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Mayo Clinic, IRS to face off again over $11.5 million school dispute

In the latest round of action in the more than four-year-old legal dispute, attorneys for the Internal Revenue Service and Mayo Clinic will make arguments remotely on Oct. 20 in front of a Minnesota appellate judge.

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The Mayo Clinic's Gonda building Monday, Aug. 7, 2017, in downtown Rochester.
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Will the Eighth Circuit U.S. Court of Appeals uphold Mayo Clinic’s $11.5 million victory over the IRS, or will it overturn the earlier ruling?

In the latest round of action in the more than four-year-old legal dispute, attorneys for the Internal Revenue Service and Mayo Clinic will make arguments remotely on Oct. 20 in front of a Minnesota appellate judge.

The case boils down to whether Mayo Clinic qualifies for federal tax exemptions designed for schools.

U .S. District Court Judge Eric Tostrud ruled in August 2019 that the clinic can claim an exemption on its "Unrelated Business Income” as "an educational organization." That legal victory opened the door for Mayo Clinic to attempt to recoup more than $11.5 million from the IRS.

However, the United States government appealed that ruling . So, before Mayo Clinic can claim that money and any future exemptions, the appellate court must rule.

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The court ruled this week that both sides will once again present their cases on Oct. 20, remotely this time due to the COVID-19 pandemic.

Nicole C. Henning of the Chicago law firm Jones Day will represent Mayo Clinic, while Judith A. Hagley will represent the IRS.

The core of the ongoing disagreement still boils down to whether Mayo Clinic qualifies for tax exemptions designed for schools.

On May 7, the U.S. filed a reply brief to rebut Mayo Clinic’s case.

“In our opening brief, we demonstrated that Mayo did not qualify for this narrow tax exemption because formal instruction to students is not Mayo’s primary function. Rather, Mayo’s primary function is providing, and managing subsidiaries that provide, healthcare to patients,” wrote Deputy Assistant Attorney General Richard Zuckerman and Deputy Assistant Attorney General Theodore Wu.

The IRS acknowledges that Mayo Clinic operates medical schools and asks its doctors to teach as part of their day-to-day routine, but the government’s position is that does not make it a “school” like the University of Minnesota or Harvard University.

Mayo Clinic’s educational endeavors accounted for less than 2% of Mayo Clinic’s revenue in recent years and less than 8% of its expenses, Zuckerman and Wu wrote.

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. The IRS cited a Treasury regulation to address that Mayo Clinic’s core focus is not education.

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When the judge ruled that the “primary purpose” guideline was “impermissible,” Joe Colaiano of Mayo Clinic's legal department explained, "On the plain language of the statute … There's no question what we are."

The IRS has responded to that argument with a brief that stated, “A taxpayer is not entitled to a tax exemption unless it demonstrates that it satisfies all — not just some — of the exemption’s requirements.”

Given the history of this case, it’s unlikely that an appeals court ruling either way will be the end. 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.

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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."

Related Topics: HEALTH NEWSMAYO CLINIC
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