Hospital? School? Mayo, IRS debate
ST. PAUL — In the three-year-old battle over an $11 million tax refund and access to millions more dollars in the future, Mayo Clinic and the IRS faced off in federal court on Monday.
At times, the three-hour hearing sounded like groups writing opposing dictionaries debating the definitions for many words including "primary," "school," "ambiguity" and even "which."
The hearing before U.S. District Court Judge Eric Tostrud in a St. Paul courtroom allowed both sides to brief the judge on their respective motions requesting dismissal by summary judgment to conclude the case in their favor.
In the end, the judge told the Mayo Clinic and IRS teams that he would rule soon. If the case is not dismissed in favor of either side, a bench trial is scheduled for a Aug. 28.
Lawsuit started in 2016
Mayo Clinic originally filed suit against the U.S. government in September 2016 to resolve a dispute with the IRS over whether the nonprofit operation is primarily a school or a medical center. The IRS statute doesn't clearly state how much an organization's activities have to educational to be termed a school.
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 IRS disagrees and considers Mayo Clinic to be "a parent company of a health-care system as its primary purpose and function." If it’s not a school, that means more of Mayo’s investment income is taxable.
Does the intertwining of Mayo Clinic's five schools and teaching residents with patient care mean it should be labeled a school instead of medical institution?
"At the end of the day, if primary means substantial, there’s no question," said Mark Rotatori, a Chicago attorney representing Mayo Clinic. "Education is part of Mayo’s DNA. If the issue is whether education at Mayo is a substantial function, there’s no question that it is."
While IRS attorney Curtis Weidler didn't dispute that Mayo Clinic does provide education, he said it's clear that the institution is not a school.
"Look at the commercials Mayo is running nationally — 'Come to Mayo for answers.' They are not advertising a school … They are advertising a Destination Medical Center," he said. "That’s their core. There’s natural overlap, but it’s not the core purpose."
Mayo Clinic's attorneys countered that and other quoted statements by three Mayo Clinic CEOs that patient care is the primary mission by stating, "Stories are driven by the audience."
Rotatori said the integration of Mayo Clinic's three "shields" means one can't have one part without the other.
"There can be more than one primary purpose … There is no non-educational patient care," he said gesturing broadly. "Excellence in health care can’t be achieved without education and research."
The IRS cited a video tour of the clinic's facilities hosted by Mayo Clinic Public Affairs specialist John Murphy in which he said the center shield of the three represents patient care, the largest part of the organization. Rotatori disputed that and said the shields have always been interchangeable.
While the IRS attorney Weidler was presenting citations from federal excise tax law about schools and nonprofits, Judge Tostrud asked if an organization can have only one primary purpose.
After a significant pause, Weidler responded, "That’s the definition of primary."
The IRS also took issue with Mayo Clinic's position that no medical care can occur without education being part of it.
"A resident does need to see a patient. A patient doesn’t need to see a resident," said Weidler. Then pointing out that half of Mayo Clinic's patients come from the smaller Health System sites scattered across rural Minnesota and Wisconsin, he asked, "Are there residents in Red Wing?"
Rotatori responded that Mayo Clinic doesn't keep "statistics or percentages" about its residents.
The judge asked the IRS attorney if he could name other institutions that operate schools, but are not considered an educational institutions?
Weidler gave the American Red Cross and museums as examples. He also said a law firm that offers some pro bono or free representation is still a law firm and cannot be called a charity.
How it started
This hotly contested 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.
The IRS rejected that claim in August 2016. 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."