Mayo Clinic will soon go head-to-head against the United States of America with “cross-motions” in an ongoing $11 million tax lawsuit that started in 2016.

On July 1, Judge Eric Tostrud and Judge Kate Menendez of the U.S. District Court in Minneapolis will consider both sides’ motions requesting summary judgment to conclude the case in their favor. If it is not resolved before, the case is scheduled for a bench trial on Aug. 28.

Mayo Clinic originally filed this lawsuit in September 2016 to resolve a dispute with the Internal Revenue Service over whether the nonprofit operation is primarily a school or a medical center.

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

The Internal Revenue Service disagrees and considers Mayo Clinic to be “a parent company of a health-care system as its primary purpose and function.”

That means more of the Mayo Clinic’s investment income is taxable, if it’s not a school.

Ground rules

In a recent filing in the case, Judge Tostrud and Judge Menendez laid down the ground rules for the July 1 hearing.

The IRS must “file an opening memorandum in support of its summary-judgment motion” with a separate “statement of facts” by May 3. The IRS also intends to file a Daubert motion, which questions the admissibility of expert witness testimony. That also needs to be filed by May 3.

Mayo Clinic needs file a memorandum supporting its summary-judgment motion and responding the IRS motion by May 24. A statement of facts and a response to the IRS statement of facts must also be filed by that deadline.

By June 5, the IRS needs to file a response to Mayo Clinic’s summary-judgment motion plus a reply to Mayo Clinic’s response to the IRS summary-judgment motion.

Mayo Clinic then has until June 19 to reply to the IRS response to its motion.

The path to now

This convoluted case started in 2009, when 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 of 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. Mayo Clinic explained that one of the investments at issue terminated in 2006, resulting in the $9.3 million gain that was “above and beyond normal annual returns.”

The clinic dutifully paid the money and then asked for a refund of the $11.5 million. In August of 2016, the IRS rejected that claim.

Suit filed

On Sept. 16, 2016, Mayo Clinic filed suit against the United States in an attempt to recover the disputed $11.5 million plus “statutory interest as provided by law.”

“We don’t take the decision to sue the federal government lightly. But we strongly believe that education is a primary function of Mayo Clinic as that concept is defined in our federal tax laws,” wrote spokeswoman Susan Barber Lindquist in an email statement. “To continue to offer medical education, Mayo Clinic must not be disadvantaged by tax laws compared with other similar educational institutions.”

It says that the Mayo Clinic College of Medicine enrolls more than 3,800 students for graduate, post-graduate, and other medical education. While the Mayo School of Continuing Medical Education does not enroll students in a degree-granting program, it does provide ongoing continuing medical education to more than 100,000 health-care professionals.

This is not Mayo Clinic’s first time in court facing the IRS on issues related to education. The two tangled previously over whether medical residents are students or employees. The case went all the way to the U.S. Supreme Court, which eventually sided with Mayo Clinic and ruled that residents are students. The IRS refunded $1.7 million to make up for Social Security taxes collected in 2005.

Mayo Clinic is citing that case, among others, as evidence that education is its primary function.

“From the time of its creation in the early 1900s, the Mayo organization’s primary objective has been to service humanity through integrated clinical, medical education and academic-scientific research,” stated Mayo Clinic in the court filings.

Mayo Clinic is also disputing the IRS use of the word “primary” in identifying Mayo Clinic not as an educational institution.

“Primary’ is not solely a quantitative test, though quantitative measures show that Mayo Clinic has no greater priority than education. ‘Primary’ is also a qualitative test, education is clearly of first importance based on qualitative factors, including the distinguished history of Mayo Clinic’s educational programs and its integration of patient care into educational activities,” stated Mayo Clinic in the complaint against the IRS.

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