Court Trashes Primary Purpose Test, Creates Potential Public Charity Classification Chaos

• DOI: http://doi.org/10.1002/npc.30642
• Published date: 01 October 2019
• Date: 01 October 2019

THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

COURT TRASHES

PRIMARY PURPOSE

TEST, CREATES

POTENTIAL

PUBLIC CHARITY

CLASSIFICATION

CHAOS

The US District Court for Minnesota, by decision dated August 6, held that

the Mayo Clinic is an educational organization, in the face of the federal govern-

ment’s contention that the entity is primarily a health care organization, thereby

trashing the venerable primary purpose test—and enabling Mayo to secure an

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

Facts

Mayo is the parent organization of several hospitals, clinics, and the Mayo

Clinic College of Medicine and Science. The college is composed of five medi-

cal schools. As the court stated the matter, Mayo describes its “educational and

patient-care activities as essential to each other and inextricable.” The court did

not quantify, such as by a percentage, the portion of the medical schools’ activities

or revenue in relation to Mayo’s total activities or revenue.

The tax dispute centers on whether Mayo is a qualified organization for pur-

poses of excluding its unrelated debt-financed income from real estate operations

from unrelated business income taxation (IRC § 514(c)(9)). One of the ways to be

such an organization—the one claimed by Mayo—is to be an educational organi-

zation (as described in IRC § 170(b)(1)(A)(ii)). The IRS held in 2013 that Mayo is not

an educational institution because its “primary function” is not “formal instruc-

tion” (Tech. Adv. Mem. 201407024 (summarized in the April 2014 issue)). The IRS

calculated that Mayo’s educational activities were 13 percent of its total activities © 2019 Wiley Periodicals, Inc.

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DOI:10.1002/npc

Analysis of current developments in tax

and related law for nonprofit organiza-

tions and their professional advisors.

Volume 36 Number 10

October 2019

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