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Mayo tries to keep IRS from questioning CEO

While Mayo Clinic’s $11.5 million lawsuit against the IRS is still about nine months away from trial, both sides are debating whether CEO Dr. John Noseworthy should testify. The IRS wants to depose Noseworthy, while Mayo Clinic is trying to block...

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While Mayo Clinic’s $11.5 million lawsuit against the IRS is still about nine months away from trial, both sides are debating whether CEO Dr. John Noseworthy should testify.

The IRS wants to depose Noseworthy, while Mayo Clinic is trying to block that plan. It is an issue that will eventually be decided by Judge Katherine Menendez of the U.S. District Court in Minneapolis.

The heart of this lawsuit is the question of whether Mayo Clinic is "primarily" a school or not.

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 IRS disagrees with the school theory. It considers Mayo Clinic to be "a parent company of health-care system as its primary purpose and function."


The end result of the "health-care system" classification over a school is that more of the income generated by Mayo Clinic’s diverse investments is taxable. That is spurring Mayo Clinic’s request for an IRS rebate for $11.5 million.

In a stipulation order filed on June 5 where both sides agreed to extend some deadlines leading up to a bench trial on March 4, a footnote introduced the conflict on whether Noseworthy has information necessary for the case or not.

The footnote stated that the IRS has requested to depose Dr. Noseworthy on June 28. As the plaintiff, Mayo Clinic responded that it will "file a motion for protection order, on or before June 27, 2018, regarding that request."

When asked to clarify why Mayo Clinic does not want the IRS to depose Noseworthy, spokeswoman Susan Barber Lindquist sent a written response.

"Mayo is opposing the request on the grounds that the issues in dispute can be fully addressed by other Mayo employees with more direct responsibility for Mayo’s educational activities," Barber Lindquist wrote.

When asked why the IRS wants to depose Dr. Noseworthy, IRS trial attorney Curtis Weidler referred questions to the Department of Justice. DOJ spokesman Marc Raimondi responded that the agency had no comment on the case or about Noseworthy’s value as a witness.

The June 5 stipulation also noted that the IRS is seeking to depose Mayo Clinic anesthesiologist and educator Dr. Mark Warner after July 18. Mayo Clinic, in turn, wants to depose IRS official Steve Fager on or after July 10.

For its part, Mayo Clinic acknowledges that filing this lawsuit is out of the ordinary for a nonprofit.


"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 Lindquist said in a previous statement about the case.

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.

Of course, the IRS has a different view of Mayo Clinic’s day-to-day operations.

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 paid the money and then asked for a refund. 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."


Related Topics: FINANCE
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