IRS appealing Mayo Clinic's win in $11.5M tax dispute

The Internal Revenue Service filed an appeal Sept. 1 seeking to overturn a 2022 ruling that required the agency to repay $11.5 million to Rochester, Minn.-based Mayo Clinic.

The legal dispute dates to May 2016, when Mayo Clinic filed a lawsuit against the IRS in an attempt to recover tax payments the hospital said it was wrongly forced to pay. The case centered on whether Mayo Clinic is primarily an educational organization or a healthcare system. 

Mayo Clinic contended it is an educational organization that makes patient care available as a necessary part of its education activities, while the IRS considers Mayo Clinic to be a parent company of a health system as its primary purpose. Under the IRS' classification, more of the income generated by Mayo Clinic's investments is taxable. 

U.S. District Judge Eric Tostrud ruled in 2022 that Mayo Clinic "operated exclusively for educational purposes," according to the lawsuit. The judgment meant the IRS is required to refund $11.5 million on revenue generated by debt-financed real-estate investment for 2003, 2005 to 2007 and 2010 to 2012.

In its appeal, the IRS is challenging whether Mayo Clinic can be an educational organization "even if it has substantial noneducational purposes and activities" and whether "primary" merely means "substantial." 

This is the second time the IRS has appealed a judgment by Mr. Tostrud in this case. After the judge sided with Mayo Clinic in 2019, the IRS successfully appealed to the 8th Circuit U.S. Court of Appeals, which remanded the case to Mr. Tostrud's court.

A Mayo Clinic spokesperson told Becker's in a statement: 

"We believe that the federal district court’s decision, which affirmed the integral role that education has had in Mayo Clinic’s mission from its earliest days, was correct and should be upheld on appeal. While Mayo Clinic is largely exempt from paying income taxes due to its nonprofit status, it still pays millions of dollars of taxes annually from various activities. Mayo Clinic will strive to ensure that it receives the same treatment under federal tax laws as other educational organizations."


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