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TAX MATTERS

Mayo Clinic,” JofA, March 2022). The example organizations such as zoos,
district court then again attempted to museums, and symphony orchestras.
answer the question of whether Mayo’s Additionally, the court found support for
overall purpose and operation estab- this interpretation based on the judicial
lish that it is organized and operated “consensus” that “the word ‘exclusively’
exclusively for educational rather than [as used in Sec. 501(c)(3)] should not
other purposes. be interpreted literally if the purposes
Issues: To determine Mayo’s overall underlying income tax exemptions
purpose, the court analyzed four issues. and charitable deductions were to be
An educational lesson First was the question of how to achieved, because every organization has
on UBIT evaluate Mayo’s primary purpose: some noncharitable activities.”
whether it is appropriate to only Next, the court looked to determine
On remand, a district court again examine the parent entity’s activities or whether the Mayo Clinic’s primary
finds Mayo Clinic is entitled to an if a more holistic approach of examin- purpose was educational. In answering
$11.5 million refund of unrelated ing the entity’s systemwide activities is this question, the court found that the
business income tax, based more appropriate. Primarily relying on clinic was founded with the purpose of
on its status as an educational Squire v. Students Book Corp., 191 F.2d providing medical education and that
institution. 1018 (9th Cir. 1951), Mayo argued, and it has consistently maintained its edu-
the court agreed, that the “integral part” cational purpose over time. Supporting
By Matthew Geiszler, Ph.D.; Nay
doctrine is best suited for determining this conclusion, the court noted, is that
Thu Rein (Jacky) Aung; and John
Mayo’s overall purpose. The court ulti- its educational purpose is reflected in
McKinley, CPA, CGMA, J.D., LL.M.
mately concluded, based on its finding of its bylaws and governance documents;
facts, that “Mayo’s system-wide entities its day-to-day operations; its finances;
The Mayo Clinic’s activities met the were highly integrated, both structurally that it meets the statutory require-
requirements to be treated as educational and financially. … The parent entity’s ments of Sec. 170(b)(1)(A)(ii) related
and thereby were not subject to liabil- governing documents granted it broad to faculty, curriculum, students, and
ity for unrelated business income tax affirmative powers over its subsidiaries, place and that its education, research,
(UBIT), a district court held. the subsidiaries’ governing documents and clinical practices are inextricably
Facts: The Mayo Clinic has been reserved all substantial decisions for the intertwined. The court concluded
involved in litigation since 2018 parent, Mayo consolidated its financial that education is a substantial part
concerning its ability to exclude debt- statements, and Mayo’s executives of Mayo’s reason to exist and said it
financed income from UBIT because of had system-wide responsibilities. And would have arrived at the same conclu-
its claimed status as an educational orga- Mayo’s subsidiaries conducted activi- sion had the test been whether it was
nization. In 2019, a district court found ties that supported the organization’s Mayo’s “most important” purpose.
in favor of Mayo, concluding that it is an mission.” The final consideration was
educational organization (Mayo Clinic, Second, the court attempted to whether Mayo had any substantial
412 F. Supp. 3d 1038 (D. Minn. 2019); understand the meaning of “primary,” noneducational purpose. A substantial
see also “Tax Matters: Mayo Clinic Held noting that the Eighth Circuit left open noneducational purpose would “destroy
to Be an Educational Organization the legal question of whether to inter- the [UBIT] exemption regardless of
Despite Engaging in Noneducational pret it to mean a “substantial purpose” of the number or importance of truly
Activities,” JofA, Nov. 2019). the organization or its “most important educational purposes” (Mayo, 997 F.3d
In 2021, on appeal by the govern- purpose.” Adopting the Supreme Court’s at 802, quoting Better Business Bureau
ment, the Eighth Circuit reversed and interpretation of “primary” in Board of Washington, D.C., Inc., 326 U.S. 279,
remanded the case to the district court of Governors of Federal Reserve System 283 (1945)). The court focused on the
(Mayo Clinic, 997 F.3d 789 (8th Cir. v. Agnew, 329 U.S. 441 (1947), the importance of whether any noneduca- IMAGES BY ILLUSTRATOR DE LA MONDE/GETTY IMAGES
2021)). In response, the IRS issued an court concluded that “primary” means tional purpose was substantial, noting
Action on Decision notice announcing “substantial.” Furthermore, it reasoned that “a noneducational activity is
that it does not acquiesce to a portion that Regs. Sec. 1.501(c)(3)-1(d)(3)(ii) insubstantial if it is ‘merely incidental’
of the Eighth Circuit’s ruling; see “Tax codifies the broad view of a tax-exempt to educational purposes” (id. at 800).
Matters: IRS Diagnoses a Defect in educational purpose, highlighting Since Mayo’s educational and support

32 | Journal of Accountancy April 2023