IRS Audit – section - 213(a) IRS Guidance Released on Medical Expense Deductions
The IRS has issued guidance regarding the deductibility of amounts paid by individuals for diagnostic and similar procedures, including certain devices, not compensated by insurance or otherwise, as medical care expenses under Code Sec. 213(a). In each of the three scenarios presented, the amounts paid by taxpayers were expenses for medical care deductible under Code Sec. 213(a), subject to the limitations of that section including the seven and a half percent floor on deductibility.

Under Code Sec. 213(d)(1)(A), medical care expenses include amounts paid related to the diagnosis, mitigation, treatment, cure or prevention of disease, or any condition affecting any structure or function of the body, including obstetrical services. Diagnosis includes the determination of the absence of disease, and may involve testing for changes in the function of the body unrelated to disease. The guidance clarifies that (1) Code Sec. 213 does not limit the deduction to amounts paid for the least expensive form of medical care applicable, and (2) a physician's recommendation, while often important to determine whether certain expenses are for medical or personal reasons, is unnecessary when the expenditures are for items wholly medical in nature and that serve no other function.

In the first scenario, money spent for an annual physical examination qualified as an expense for medical care, even though the taxpayer was not experiencing any symptoms of illness. In the second scenario, a taxpayer who was not experiencing any symptoms of illness paid for a full-body electronic scan at a clinic without having obtained a physician's recommendation for this procedure. Because the procedure served no non-medical purpose, it, too, qualified as an expense for medical care. In addition, neither the high cost of the procedure nor the possibility of less expensive alternative diagnostic tests barred the deductibility of the expense. Finally, in the third scenario, the expense of a self-administered pregnancy test kit qualified as an expense for medical care, even though it tested the healthy functioning of the body rather than attempted to detect disease.




Medical expenses: Diagnosis: Physician's recommendation. --
The IRS has issued guidance regarding the deductibility of amounts paid by individuals for diagnostic and similar procedures, including certain devices, not compensated by insurance or otherwise, as medical care expenses under Code Sec. 213(a). In three scenarios presented, the amounts paid by taxpayers were expenses for medical care deductible under Code Sec. 213(a), subject to the limitations of that section. The guidance clarifies that: (1) Code Sec. 213 does not limit the deduction to amounts paid for the least expensive form of medical care applicable, and (2) a physician's recommendation, while often important for determining whether certain expenses are for medical or personal reasons, is unnecessary when the expenditures are for items wholly medical in nature that serve no other function.





ISSUE

Are amounts paid by individuals for diagnostic and certain similar procedures and devices, not compensated by insurance or otherwise, medical care expenses deductible under § 213(a) of the Internal Revenue Code?



FACTS

In the situations described below, the costs paid by the taxpayers are not compensated by insurance or otherwise, and the taxpayers are not experiencing any symptoms of illness.



Situation 1

Taxpayer A undergoes an annual physical examination, which is performed by a physician. A pays for the physician's services and laboratory tests.



Situation 2

Taxpayer B pays for a full-body electronic scan, a relatively high-cost procedure, performed by a technician at a clinic. The scan examines the condition of B's internal organs and may identify disease or other abnormalities. B has not consulted a physician before undergoing the procedure, which can be obtained without a physician's direction, or determined if less expensive alternatives are available.



Situation 3

Taxpayer C buys a test kit and uses it to determine whether she is pregnant.



LAW

Section 213(a) allows a deduction for expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer, spouse, or dependent, to the extent that the expenses exceed 7.5 percent of adjusted gross income. Medical care includes 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. Section 213(d)(1)(A).

Medical care includes X-rays and laboratory and other diagnostic services. Amounts paid for obstetrical services are deemed to be for the purpose of affecting a structure or function of the body and therefore are paid for medical care. Section 1.213-1(e)(1)(ii) of the Income Tax Regulations.

"Diagnosis" is the determination of a medical condition, such as a disease, by physical examination or study of symptoms. Black's Law Dictionary (8 th ed., 2004). A diagnosis may encompass a determination that disease is absent. The determination of a medical condition may include testing for changes in the functions of the body, such as those resulting from pregnancy, that are unrelated to disease.

In determining whether an expense is for either medical or personal reasons, the recommendation of a physician is important. Havey v. Commissioner, 12 T.C. 409, 412 (1949). However, this determination is unnecessary in the case of expenses for items that are wholly medical in nature and serve no other function in everyday life. Stringham v. Commissioner, 12 T.C. 580, 584 (court reviewed), aff'd 183 F.2d 579 (6 th Cir. 1950).

The amount of the deduction under § 213 is not limited by a ceiling and, although additional costs for personal convenience are not allowable, § 213 does not limit the deduction to amounts paid for the least expensive form of medical care available. Ferris v. Commissioner, 582 F.2d 1112, 1116 (7 th Cir. 1978).



ANALYSIS

In Situation 1, the amount A pays for the annual physical examination is for diagnosis and qualifies as an expense for medical care even though A is not experiencing any symptoms of illness.

In Situation 2, the amount B pays for the full-body scan is for diagnosis and qualifies as an expense for medical care even though B is not experiencing symptoms of illness and has not obtained a physician's recommendation before undergoing the procedure. The procedure serves no non-medical function and the expense is not disallowed because of the high cost or possible existence of less expensive alternatives.

In Situation 3, the amount C pays for the pregnancy test qualifies as an expense for medical care even though its purpose is to test the healthy functioning of the body rather than to detect disease.

Therefore, the amounts paid by Taxpayers A, B, and C for the physical examination, the full-body scan, and the pregnancy test kit are deductible under § 213(a), subject to the 7.5 percent floor.



HOLDING

Amounts paid by individuals for diagnostic and certain similar procedures and devices, not compensated by insurance or otherwise, are medical care expenses deductible under § 213(a), subject to the limitations of that section.



DRAFTING INFORMATION

For further information regarding this revenue ruling, contact Dan Cassano at (202) 622-7900 (not a toll-free call).