by John Anthony Castro, J.D., LL.M.
A question that often comes up with clients is: what in the world are temporary work-related impairment expenses? “Temporary work-related impairment expenses,” to be defined below, are legally deductible pursuant to three separate and distinct sections of the Internal Revenue Code: 67(b)(6)/(d)(1)-(2), 162, and 212.
This article will exclusively analyze the deductibility of these expenses under Code section 67. A separate article will discuss their deductibility under Code section 162 and 212.
Deductibility Under Section 67(b)(6), (d)(1)-(2)
Code section 67(b)(6) reads “For purposes of this section, the term “miscellaneous itemized deductions” means the itemized deductions other than any deduction allowable for impairment-related work expenses.” In other words, impairment expenses are not considered a miscellaneous deduction subject to the 2% floor for deductibility.
There are three requirements to claim a deduction under Code section 67(b)(6):
- The individual at issue must be a “handicapped individual as defined in section 190(b)(3),” which we’ll call the “Qualify Individual” Requirement to avoid confusion;
- The expenses are in connection with the individual’s place of employment which are necessary for such individual to be able to work, which we’ll call the “Work Connection” Requirement, and
- If this section did not exist, the expense would still qualify as deductible under section 162, which we’ll call the “Ordinary and Necessary” Requirement.
In analyzing the first requirement, it is critical to look beyond the ordinary use of the term “handicapped individual” since the statute directly references and defers to an existing statutory provision for the definition, which could be much more broad than the ordinary use of the term or much more restrictive.
As mentioned above, Code section 67(d)(1) specifically refers to “a handicapped individual as defined in section 190(b)(3).” In other words, we refer to Code section 190 for the sole and limited purpose of determining the definition of a “handicapped individual” under Code section 190(b)(3). No other provision of Code section 190 is relevant for the purpose of this matter.
Under Code section 190(b)(3), “the term handicapped individual means any individual who has a physical... disability… which for such individual constitutes… a functional limitation to employment, or who has any physical... impairment… which substantially limits one or more major life activities of such individual.”
In other words, there are two avenues to claiming to be a qualifying individual.
Avenue One requires the individual to have a physical “disability” which “for such individual constitutes” a “functional limitation to employment.”
Avenue Two requires the individual to have a physical “impairment” which “substantially limits” a “major life activity.”
The statute does not define “disability,” the seemingly highly subjective “for such individual” standard, the critical “impairment” term, or the standard for whether the impairment “substantially limits” activities.
For clarification, we turn to Treasury Regulations. Treasury regulation section 1.190-2(a)(3) reads: “The term ‘handicapped individual’ means any individual who has a physical... disability... which for such individual constitutes... a functional limitation to employment, or a physical... impairment... which substantially limits one or more of such individual's major life activities, such as performing manual tasks, walking, speaking, breathing, learning, or working.”
Regulations do not provide any additional clarification or guidance other than providing examples of what major life activity entails. The regulations do not clarify critical terms and matters such as:
- What constitutes an “impairment”?
- What constitutes a “functional limitation”?
- How subjective is the “for such individual constitutes… a functional limitation” standard?
- How does one determine whether such impairment “substantially limits” a major life activity?
Because Treasury has not promulgated regulations limiting the interpretation of impairment expenses in order to obtain the benefit of deference with regard to statutory interpretation, which is known as Chevron deference based on the U.S. Supreme Court case that afforded executive agencies judicial deference with regard to interpreting statutes affecting the laws they’re tasked with enforcing within certain limits, the legal community is free to interpret this provision as broadly as one deems to be reasonable.
For example, strep throat substantially limits one’s ability to speak. Speaking is specifically listed as a major life activity in the regulations interpreting Code section 190(b)(3). Therefore, an individual that has strep throat would meet the definition of a handicapped individual under Code section 190(b)(3). In other words, strep throat could reasonably be a qualifying impairment since it results in a functional limitation to speaking thus allowing the individual to be deemed to be a qualifying individual.
This is why promulgating regulations to interpret statutes is a critical task for the United States Department of the Treasury. Without Treasury regulations, any reasonable interpretation of the statute will be upheld by the courts. Treasury regulations are specifically designed to limit creative tax planning and lawyering with regard to statutory interpretation.
Code section 67(b)(6) requires the expenses to be “in connection with” the workplace and “necessary for such individual to be able to work.”
Again, Treasury regulations do not provide guidance, and there is absolutely no case law on this topic since the provision was enacted in 1986. Not a single court case.
Preventive health care has long been viewed as being necessary for employees to work without concern of contracting contagions or infecting coworkers with contagious illnesses.
According to a report titled “Promoting Prevention Through the Affordable Care Act: Workplace Wellness” published by the National Center for Biotechnology Information, “declining workforce health contributes to an increase in health-related expenses, both in direct medical payments and indirect costs resulting from absenteeism and presenteeism. [Preventive] Wellness programs have been shown to save money; however, such programs are underused. One reason may be that the future benefits of healthy employees are significantly undervalued relative to the cost.” In other words, preventive health expenses, by virtue of their ability to reduce sick day claims and the spread of contagious illnesses in the workplace, are necessary for individuals to work with less interpretation, which increases workplace productivity.
Ordinary and Necessary
Code section 162 is abundantly clear with regard to the deductibility of any expenses associated with one’s health, including, but not limited to, health insurance, medical care for the entire family, long-term care services, and long-term care premiums.
While this certainly creates overlap with Code section 213’s deduction for medical expenses, it is an overlap caused by Congress’s inability to pass laws that are clear and explicit, Treasury’s inability to promulgate regulations interpreting this provision, and the judiciary’s lack of interpretive guidance largely due to the IRS’s unwillingness to challenge firms like ours on this matter for fear of “opening the flood gates” on a new deduction.
Unless and until either the U.S. Treasury promulgates regulations or the judiciary provides clarifying guidance or a definitive interpretation of this statutory provision, the most reasonably broad interpretation of Code section 67(d)(1) is as follows:
The term “impairment-related work expenses” means expenses directly related to curing or preventing a functional limitation that, if contracted, would either result in a substantial limitation to an individual’s ability to perform job functions or pose a risk to others at his or her place of employment.
In other words, after the passage of the Affordable Care Act, our firm began deducting all medical expenses as impairment expenses in light of the new national policy that preventive healthcare was necessary to a workplace.
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About the Author
John Anthony Castro, J.D., LL.M., is the Managing Partner of Castro & Co., the author of International Taxation in Plain English as well as International Estate Planning in Plain English, an esteemed graduate of Georgetown University Law Center in Washington DC, an OPM Fellow at Harvard Business School, and an internationally recognized tax attorney with offices in New York, Los Angeles, Miami, Chicago, Dallas, and Washington DC.
Bluebook Citation: John Anthony Castro, Work-Related Temporary Impairment Expenses, Castro Int’l Tax Blog (June 27, 2018) url.