IRS Fight Against Sex Change Deduction Was Stupid

Originally Published on forbes.com on November 7th,2011

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It is not unusual for the IRS to lose in court.  It is unusual for them to say anything about it afterwards.  When they do it is called an Action on Decision.  An Action on Decision indicates whether the IRS conisders itself bound by the decision or whether it will come back to fight another day.  They do not issue many actions on decision.  You have to go back to the previous millennium to find a year where there were more than 10.  So an AOD is a pretty big deal.  The third one for 2011, aptly referred to as AOD 2011-3 concerned a 2010 Tax Court decision.   Rhiannon G. O’Donnabhaindid not have a big dollar case. The case was about the deductibility of $25,000 in medical expenses  making for about $5,000 in tax. The IRS is acquiescing in the decision indicating that they will allow similar deductions in the future.  The unusual nature of the deduction has the tax blogosphere responding in its characteristically mature manner.  Here is what Robert Flach, The Wandering Tax Pro has to say:

I’ve heard it all over the past 40 tax seasons – clients trying to deduct the strangest things.  But I have never had a client ask about deducting this.

Ms. O’Donnnabhain was seeking to deduct gender reassignment surgery and with the help of Gay and Lesbian Advocates and Defenders (GLAD)prevailed in Tax Court.  This case deserves a lot more respect that Anietra Hamper’s underwear, which really was funny.  Interesting as the case is, I think the story of how it came to be litigated might be more interesting.

The Issue

There was very little authority on the deductibility of gender reassignment.  In 1983 a private letter ruling (PLR 8321042) implicitly recognized it as a valid medical procedure.  Subsequently, though the Code was amended to deny deductions for cosmetic surgery, which was the theory that the Service used to deny the deduction in this case.  There was a chief counsel advice that staked out that position.  Although anonymous, it is pretty clear that CCA 200603025 was referring to this case.

The Decision

The case featured dueling experts on the validity of the Benjamin standards of care, which defines a process that should be followed in the treatment of Gender Identity Disorder.  Basically you do a lot of therapy and have to publicly live as a member of the other gender for 12 months prior to having reassignment surgery,  The IRS experts didn’t put up a very good fight as the Court noted :

Even if one accepts respondent’s expert Dr. Schmidt’s assertion that the validity of the GID diagnosis is subject to some debate in the psychiatric profession, the widespread recognition of the condition in medical literature persuades the Court that acceptance of the GID diagnosis is the prevailing view. Dr. Schmidt’s own professed misgivings about the diagnosis are not persuasive, given that he continues to employ the diagnosis in practice, believes that psychiatrists must be familiar with it, and recently gave a GID diagnosis as an expert in another court proceeding. On balance, the evidence amply demonstrates that GID is a widely recognized and accepted diagnosis in the field of psychiatry.

The Interesting Question

The interesting question is how this thing ended up being litigated.  An IRS old timer who had some familiarity with the case told me that they were ready to settle for half the deduction.  This would have left no public trail.  Instead the powers on high decided it required high level attention which resulted in the chief counsel advice, which while not authority put the Service on record with the position.  Once that was done the Tax Court fight was almost mandatory given that Ms. O’Donnnabhain and GLAD were not going to back down.

Who Cares ?

I think the most common reaction to transgender issues is that expressed by the Tax Pro – seems like exotic weirdness.  There are at least two groups that have intense negative reactions to transgenderism.  Radical feminists are concerned about men invading woman only spaces. Radfemhub   does not even want male to female transsexuals leaving comments on the blog.  Then there is the religious right.  I’m pretty sure that they had a lot more influence with the Bush administration than the radfems did.  Here is a story from 2004 about the Traditional Values Coalition worried about the deduction being allowed.  So presumably it was the religious right that pushed the IRS into this stupid fight.

Why Was It a Stupid Fight ?

Most of my sympathy on the issue goes to the transgendered.  That is mainly because of my general feeling of identification with the underdog.  The most important legal decision concerning a trangendered person wasFarmer v Brennan.  Dee Farmer was a pre-op transexual who was imprisoned in the general population of a male prison and was repeatedly raped.  I don’t think anybody goes very far into transgendering for the laughs and giggles. On the other hand I have sympathy for the radfem perspective.  If they need space that doesn’t have men around to feel safe, because men are such jerks – Well probably surgery will not cure men of their jerkiness.  Having grown up in a highly gendered environment I can also appreciate the religious right perspective.  So there is going to be an argument, but it was exceedingly dumb of the religious right to pick the fight in Tax Court particularly in Boston where they were up against GLAD which is currently kicking ass on DOMA.  IRS had an expert who said the surgery was not a valid medical procedure.  You could probably find an expert somewhere or other to say that about any procedure. Using your political muscle to get the IRS to pick on an individual is a great way to win sympathy for the other side of the argument, particularly if the individual wins in Tax Court.

Is There Still Politics in This ?

Of course there is.  Monica Roberts rates Obama as the best president ever for transgender issues.  She lists his accomplishments including the appointment of openly transgendered individuals.  Ms. Roberts indicates that she is keeping the list open.  Well AOD 2011-3 should get added to the list.  It is the icing on the cake of last years victory in Tax Court.