On April 9, 2021, the Inside Earnings Assistance (IRS) released PLR 202114001 (PLR), which gives steerage on the deductibility of health care prices beneath Section 213 of the Inside Income Code (Code) relating to fertility expenditures for very same-sex couples. Whilst the PLR disallows most of the expenditures incurred by a very same-sex few wishing to have a baby, the IRS’ difference concerning deductible expenditures for clinical strategies attributable to the taxpayer and non-deductible prices for health-related treatments attributable to third get-togethers raises unique issues about the equitable therapy of unique taxpayers.
The PLR responded to a ask for for a ruling on the deductibility of clinical fees arising from egg donation, in vitro fertilization (IVF) treatments and gestational surrogacy for a male exact-intercourse few (Taxpayers A and B, collectively the Taxpayers). The Taxpayers ended up lawfully married and wished to have a baby with as considerably of their representative DNA as feasible. As these types of, the Taxpayers prepared for Taxpayer A to donate sperm and for Taxpayer B’s sister to donate the egg, with an unrelated third celebration utilized as a gestational surrogate to carry the ensuing baby to phrase. The Taxpayers sought a ruling less than Section 213, authorizing deductions for fees and charges relating to egg retrieval, sperm donation, sperm freezing, IVF clinical strategies, surrogate childbirth expenditures, surrogate health-related insurance plan, legal and company service fees relating to the surrogacy and other professional medical fees arising from the surrogacy.
The IRS concluded that the costs and charges similar to egg donation, IVF processes and gestational surrogacy would not qualify as deductible clinical fees beneath Portion 213 when they are incurred for 3rd functions, this kind of as Taxpayer B’s sister and the proposed surrogate. In contrast, healthcare costs and fees right attributable to the taxpayers are deductible inside the restrictions of Part 213, which includes sperm donation and sperm freezing.
The IRS viewed as numerous important authorities in advance of arriving at its conclusion. Creating the statutory composition for the deductions, Area 213(a) of the Code will allow a deduction of costs paid out for healthcare treatment of the taxpayer to the extent they exceed 7.5% of the their modified gross earnings. Critically, “medical care of the taxpayer” is examine to consist of only all those expenses and charges directly attributable to the taxpayer, the taxpayer’s spouse or the taxpayer’s dependents, as a result excluding third-occasion egg donors or gestational surrogates.
Segment 213(d)(1)(A) of the Code supplies that professional medical treatment incorporates quantities compensated for the diagnosis, treatment, mitigation, treatment or avoidance of condition or for the objective of influencing any framework or perform of the body. Health care care is consequently divided into two distinct qualifying definitions: Those amounts compensated to treat a health-related issue or defect and individuals amounts paid out for the objective of impacting any composition or function of the entire body.
The PLR provides many authorities that study the contours of the health-related price deduction underneath the 1st qualifying definition of treatment relating to a healthcare affliction. For instance, Atkinson v. Commissioner, 44 T.C. 39 (1965) and Magdalin v. Commissioner, T.C. Memo 2008-293, aff’d with no revealed impression, 105 A.F.T.R.2d (RIA) 2010-442 (1st Cir. 2009) both of those support the common proposition that the deduction has historically been construed narrowly.
Below the 2nd qualifying definition of health-related treatment relating to the construction and perform of the human body, Income Ruling 73-201 (1973-1 CB 140) and Revenue Ruling 73-603 (1973 CB 76) are referenced to deliver added assistance in the certain context of health-related treatment options impacting fertility. These rulings maintain that the costs affiliated with vasectomies and operations that render a lady incapable of possessing small children influence a framework or function of the human body and for that reason qualify as a deductible healthcare expenditure in the restrictions of Area 213.
The IRS lastly provides a quantity of illustrative situations. In Magdalin, the US Tax Courtroom viewed as surrogacy and egg donor costs claimed by a solitary, heterosexual male and held that fees incurred in fathering children by way of unrelated egg donors and gestational carriers are not deductible medical charges underneath Section 213. The deductions had been denied due to the fact there was not a causal romance between an underlying health-related problem or defect and the taxpayer’s expenditures nor were the prices incurred for the objective of influencing a construction or operate of the taxpayer’s entire body. Longino v. Commissioner, T.C. Memo 2013-90, aff’d 593 Fed. Appx. 965 (11th Cir. 2014) dominated similarly, with the Tax Court docket keeping that a taxpayer can’t deduct IVF prices of an unrelated particular person if the taxpayer does not have a defect which helps prevent them from in a natural way conceiving little ones. In Morrissey v. United States, 871 F.3d 1260 (11th Cir. 2017), a male taxpayer in a similar-intercourse union sought to deduct expenses he incurred to retain, compensate and treatment for the female serving as the egg donor and gestational surrogate. Morrissey characterized himself as “effectively,” if not medically, infertile because he is homosexual, prompting the courtroom to take into consideration no matter if the bills had been incurred for the purpose of affecting Morrissey’s bodily reproductive function. The court docket uncovered that the IVF expenses were being not deductible below Area 213(d) because the costs had been not for materially influencing or altering an action for which the taxpayer’s own human body was specially fitted, utilized or accountable. Considering the fact that the IVF and surrogacy techniques did not materially influence the framework and perform of the taxpayer’s entire body, they did not qualify less than the 2nd definition of “medical expenses.”
Offering steering on the deductibility of health-related costs could not have been an effortless job for the IRS. The latest legal routine less than Area 213 provides a steady and structured analytical framework for analyzing the deductibility of charges connected with fertility-associated medical processes. Nonetheless, it also introduces selected equity concerns concerning taxpayers.
The PLR is relatively scarce in that the Taxpayers have been advised that the IRS would most likely issue an adverse ruling and opt for to progress with their request. This determination explicitly highlights the sophisticated character of this portion of the Code, raising the possibility that it may perhaps need to be revisited to assure taxpayers acquire good therapy. Exactly where this are unable to be achieved through IRS or US Division of the Treasury advice, it may point out the require for a legislative answer.
Mechanically, it might be argued that restricting the applicability of the deduction stops earnings shifting concerning many taxpayers. Beneath the PLR, until the taxpayer is medically infertile, only third-occasion egg donors and surrogates can deduct health-related expenditures relating to IVF processes simply because of the impact this sort of a approach would have on the structure and perform of their human body. If such a deduction were being permitted to taxpayers devoid of health care infertility, it may well be favorable to change the deduction amongst the couple and the surrogate dependent on their economical instances. As a result, the limitation on the deduction may well assure equitable tax remedy concerning the many functions by protecting against money shifting.
Conversely, since of the framework of Area 213 and the definition of “medical costs” as interpreted by the PLR, partners seeking the exact professional medical processes for the similar goal of conceiving a kid may possibly facial area different tax treatment method depending on their medical circumstances or family members framework.
For case in point, a unique-intercourse few dealing with health-related infertility would very likely locate their health-related charges relating to IVF strategies deductible beneath the PLR framework. A different-sex couple that does not practical experience health care infertility but is faced with other respectable clinical factors for pursuing IVF methods, these kinds of as dormant genetic conditions at hazard of passing on to the baby, would very likely find the exact same medical costs non-deductible. Thus, when both equally couples are presented with the option involving conceiving normally or by means of IVF processes, the PLR framework would very likely only make it possible for the deduction to the initially pair inspite of the second couple’s legit motives for pursuing IVF methods.
Even stranger outcomes may possibly arise in the context of same-intercourse couples. The existing legal regime appears to imply that a similar-sex pair confronted with healthcare infertility would probably come across their professional medical costs relating to IVF strategies deductible. In comparison, a same-intercourse couple that does not practical experience healthcare infertility would possible uncover the identical fees non-deductible. From a sensible issue of perspective, neither few would be able of directly conceiving a boy or girl with each other. However, just for the reason that of the dissimilarities in their healthcare situation, one few would be equipped to entry a deduction when the other would not.
In light-weight of social and lawful developments surrounding similar-intercourse couples—and confronted by the practical realities of present day families—a reassessment of this analytical framework may possibly be required for equitable remedy involving taxpayers.
Anthony Teng, a summertime associate in the New York business, also contributed to this report.