The Tax Court has decided in O’Donnabhain v. Commissioner that a MTF transsexual can deduct her hormone therapy and sex reassignment surgery as a medical expense, but cannot deduct her breast augmentation surgery. (HT: Tony Infanti) That's slicing the baloney pretty thin. So to speak.
Update: Paul Caron breaks down the legal logic, but leaves me still thinking that our tax laws are way too complicated if we're making this fine of a distinction. It's no wonder that even the IRS Commissioner can't do his own taxes.