Weekly SSRN Tax Article Review And Roundup: Layser Reviews Medical Necessity — A Higher Hurdle for Marginalized Taxpayers?

This week, Michelle Layser (Illinois) reviews Julie Furr Youngman (Washington & Lee) & Courtney D. Hauck (J.D. 2021, Columbia), Medical Necessity: A Higher Hurdle for Marginalized Taxpayers?, 51 Loy. L.A. L. Rev. ___ (2018).

Many recent advancements in transgender rights have been followed by setbacks. Obama era rules that protected transgender patients from discrimination have been rolled back, and just last week the Trump administration announced plans to define gender for federal civil rights laws as biological, immutable and determined at birth. Now a new article by Julie Furr Youngman and Courtney Hauck warns that a 2010 U.S. Tax Court case that upheld the medical expense deduction for gender affirmation surgery may come back to haunt the transgender community if its dicta is interpreted as requiring proof of medical necessity. (Note: For definitions and terms preferred by the transgender community, please see the National Center for Transgender Equality.)

A requirement that taxpayers establish medical necessity to claim the medical expense deduction would be problematic for any taxpayer who relies on the tax deduction as a backstop to insurance coverage. In other words, if an important goal of the medical expense deduction is to reimburse taxpayers—whether transgender, disabled, or otherwise—for medical expenses that fail to satisfy insurance companies’ “medically necessary” requirements, then a rule that would import the medical necessity requirement to the tax context would clearly undermine that goal. The authors argue that a leading Tax Court case, if read incorrectly, could do exactly that.

The article begins by describing the health challenges faced by the transgender community, which includes unequal access to medical care. The barriers to access are sometimes financial. Many transgender patients are poor and uninsured, and even those who are insured often find that their medical insurance does not cover transition related medical care. Other times, the barriers to medical care are cultural and systemic, arising from discrimination and ignorance on the part of hospitals, physicians and other medical professionals.

Given this unequal access to medical care, Youngman and Hauck contend that it is critical that tax law provides equal access to the medical expense deduction. And at first glance, it often does. As the article explains, the U.S. Tax Court held in O’Donnabhain v. Comm’r (2010) that hormone replacement therapy and gender affirmation surgery used to treat the taxpayer’s gender dysphoria constituted tax deductible medical care. At the same time, the court held that her breast augmentation surgery was nondeductible because it was cosmetic surgery, which the tax code stipulates is not medical care.

The case raised red flags for tax law researchers. As others have also noted, the argument set forth by the IRS was deeply influenced by Dr. Paul McHugh, the leader of President George W. Bush’s Council on Bioethics. Dr. McHugh, who had advised the Boston IRS Appeals Office to deny the deduction, was firmly opposed to gender reassignment surgery and skeptical of transition treatments. The agency’s willingness to rely on his research suggested that its rulings may be unduly influenced by the current administration’s views.

However troubling the agency’s reasoning may have been, Youngman and Hauck focus on another—and potentially more troublesome—analytical error on the part of the Tax Court itself. When rejecting the IRS’s arguments, the court stated in dicta that O’Donnabhain’s treatments were, in fact, “medically necessary.” The phrase helped establish that many of the treatments endured by O’Donnabhain were not nondeductible cosmetic procedures. It also mirrored language used by insurance companies. There’s just one problem: medical necessity was never required by the tax code or regulations.

Youngman and Hauck argue that medical necessity is not and should not be the standard for qualifying for the medical expense deduction. They reason that no statute, regulation, or informal agency guidance has used the phrase. Meanwhile, the U.S. Tax Court has previously held that the medical expense deduction is allowable without physician referrals, which are typically required by insurance companies to establish medical necessity. To introduce a new medical necessity standard may reduce access to the tax deduction for all people with medical related expenses that are ineligible for insurance reimbursement based on medical necessity grounds.

But the medical necessity standard may be especially dangerous for the transgender community. Most obviously, if the standard were to apply only to cases of gender affirmation treatments creates yet another discriminatory barrier to transgender individuals’ access to healthcare. Less obviously, defining the right to the tax deduction in terms of medical necessity may be used to exclude many members of the transgender and gender nonbinary community. As the authors note, not all transgender individuals experience gender dysphoria or other medical conditions. Moreover, gender identities are often fluid and sometimes—dare I say it—voluntary.  

And therein lies the real danger of decisions like O’Donnabhain: cases that produce a “good” outcome for a transgender claimant may nevertheless serve to undermine the broader transgender rights movement if the law evolves to protect only some (and not all) people who identify as transgender or gender nonbinary. In the context of the medical expense deduction, the best result may be one the authors do not consider: amend the statute to permit a tax deduction for cosmetic surgery. This would eliminate the need for the IRS to determine whether a particular surgery is cosmetic, thereby affirming the right of all people to express their gender—and identities—in any way they please.

This article should be of interest to any tax scholar interested in gender equality, LGBT rights, health, or culture and law.

Here’s the rest of this week’s SSRN Tax Roundup:

• William D Andrews (Harvard), The Unintegrated Economics of Corporate Tax Integration, Harvard Law School John M. Olin Center Discussion Paper No. 976
• Stephen Daly, Scott v HMRC: Principles, Policies and Interpretation, 4 British Tax Review 381 (2018)
• Tarun Jain (Supreme Court of India), Taxing ‘Second-Hand’ Goods Under GST: Guidance from the ECJ, 16 GST Law Times (2018)
• Erik M. Jensen (Case Western), Taxation and the Constitution: Recent Articles, Tax Notes, May 21, 2018
• Jeyapalan Kasipillai (Monash) and Richard Krever (Western Australia), The Adoption of GST in Malaysia: Lessions Not Learned and a Few New Paths, 32(2) Australian Tax Forum 463 (2017)
• Joana Naritomi (LSE), Consumers as Tax Auditors, CEPR Discussion Paper No. DP13276
• Henry Ordower (St. Louis), Abandoning Realization and the Transition Tax: Toward a Comprehensive Tax Base, Working Paper Series
• Shayak Sarkar (UC-Davis) and Josh Rosenthal (National Immigration Law Center), Exclusionary Taxation, Harvard Civil Rights – Civil Liberties Law Review (CR-CL) (forthcoming)
• Linda Sugin (Fordham), The Social Meaning of the Tax Cuts and Jobs Act, 128 Yale L. J. Forum 403 (2018)
• Carsten Weerth (FOM Hochschule für Oekonomie & Management), Advance Rulings and Binding Pre-Entry Tariff Classification According to Article 3 TFA: Situation 2018—Still a Long Way to Go, 12 World Customs Journal 31