IRS Inconsistencies: Section 213 And The Deductibility Of Assisted Reproductive Technology

Natalie Packard (J.D. 2023, Arizona State), Comment, IRS Inconsistencies: Section 213 and the Deductibility of Assisted Reproductive Technology, 54 Ariz. St. L.J. 1421 (2022): 

The Internal Revenue Code (the “Code”) is a powerful tool that both reflects and shapes public policy. Through its complex set of deductions, tax rates, and credits, the Code creates financial incentives that encourage certain behavior, such as buying a house or donating to charity. While the Treasury Department writes the Code, the Internal Revenue Service (“IRS”) performs the essential role of interpreting its language, hopefully in a way that reflects taxpayers’ values. Thus, as values change, the IRS’s application of the Code or the Code itself should change. Unfortunately, both Congress and the IRS can be slow to accept evolving values. As a result, many Code provisions preserve outdated and inaccurate assumptions about families, resulting in a “landscape of discrimination hidden within the tax code.” Section 213 is one such provision, where the IRS has applied a traditional view of family and medical care that discriminates against same-sex couples who want to have children. 

Section 213 allows taxpayers to deduct expenses for their “medical care” and defines “medical care” as amounts paid “for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.” This broad definition of “medical care” includes reproductive treatments for individuals dealing with medical infertility. Medical infertility affects one in ten couples and causes emotional and financial burdens for these individuals. Advancing technology has allowed infertile patients to utilize medical treatments known as assisted reproductive technologies (“ARTs”), which include in vitro fertilization (“IVF”), egg donation, intracytoplasmic sperm injection (“ICSI”), and surrogacy. Unfortunately, ARTs are expensive, but the Section 213 medical expense deduction could reduce the after-tax costs if the treatment qualifies as “medical care” under Section 213. ARTs qualify as “medical care” if they manage a disease, satisfying the disease prong of Section 213, or affect a bodily structure or function, satisfying the structureor-function prong. Despite a history of interpreting the “medical care” definition broadly, the IRS recently narrowed its view for same-sex couples and unmarried taxpayers.

The IRS, with the courts’ affirmation, has disallowed same-sex couples and taxpayers without a sexual partner from deducting their ART expenses under both prongs of the Section 213 definition of “medical care.” Courts found that such taxpayers did not qualify under the disease prong because they did not have a physiological medical anomaly causing their infertility. The IRS and courts have not recognized any other form of infertility, such as infertility due to social circumstances. These taxpayers also did not satisfy the structure-or-function prong because of the type of ARTs received. Some taxpayers must utilize “collaborative” ARTs, or treatments that require a third party. Male same-sex couples, for example, need a third-party surrogate to facilitate their process of having a biological child. The IRS and courts held that these collaborative ARTs are not “medical care” because they do not directly affect the taxpayer’s body.

The IRS’s position in these cases and its own administrative guidance create multiple inconsistencies. First, its arguments contradict the rationales of prior rulings. The IRS argued in Magdalin v. Commissioner that the disease prong must be satisfied even if the structure-or-function prong is satisfied. Not only does this ignore the clearly disjunctive language of Section 213, but it is also inconsistent with IRS rulings allowing other reproductive treatment to qualify as “medical care” under the structure-orfunction prong when the treatment is not addressing any disease. Furthermore, the IRS’s argument that collaborative ARTs cannot satisfy the structure-or-function prong contradicts IRS rulings allowing taxpayers to deduct procedures that are not performed on the taxpayer’s body if the treatment is for the taxpayer. For example, expenses for an organ donor’s procedures and a notetaker assisting a deaf college student were deductible under the structure-or-function prong because these services were “primarily for” the taxpayer. The IRS also allowed different-sex married couples to deduct non-collaborative surrogacy expenses in two settled cases. The IRS is wrong to take conflicting positions regarding the deductibility of ARTs.

Second, the IRS’s view that infertility only includes the inability to physiologically conceive a child ignores modern societal and medical advancements that broaden the concept of infertility. And the IRS may be inconsistently applying this narrow definition. Medically fertile, married, different-sex couples are using ARTs for health reasons, such as to protect a child from inheriting a genetic disease, yet there is no literature regarding the deductibility of these ARTs. The lack of rulings or discussion suggests that the IRS is actually allowing these couples to deduct their expenses. The IRS may be allowing these deductions under the disease prong with the potential child’s genetic mutation as the disease, in which case same-sex couples with genetic disorders could deduct their ARTs. But more likely, the IRS views the ARTs as treating infertility and the IRS is not scrutinizing the form of infertility for these married different-sex couples. Applying a different and effectively broader definition of infertility for medically fertile, married, different-sex couples but not for medically fertile, married, same-sex couples is discriminatory.

Finally, the IRS’s current position creates convoluted qualifiers for taxpayers wishing to deduct their ART expenses. The deductibility of ARTs depends on several factors, including gender, marital status, sexual orientation, and type of ART. These factors do not promote any known policy objective behind Section 213 and result in discriminatory effects.

Despite these inconsistencies, the IRS continues to apply Section 213 in this way. Scholars have proposed to broaden the definition of “medical care” to include all taxpayers with various forms of infertility. Such proposals, however, ignore the practical difficulties of amending the federal tax code.

This comment argues that states, including Arizona, should write their own definition of “medical care” that specifically includes collaborative treatments to ensure consistent application to all taxpayers and encourage intending parents to form families. Part II reviews how courts and the IRS interpret “medical care” generally under Section 213. Part III analyzes how the IRS and courts have applied this definition to fertility treatments, including ARTs, and explains the problems with the current interpretation. Part IV explores a potential solution in the states, analyzing the issues and benefits of state conformity to federal tax law. This Part argues that Arizona should not conform to the federal definition of “medical care” so it can provide clearer requirements, avoid potentially discriminatory effects, and encourage effective and safe reproductive care. Finally, this Part proposes a new definition of “medical care” for Arizona’s tax code.