I'll start by saying this. Surrogacy is definitely a "gray area" of the tax code. Many tax scholars and bloggers out there dip their toes in, but stop shorting of offering a definitive opinion as to whether or not surrogacy is a tax-deductible medical expense. The purpose of this article is to boldly draw a line in the sand. It is my professional opinion that amounts paid to a surrogate parent are qualified medical expenses, as prescribed in IRC Section 213.
Specifically, taxpayer, spouse, and dependents (we'll get into that later) are allowed deductions for medical care. Amounts paid for "medical care," as defined in IRC 213(d)(1)(A) are "for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body..." That section never says which body. It can be inferred that the body includes the child. A surrogate is certainly affecting the structure of the child by hosting it during development.
Now, onto "qualified dependents...." IRC Section 152 defines a "qualifying child" as an individual who bears a relationship to the taxpayer, has the same principal place of abode as the taxpayer for more than one-half of such taxable year, and is under the age of 19, or in the case of a full-time student, 24. For the "principal place of abode" clause, it is assumed the surrogacy is successful, and the child ultimately resides with its parents.
If you are considering surrogacy and would like to discuss the tax implications of such a venture, I will be happy to discuss further.