Eighth Circuit Affirms Mayo Clinic Win on Unrelated Business Income Tax

(Parker Tax Publishing August 2025)

The Eighth Circuit affirmed a district court and held that the Mayo Clinic is an "educational organization" that is exempt from unrelated business income tax based on the acquisition indebtedness of property held by Mayo to produce income. The Eighth Circuit rejected the government's argument that Mayo's patient care is a substantial, noneducational purpose and found the district court did not err in its interpretation of Code Sec. 170(b)(1)(A)(ii) as requiring a qualifying organization's primary purpose to be educational and that in this context, "primary" means "substantial." Mayo Clinic v. U.S., 2025 PTC 257 (8th Cir. 2025).

Background

Mayo Clinic (Mayo) is a Minnesota nonprofit corporation and a tax-exempt organization under Code Sec. 501(c)(3). Mayo sought a refund of substantial unrelated business income tax (UBIT) it paid based on the acquisition indebtedness of property held to produce income in tax years 2003, 2005-2007, and 2010-2012 under Code Sec. 514(c)(9).

Code Sec. 501(c)(3) exempts from taxation corporations and foundations "organized and operated exclusively for religious, charitable, scientific . . . or educational purposes." Under Code Sec. 170(b)(1)(A)(ii), individual taxpayers can deduct charitable contributions to "an educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on." Code Sec. 514 imposes UBIT on a Code Sec. 501(c)(3) organization's acquisition indebtedness of debt-financed property that is held to produce income. However, Code Sec. 514(c)(9) provides that acquisition indebtedness does not include debt incurred by a "qualified organization" in acquiring or improving real property. Qualified organizations include Code Sec. 501(c)(3) educational organizations as defined in Code Sec. 170(b)(1)(A)(ii).

After a 2009 audit, the IRS assessed Mayo $11,501,621 in unpaid acquisition indebtedness UBIT. The IRS concluded that Mayo's acquisition indebtedness was not exempt from UBIT because Mayo was not a Code Sec. 170(b)(1)(A)(ii) qualified organization as defined in Reg. Sec. 1.170A-9(c)(1) -- its "primary function" was not "the presentation of formal instruction," and its noneducational activities were not "merely incidental to [its] educational activities." Mayo paid the amount assessed and sued for a refund in September 2016.

In Mayo Clinic v. U.S., 2019 PTC 295 (D. Minn. 2019), a district court granted Mayo summary judgment, concluding it is an educational organization as defined in Code Sec. 170(b)(1)(A)(ii). The district court also held that Reg. Sec. 1.170A-9(c)(1) is invalid because it added the "primary function" and "merely incidental" requirements to Code Sec. 170(b)(1)(A)(ii). The government appealed, and in 2021 PTC 132 (8th Cir. 2021), the Eighth Circuit held that Reg. Sec. 1.170A-9(c)(1) is valid in part but that it added unreasonable conditions to the statutory requirements for a qualified educational organization. The Eighth Circuit remanded to the district court to determine whether Mayo's overall purpose and operations establish that it is organized and operated exclusively for educational rather than other purposes. The district court concluded in 2022 PTC 368 (D. Minn. 2022) that "primary" in this context means "substantial." The district court found that Mayo had a substantial educational purpose and no substantial noneducational purpose because its educational functions are inextricably intertwined with its clinical and research functions. According to the district court, Mayo uniquely integrates education, clinical practice, and research across all of its operations such that "education is a substantial part of Mayo's reason to exist" that dates back to Mayo's founding. The court granted Mayo judgment for the full amount of its refund claim, plus statutory interest.

The government appealed, raising two issues. First, the government argued that education was required to be Mayo's principal or most important purpose, rather than merely a "substantial" purpose. Second, the government argued that Mayo's nationwide hospital network and extensive patient care activities disqualify it from categorization as an educational organization because those functions represented a substantial, noneducational purpose.

Analysis

The Eighth Circuit affirmed the district court. In the view of the Eighth Circuit, the district court did not err in its interpretation of "primary" to mean "substantial." The court found that it is difficult to pinpoint a singular, predominant activity for Mayo because its education, patient care, and research functions are inextricably intertwined. An organization like Mayo, the court reasoned, can have more than one substantial function (medical education and patient care) and other noneducational functions such as its extensive administrative operations that are merely incidental to education. Moreover, the court said that even if it adopted the government's interpretation of "primary," the district court was not foreclosed from finding, as it did, that Mayo's substantial patient care activities are not noneducational, given Mayo's careful integration of education and clinical practice. Thus, the court concluded that Mayo's patient care function need not be merely incidental to its educational offerings.

The Eighth Circuit also disagreed with the government's assertion that patient care is a substantial and noneducational purpose at Mayo. The weight of the evidence, in the court's view, supported the district court's conclusion that Mayo's patient care function is not noneducational because patient care could not be completely detached from Mayo's medical education activities. The court also rejected the government's contention that Mayo is more appropriately categorized as a teaching hospital or medical research organization under Code Sec. 170(b)(1)(A)(iii) that does not qualify for the UBIT debt-financed real property exception. The district court concluded that Mayo qualified as an educational organization under Code Sec. 170(b)(1)(A)(ii). The Eighth Circuit found that, given the soundness of that conclusion, that the district court could have concluded that Mayo also qualifies for the limitation on charitable deductions in Code Sec. 170(b)(1)(A)(iii) was simply irrelevant.

For a discussion of Code Sec. 501(c)(3) organizations, see Parker Tax ¶60,502. For a discussion of UBIT and unrelated business taxable income, see Parker Tax ¶66,120.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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