Tax Court reverses IRS on Sex reassignment deductability

In 2001 Rhiannon O'Donnabhain, then aged 50, underwent sex reassignment surgery to transition from male to female. She deducted the allowable portion of the surgery costs on her federal taxes.

In 2003 the IRS disallowed the deduction, claiming the surgery, performed after five years of therapy, as "cosmetic," and therefor not a deductible medical expense.

Rather than quietly allow the IRS position to prevail,she decided to appeal the decision, and the initial appeal granted her the deduction for the surgery expense. The local IRS office sought a decision from Washington, and a Tax Letter was issued on Oct 14,2005 denying the applicability of the deduction.

The case went before the Tax Court in 2007. Oral arguments were heard in November of that year. Both sides finished filings in February of 2008. The Tax Court issued its final opinion on Feb 2,2010.

The decision of the court is that the surgery and hormone treatments are deductible expenses, but the breast augmentation surgery was primarily "cosmetic" in nature, and therefore does not pass the statutory test for the qualification as a deductible expense.

(One of the side-notes that, to me, made this more of a political case than a straight-forward finances case, was the choice of one of the expert witnesses by the IRS: forensic psychiatrist Dr. Park Dietz, who testified that Gender Identity Disorder is not a disease. Dr Dietz has a small problem in credibility, when one reflects that he was the same doctor who testified that Andrea Yates had apparently seen an episode of the TV series "Law and Order" that depicted a woman who had an insanity defense after drowning her children. The problem, however, was that no such episode of Law and Order had ever aired. Indeed, Deitz also stated his opinion during the trial that a disorder should not be called a "disease" unless it has a clear and unambiguous organic or physiological basis)

Legal assistance to O'Donnabhain was rendered through the Gay and Lesbian Advocates & defenders.

I wrote about this in 2007, but I don't have a subscription to the proper legal services to be able to inquire about the progress of cases, and my periodic curiosity about the progress of the case has been, until now, unsatisfied.

Initial coverage from the New York Times,

Initial tax court petition

Tax court decision

This blog's prior posts are here (07/2007) and here (10/2007)

IRS rules for 2007 limit recognition of some donations

As a year-end tax reminder the U.S. Internal Revenue Service is reminding taxpayers that beginning for tax year 2007, that the rules for deductibility of charitable donations has changed slightly.

In the past, if you made donations to a charitable organization (such as a church) in cash of less than $250 your record keeping requirements were simple, and could include a diary entry or other notation showing the amount you contributed (such as a day-timer entry each Sunday saying "$20 - MyFaithWorship").

Under the new rules, the written record must be independent of the taxpayer -- that is, it must be something such as a cancelled check, credit card statement showing a transfer of funds, or a written record from the charity that acknowledges the donation, its date and value.

From the instructions for Schedules "A" & "B" for the 2006 tax year:

"...What's New For 2007
New recordkeeping requirements for contributions of money.
For charitable contributions of money, regardless of the amount, you must maintain as a record of the contribution a bank record (such as a cancelled check)or a writtten recoird from the charity. The written record must include the name of the charity, date and amount of the contribution... "

This means, however, that those who typically make small contributions in cash (as in "taking a $20 bill out of my wallet") are generally going to be S.O.L on deductibility in many cases, because it is certainly not common practice for the ushers with the collection plate to have a receipt book with them.

Thus, the individual who pulled that same $20 out of their wallet each Sunday could report the aggregate cash contributions of $1,020 (the individual contributions, being less than $250, do not require special reporting), as long as there was that diary notation to back it up.

However, according to the new rules for the 2007 tax year, you had better make that contribution out of your checking account, or else you will not be allowed to deduct it.

Do I have an opinion on this?

Of course I do.

This appears, to me, just a continuation of the nickle-and-dime attack on the small-to-medium taxpayer that is being used to recover the tax revenue lost by the cuts to the taxes of those with big revenues.

Consider, does the small taxpayer benefit when the Alternative Minimum Tax structures are not updated to factor in wage inflation (and certainly not factor in buying power compression)?

Or the general prohibition on the individual taxpayer's ability to deduct most kinds of interest paid on debt (and with credit APRs routinely running from 20% to 25%)?

Or the absurdity of a minimum floor on deductibility of medical expenses?

Do these tax law provisions affect those with large annual revenue to the same extent as those who have a lot less in their take-home pay?

Of course not. And to try to claim that these give-aways for big taxpayers (who wind up shelling out a much smaller proportionate share of their annual income) are somehow of "benefit" to the smaller wage-earner is simply preposterous.

See:

"2006 Instructions for Schedules A & B (Form 1040)"
"Recent Tax Law Changes May Affect People Giving to Charity: IRS Offers Tips for Year-End Donations"
"Publication 526 - Charitable Contributions"