in the second, or “structure or function,” prong of the definition. This second prong correctly characterizes as medical expenses the costs of medical treatment of a patient’s injuries, conditions, impairments, or disorders. The problem with the “structure or function” prong of the medical expense definition is that it is overinclusive. For example, read literally, the second prong would characterize even the costs of cosmetic surgery as medical expenses. 109 Consistent with this interpretation of 213, the IRS ruled that the costs of cosmetic surgery were medical expenses under the “structure or function” prong of the definition. 110 Although the IRS was no doubt unhappy about allowing taxpayers to deduct the costs of cosmetic surgery as medical expenses, such costs were within the broad second prong of the statutory definition. In 1990, Congress addressed this problem by amending 213 to specifically exclude “cosmetic surgery or other similar procedures” from the definition of medical expenses. 111
The cosmetic surgery amendment was drafted to create an exception for the cost of medical procedures that affect the structure and appearance of the body, but not the functioning of the body. In other words, Congress drafted the amendment to limit the “structure or function” prong of the medical expense definition, but not the first prong of the definition. Under this approach, the cost of breast augmentation, for example, cannot qualify as a medical expense because: (1) the cost is not incurred because of a disease or a medical condition, and thus is not within the first prong of the definition; and (2) the cost is not incurred for a procedure that affects the functioning of the body, and thus is not within the second prong of the definition. 149
On the other hand, the costs of cosmetic surgery procedures that either affect the functioning of the body or mitigate the affects of a disease or medical condition are deductible as medical expenses. 150
For purposes of characterizing costs as deductible medical expenses, the appropriate baseline in 213 is normal biological functioning, 170 [*1151] and the 213(d)(1)(A) definition must be interpreted in light of this benchmark. Recall that the costs of cosmetic surgery were thought to qualify as medical expenses, prior to the amendment of 213, under the “structure or function” prong of the definition. 171 For purposes of 213, however, medical care that affects a structure of the body should only be treated as medical care if it helps to restore or approximate normal biological functioning. For example, the cost of a prosthetic leg is a medical expense because the prosthetic limb affects both the structure and function of the body.
Although cosmetic surgery affects the structure of the body, it is not generally medical care for purposes of 213 because it does not usually affect normal biological functioning. The change in the structure of the body merely affects appearance. Where cosmetic surgery is necessary to restore or approximate normal functioning, it is medical care. Medically necessary cosmetic surgery includes surgery to repair congenital abnormalities, injuries, and disfigurements from disease. Consistent with this language, a breast augmentation procedure is not medical care, for purposes of 213, but a breast reconstruction surgery following surgical removal of breast cancer is medical care. 172 The standard is not whether the patient would die or appear disabled without treatment; rather, it is whether the treatment is necessary to restore or approximate normal biological functioning. 173
In numerous health law cases, courts have had to define the terms “illness,” “disease,” and “medical necessity,” in order to determine the scope of medical insurance coverage. Some of these cases relate to medical care for various types of sexual and reproductive dysfunction. These cases may be relevant for purposes of considering whether, for tax purposes, such medical care should be treated as”voluntary”or”involuntary.”
These cases indicate that courts seem to appreciate the importance of sex and reproduction more than insurers. 277 In part, this is due to the fact that insurers have narrowed the scope of insurance coverage to contain growing health care costs. Traditionally, insurers deferred to doctors’ medical judgment and covered medical care that was ordered by doctors. 278 When expensive new high-tech treatments began driving up the cost of health care dramatically, however, insurance companies changed their practices. 279 Beginning in the mid-1970s, following the 1965 enactment of Medicare and Medicaid, our national health policy objectives shifted from a policy of expanding health care coverage to a policy of cost containment. 280 Private insurers attempted to control skyrocketing health care costs by stating in their contracts that coverage is limited to treatment: (1) of a “disease” or “illness,” 281 (2) that is a “medical necessity,” 282 and (3) that is not “experimental” or “investigative.” 283 Medicare and Medicaid also [*1171] exclude from coverage services that are not medically necessary. 284 Insurers use these definitions to support their denials of coverage.
Courts have defined the terms “illness,” “disease,” and “medical necessity,” in cases involving sexual and reproductive dysfunction. In Egert v. Connecticut General Life Insurance Co., the court held that infertility was an “illness” and that IVF was “medically necessary” treatment for infertility, so the patient was entitled to reimbursement for the costs of IVF. 285 Several courts have also held that sex reassignment surgery for treatment of a transsexual with gender identity disorder is a medical necessity. 286 Shortly after the FDA approved Viagra, the federal agency that administers the Medicaid program 287 took the position that Viagra is a medically necessary treatment for erectile dysfunction and mandated that state Medicaid programs cover the drug. 288
Professor Pratt’s TaxProf listserv posting is reprinted in its entirety with her permission. Her TaxProf profile is here.