An appellate ruling is sending Mayo Clinic’s more than decade-old legal battle with the IRS back to district court.

On Thursday, the Eighth Circuit Court of Appeals invalidated the previous ruling in Mayo Clinic’s favor, saying that the question of whether Mayo Clinic is a school or not -- a tax matter worth $11.5 million to Mayo -- is still not resolved.

“... The district court did not reach these questions and the summary judgement record is not adequate to permit us to decide it as a matter of law,” according to the ruling.

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This invalidates U.S. District Court Judge Eric Tostrud’s August 2019 decision in Mayo Clinic’s favor. In its winning case, Mayo Clinic said the tax statute about this exemption does not include any language about whether an institution is primarily one thing or another.

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“We are studying the appeals court opinion to determine Mayo Clinic’s next steps and have no additional comment at this time," stated Mayo Clinic Spokesman Jay Furst on Friday afternoon.

Justin P. (Jay) Furst

Senior Communications Specialist

The IRS cited a Treasury regulation to address that Mayo Clinic’s core focus is not education. The district judge ruled that the “primary purpose” guideline from the regulation was “impermissible.”

The IRS appealed in October 2020. The appeals court disagreed with the lower court’s opinion of Treasury Regulation.

"We reverse the district court's invalidation of Treasury Regulation … to the extent it is not inconsistent with (Internal Revenue Code) … and remand for proceedings consistent with this opinion," the appeals court said.

That brings Mayo Clinic and the IRS back to the courtroom to debate the core issue once again. From the beginning, the case has always boiled down to whether Mayo Clinic qualifies for federal tax exemptions on revenue generated by "debt-financed real-estate investment" that are designated as being for schools. Nonprofit hospitals don't qualify for the exemption.

“... Mayo’s status as an academic medical center means that its medical and educational purposes -- and the operations supporting those functions -- are inextricably intertwined,” stated Judge James B. Loken in the decision. “Separating the wheat from the chaff -- the educational from the noneducational -- while difficult, is not impossible.”

Given the history of this case, it seems unlikely that the district court’s second attempt at resolving it will be the final word.

Previous disputes between Mayo Clinic and the IRS have gone to the U.S. Supreme Court to be settled. This case seems to be on that same path.

How it all started

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 to 2007, and 2010 to 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 does 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 came from 2006, when the IRS said Mayo Clinic owed $9.3 million.

The clinic dutifully paid the money, then asked for a refund of the $11.5 million.

In August 2016, the IRS rejected that refund claim. Mayo Clinic filed suit on Sept. 16, 2016, to recover the disputed $11.5 million, plus "statutory interest as provided by law."