Rhiannon O'Donnabhain, who underwent reassignment surgery in 2001, and listed the $25K as a medical deduction, had the deductability disallowed by the IRS in 2003.
The IRS is claiming that the surgery, which O'Donnabhain underwent only after 5 years of therapy, was "cosmetic," and not medically required. (I'm not going to even try to firgure out that logic)
The Tax Court has not ruled on this issue yet, but there has been at least one case where the IRS ruled against the deductability of the procedure, while in another case the IRS allowed the travel expense for a man who drove his college-age son to a clinic for reassignment surgery.
One of the peculiarities of the IRS and the Tax Court are that they do not need to follow strict precedent when considering cases, unless a situation is clearly codified by law, rather than practice.
It would appear, from my viewpoint, that the deductability of the procedure is valid in these circumstances. However, the rules the IRS are operating under may have been influenced by the prevailing political climate in Washington DC from 2001 to the present.
The AP writeup for the story can be found here.