In a landmark decision the tax appeals court overturned an ealier IRS decision in the case of Ms. O’Donnabhain and allowed her to deduct the cost of her hormone therapy and SRS against her income
http://www.irs.gov/pub/irs-aod/aod201103.pdf
This story was taken from a recent article in 'Growin Concern':-
http://goingconcern.com/2011/11/irs-to-allow-deduction-of-medical-expenses-for-those-diagnosed-with-gender-identity-disorder/