Home Organization The Mayo case raises questions about the meaning of educational organization: part one

The Mayo case raises questions about the meaning of educational organization: part one

The Mayo case raises questions about the meaning of educational organization: part one

In Mayo Clinic v. United Statesthe question posed was whether the Mayo Clinic, or Mayo, was considered an educational organization under Section 170(b)(1)(A)(ii). At issue in that case was whether Mayo was liable for almost $12 million in tax on the taxable income of an unrelated business, or UBTIwhich the government and Mayo agreed would not apply if Mayo was in fact described as an educational organization.


Mayo is a Minnesota nonprofit corporation classified as 501(c)3 tax exempt organization. Mayo oversees health system subsidiaries and operates the Mayo Clinic College of Medicine and Science, or Mayo College. Mayo College is made up of five separate medical schools that offer MD, doctoral, and other degrees, as well as residencies, fellowships, and continuing medical education: the Mayo Clinic Graduate School of Biomedical Sciences, the Mayo Clinic School of Graduate Medical Education, Mayo Clinic Alix School of Medicine, Mayo Clinic School of Health Sciences, and Mayo Clinic School of Continuing Professional Development. The medical schools that make up Mayo College are all operating divisions of Mayo, not separately incorporated entities, so their businesses and operations are an integral part of Mayo.

During the taxation years at issue, Mayo made investments in partnerships that had acquisition debt with respect to real estate, causing the income of the partnership to constitute funded income. by borrowing under Article 514(b)(1) and, as such, to qualify as UBTI subject to tax under Section 511(a)(1). Under a special exception to the debt-financed income rules under Section 514(c)(9)(A), however, acquisition debt does not include debt incurred by a qualified organization in the acquisition or improvement of real property. For this purpose, an eligible organization includes an educational organization described in Section 170(b)(1)(A)(ii). Based on its qualification as an educational organization, Mayo has taken a position on its Form 990 that the exception to the debt-funded income rules applied and therefore the partnership income was not a UBTI.

The IRS asserted in a subsequent audit that in its view Mayo was not an educational organization under Section 170(b)(1)(A)(ii) and therefore was liable for taxes on income from its debt-financed partnership. Mayo paid the disputed $11,501,621 in taxes and in 2016 sued in federal district court seeking a refund on the grounds that it meets the definition of an educational organization as specifically prescribed in law.

Meaning of “educational body”

Under Section 170(b)(1)(A)(ii), an educational organization is defined as an organization “which normally maintains a regular faculty and program and normally has a regularly enrolled body of pupils or teachers. “students present at the place where its educational activities are regularly carried on. Under this statutory language, there are four basic requirements to qualify as an educational organization: a faculty, a program, students, and a place where activities educational sessions are conducted on a regular basis.Contrary to the definition of a hospital under Section 170(b)(1)(A)(iii), which specifically includes a primary purpose requirement, there is no primary purpose requirement such as, on its face, section 170(b)(1)(A)(ii ) does not require an organization to have education as a primary objective in order to be classified as an educational organization. The wording of Section 170(b)(1)(A)(iii) specifically requires that the primary purpose be the provision of medical or hospital care, among other health care functions.

In addition to the legal requirements for incorporating an educational organization, Rule 1.170A-9(c)(1) includes two additional requirements that do not appear explicitly in the statute, that an educational organization will only be described in section 170(b)(1)(A)(ii) if its “primary function is the presentation of formal instruction” and its non-educational activities “are merely incidental to educational activities”. With respect to the purely incidental requirement, the regulations give the following example: “A recognized university that incidentally operates a museum or sponsors concerts is an educational organization within the meaning of section 170(b)(1) (A)(ii). However, the operation of a school by a museum does not necessarily qualify the museum as an educational organization within the meaning of this paragraph.

Under this regulation, an organization that might otherwise be an educational organization by virtue of maintaining a regular faculty and curriculum and having a student body regularly enrolled in an educational institution, as prescribed by law , will not be considered an educational organization under Section 170(b)(1)(A)(ii) unless its primary function is educational and any non-educational activity is merely incidental to educational activities.

The case would end up going to two different courts – both the Federal District Court and the United States Court of Appeals – and achieve two different results. We will discuss these results in more detail in Part II.

This article does not necessarily reflect the views of the Bureau of National Affairs, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Richard L. Fox is a founding partner of the Law Offices of Richard L. Fox. He focuses his practice in the areas of charitable giving, tax-exempt organizations, private foundations, estate planning, trusts and estates.

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