Mayo Clinic v. United States

Background

Mayo Clinic, described in the opinion as a Minnesota nonprofit corporation and tax-exempt organization, sued the United States for tax refunds totaling $11,501,621, plus interest. The refunds concerned taxes Mayo paid on certain partnership income for tax years 2003, 2005, 2006, 2007, 2010, 2011, and 2012. The parties stipulated that Mayo’s refund claims were timely.

Mayo operates or is the parent organization of hospitals, clinics, and the Mayo Clinic College of Medicine and Science. The College includes five medical schools offering degrees, residencies, fellowships, and continuing medical education. After an audit, the Internal Revenue Service concluded that Mayo was not an “educational organization” under 26 U.S.C. § 170(b)(1)(A)(ii). Mayo paid the disputed taxes and later filed this refund action.

The statute describes an educational organization as one that normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of students attending where its educational activities are regularly conducted. The Government conceded that Mayo met those faculty, curriculum, student, and place requirements. It nevertheless argued that Mayo did not qualify because its primary function was health care rather than education and because its health-care activities were not merely incidental to its educational activities.

Legal framework and analysis

The court reviewed the Treasury Department’s regulation under the framework commonly called Chevron, which asks first whether Congress directly answered the precise legal question and, if not, whether the agency adopted a permissible interpretation. The regulation largely repeated the statute but also required that an organization’s primary function be formal instruction and that its noneducational activities be merely incidental to its educational activities.

The court held that Congress unambiguously chose not to include a primary-function requirement in § 170(b)(1)(A)(ii). The court relied in part on the next statutory subsection, § 170(b)(1)(A)(iii), where Congress expressly required a qualifying organization’s principal purpose or functions to involve medical or hospital care, medical education, or medical research. The court reasoned that Congress’s inclusion of such language in one subsection and omission of it from the educational-organization provision showed that the omission was deliberate.

The court further held that the regulation’s merely-incidental test was another way of imposing the same type of primary-function requirement. Requiring all noneducational activities to be merely incidental to educational activities effectively required education to be the organization’s primary purpose. The court concluded that this requirement also exceeded the Treasury Department’s statutory authority.

The court rejected or found unpersuasive the Government’s additional arguments based on other statutory provisions and legislative history. It explained that an organization may qualify under more than one subsection of § 170(b)(1)(A), and that the cited statutes and legislative history did not establish that Congress intended the regulation’s added tests.

Rulings

Because the Government conceded that Mayo met the statute’s faculty, curriculum, student, and place requirements, and because the Government relied entirely on the unlawful additional tests, the court found no genuine dispute of material fact. It held that Mayo qualified as an educational organization under § 170(b)(1)(A)(ii) and was entitled to summary judgment on its refund claims.

The order ruled as follows:

- Mayo’s motion for summary judgment was GRANTED. - The United States’ motion for summary judgment was DENIED. - The United States’ motion to exclude the expert testimony of Melvin Hurley was DENIED as MOOT, because the court did not need to consider his report to decide the summary-judgment motions.

The court directed that judgment be entered accordingly.