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Mayo Clinic takes on IRS over status as a school

The $11.5 million question at the core of Mayo Clinic's lawsuit against the United States is whether the nonprofit operation is primarily a school or a medical center. Mayo Clinic's position is that it is an "educational organization," which "makes...

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The Mayo Clinic's Gonda building Monday, Aug. 7, 2017, in downtown Rochester.
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The $11.5 million question at the core of Mayo Clinic's lawsuit against the United States is whether the nonprofit operation is primarily a school or a medical center.

Mayo Clinic's position is that it is 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 health-care system as its primary purpose and function." That means more of the Mayo Clinic's investment income is taxable, if it is not a school.

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 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."

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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 $9,390,781. The $9.3 million figure from 2006 is more than 11 times higher than the next highest amount of $837,000 in 2005.

Mayo Clinic explained that one of the investments at issue terminated in 2006, resulting in a 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 refund claim.

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," said spokeswoman Susan Barber Lindquist. "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 that 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.

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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.

Mayo Clinic has requested many documents from the IRS to help prove its point. On Nov. 28, a hearing was held in Minneapolis about the massive document request. The IRS position is that it has already provided enough documents.

"The United States responded … produced the IRS's examination file and its administrative file, a production totaling more than 8,700 pages. The United States withheld or redacted twelve documents from the examination file on privilege grounds and it produced a privilege log," the government stated in filings. "Mayo Clinic's motion does not state why these 2,700 redacted written determinations are not a sufficient sample from which it can ascertain the IRS's interpretations of the word 'Primary.'"

In its complaint, Mayo Clinic also claimed that other similar institutions are being treated differently. The IRS has responded that how other organizations, like the Cleveland Clinic and Johns Hopkins Medicine, is not a legal reason to change Mayo Clinic's status.

"But a taxpayer cannot avoid liability for a lawfully assessed tax merely by showing that others who should have been taxed were not," the government stated.

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