United States District Court, D. Minnesota
Mayo Clinic, a Minnesota Corporation, on its own behalf and as a successor in interest to Mayo Foundation, Plaintiff,
United States of America, Defendant.
P. Rotatori, Jones Day, Chicago, IL; and Annamarie A. Daley,
Caroline Heicklen, and Andrew Leiendecker, Jones Day,
Minneapolis, MN, for Plaintiff Mayo Clinic.
J. Weidler, Samuel P. Robins, and Eric M. Aberg, U.S.
Department of Justice Tax Division, Washington, DC, for
Defendant the United States of America.
OPINION AND ORDER
C. Tostrud United States District Judge
Clinic brought this case to obtain $11, 501, 621 in tax
refunds. Mayo qualifies for the tax refunds it seeks if,
during the tax years in question, it was:
an educational organization which normally maintains a
regular faculty and curriculum and normally has a regularly
enrolled body of pupils or students in attendance at the
place where its educational activities are regularly carried
26 U.S.C. § 170(b)(1)(A)(ii). The Government concedes
that, during the tax years at issue and today, Mayo
“normally maintains a regular faculty and curriculum
and normally has a regularly enrolled body of pupils or
students in attendance at the place where its educational
activities are regularly carried on.” The Government
says Mayo is nonetheless not an “educational
organization.” To support this position, the Government
argues that the term “educational organization”
as used in § 170(b)(1)(A)(ii) unambiguously requires
education to be an organization's “primary
purpose.” The Government also relies on a Treasury
Department regulation interpreting § 170(b)(1)(A)(ii).
That regulation, 26 C.F.R. § 1.170A-9(c)(1), provides
that an organization cannot qualify as an “educational
organization” under § 170(b)(1)(A)(ii) unless
education is the organization's “primary
function” and its noneducational activities are
“merely incidental” to its educational
activities. These requirements do not appear explicitly in
Government and Mayo have filed cross-motions for summary
judgment. The Government argues that Mayo's primary
function is health care, not education, and even if that were
not so, that Mayo's health-care activities are not merely
incidental to its educational activities. Mayo disagrees with
the Government's interpretation of the law at every step
and disputes the Government's characterization of the
facts. Mayo describes its educational and patient-care
activities as essential to each other and inextricable.
the Parties' summary-judgment motions requires analyzing
§ 170(b)(1)(A)(ii) and its accompanying regulation under
Chevron U.S.A., Inc. v. Natural Resources Defense
Council, Inc., 467 U.S. 837 (1984). This analysis shows
that the regulation does more than the law allows because it
adds requirements-the primary-function and merely-incidental
tests-Congress intended not to include in the statute.
Because the Government's position is based entirely on
these impermissible requirements, Mayo is entitled to the
sued-for refunds. Mayo's summary-judgment motion will be
granted, and the Government's motion will be denied.
a Minnesota nonprofit corporation and tax-exempt organization
under 26 U.S.C. § 501(c)(3). Mayo SOF ¶ 4 [ECF No. 185]. For
this case, it helps as background to know that Mayo is the
parent organization of several hospitals, clinics, and the
Mayo Clinic College of Medicine and Science. Id.
¶ 34. The College is comprised of five distinct medical
schools that offer M.D., Ph.D., and other degrees, as well as
residencies, fellowships, and continuing medical education:
(1) Mayo Clinic Graduate School of Biomedical Sciences; (2)
Mayo Clinic School of Graduate Medical Education; (3) Mayo
Clinic Alix School of Medicine; (4) Mayo Clinic School of
Health Sciences; and (5) Mayo Clinic School of Continuing
Professional Development. Id. ¶ 35.
conducting an audit, the Internal Revenue Service in 2009
issued a Notice of Proposed Adjustment asserting that Mayo
owed tax on certain income that it received from
partnerships. Id. ¶ 7. The IRS concluded Mayo
was not entitled to a tax exemption with respect to this
partnership income because, in its view, Mayo was not an
“educational organization.” Id. In 2013,
the IRS issued a Technical Advice Memorandum confirming its
position that Mayo did not qualify as an “educational
organization.” Applying a test from a Treasury
Department regulation, the IRS concluded Mayo's
“primary function” was not “formal
instruction.” Id. ¶¶ 8-9;
see Mayo SOF Ex. 10 [ECF No. 186-1 at 371].
paid the disputed taxes and, in 2016, filed this lawsuit
seeking a refund. Mayo SOF ¶ 10; see Compl.
[ECF No. 1]. Mayo is the proper party to seek all tax refunds
at issue in this case. Id. ¶ 6. The Parties
have stipulated that the value of the refund at issue is $11,
501, 621, together with interest as provided by law, and
breaks down as follows for each tax year for which Mayo seeks
$9, 390, 781
Id. ¶ 11. The Parties also have stipulated that
Mayo's refund claims are timely. See Compl.
¶ 18 (discussing tolling of statute of limitations).
is subject-matter jurisdiction over this case pursuant to 28
U.S.C. § 1346(a)(1). See 28 U.S.C. §
1346(a)(1) (providing jurisdiction for “[a]ny civil
action against the United States for the recovery of any
internal-revenue tax alleged to have been erroneously or
illegally assessed or collected”); see also 26
U.S.C. § 7422 (containing pre-suit requirement that
plaintiff in tax-recovery lawsuit must first file “a
claim for refund or credit . . . with the Secretary” of
the Treasury) and Compl. ¶ 9 and Answer ¶ 9 [ECF
No. 23] (establishing Mayo's compliance with this
statutory system governing unrelated business income
(“UBI”) and the related tax (“UBIT”)
seem complex and contain multiple exceptions to the rule and
exceptions to the exceptions. For this case, the precise
framework of the UBIT (26 U.S.C. § 514) is less
significant than the statute concerning “educational
organizations” that the UBIT statute incorporates by
reference (26 U.S.C. § 170(b)(1)(A)(ii)). Regardless,
some background information on UBIT helps to understanding
this case. As the United States explains it, tax-exempt
charitable organizations under § 501 are permitted to
exclude from their UBI “certain types of passive
income-such as income from dividends, interest, and
real-property rents.” USA Mem. in Supp. at 4-5 [ECF No.
177]. “This passive-income exclusion is generally what
allows a tax-exempt organization to avoid incurring UBIT on
the dividends and interest that it earns on its
endowment.” Id. at 5. But there is an
exception to this exclusion: “If the passive income is
earned using leverage-that is, borrowed money-then the amount
that is excluded from UBI is reduced.” Id. And
this exception, too, has an exception: “[W]hen the
passive income comes from debt-financed real property, the
income can be excluded from UBI if the organization is a
‘qualified organization' under 26 U.S.C. §
514(c)(9)(C).” Id. Included among the
qualified organizations is “an organization described
in section 170(b)(1)(A)(ii), ” which is the
educational-organization statute at issue in this case.
170(b)(1)(A)(ii) is one subsection of a statute that lists
nine types of charitable contributions by individuals that
are eligible for tax deductions. As relevant here, the
(A) General rule. Any charitable contribution to- (i) a
church or a convention or association of churches, (ii) an
educational organization which normally maintains a regular
faculty and curriculum and normally has a regularly enrolled
body of pupils or students in attendance at the place where
its educational activities are regularly carried on,
(iii) an organization the principal purpose or functions of
which are the providing of medical or hospital care or
medical education or medical research, if the organization is
a hospital . . .
. . .
shall be allowed to the extent that the aggregate of such
contributions does not exceed 50 percent of the
taxpayer's contribution base for the taxable year.
26 U.S.C. § 170(b)(1)(A).
addition to this statute, there is a regulation promulgated
by the Treasury Department interpreting §
170(b)(1)(A)(ii), 26 C.F.R. § 1.170A-9. The regulation
is entitled “Definition of section 170(b)(1)(A)
organization.” The regulation essentially repeats the
statute in some respects, parroting the
of the statute. It also includes two requirements that do not
appear explicitly in the statute-what will be referred to as
the “primary-function requirement” and the