Mayo Clinic wins $11.5M tax fight

A federal judge sided with Rochester, Minn.-based Mayo Clinic in a dispute over $11.5 million in tax refunds, according to Law360.

In May 2016, Mayo filed a lawsuit against the IRS in an attempt to recover tax payments the hospital says it was wrongly forced to pay. The case centered on whether Mayo is primarily an educational organization or a medical center.

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.

Mayo and the IRS filed competing motions for summary judgment in the case, and Judge Eric C. Tostrud granted Mayo's motion on Aug. 6.

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.

In the opinion and order issued Aug. 6, Mr. Tostrud said Mayo is entitled to the $11.5 million tax refund because the federal government exceeded its authority by creating extra requirements for organizations to qualify as tax-exempt educational organizations, according to Law360.

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