Mayo Clinic, IRS face off in federal court

A federal judge was briefed July 1 on dueling motions for summary judgment in a lawsuit Rochester, Minn.-based Mayo Clinic filed against the IRS more than two years ago.

Mayo filed the lawsuit in September 2016 in an attempt to recover money the hospital says it was wrongly forced to pay the IRS. The case centers on whether Mayo is primarily a medical center or a school.

Mayo contends it is an "educational organization" that "makes patient care available as a necessary and integral part of its educational activities." However, the IRS considers Mayo to be "a parent company of a healthcare system as its primary purpose and function."

Under the IRS' classification, more of the income generated by Mayo's investments is taxable.

Both sides briefed U.S. District Judge Eric Tostrud on their respective motions during a three-hour hearing in St. Paul, Minn., on July 1. Mayo and the IRS debated the definitions of several words during the hearing, including "primary" and "school," according to the Post Bulletin.

"At the end of the day, if primary means substantial, there's no question," Mark Rotatori, a Chicago attorney representing Mayo Clinic, said during the hearing, according to the Post Bulletin. "Education is part of Mayo's DNA. If the issue is whether education at Mayo is a substantial function, there's no question that it is."

IRS attorney Curtis Weidler argued it's clear that Mayo Clinic is not a school.

"Look at the commercials Mayo is running nationally — 'Come to Mayo for answers.' They are not advertising a school … They are advertising a Destination Medical Center," he said, according to the Post Bulletin. "That's their core. There's natural overlap, but it's not the core purpose."

The issues involved in the lawsuit date back to 2009, when the IRS audited Mayo Clinic and issued an "adjustment" for 2005 and 2006. The agency later expanded the adjustment to include seven nonconsecutive years of the clinic's tax returns — 2003, 2005 to 2007 and 2010 to 2012. The years 2004, 2008 and 2009 were excluded because Mayo did not report any income from investments during that time.

In 2014, the IRS concluded Mayo Clinic does not qualify for a tax exemption on revenue generated by "debt-financed real-estate investments." That type of income would not be taxed if the IRS categorized Mayo Clinic as a nonprofit educational organization.

Because of the adjustments, the IRS required Mayo Clinic to make $11.5 million in additional tax payments. The health system made the payments and then asked the IRS for a refund of the full amount. However, the IRS rejected the refund claim in August 2016. One month later, Mayo sued the IRS to recover the $11.5 million payment.

On July 1, the judge said he would rule on the dueling motions soon. If the case is not dismissed in favor of Mayo or the IRS, a bench trial is slated to begin Aug. 28.

Access the full Post Bulletin article here.

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