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11th Circuit Rejects Tax Deductibility of Surrogacy Expenses

Posted on: October 3rd, 2017 by Art Leonard No Comments

A gay male couple that wants to have a child who is genetically related to one of the men needs to retain the services of at least one and possibly two women, depending whether they are going to use ordinary surrogacy or gestational surrogacy to have the child. Should those expenses be deductible if they exceed the threshold set by the Internal Revenue Code for deductible medical expenses?  On September 25, the 11th Circuit Court of Appeals, affirming a ruling by the Internal Revenue Service, answered in the negative. Morrissey v. United States, 2017 U.S. App. LEXIS 18479, 2017 WL 4229063.

Joseph F. Morrissey, the plaintiff, is a gay man who has been in a monogamous relationship with his same-sex partner since 2000. (They married after the events described in this case took place, when same-sex marriage became legal in Florida.)  Morrissey characterizes himself as “effectively infertile” (since he is gay) because “it is physiologically impossible for two men to conceive a child through sexual relations.”  The way out of this “effective infertility” is to use a surrogate, a woman who is willing to bear a child and give up her parental rights after the child is born.

In 2010, Morrissey and his partner decided to try to have children through in vitro fertilization (IVF) using a gestational surrogate, with Morrissey as the sperm donor. Morrissey’s sperm would be collected and then used to fertilize a donated egg in a petri dish; the resulting embryo would be implanted in a different woman than the egg donor.  The gestational surrogate would then bear the child, both women having agreed to the termination of their parental rights as genetic mother and birth mother.  Between 2010 and 2014 Morrissey went through several IVF procedures involving three egg donors, three surrogates, and two fertility specialists.  He spent more than $100,000 altogether.  (The opinion does not mention whether he actually ended up having kids.)  During tax year 2011, he spent nearly $57,000 that was not covered by insurance on these IVF-surrogacy procedures.  $1,500 of his expenditures that year went toward procedures performed directly on Morrissey – blood tests and sperm collection.  The remainder of his expenditures that year went to identifying and retaining the women who would be egg donors and surrogates, for compensation of their services, reimbursement of their travel and other expenses, and providing medical care to the women.

Morrissey did not claim a deduction for these medical expenses when he filed his 2011 tax return, paying the full $22,449 that he owed in taxes without medical deductions. After paying his taxes, he filed an amended 2011 tax return, claiming a medical expense deduction of $36,538, the amount by which his claimed expenses exceeded the threshold specified in the Code, and seeking a $9,539 refund.  At the time, the threshold was 7.5 of adjusted gross income.  (Today it is 10, having been increased effective with the 2013 tax year.)  The $1500 he spent for medical services to himself could not be deducted on its own, because it would not exceed the threshold.  Only by being able to claim the other expenses associated with the IVF-surrogacy procedures would he be able to have any medical deduction.

The IRS disallowed his deduction and denied the refund, taking the position that Sec. 213, which governs the “medical care” deductions, “states that Medical Care must be for Medical Services provided to the taxpayer, his spouse, or dependent.” As far as IRS was concerned, the expenses Morrissey incurred were not, with the exception of the $1500, for medical services provided to him.

Morrissey then sued in the federal district court, claiming first that Section 213 authorizes his claimed deduction, and second that the IRS’s disallowance of his claim violated his equal protection rights under the 5th Amendment. The district court granted summary judgment for the IRS.

Writing for the panel, in one of his first opinions since being appointed to the court by Donald Trump, Circuit Judge Kevin Newsom rejected Morrissey’s attempt to bring his claim within the language of Section 213. Morrissey argued that the IVF-related expenses were “medical care” because they constituted amounts that were paid “for the purpose of affecting any . . . function of the body.”  The problem, as Newsom pointed out, was that the “body” referred to by the statute is the taxpayer’s body, and the medical care was affecting the functions of the egg donor’s and the surrogate’s bodies.  Wrote Newsom, “Mr. Morrissey contends that all of the IVF-related expenses that he incurred – including the costs attributable to the identification, retention, compensation, and care of the women who served as the egg donor and the surrogate – were made for the purpose of affecting his body’s reproductive function.  In particular, Mr. Morrissey asserts that because he and his male partner are physiologically incapable of reproducing together, IVF was his only means of fathering his own biological children.  Accordingly, Mr. Morrissey claims, it was medically necessary to involve third parties – a female egg donor and a female surrogate – in order to enable his own body to fulfill its reproductive function.”

But Judge Newsom found that the section’s “plain language” foreclosed this argument, getting into a word by word analysis with the dictionary as his authority. As he interpreted the section, it would apply only if “the expenses at issue were paid for the purpose of materially affecting or altering some function of Mr. Morrissey’s body,” and clearly they were not.  Although they were intended to solve the reproductive problem, it was not by rendering care that would affect Morrissey’s body or how his body would function.  Newsom (or more likely his clerk) had fun writing a primer on the physiology of human reproduction, in order to reach the obvious conclusion that a man’s role in the reproductive function is to ejaculate sperm, and none of the “medical care” he was trying to claim had to do with any problem concerning that.

Turning to the equal protection claim, Newsom described Morrissey’s two equal protection arguments. “First, he asserts that we should employ strict scrutiny because the IRS’s disallowance of his claimed deduction under IRC Sec. 213 infringes his fundamental right to reproduce.  Second, he argues that some form of heightened scrutiny should apply because in disallowing the deduction the IRS discriminated against him on the basis of his sexual orientation.”

While conceding that the Supreme Court has described reproduction as a fundamental right in a broad sense, the court concluded that the issue here is “whether a man has a fundamental right to procreate via an IVF process that necessarily entails the participation of an unrelated third-party egg donor and a gestational surrogate.” As to that, the court concluded, “History and tradition provide no firm footing – let alone ‘deep rooting’ – for the right that underlies Mr. Morrissey’s claim. To the contrary, IVF, egg donation, and gestational surrogacy are decidedly modern phenomena.  Indeed, not all that long ago, IVF was still (literally) the stuff of science fiction.”  There follows a citation to and quotation from Aldous Huxley’s novel, Brave New World (1932).

Newsom then described the controversial history of alternative reproductive medicine, whose morality has been questioned by some major religions and whose legality has been put into play by a variety of state laws, ranging from regulation to criminalization of surrogacy agreements and laws against their enforcement. “Were we to confer ‘fundamental’ status on Mr. Morrissey’s asserted right to IVF-and-surrogacy-assisted reproduction,” wrote Newsom, “we would ‘to a great extent, place the matter outside the arena of public debate and legislative action.’ Particularly in view of the ethical issues implicated by IVF, egg donation, and gestational surrogacy,” he continued, “as well as the ongoing political dialogue about those issues – and mindful that ‘guideposts for responsible decision-making’ in the fundamental-rights area ‘are scarce and open-ended’ – we decline to take that step.”

The court rejected Morrissey’s invitation to opine as to whether sexual orientation is a “suspect classification” for equal protection purposes, because it found that the challenged statute – and its interpretation here – was neutral regarding sexual orientation. Newsom asserted that the statute “deals with heterosexual and homosexual taxpayers on equal terms.”  The court found that Morrissey could not show that the IRS treated him differently from a heterosexual taxpayer who sought to claim a medical deduction for the expenses of IVF-surrogacy procedures.  “The agency’s disallowance of Mr. Morrissey’s claimed deduction is consistent with longstanding IRS guidance and analogous Tax Court precedent,” he wrote, as “IRS has consistently refused deductions sought by heterosexual taxpayers for IVF-related expenses similar to Mr. Morrissey’s.  An IRS guidance published in 2002 advised that ‘medical expenses paid for a surrogate mother and her unborn child would not qualify for deduction under Sec. 213(a),’” and this was upheld in several Tax Court cases.  He pointed out that such deductions had even been disallowed where the surrogate was impregnated through sexual intercourse with the taxpayer!

The court refused to accept Morrissey’s analogy to the IRS’s allowance of deductions for fertility treatments, saying, “Even if Mr. Morrissey could show that he had been treated differently from similarly situated heterosexual taxpayers, he hasn’t shown that any difference was motivated by an intent to discriminate against him on the basis of his sexual orientation.” In essence, Morrissey’s equal protection claim was more of a disparate impact claim, not a disparate treatment claim, and the constitutional requirement of equal protection has been interpreted by the Supreme Court to apply only to intentional discrimination, not to the discriminatory effects of a tax regime that makes it more expensive for gay couples to have biological offspring than for those straight couples who do it the old-fashioned way.  Although Morrissey was able to come up with an internal IRS document in which an agent made a remark that might be construed as showing discriminatory intent, the court insisted that the official explanation provided by IRS for denying his claim carried no implication of any discriminatory purpose.  “Because there is no evidence that the IRS’s actual decision-makers engaged in any intentional discrimination,” wrote Newsom, “Mr. Morrissey’s equal protection claim fails.”

Morrissey is represented by Richard Donald Euliss of Carlton Fields Jorden Burt PA (Washington, DC) and David Paul Burke, Scott D. Feather, and Gary L. Sasso, of the same firm’s Tampa office.