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

Published date01 October 2019
Date01 October 2019
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).
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.
View this newsletter online at
Analysis of current developments in tax
and related law for nonprofit organiza-
tions and their professional advisors.
Volume 36 Number 10
October 2019
Also in This issue...
Rev. Proc. Changing Gift
Disclosure Rules Set Aside for
Procedural Reasons 3
Private Foundation Wins Big in
Stock Valuation Dispute 4
IRS Applies Commerciality
Doctrine in Denying Exemption
for Coffeehouse 4
Charitable Lead Trust’s
Termination Ruled to Not Trigger
Termination Tax 5
Fundraising Charity Loses
Exemption Because of Corporate
Sponsorship Program 6
Nonexempt Business League
Corner 6
Charities and Bankruptcy 101 7
Charitable Estate Planning: A
Case Study 7
Sad Case for Exempt Amateur
Organization Status 7
Other Recent IRS Private Letter
Rulings 8

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT