The Wall Street Journal reported that genetic testing service 23andMe has received a private letter ruling from the IRS that allows a portion of the payment made to the entity to be treated as a medical expense.[1] A redacted copy of the ruling has been posted by the company on its website.[2] The Wall Street Journal article noted that the IRS will publish the standard redacted PLR in August.[3]

23andMe offers two different services to customers on its website:

Ancestry Service – cost of $99 as of August 1, 2019
Health + Ancestry Service – cost of $199 as of August 1, 2019.[4]

The ruling involves someone paying for a “health-and-ancestry” kit from the organization. Per the organization, in addition to ancestry information, the more expensive service provides information on health predispositions, wellness, carrier status and traits that are impacted by your DNA. As well, an individual cannot purchase just the health service, but always will have to include the ancestry service.[5]

The ruling immediately begins by noting that the taxpayer was not asking for a ruling on the treatment of the ancestry service as a medical expense for federal tax purposes.[6] Rather, the ruling being sought deals with two issues:

Are some or all of the additional services provided through the “health + ancestry service” medical expenses for purposes of IRC §213(d)(1)(A) and subject to reimbursement from a healthcare flexible spending account? And
If a portion of the health + ancestry service qualifies as medical expense for federal tax purposes, what portion of the fee would be allowed as a deduction?

The ruling concludes that a portion of the health + ancestry service does constitute medical expenses for federal tax purposes under IRC §213(d)(1)(A). The IRS notes that Revenue Ruling 71-282 provides that the fee paid for storage of medical information in a computer bank qualified as a deductible medical expense, and that Revenue Ruling 2007-72 found that diagnosis (one of the items that qualifies for a medical deduction) includes cases where an individual, without a recommendation from a physician, has diagnostic tests such as a full body scan performed. The ruling finds that some of the services provided are similar to those discussed in those rulings.[7]

But the fact that some of the services are medical services does not allow a deduction for the entire cost of the package. The ruling notes that the ancestry services are clearly not medical expense items. Citing Revenue Ruling 51-457, the IRS holds that when a lump-sum is charged that encompasses medical and non-medical services, the cost must be allocated between medical items with qualify under IRC §213 and non-medical expenses that do not.[8]

The ruling holds that a taxpayer that only purchases the ancestry service has not incurred a §213 medical expense and cannot claim any of the cost on Schedule nor be reimbursed from a healthcare FSA for any of the cost. However, if the taxpayer purchases the ancestry + health service, then the price of the kit must be allocated between the two categories. The deductible percentage is computed as follows:

Of course, that begs the question of how a taxpayer is supposed to come up with the cost of health services to enter into that equation. The ruling provides the following:

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).[10]

The company is offering up its view of what is a reasonable allocation per the Wall Street Journal article. The article indicate 23andMe states that customers can claim “up to $117.74” of the $199 cost of the ancestry + health service as medical care. The article quotes Jacquie Haggarty, the company’s deputy legal counsel, as stating that any 2019 purchases should be eligible expenses.[11] Those same figures are cited by the company on its blog article about the IRS ruling, along with a link to a calculator for those purchasing an upgrade service or other special cases.[12]

Of course, those number are not part of the ruling, so it remains to be seen if the IRS questions that allocation on exam. And, as well, a private letter ruling only applies directly to the party that requested it. But with those caveats in mind, private letter rulings are regularly requested to get an IRS ruling on an issue the agency has not yet addressed and IRS agents generally will respect the ruling unless the agency has indicated it has revoked the ruling or issues contrary guidance.

Similarly, while the IRS could question the allocation of expenses on Schedule A, it is likely most agents will accept that allocation. Getting an administrator of an FSA to accept the allocation may prove more difficult in some cases—cautious administrators may balk at the split without additional data to back up that division or even not want to trust a single private letter ruling (especially one that, at the date this was written, has not made its way onto the IRS’s publicly released rulings on their website).

[1] Richard Rubin and Amy Dockser Marcus “IRS Greenlights Tax Breaks for Buyers of 23andMe Genetic Tests,” Wall Street Journal online, July 22, 2019, https://www.wsj.com/articles/irs-greenlights-tax-breaks-for-buyers-of-23andme-genetic-tests-11563800520, retrieved August 1, 2019 (subscription required)

[2] https://permalinks.23andme.com/pdf/IRS_PLR132576_18.pdf, retrieved August 1, 2019

[3] Richard Rubin and Amy Dockser Marcus “IRS Greenlights Tax Breaks for Buyers of 23andMe Genetic Tests,” Wall Street Journal online, July 22, 2019, https://www.wsj.com/articles/irs-greenlights-tax-breaks-for-buyers-of-23andme-genetic-tests-11563800520, retrieved August 1, 2019 (subscription required)

[4] https://www.23andme.com/, retrieved August 1, 2019

[5] https://www.23andme.com/dna-health-ancestry/, retrieved August 1, 2019

[6] https://permalinks.23andme.com/pdf/IRS_PLR132576_18.pdf, p. 1

[7] Ibid, pp. 2-3

[8] Ibid, p. 2

[9] Ibid, p. 3

[10] Ibid

[11] Richard Rubin and Amy Dockser Marcus “IRS Greenlights Tax Breaks for Buyers of 23andMe Genetic Tests,” Wall Street Journal online, July 22, 2019, https://www.wsj.com/articles/irs-greenlights-tax-breaks-for-buyers-of-23andme-genetic-tests-11563800520, retrieved August 1, 2019 (subscription required)

[12] “A Predisposition to Save on 23andMe Health + Ancestry Service,” 23andMeBlog, July 22, 2019, https://blog.23andme.com/health-traits/a-predisposition-to-save-on-23andme-health-ancestry-service/