Briefs Filed in Mayo Clinic Case

• Published date: 01 June 2020
• Date: 01 June 2020
• DOI: http://doi.org/10.1002/npc.30731

Bruce R. Hopkins’ NONPROFIT COUNSEL

6 June 2020 THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc

tax law specialists, and managers, to test the “draft TE/

GE Exam Process/Handbook and system improvements.”

The division “spent the year working with stakeholders

across the agency to strengthen [its] abilities in the areas of

fraud, promoter investigations and abusive transactions.”

Its agents continue to work with other components of the

IRS on syndicated conservation easements cases. Its agents

were sent for specialized training in areas ranging from

promoter/abusive transactions to cyber currency. ◆

IRS RULING ISSUED AS TO

RENTS FROM REAL PROPERTY

A fundamental component of unrelated business

income law is the exclusion from the computation of unre-

lated business taxable income of rents from real property

(IRC § 512(b)(3)). In that connection, the tax regulations

state that payments for the occupancy of space, where

certain services are provided to the occupant, do not consti-

tute rent from real property (Reg. § 1.512(b)-1(c)(5)).

These rules have been invoked in an IRS ruling concern-

ing a real estate investment trust (Priv. Ltr. Rul. 202013006).

REITs must have, as a substantial portion of their gross

income, rents from real property (IRC § 856(c)(2), (3)). The

definition of these rents in this context is similar to the

definition of such rents in the UBI setting (IRC § 856(d)

(1)), including the exclusion of impermissible tenant service

income (IRC § 856(d)(2)(C)). One difference between these

two sets of rules is that services furnished through an inde-

pendent contractor from whom the REIT does not derive

any income or through a taxable subsidiary is not treated

as rendered or provided by the REIT (IRC § 856(d)(7)(C)(i)).

In this case, at issue was income generated by opera-

tion of parking garages. Each of these garages is part of a

property that includes office, retail, or multifamily residen-

tial use. A garage is located in or is adjacent to a building

occupied by tenants of the owner of that garage. The

owners of the parking garages will make them available

to tenants and their guests, customers, and subtenants, as

well as the public. The parking garages are appropriate in

size for the expected number of guests and the like.

All services rendered at the parking garages will

be those customarily furnished in connection with the

rental of space in parking garages in the area. An inde-

pendent contractor from whom the REIT will not derive

any income will manage the garages, employ the individ-

uals involved, and perform all recurring functions unique

to reserved spaces. Therefore, these services will not be

considered furnished, rendered, or provided by the REIT.

Thus, under these facts, the IRS concluded that the

REIT’s share of the parking revenues will qualify as rents

from real property for purposes of REIT law. Presumably,

that would be the same outcome in the UBI setting.

[25.1(h)] ◆

BRIEFS FILED IN MAYO CLINIC

CASE

It will be recalled that a district court ruled last year

that the Mayo Clinic is an educational institution, in the

face of the federal government’s contention that the

entity is primarily a parent company of a health care

system, thereby disregarding (trashing, really) the pri-

mary purpose test, and enabling the clinic to secure an

$11.5 million tax refund judgment (Mayo Clinic v. United

States) (opinion summarized in the October 2019 issue).

The government appealed this decision to the US Court

of Appeals for the Eighth Circuit, filing its appellate brief

in January. The clinic filed its brief on March 20.

US Brief

The US observed that, although the clinic operates

several medical schools, that activity is incidental to its

primary management and patient-care functions, pro-

ducing in recent years less than 2 percent of its revenue

and less than 8 percent of its expenses.

A core finding of the district court was that a pri-

mary purpose test is not contained in the provision for

educational organizations (IRC § 170(b)(1)(A)(ii)), as it

is for health care organizations (IRC § 170(b)(1)(A)(iii)).

But the US pointed out that the primary purpose test is

inherent in the word educational: The word educational

“describes an organization that is solely or primarily edu-

cational; it does not accurately describe an organization

that is primarily noneducational and only incidentally

educational.” Considerable federal and state case law

was cited in support of this proposition.

This brief discusses a concept that is fundamental to

the government’s position: “[T]here are different ways to

describe an organization that serves a primary function,”

in that a “primary-function test” can be used (as is done

in IRC § 170(b)(1)(A)(iii)) or a “specific noun[] or adjec-

tive[] that produces the same result” can be used (as is

the case in IRC § 170(b)(1)(A)(ii)).

Other arguments are that this tax exemption (IRC §

514(c)(9)) should be narrowly construed but the district

court erred in broadening it, other Internal Revenue

Code provisions support this construction of the word

educational, the Code provision involved (IRC § 170)

has been amended over a dozen times but Congress has

never altered this over 60-year-old interpretation of edu-

cational organizations, the legislative history of the Code

provision involved does not support the district court’s

position, the construction of the phrase educational

organization in the tax regulations is reasonable and

warrants judicial reference, and the lower court erred in

granting summary judgment to the clinic.