Reproductive decisions affect our lives in profound ways. One of the underappreciated challenges of navigating parenthood in today’s world of assisted reproductive technology lies in understanding the tax treatment of the significant expenses that parents bear. Professor Katie Pratt has been wrestling with difficult policy issues raised by technological change for more than a decade. Pratt explains how the tax law has failed to provide would-be parents with the clarity they need on whether the costs of fertility treatments including IVF, egg donor, and surrogate procedures. In the world of Obergefell, the questions become both more urgent and more challenging and Pratt offers key insights and answers. Pratt’s scholarship has allowed her to build bridges between the tax and public health communities. She explains why that communication is critical to crafting effective laws by telling the story of one of the sugary drink taxes that fell victim to a simple misunderstanding. Tax laws can help improve lives and even help create them, but it takes thoughtful experts like Pratt to make sure that they deliver results. Pratt fields a tricky pencil question drawn from an article by her colleagues Ted Seto and Sande Buhai: “Tax and Disability: Ability to Pay and the Taxation of Difference”, 154 University of Pennsylvania Law Review 1053 (2006).
Professor Katie Pratt is Loyola Law School’s Sayre Macneil Fellow. She is an expert in income taxation and tax policy, and the co-author of a popular textbook on income tax. She writes on the intersection of tax law and population health, tax expenditures and federal budget issues, with the goal of improving policy. Focusing on what she calls “scholarship with a heart,” Pratt explores the consequences of tax policies on health issues affecting wide swaths of the population. Her work is uniquely interdisciplinary: a member of the American Public Health Association as well as the National Tax Association, she studies and writes about the use of taxes on soda and junk food to control obesity, as well as the tax treatment of medical expenses for gender reassignment and fertility treatments.
Our student quote is read by Alex Pettingell from New York, NY and is by Martin D. Ginsburg. The quote is from testimony Ginsburg offered to the Senate Finance Committee noting that the now-repealed § 341 contained a single sentence longer than the entire Gettysburg Address.
Resources
Speaker 1:
All of us should be willing to pay whatever taxes are necessary to enable efficient government to improve or expand any essential service.
Speaker 2:
You have a beautiful tax return, the nicest one I've ever seen.
Speaker 3:
Okay, folks, but remember your manners, no stampeding. Walk slow like you do when you come to pay your taxes.
Steven Dean:
Hi, I'm Steven Dean. This is the Tax Maven. Here we are going to, in each episode, talk to our Tax Maven, who will be a person proving Archimedes' point that a single person with a lever long enough and a place to put it can change the world. The lever in this case is tax and the place to put it is here at NYU Law.
I'm Steven Dean, the faculty director of the graduate tax program at NYU Law. I'm here today with Katie Pratt, who is professor of law and Sayre Macneil Fellow at Loyola Law School.
Katie Pratt:
Thanks for having me.
Steven Dean:
Among the many subjects, Professor Pratt has examined in her work, including her 2004 Cornell article, Inconceivable: Deducting the Cost of Fertility Treatment, those questions where tax law and healthcare intersect have proven particularly important.
Katie Pratt:
For quite some time, the IRS, in taxpayer publication 502, has stated that medical care, deductible medical care, includes the cost of treatment to "Overcome your inability to have children," including in vitro fertilization. So, taxpayers have been deducting those expenses for many, many years. It's pretty clear the IRS had in mind different sex married couples when it specified the deduction for IVF costs. And in a series of cases, the IRS has taken the position that men in all of the three cases litigated, unmarried men, cannot deduct the cost of IVF or egg donation or surrogacy. The IRS has also litigated the question of whether surrogacy expenses are deductible by different sex married couples who have experienced infertility. In both of the litigated cases, the IRS settled the case favorably to the taxpayer, but in neither case was there a reported decision. So the only authority that exists is in the context of single men trying to deduct IVF egg donation and surrogacy expenses.
And in all three cases, courts denied the expenses, both in the tax court and in a district court and all those cases were appealed and affirmed. I told a group earlier today, of all articles I've ever written, this is the article about which I receive the most correspondence. I receive email inquiries and phone inquiries because there are a lot of advisors out there and a lot of patients who actually don't know what position to take on the return. So my sense is that most advisors tell the taxpayers to take the deduction for all of the expenses. Exactly what's going on at the IRS, it's hard to say, but I did check the IRS manual to see what it said, and it refers agents to publication 502, the taxpayer publication, which is a little strange because of course, in terms of the hierarchy of authorities, a taxpayer publication is at the very, very, very, very bottom. It's not authority. Nonetheless taxpayers are relying on it. Their advisors are relying on it, although legally they're not entitled to rely on it.
Steven Dean:
And I guess maybe it's helpful to take a step back and think about how we get to this place. So under the tax law, you're allowed to take certain deductions for obviously business expenses, which are needed to produce the income you generate. So that makes perfect sense, logically, economically, but they're also deductions the taxpayers allowed to take that relate to just their personal lives. And one of those personal deductions is good old section 213, that allows you to take a deduction for certain medical expenses. And the question that we're grappling with here is one that really should not be as hard as it is, one would imagine, whether these expenses are medical costs related to this section 213 deduction. Why is it so hard to know whether these things doctors are doing for patients are medical or not?
Katie Pratt:
Well, that's a good question. So let's go back to 1972 to a famous article defending the 213 deduction, in which the author said that medical expenses are not consumption, that they are involuntary expenditures. If you're suffering from arterial bleeding, you don't really have much choice about whether to incur the expense of medical care. So the idea is if those are involuntary expenses, they should be reflected that a taxpayer's ability to pay is changed by involuntary expenditures. So if taxpayer A has a $100,000 of income and no medical expenses, taxpayer B has a $100,000 of income and $20,000 of medical expenses and taxpayer C has $80,000 of income, the taxpayer B is more like taxpayer C than taxpayer A. So that provides a justification for allowing a deduction for unreimbursed medical expenses. So the question then is, under that ability to pay rationale, what sorts of expenses are deductible and which are not?
And that has been litigated many, many, many times. So I explain in a series of articles that there are various categories of cases. So one category of cases involves expenditures for items that people purchase without medical reasons. For example, I go on vacation with no medical reason at all. So if my doctor tells me, you're very stressed out, you must take a vacation. Is my vacation now a medical expense? So the answer is no. No, that is the sort of expenditure that is encouraged to promote the taxpayer's general wellbeing. It is not a medical expense. What about if I have asthma and I buy a vacuum cleaner with a HEPA filter? Well, initially we would classify that as a consumption expense, but if I can show that my doctor said I would have fewer asthma attacks if I bought a vacuum cleaner with a HEPA filter, well then that expense moves from the category of non-deductible consumption into deductible medical care.
So a lot of the difficult cases are cases in which the court is trying to figure out whether the taxpayer is abusing the medical expense deduction by attempting to reclassify what would normally be a personal consumption expense as a medical expense. Then there is a separate category that is what I referred to as inherently medical expenses. So these are hospital expenses, surgical expenses, office visits with doctors, services provided by medically licensed professionals. So the cases refer to these as inherently medical expenses. So our starting assumption is that these are deductible medical expenses. This is medical care.
And the category of expenses that is then taken out of inherently medical expenses is the category for cosmetic surgery expenses because in 1990 Congress amended 213 to provide that cosmetic surgery and similar procedures are not medical care. And cosmetic surgery, and similar procedures are procedures that are primarily intended to change the taxpayer's appearance, but not the taxpayer's functioning. In other words, they don't address a disease or condition. So the legislative history gives us an example. Breast augmentation surgery is cosmetic surgery, so the expenses would not be medical care, but breast reconstruction surgery following mastectomy would not be cosmetic surgery because those expenses are incurred to restore normal functioning.
Steven Dean:
Professor Pratt's research on the taxation of fertility treatments was spurred by an incident that she remembers quite clearly.
Katie Pratt:
What started me writing on the topic was a debate on the tax prof listserv. A senior tax professor said "My son and his wife incurred these expenses for IVF egg donation and surrogacy because of medical infertility. What does everyone think about whether they can deduct these expenses as medical expenses." And three men on the listserv immediately responded "nondeductible. This is like buying a Gucci handbag. This is simple." And I thought, "I don't think it's like buying a Gucci handbag." I think of it quite differently. So that's what got me started—
Steven Dean:
I can see why that might get you started.
Katie Pratt:
Yes. So of course we know in the tax area, there's an old case that says that the cost of childcare is not an ordinary and necessary business expense, even if it enables a secondary wage earner to go out and earn a living because the decision about whether to have a child is an inherently personal decision. So I guess the position of the men on the listserv was that you can lead a perfectly normal life without having children and that having a child as a personal decision, therefore medical treatment to have a child is a consumption expenditure. So I argue that reproductive functioning is part of normal biological functioning. And I cite to cases under the Americans with disabilities act like Bragdon v. Abbott. So I argued that even though some people lead perfectly normal lives without children, they decide not to have children. And that's a choice that the vast majority of adults want to have children, and if they are unable to do so without medical assistance, that that medical assistance is medical care for purposes of 213.
And I should point out that 213 sort of a blunt instrument. It's binary. There are no gray areas. So either an amount is medical care, or it is not, those the only two choices. So there's no nuance in the definition. So I argue that reproductive medical care is medical care. So if it is inherently medical, then it is within the 213 definition of medical care, in my view. And that could be by broadly construing the term disease under the first part of the definition, or it could be by reading the structure or function prong to include care that is performed on a third party for the taxpayer. So care of a surrogate by an intended parent would be treated as care of the intended parent.
Steven Dean:
So I'm going to change gears a little bit. So you have continued to write on this topic and you have a relatively recent article that is really interesting, and I think will be interesting to a lot of folks out there. And I'm going to segue to that article by asking you about something called reproductive binarism. What is reproductive binarism? How does that help us understand maybe the direction we're going to be headed in the future?
Katie Pratt:
Well, there is an argument that the only people who should be allowed to have children are the people who are capable of doing so because they are in a heterosexual relationship. In other words, that the biological mechanics of reproduction have implications for who should be allowed to form a family. Now, as it turns out, family law is way ahead of the tax law in trying to resolve what has happened in the context of assisted reproductive technology. So there are all sorts of permutations of parents, people who are not biologically related to a child, but assume a parenting role or adoptive parents or genetic children and so on.
So family law has had to resolve a lot of these issues. And family law has moved away from binarism to say that what is critical to the evaluation of legal consequences of family formation and parenting is the intention of the intended parents. So I'm arguing that that approach could be applied in the tax context as well. So I cite the work of a constitutional scholar who writes in this area, Courtney Cahill. She argues that under the Obergefell case that family formation should be treated as a right of same-sex couples and that we should reject the reproductive binarism and say that what is critical is not the biological gendered mechanics of reproduction, but the intention to parent, and that should drive how we treat reproductive care. So that is relevant in the tax context.
Steven Dean:
What conclusion would that really lead you to in the tax area? So if you were to reject reproductive binarism understanding that what is paramount is the intention of the would be parents? What sort of conclusion would that lead you on the tax front?
Katie Pratt:
Well, currently I think the strongest argument for classifying reproductive care expenses as medical care would be in the context of medical infertility, but that's focusing specifically on the biological inability to bear children. So I'm arguing that that should not be the only consideration, that the importance of family formation is important enough that reproductive binarism should not be the sole criteria for deductibility. So I argue that intended parents, including those suffering from medical infertility and those who are, to use a term coined by Lisa Ikemoto, dysfertile, because of sexual orientation, that they both should be allowed to deduct the cost of inherently medical care that enables them to form a family.
Steven Dean:
And this sounds like it might require more than just a different interpretation of the existing statutory framework. What would you say would be an appropriate solution?
Katie Pratt:
Well, a court could get there under the current language. They could interpret the term disease under the first prong of medical care definition to mean any inherently medical care. For 70 years the courts have interpreted disease to include many things we don't think of it as disease, including congenital defects, traumatic injuries, conditions for which patients seek medical care. So the term disease is, and always has been construed very broadly. So a court could construe disease broadly enough to encompass medical reproductive care, including assisted reproductive technologies. But I think that probably what would be required for clarification would be amendment of section 213 to specifically provide that inherently medical care, care provided in hospitals, operating rooms and doctor's offices, and so on, that those inherently medical expenses are medical care for tax purposes, unless they are for cosmetic surgery. And we would keep the current definition of cosmetic surgery. And I believe that would approximate what should be the results under 213
Steven Dean:
Section 213 written by Congress to ensure that taxpayers burdened by healthcare expenses should not be treated unfairly by the tax system, represents only one way in which tax and health intersect. Professor Pratt explains why Congress may one day meet to get into the business of regulating or taxing your favorite soft drink.
Katie Pratt:
My interest in the crossover between tax and health extends beyond the 213 deduction. So I've been following public health proposals to tax sodas and other sugar-sweetened beverages and regulatory proposals to reduce the consumption of sugary drinks for about a decade. So I wrote an article a while back and said, here are the potential normative justifications for a sugary drink tax. And the article was called "A Constructive Critique of Normal Justifications for Sugary Drink Taxes". So I went through the arguments and shot down some of them and suggested some alternative rationales. And the ultimate conclusion in that article was that targeting sugary drinks, while understandable from a public health perspective or a nutritional perspective, was too narrow. And what we should be doing is going after unhealthy diets. So I proposed stoplight labeling so red, yellow, green on the front of the package. And if the good is a red label, it would be subject to a junk food excise tax.
If it's yellow, there would be no tax or subsidy, and if it's green, there would be a subsidy. So my argument was broader and my knowledge, the only jurisdiction in the US that has adopted this proposal is the Navajo nation, but obviously sugary drink taxes have been enacted all over the world and have been shown empirically to reduce the consumption of sugary drinks. And a number of jurisdictions in the United States have experimented with sugary drink regulation, and taxes. I followed the New York City sugary drink portion cap litigation with great interest and went for the argument in the New York court of appeals in Albany, and was quite fascinated. I think that that portion cap could have potentially been done in a way that would have been upheld, but I'll just give you an example. The portion cap was 16 ounces that restaurants would be limited to serving sugary drinks in portions of 16 ounces.
And it turns out that the, I guess at the half liter size, which is very, very commonly sold in food establishments in New York city is 16.9 ounces. So the public health regulators unfamiliarity with the market they were trying to regulate resulted did in a regulation that arguably was arbitrary and capricious. So I do think there could have been ways to do it that might have passed muster. And there are regulatory developments, both at the local level and at the state level. For example, at the state level, the food and beverage industry is now trying to bypass sort of liberal health minded cities by going straight to the state legislature and having the state enact legislation that prohibits localities from taxing sugary drinks. So that has happened with increasing frequency. So ultimately we may need a federal resolution of the issue.
There are justifications for nudging people on diet, certainly not prohibiting the ability to eat unhealthy foods or drink unhealthy beverages. But if you will, sort of a finger on the scale, no pun intended. And I think that these could pass muster and the sugary drink taxes have shown that there can be very significant public health benefits from reducing added sugar. Someone once asked me, "How can you describe your scholarship?" And I said, "Well, my scholarship is trying to build bridges between people who don't usually speak to one another and who speak different languages." So I love to... I'm a member of the American public health association. And I love to go to public health meetings where they throw around terms like externalities, oh, well, just try sugary drink taxes, because of the externalities. And I say hold the phone, an externalities argument backfired on public health advocates in the cigarette context, because it doesn't work out exactly the way you think it does.
Steven Dean:
So there's a very famous episode that I think you're referring to. Would you tell our listeners about that?
Katie Pratt:
About tobacco-
Steven Dean:
Yeah.
Katie Pratt:
... taxes? Yes. Well, for years, public health advocates said we should have very, very significant taxes on tobacco because of the externalities that smokers impose on non-smokers. And by externalities, we mean uncompensated costs that smokers impose on non-smokers. And I think we can all imagine those fairly easily, that smokers consume more medical care. They get sicker more often and have smoking related illnesses, and those of us who don't smoke, subsidize the care of smokers. And that is true. But what public health advocates did not realize is that smokers tend to die right about the time they would start collecting retirement benefits. So there is an almost completely offsetting subsidy from smokers to non-smokers through retirement benefits. So when a study was actually done, this is the famous Manning study, which has been replicated and tweaked various times since, it turns out the externalities from tobacco are actually fairly small. And a number of papers have updated that and adjusted various pieces of it, but the conclusion stands.
And then add a new piece to it, the economists Gruber and Koszegi said, all right, so let's give up on externalities for tobacco. Let's look at internalities. So those are costs that the present self is imposing on the future self without properly taking into account, in effect, the discount rate. And Gruber and Koszegi concluded that the internal costs of smoking are on the order of $24 a pack. So way higher than the external costs of smoking. So I argue in the first paper on soda and junk food taxes, that there potentially is a very good internalities argument for regulating or taxing unhealthy diet, which would include consumption of sugary drinks.
Steven Dean:
A lot of food for thought for our listeners. All right. So I've asked you about a lot of things you know a lot about, and now I'm going to ask you another kind of question. One that you may not know the answer to. You might, but you really have no reason to. In fact, the reason I'm asking this question specifically is because the article that I drew it from comes from a man you may know, Ted Seto, have you heard the name before? He wrote an article along with Sande Buhai.
Katie Pratt:
Yeah.
Steven Dean:
And so I'm going to ask you the question and then I'll explain what it is. And of course, the stakes here are quite high. If you get the question, right, you're going to get this beautiful NYU Law Graduate Tax Program pencil.
Katie Pratt:
Long have I coveted the NYU purple pencil.
Steven Dean:
This is your chance. I mean your roots are really deep here, so I can imagine how much this would mean to you. I'll put it right here so you can watch it as you think about the question not to make you nervous. Oh, it's rolling around. All right. So the question is sometimes the income tax actually doesn't impose much of a tax on even people with very high incomes. So in 1969, largely the urging of one person, Congress created a second shadow tax designed to ensure that at least some tax would fall on those with high incomes. So the question is who did the urging, so who successfully urged Congress to act? And the three choices are A). Leona Helmsley, B). President Richard Nixon, or C). Stanley Surrey.
Katie Pratt:
Of course, as a tax person, I want to say Stanley Surrey. So we're discussing the AMT. Say the question again.
Steven Dean:
So the question is in 1969, largely the urging of one person Congress created a second shadow tax-
Katie Pratt:
Okay. At the urging of one person, well, I have to say Surrey.
Steven Dean:
You are correct. The pencil is yours.
Katie Pratt:
Thank you.
Steven Dean:
So I'll read you just a little bit of a quote from Ted and Sande's article.
Steven Dean:
So this is-
Katie Pratt:
On disability, yes.
Steven Dean:
... So after the... I know, so you-
Katie Pratt:
Penn Law Review...
Steven Dean:
... Exactly. So this is from Ted Seto and Sandy Buhai's article "Tax and Disability: Ability To Pay and the Taxation of Difference" in the Penn Law Review from 2006. And the context is that after the treasury secretary announced the 155 high income taxpayers had paid no income tax, and this is quoting from their article, largely at Surrey's urging in 1969, Congress enacted a parallel tax system, the alternative minimum tax, which works from theoretical income. It then takes exclusions and deductions computed under rules that are often different from the regular tax rules. And of course, Leona Helmsley may have helped in her way, but is most famous for the quote, "Only the little people pay taxes."
Katie Pratt:
Yes, yes. That's why I asked you to repeat the question. Because as a result of that could have been Leona Helmsley, right? The "only little people pay taxes" and I was waiting to hear the word urging and then it had to be Stanley Surrey.
Steven Dean:
Yes, exactly. That's right. So he was responsible for a lot of the good things in our tax system and many would say this is yet another example. So I really appreciate you joining us today. Katie Pratt from Loyola Law School in Los Angeles and a long-time member of our community, both as a student and as a teacher. So we're glad to have you back. Thank you very much.
Katie Pratt:
Thank you very much. It's lovely to be back here at NYU.
Steven Dean:
Thank you for listening to the Tax Maven. And I also want to give a very special thank you to those that helped make the podcast possible. Patrick Kelly, Joe Rivera, Greg Addison, Rebekah Carmichael, Jill Rachlin and Anthony Pietrangelo. And thank you Rachel Burns. The NYU Law Graduate Tax Program has been the premier place to learn about tax law for the past 75 years. So please visit us on the web, visit our graduate tax program website to see the different programs we offer both in-person and online, both for lawyers, and non-lawyers. Take a look at what we offer and I hope you consider joining us. And now we like to end each of our episodes with a quote about taxes read by one of our students. Today's tax quote comes from Alex Pettengill from New York City.
Speaker 5:
"There's an ancient belief that the gods love the obscure and hate the obvious. Without benefit of divinity, modern men of similar persuasion draft provisions of the internal revenue code. Section 341 is their triumph."
Steven Dean:
Please email us at info@taxmavenpodcast.com if you have any questions or comments or suggestions, and if you are a student and want to email us a recording of your favorite tax quote, please mail it there as well. Thanks for tuning in.