Mayo Clinic v. United States, No. 19-3189 (8th Cir. 2021)
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After the IRS concluded that Mayo, a tax-exempt organization under IRC 501(c)(3), owed unrelated business income tax (UBIT) on certain investment income it received from the investment pool it manages for its subsidiaries, the IRS issued a Notice of Proposed Adjustment and reaffirmed its position in a 2013 Technical Advice Memorandum. In this refund action, the parties dispute the $11,501,621 in UBIT for tax years 2003, 2005-2007, and 2010-2012. At issue is whether Mayo is a "qualified organization" exempted from paying unrelated business income tax on "unrelated debt-financed income" under section 514(c)(9)(C)(i) and whether it its a qualified organization under section 170(b)(1)(A)(ii) because it is an educational organization. The district court held that the Treasury Regulation is invalid "because it adds requirements -- the primary-function and merely-incidental tests -- Congress intended not to include in the statute."
The Eighth Circuit concluded that Treasury Regulation 1.170A-9 is valid, but only in part, and that application of the statute as reasonably construed by the regulation to Mayo's tax years in question cannot be determined as a matter of law on this summary judgment record. Accordingly, the court reversed the district court's invalidation of Treasury Regulation 1.170A-9 to the extent it is not inconsistent with IRC 170(b)(1)(A)(ii) and remanded for further proceedings.
Court Description: [Loken, Author, with Smith, Chief Judge, and Gruender, Circuit Judge] Civil case -Federal Tax. The IRS determined Mayo owed unrelated business income tax on certain investment income it received from the investment pool it manages for its subsidiaries; Mayo paid the $11.5 million the IRS claimed was owed and brought suit for a refund. The issues are whether Mayo is a "qualified organization" exempted from paying unrelated business income tax on "unrelated debt-financed income" under IRC Sec. 514(c)(9)(C)(i) and whether it its a qualified organization under Section 170(b)(1)(A)(ii) because it is an educational organization; the IRS concluded it was not an educational organization as defined in 26 C.F.R. 1.170A-9(c)(1); the district court granted summary judgment for Mayo based on its determination that the Treasury Regulation was invalid because it added requirements to the definition of an educational institution Congress intended not to include the statute. The court concludes the regulation is valid, but only in part, and that application of the statute as reasonably construed by the regulation to Mayo's tax years in question cannot be determined as a matter of law on this summary judgment record. Reversed and remanded for further proceedings. Judge Gruender, concurring in part and concurring in the judgment.
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