Are the expenses incurred for gender reassignement surgery deductible medical expenses under §213 of the Internal Revenue Code or are they nondeductible expenses for cosmetic surgery? Rhiannon O’Donnabhain thought so and so she deducted them in 2001. The IRS denied the deduction and she sued in Tax Court. The Tax Court ruled in her favor in 2010 and now the IRS has acquiesced in that decision.

The IRS issues an acquiescence when it agrees with a decision by the Tax Court. This is essentially the equivalent of a revenue ruling saying that such expenses are deductible. For a copy of the AOD (Action on Decision) see here.

O’Donnabhain incurred her costs in 2001 and deducted them on her 2001 tax return. She received her tax refund and in 2002 she was audited. GLAD tells us that the local IRS folks were at first inclined to allow the deduction, but for them it was an issue of first impression and so they sought guidance from the National Office – sometimes we call this a request for technical advice or a field service advisory – but more and more in recent days this advice is published as Advice from Chief Counsel – a CCA – and that’s what ultimately led to the tax court battle in this case.

But if you do a little detective work, you’ll find that the initial response from the Office of Chief Counsel was supportive of the deduction. In 2003, about the time that this case was in audit, a PLR was issued (PLR 200324011). It was carefully worded so as not to attract attention. It simply provided the following information:The taxpayer has been diagnosed with an unidentified disorder and is planning to undergo an unidentified surgical procedure.

That ruling concluded that because the proposed surgery would affect a “structure or function of the body” it should qualify as medical care under §213. The IRS also noted that the pproposed surgery was not directed primarily at improving the taxpayer’s appearance and so was not a cosmetic procedure.

That was written by staffers in office of Chief Counsel who wanted to get the law right. But I’m told that the then Commissioner got whiff of the proposed advice and demanded a different result, citing Bush family values as his guide. And the result was the CCA denying the deduction and leading to this litigation.