Summary
This Eighth Circuit opinion affirms a district court's grant of summary judgment in favor of Mayo Clinic in a tax refund action regarding unrelated business income tax (UBIT). The court addressed whether Mayo Clinic qualifies as an "educational organization" under the Internal Revenue Code, thereby exempting its acquisition indebtedness from UBIT. Applying Supreme Court precedent and Treasury Regulations, the court interpreted "primary purpose" to mean "substantial" rather than "principal," concluding that Mayo's integrated clinical, research, and educational functions do not constitute a substantial noneducational purpose. Consequently, the court upheld Mayo's tax-exempt status for the relevant tax years.
Topics
Practice areas
Questions Presented
- Whether the term "primary" in the requirement that an organization have an educational primary purpose under IRC § 170(b)(1)(A)(ii) means "substantial" rather than "principal or most important."
- Whether Mayo's substantial patient-care activities constituted a substantial noneducational purpose that disqualified Mayo from being an educational organization under IRC § 170(b)(1)(A)(ii) and from the acquisition-indebtedness exception to unrelated business income tax under IRC § 514(c)(9).
- Whether Mayo's possible qualification under IRC § 170(b)(1)(A)(iii) affected its qualification as an educational organization under § 170(b)(1)(A)(ii).
Holdings
- In the context of determining whether an integrated academic medical center is an educational organization, "primary" may mean "substantial" rather than requiring education to be the organization's single principal or most important purpose.
- Mayo's substantial patient-care activities did not constitute a substantial noneducational purpose because the activities were carefully integrated with and furthered Mayo's medical education and research functions.
- Mayo's possible qualification under § 170(b)(1)(A)(iii) did not preclude it from also qualifying as an educational organization under § 170(b)(1)(A)(ii), and the alternative category was irrelevant once Mayo qualified under subsection (ii).
Key quotations
“What will disqualify the organization is if the other charitable purpose is substantial and unrelated to the organization’s educational functions.” (at 16)
“Here, for more than a century, Mayo’s careful integration of patient care and education has resulted in a patient care function that is not noneducational and therefore does not disqualify it from being an “educational organization” as defined in § 170(b)(1)(A)(ii), in applicable Treasury Regulations, and in the extensive legislative history describing the evolution of these complex income tax provisions.” (at 19)
Factual background
Mayo Clinic is a Minnesota nonprofit corporation and a tax-exempt organization under Internal Revenue Code § 501(c)(3). During the tax years at issue, Mayo operated medical schools and other educational programs while integrating medical education, clinical patient care, and biomedical research throughout its organization. The IRS assessed unrelated business income tax on debt-financed property, but the district court found that Mayo's substantial patient-care activities were integrated with and furthered its educational purposes rather than constituting a substantial noneducational purpose.
Procedural history
The IRS assessed Mayo $11,501,621 in unpaid unrelated business income tax based on acquisition indebtedness for debt-financed property during specified tax years. Mayo paid the assessment and filed a refund action. The district court granted Mayo summary judgment, the Eighth Circuit reversed the district court's invalidation of Treasury Regulation § 1.170A-9(c)(1) in part and remanded in Mayo Clinic v. United States, 997 F.3d 789 (8th Cir. 2021), and the district court then conducted a week-long bench trial and again entered judgment for Mayo. The Eighth Circuit affirmed.