This was on YaHoo News this Morning! Richard

Feb. 3 (Bloomberg) -- Costs incurred in sex-change operations and procedures are tax-deductible, the U.S. Tax Court ruled.

The Washington-based court ruled yesterday that hormone therapies and sex reassignment surgeries are necessary to treat gender identity disorder, a disease, in the case of a Boston- area man who became a woman named Rhiannon O’Donnabhain.

“The Court is persuaded that petitioner’s sex reassignment surgery was medically necessary,” Judge Joseph Gale wrote in a 69-page decision for the majority.

The decision is the first to rule that sex-change operations qualify as medical care and overturns a 2005 Internal Revenue Service policy denying medical expense deductions in such operations on the grounds they are ‘cosmetic.”

The case involves a $5,679 tax bill assessed by the IRS, which denied medical deductions claimed by O’Donnabhain after she underwent sex reassignment-surgery in 2000. O’Donnabhain, a civil engineer who joined the U.S. Coast Guard during the Vietnam War, was diagnosed with gender identity disorder in 1997.

Oá¢â‚¬â„¢Donnabhain sued the IRS after it denied her deduction of $25,000 in out-of-pocket medical costs associated with the surgeries and other care such as hormone treatments and counseling, according to Boston-based Gay & Lesbian Advocates & Defenders, which represented her in court.

Deduction Rules

Medical expenses are deductible after they exceed 7.5 percent of adjusted gross income. Cosmetic surgery generally doesn’t qualify.

O’Donnabhain, who became a woman after 20 years of marriage that produced three children while simultaneously struggling with her gender identity, argued her medical costs were no different than heart surgery.

á¢â‚¬Å“Iá¢â‚¬â„¢m not asking for any more than any other person is entitled to,á¢â‚¬

Yesterday, a majority of the court sided with her, ruling the IRS was wrong to deny her deductions.

The contention that O’Donnabhain “undertook the surgery and hormone treatments to improve appearance is at best a superficial characterization of the circumstances that is thoroughly rebutted by the medical evidence,” Gale wrote.

In an opinion that dissented in part, Judge David Gustafson said that O’Donnabhain may have suffered a “serious mental condition.” Still, he said her condition met a strict definition of non-deductible “cosmetic surgery.”

“Congress did not provide that an appearance-improving procedure will nonetheless be deductible if it merely ‘mitigates a disease,’” Gustafson wrote.

GLAD didn’t immediately return calls seeking comment.

The decision was first reported by the TaxProf Blog, run by University of Cincinnati law professor Paul Caron.

The case is O’Donnabhain v. Commissioner, 134 T.C. No. 4 (Feb. 2, 2010).

To contact the reporter on this story: Ryan J. Donmoyer in Washington at [email protected] .