By Jeff Kiger
Post-Bulletin, Rochester, Minn.
(TNS)
(Aug. 13) ROCHESTER — After pinballing through the courts for nine years, an Eighth Circuit Court of Appeals ruling officially wraps up Mayo Clinic’s victory over the IRS in a $11.5 million legal dispute over whether the teaching hospital is enough of a school to avoid taxes on real estate investments.
Andrea Kalmanovitz, Mayo Clinic’s director of communications/media relations, issued a short statement on Wednesday about the ruling.
“Mayo Clinic is pleased the Eighth Circuit Court of Appeals upheld the District Court’s ruling in favor of Mayo. The ruling will help ensure that Mayo Clinic receives the same treatment under federal tax laws as other educational organizations.”
Kalmanovitz did not answer if the IRS has yet refunded the money it now owes Mayo Clinic plus “statutory interest.”
The IRS appealed a ruling by U.S. District Judge Eric Tostrud in 2022. The Eighth Circuit Court affirmed Tostrud’s ruling in favor of Mayo Clinic. This is the second time that the appeals court has ruled on Tostrud’s work on this case.
In 2021, the Eighth Circuit Court of Appeals invalidated a 2019 Tostrud ruling and had the judge retry the case. That resulted in the 2022 ruling that the IRS was wrong and Mayo Clinic does qualify for a tax exemption on revenue generated by “debt-financed real-estate investment.”
The question at the heart of the case is whether Mayo Clinic should be considered an educational institution. Universities and schools are entitled to an exemption from paying taxes on the type of real estate revenue that the IRS denied Mayo Clinic in 2014. Nonprofit hospitals are required to pay taxes on that type of income.
While the two sides agreed that Mayo Clinic does offer education, the IRS position was that medical care is Mayo Clinic’s “primary” purpose. It considered Mayo Clinic to be “a parent company of a health-care system as its primary purpose and function.”
Mayo refuted that. Its position is that “education is a substantial part of Mayo’s reason to exist.”
The issue narrowed down to the definitions of “primary” and “substantial” in the context of the tax law. Tostrud found the words to mean the same thing. Eighth Circuit Judge James B. Loken affirmed that.
“When this case was previously remanded to the district court, we directed the court to separate ‘the wheat from the chaff’ in terms of Mayo’s educational and noneducational purposes. The district court undertook this task and decided all the potential chaff was actually wheat, finding Mayo’s educational purposes were inextricably intertwined with its multi-billion-dollar network of patient care,” wrote Loken in the latest ruling. “While this finding may be debatable, it is not clearly erroneous. And the district court made the alternative finding that even ‘[i]f ‘primary’ meant ‘most important,’ [it] would still find [as fact] that Mayo’s most important or principal purpose is education.’ Based on this alternative finding, I concur in affirming the district court.”
Florida A&M University law professor Darryll K. Jones, who writes about nonprofits and legal issues, interpreted that statement.
“The court basically said that maybe this is debatable, but it’s not so far out in left field that we can call it clearly erroneous. It’s a very technical sort of legal tap dance around the idea,” he said. “We’re going to take the facts as they were found by the lower court, and then we’re going to apply the law. We’re not going to re-debate the facts.”
Jones believes the convoluted case drifted away from the core issue of the Treasury regulation used by the IRS, which he thinks wasn’t a good fit as a reason to deny Mayo Clinic’s exemption.
“I don’t begrudge Mayo. But the Court’s reliance on semantics, without ever mentioning the policy or purpose of the unrelated debt financed income tax, leaves my brain cells twisted,” he wrote on his Substack called “Jonesing for Nonprofits.” “The long-delayed conclusion seems reasonable, even if anti-climactic and entirely unsatisfying.”
The history of the case is complex and tracks back years.
In 2009, the IRS audited Mayo Clinic and issued a notice of “adjustment” for the years 2005 and 2006. Those recalculations later expanded to include a total of seven years of Mayo Clinic tax returns—2003, 2005-2007 and 2010-2012. The years 2004, 2008 and 2009 were not included because no income of that type was reported.
The IRS concluded in 2014 that Mayo Clinic did not qualify for tax exemption on revenue generated by “debt-financed real-estate investment.”
That type of revenue is not taxed for nonprofit educational institutions or schools. For other tax-exempt institutions, that type of revenue is considered “Unrelated Business Income,” which is taxable. The additional payments totaled $11,501,621. The bulk of that amount came from 2006, when the IRS said Mayo Clinic owed $9.3 million on real estate revenue.
The clinic dutifully paid the money and then asked for a refund of the $11.5 million. In August 2016, the IRS rejected that refund claim. Mayo Clinic soon filed a lawsuit to recover the disputed $11.5 million plus “statutory interest as provided by law.”
This is not Mayo Clinic’s first time in court facing the IRS on issues related to education. The two tangled previously over whether medical residents are students or employees.
While lower courts agreed with Mayo Clinic that medical residents are students, the U.S. Supreme Court eventually ruled in 2011 that they are employees. As employees, the medical residents have payroll taxes, Social Security and Medicare taxes that must be paid.
Photo credit: DNY59/iStock
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Tags: courts, IRS, Mayo Clinic, tax-exempt groups, Taxes
