Court sides with Mayo Clinic in $11.5 million IRS dispute

Mayo Clinic came out on the winning side of a court decision handed down this week by the U.S. District Court in Minnesota.

Mayo had been arguing with the IRS for the past three years about whether the organization qualifies as a tax-exempt educational institution.

The IRS contended Mayo did not, because its primary mission is healthcare, not education. But on Tuesday, a federal judge sided with Mayo — stating that the government exceeded its authority when it created extra requirements for organizations to qualify for the tax exemption.

The outcome of the court case will save Mayo millions of dollars, now and in the future. Already, as a result of the decision made this week, the IRS is responsible for issuing Mayo an $11.5 million tax refund.

Read the full text of the Opinion and Order here.

The government had built its case around the argument that Mayo’s primary function was not education. However, the court said the point was moot, given that “Congress explicitly chose not to include the primary-function requirement in Section 170,” according to Law 360, a legal news service.

Section 170 of the Internal Revenue Code says an entity must maintain a regular faculty and curriculum, and have a regularly enrolled body of students, in order to classify as an educational organization.

Mayo, with its medical college, met those requirements.

But by adding additional regulations, the court said, the Treasury Department “exceeded the bounds of its statutory authority.”

“This analysis shows that the regulation does more than the law allows because it adds requirements — the primary-function and merely-incidental tests — Congress intended not to include in the statute,” Judge Eric C. Tostrud said in the opinion. “Because the government’s position is based entirely on these impermissible requirements, Mayo is entitled to the sued-for refunds.”

Mayo’s refund will cover taxes paid from 2003-12. The Rochester-based clinic was represented by the high-powered law firm of Jones Day.

Sean Baker is a Rochester journalist and the founder of Med City Beat.