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In a redacted Private Letter Ruling the IRS has ruled that a portion of ancestry genetic testing (consisting of a DNA collection kit and health services) is medical care and, hence, that portion of the costs of the services and kit is potentially deductible. The IRS left it to the taxpayer to allocate the costs of the services and kit among the medical and non-medical items and services he received.
Background. Code Sec. 213(a) allows a taxpayer to deduct expenses paid for medical care of the taxpayer to the extent the expenses exceed 10% of the taxpayer’s adjusted gross income.
Code Sec. 213(d)(1)(A) provides that “medical care” is for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.
Reg. § 1.213-1(e)(1)(ii) provides that medical care includes medical, laboratory, surgical, dental, and other diagnostic and healing services.
However, Code Sec. 262 and Reg. § 1.213-1(e)(1)(vi) prohibit taxpayers from deducting personal, family, or living expenses if the expenses do not fall within the Code Sec. 213 definition of medical care. An expenditure that is merely beneficial to the general health of an individual is personal and is not for medical care. (Reg. § 1.213-1(e)(1)(ii)) For example, ordinary education is not medical care. (Reg. § 1.213-1(e)(1)(v)(a))
When a university charges a student a lump-sum fee that includes medical care as well as other expenses, the portion of the charge that is allocable to medical care is considered a proper medical expense deduction if there is a breakdown showing the amount of the fee that is allocable to medical care or such information is readily available from the university. Therefore, if non-medical items or services are provided, for purposes of Code Sec. 213, the fee paid must be allocated between items and services that are medical care and those that are not medical care. (Rev Rul 54-457, 1954-2 CB 100)
The fee paid for storage of medical information in a computer data bank is an amount paid for medical care expense because the information facilitates the diagnosis of disease. (Rev Rul 71-282, 1971-2 CB 166)
The term “diagnosis” encompasses the determination that a disease may or may not be present and includes testing of changes to the function of the body that are unrelated to disease. Amounts paid by individuals for diagnostic and similar procedures and devices, such as a full-body scan performed without a physician’s recommendation and on an individual not experiencing symptoms of an illness or disease, and a pregnancy test that tests the healthy functioning of the body, qualify as medical care. (Rev Rul 2007-72, 2007-72 CB 1154)
Facts. Taxpayer has an FSA, and seeks to use the FSA to purchase genetic testing services and resultant reports offered by X.
X offers a version of its services that includes reports on an individual’s ancestry and health.
A purchaser of X’s ancestry and health services receives a DNA collection kit, which is used to collect a DNA sample from the individual and is sent to X for genetic testing. Once received by X, the sample is sent to be tested by a third party laboratory through a process called genotyping.
After the genotyping, X then provides health services. The genetic information collected from the laboratory is sent to X to be analyzed. From the data, for its health services, X generates reports that provide an individual with the results from the laboratory and general information regarding, according to the unredacted version of the PLR obtained by the Wall Street Journal, genetic health risks, carrier status, wellness, and traits.
The goal of the health services is to encourage individuals to provide the information to a healthcare provider for additional testing, diagnosis, or treatment. According to the unredacted version of the ruling, X’s services and reports may be purchased through X’s website or through resellers, but the health services may not be purchased from X without also purchasing services relating to ancestry.
Issue. In order to use the FSA to purchase the items and services, Taxpayer is seeking a determination that the services and reports that are offered by X are medical care as defined in Code Sec. 213(d).
Ruling. X’s health services contain items that are considered medical care under Code Sec. 213(d), such as the genotyping, and not medical care, such as the reports that provide general information to an individual. As a result, Taxpayer must allocate the price paid for the DNA collection kit and health services between the medical and non-medical items and services to determine what is medical care under Code Sec. 213(d).
There are two steps to making this allocation.
First, the price of the DNA collection kit must be allocated between the ancestry services and the health services using a percentage (cost of the health services / total cost of ancestry plus health services).
Second, as to the health services, the taxpayer may use a reasonable method to value and allocate the cost of the health services between services that are medical care (such as the testing at the laboratory) and non-medical services or items (such as the reports that provide general information on a test result).
Observation. The PLR does not say whether X will be required to provide the data necessary for the Taxpayer to make these allocations. If X is not required to, then it is not clear how the Taxpayer will be able to make the allocations.