Almost three years after Mayo Clinic and the IRS last faced off in court over a $11.5 million tax exemption, a new trial will be held to address the question of whether or not Mayo is a school, for taxing purposes.
Mayo Clinic and the Internal Revenue Service will return to U.S. District Court Judge Eric Tostrud’s St. Paul courtroom on April 22 for a second trial to attempt to resolve the dispute, which dates back to a 2009 tax audit. The trial date was announced on Tuesday.
The case is expected to take four or five days.
Judge Tostrud previously made a summary judgment in Mayo Clinic’s favor in 2019 saying that the IRS should refund $11.5 million. The case is boomeranging back because of an appeals court ruling that Tostrud had left the key issue of Mayo Clinic’s status as a school unresolved.
“... The district court did not reach these questions and the summary judgment record is not adequate to permit us to decide it as a matter of law,” according to the 8th Circuit Court of Appeals decision in May.
From the beginning, the case has boiled down to whether Mayo Clinic qualifies for federal tax exemptions on revenue generated by "debt-financed real-estate investments" that are designated as being for schools. Nonprofit hospitals don't qualify for the exemption, but schools do.
Mayo Clinic's stance is that it is an institution that features medical practice, education and research activities that are "intertwined” to the point that it can call itself a school.
The IRS acknowledged that while Mayo Clinic does have educational offerings, a U.S. Treasury regulation said it has to be primarily a school to avoid the investment earnings taxes. Mayo Clinic disputed that and filed a lawsuit against the government in September 2016 to recover $11.5 million in taxes that it paid on investment revenue.
Tostrud’s 2019 ruling found that the Treasury regulation cited by the IRS does not clearly require judging if an organization is primarily one thing or another. Since the IRS did concede that Mayo Clinic "normally maintains a regular faculty and curriculum and normally has a regular enrolled body of pupils or students…" as a school, the judge ruled that the case had no basis to go forward.
However, that still left the core question unanswered.
The IRS appealed in October 2020. The appeals court disagreed with the lower court’s opinion of the 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.
The appeals court judge clearly mapped out the crux of what needs to be decided.
“... Mayo’s status as an academic medical center means that its medical and educational purposes -- and the operations supporting those functions -- are inextricably intertwined,” said Judge James B. Loken in the decision. “Separating the wheat from the chaff -- the educational from the noneducational -- while difficult, is not impossible.”
And that circles the case back to the beginning. However, the appellate ruling might put the IRS in a more favorable position this time.
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 as high as the U.S. Supreme Court to be settled. This case could end up following 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."
That was the starting gun for the legal marathon to begin.