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Back to the start – $11.5 million dispute between Mayo Clinic and IRS to go before judge again

On Monday, the $11.5 million dispute between Mayo Clinic and the IRS will once again appear before Judge Eric Tostrud in St. Paul’s federal courthouse to try to resolve the question of whether Mayo Clinic should be exempt from paying taxes on revenue generated by "debt-financed real-estate investment."

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On Monday, the $11.5 million dispute between Mayo Clinic and the IRS will once again appear before Judge Eric Tostrud in St. Paul’s federal courthouse to try to resolve the question if Mayo Clinic should be exempt from paying taxes on revenue generated by "debt-financed real-estate investment."
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ROCHESTER — A Minnesota judge who previously ruled in favor of Mayo Clinic in its $11.5 million lawsuit against the IRS will hear the case once again on Monday with former Mayo Clinic CEO Dr. John Noseworthy and other executives as witnesses.

On Monday, the dispute between Mayo Clinic and the IRS will once again appear before U.S. District Judge Eric Tostrud in St. Paul’s federal courthouse to try to resolve the question if Mayo Clinic should be exempt from paying taxes on revenue generated by "debt-financed real-estate investment."

Tostrud is familiar with the case, which Mayo Clinic originally filed in 2016. The judge issued a summary judgment in 2019 in Mayo Clinic’s favor, which meant the IRS needed to repay $11.5 million it had collected in taxes from Mayo Clinic, and that Mayo Clinic would be exempt from paying taxes on "debt-financed real-estate investment” revenue in the future.

The IRS appealed the decision and the Eighth Circuit Court of Appeals invalidated the previous ruling in 2021. The appellate court ruled that Tostrud did not address the core issue and he needed to try again.

That’s what will happen next week in the Warren E. Berger Federal Building and Courthouse. The case has a courtroom scheduled for Monday through Thursday.

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The IRS witness list includes Noseworthy, who was president and CEO of Mayo Clinic from 2009 to 2018. Other former Mayo executives on the list include Dr. Mark Warner and Jonathan Oviatt. Mayo Clinic executive office coordinator Beth Backus is also named as a witness.

Previously, the IRS wanted to also have the current CEO Dr. Gianrico Farrugia as a witness, but he was removed from the list after his chief of staff testified that Farrugia’s schedule was already full for the week of April 25.

The question at the heart of this dispute is whether Mayo Clinic should be considered an educational institution. Universities are exempt from paying taxes on that type of real estate revenue. Nonprofit hospitals are not exempt.

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Mayo Clinic’s position is that it is an "educational organization," which "makes patient care available as a necessary and integral part of its educational activities."

The IRS disagrees with the school theory. It considers Mayo Clinic to be "a parent company of a health-care system as its primary purpose and function."

In 2009, the IRS issued a notice of "adjustment" for seven years of Mayo Clinic filings - 2003, 2005 to 2007, and 2010 to 2012. The IRS billed Mayo Clinic for $11.5 million in back taxes.

While Mayo Clinic paid the $11.5 million, the clinic filed a lawsuit in 2016 claiming it should be exempt and asking for the money back.

After years of court filings, court appearances and many billable hours of work by attorneys on both sides, the case is now back at where it started.

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Jeff Kiger tracks business action in Rochester and southeastern Minnesota every day in "Heard on the Street." Send tips to jkiger@postbulletin.com or via Twitter to @whereskiger . You can call him at 507-285-7798.

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Jeff Kiger writes a daily column, "Heard Around Rochester," in addition to writing articles about local businesses, Mayo Clinic, IBM, Hormel Foods, Crenlo and others. The opinions of my employer do not necessarily reflect my opinions. He has worked in Rochester for the Post Bulletin since 1999. Send tips to jkiger@postbulletin.com or via Twitter to @whereskiger . You can call him at 507-285-7798.
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