The United States is appealing Mayo Clinic's recent legal victory to recoup more than $11.5 million from the Internal Revenue Service.
The U.S. filed for the appeal on Oct. 4. The appeal isn't much of a surprise. Many expected the IRS to push back against the Aug. 6 summary judgement in favor of Mayo Clinic that concluded an almost three-year legal battle.
U.S. District Court Judge Eric Tostrud issued a summary judgement in favor of Mayo Clinic ruling that the question at the heart of the case exceeds the government's bounds of authority and is "unlawful."
If the ruling stands, it means that the IRS owes the clinic an $11.5 million refund. It also clears the way for the clinic to save millions in taxes on future investment earnings.
"The District Court issued a sound opinion in ruling in Mayo Clinic’s favor, and we believe that it will be upheld on appeal," Mayo Clinic representative Ginger Plumbo stated this week.
The IRS did not comment on the case. It's unclear when the appellate court is expected to rule on the case, which dates back to a Mayo Clinic lawsuit filed in September 2016.
The dispute stems from the IRS claiming that the nonprofit Mayo Clinic's annual revenue generated by “debt-financed real-estate investment” is taxable as "unrelated business income." While nonprofit hospitals and medical institutions are taxed on that type of revenue, IRS statute says schools and educational institutions are exempt from those taxes.
The IRS claimed 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 United States of America to recover $11.5 million in taxes paid on investment revenue.
The August ruling did not affect any Mayo Clinic tax filings since 2009. Mayo Clinic Corporate Tax Director Christie Lohkamp explained that the annual filings did not list the investment earnings as taxable and all of the filings have reflected Mayo Clinic's position.
"We have always believed that we were likely to win," she said.
How it 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 and then asked for a refund of the $11.5 million. In August 2016, the IRS rejected that refund claim. Mayo Clinic soon filed suit to recover the disputed $11.5 million plus “statutory interest as provided by law.”