Mayo Clinic, a Minnesota Corporation, on its own behalf v. United States of America

United States Court of Appeals
For the Eighth Circuit
___________________________
No. 23-2246
___________________________
Mayo Clinic, a Minnesota Corporation, on its own behalf
and as successor in interest to Mayo Foundation
lllllllllllllllllllllPlaintiff - Appellee
v.
United States of America
lllllllllllllllllllllDefendant - Appellant
____________
Appeal from United States District Court
for the District of Minnesota
____________
Submitted: October 23, 2024
Filed: July 25, 2025
____________
Before LOKEN, SMITH, and GRASZ, Circuit Judges.
____________
LOKEN, Circuit Judge.
Mayo Clinic (“Mayo”) is a Minnesota nonprofit corporation and a tax-exempt
organization under Section 501(c)(3) of the Internal Revenue Code (“IRC”),
26 U.S.C. § 501(c)(3). In this complex tax case, Mayo seeks the refund of substantial
unrelated business income tax (“UBIT”) imposed by the Internal Revenue Service
(“IRS”) and paid by Mayo based on the acquisition indebtedness of property held by

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Mayo to produce income in tax years 2003, 2005-2007, and 2010-2012 (the “Tax
Years”). See IRC § 514(c)(9). On remand from our court, the district court,1 after a
week-long bench trial, granted Mayo summary judgment, concluding that Mayo is an
“educational organization” that is exempt from acquisition indebtedness UBIT under
IRC § 170(b)(1)(A)(ii). The United States appeals. We affirm.
I. Framing the Tax Issues.
Section 501(c)(3) exempts from taxation corporations and foundations
“organized and operated exclusively for religious, charitable, scientific . . . or
educational purposes.” The IRC also allows individual taxpayers to deduct
“charitable contribution[s]” to “an educational organization which normally maintains
a regular faculty and curriculum and normally has a regularly enrolled body of pupils
or students in attendance at the place where its educational activities are regularly
carried on.” IRC § 170(b)(1)(A)(ii).
More than fifty years ago, concerned that judicial weakening of the § 501(c)(3)
exclusivity requirement had created a tax loophole for for-profit businesses, Congress
imposed the UBIT on 501(c)(3) organizations. See IRC §§ 512-14. In the Tax
Reform Act of 1969, Congress expanded the UBIT to include an amount determined
by the acquisition indebtedness of debt-financed property that is held to produce
income. Id. § 514(a)(1), (b)(1). However, the UBIT provision at issue provides that
acquisition indebtedness does not include debt incurred by a “qualified organization”
in acquiring or improving real property. Id. § 514(c)(9)(A), (C)(i). Qualified
organizations include 501(c)(3) educational organizations as defined in
§ 170(b)(1)(A)(ii).
1The Honorable Eric C. Tostrud, United States District Judge for the District
of Minnesota.
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After a 2009 audit and subsequent Notice of Proposed Adjustment, the IRS
assessed Mayo $11,501,621 in unpaid acquisition indebtedness UBIT. The IRS
concluded that Mayo’s acquisition indebtedness was not exempt from UBIT because
Mayo in the Tax Years was not a § 170(b)(1)(A)(ii) qualified organization as defined
in Treasury Regulation (26 C.F.R.) § 1.170A-9(c)(1) -- its “primary function” was not
“the presentation of formal instruction,” and its noneducational activities were not
“merely incidental to [its] educational activities.” Mayo paid the amount assessed
and brought this refund action in September 2016.
The district court granted Mayo summary judgment, concluding it is an
educational organization as defined in § 170(b)(1)(A)(ii). The court held Treasury
Regulation § 1.170A-9(c)(1) invalid because it added the “primary function” and
“merely incidental” requirements to § 170(b)(1)(A)(ii). Mayo Clinic v. United States,
412 F. Supp. 3d 1038, 1042, 1057 (D. Minn. 2019). The United States appealed. We
reversed the district court’s invalidation of Treasury Regulation § 1.170A-9(c)(1) “to
the extent it is not inconsistent with IRC § 170(b)(1)(A)(ii)” and remanded for further
proceedings consistent with our opinion. Mayo Clinic v. United States, 997 F.3d 789,
802 (8th Cir. 2021) (Mayo I).
Our lengthy opinion carefully reviewed more than one hundred years of
relevant statutory, regulatory, and judicial developments. We concluded that, given
the settled judicial interpretation of “organized and operated exclusively” in IRC
§ 501(c)(3), “it is valid to interpret [§ 170(b)(1)(A)(ii)] as requiring that a qualifying
organization’s primary purpose be ‘educational’ and that its noneducational activities
be merely incidental to that primary purpose.” Mayo I, 997 F.3d at 800. However,
we agreed with the district court that “Treasury Regulation § 1.170A-9(c)(1) add[ed]
unreasonable conditions” to the statutory requirements for a qualified educational
organization -- “[t]he [1958] requirement that the organization’s ‘primary function
[must be] the presentation of formal instruction’ has no long history of congressional
acceptance.” Id. at 799. Because we could not determine from the record on appeal
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“whether Mayo’s overall purpose and operations establish that it is ‘organized and
operated exclusively’ for educational rather than other purposes,” we remanded to the
district court for further proceedings, noting that “Mayo’s status as an academic
medical center means that its medical and educational purposes -- and the operations
supporting those functions -- are inextricably intertwined.” Id. at 802. We held that
“the presence of a single non-educational purpose, if substantial in nature, will
destroy the UBIT exemption regardless of the number or importance of truly
educational purposes.” Id. (cleaned up), quoting Better Bus. Bureau of Wash., D.C.
v. United States, 326 U.S. 279, 283 (1945). We noted that this may make
“[s]eparating out the wheat from the chaff -- the educational from the
noneducational . . . difficult [but] not impossible.” Id.
On remand, following a week-long bench trial, the district court concluded that
“primary” in this context means “substantial.” It found that Mayo had a substantial
educational purpose and no substantial noneducational purpose during the Tax Years
because its educational functions are “inextricably intertwined” with its clinical and
research functions. The court determined that Mayo uniquely integrates education,
clinical practice, and research across all of its operations such that “education is a
substantial part of Mayo’s reason to exist” that dates back to Mayo’s founding. The
court granted Mayo judgment for the full amount of its refund claim, plus statutory
interest. The government appeals the court’s conclusion that Mayo lacks a
substantial, noneducational purpose and its interpretation of “primary” to mean
“substantial” in this context.
II. Background
Mayo traces its history to 1863, when Dr. William Worrall Mayo, an English-
born physician who completed his medical training in Indiana, arrived in Rochester,
Minnesota to serve as examining surgeon at an enrollment board for Union Army
recruits. He settled in Rochester permanently with his family and established a
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medical practice. His two sons, Drs. William J. Mayo and Charles H. Mayo joined
the practice in the 1880s after completing their medical training.
A tornado swept through Rochester in 1883, resulting in more than twenty
deaths and dozens more injuries. Mother Alfred Moes of the Sisters of Saint Francis
congregation in Rochester set out to build a hospital that would be open to all and
asked Dr. William Worrall Mayo to lead its medical staff. Saint Marys Hospital
officially opened in 1889. The day before it opened, the Mayo brothers completed
the first surgery at the facility. Saint Francis nuns formed the hospital’s nursing staff.
By the early 1890s, the brothers had taken charge of the family practice,
quickly gaining a national reputation for their innovative and collaborative approach
to treatment. Their practice came to be known as the Mayo Clinic. As it grew, the
brothers committed to developing and funding medical education and training
programs. They began hosting doctors from around the country to observe surgeries
and shared their knowledge of the latest medical techniques. In 1905, the brothers
began offering fellowships to visiting physicians, training their first fifty fellows over
the next decade. In 1906, they established the Surgeons Club, the precursor of
Mayo’s School of Continuous Professional Development, which offers continuing
education for medical professionals from around the world.
In February 1915, the brothers endowed the Mayo Foundation for Medical
Education and Research with $2 million of their personal wealth. The Foundation
operated the Mayo School of Graduate Medical Education to train residents and
fellows. In 1917, they transferred its endowment to the management of the University
of Minnesota, which granted degrees for Mayo graduates until its programs were later
independently accredited, with the condition that the funds could only be used to
support medical education in Rochester. Two years later, the Colonial Hospital
Training School for Nurses opened in downtown Rochester.
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Before 1919, the Mayo brothers personally owned the assets of their private
practice. That year, they transferred all practice assets and the majority of their
personal savings to a nonprofit entity called the Mayo Properties Association (a gift
worth approximately $10 million at the time). The 1919 Deed of Gift stated that the
purpose of the gift was:
To aid and advance the study and investigation of human ailments and
injuries, and the causes, prevention, relief and cure thereof, and the
study and investigation of problems of hygiene, health and public
welfare, and the promotion of medical, surgical and scientific learning,
skill, education and investigation, to engage in and conduct and to aid
and assist in medical surgical and scientific research in the broadest
sense.
All proceeds beyond operating expenses would be put towards education, research,
and patient care. The Deed of Gift included two conditions. First, if the Association
determined it could no longer fulfill the purposes laid out in the Deed of Gift, it could
transfer the gift “to a Medical School or to a University or College maintaining one.”
Second, the gift would revert to the brothers if its purposes were not fulfilled.
At the time of the transfer, Mayo physicians, scientists, and other personnel
were employed by the Associates of the Mayo Clinic, a nonprofit-partnership entity.
No employee had a stake in the Associates or the Mayo Clinic’s profits. Employees
received fixed salaries. The Associates’ net income was transferred to the Mayo
Properties Association as compensation for the Associates’ use of real estate and
equipment owned by the Association, which in turn used its income and assets to
fund education and research. In 1965, the IRS designated the Associates of the Mayo
Clinic as a tax-exempt organization under § 501(c)(3).
The brothers’ groundbreaking contributions to modern medicine and medical
education garnered national attention. In recognition of the Mayo brothers’ service
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to their country, including providing free medical care to World War I veterans,
President Franklin D. Roosevelt came to Rochester in 1934 and presented the Mayo
brothers an American Legion award, referring to the brothers as “teachers of
America.” In 1969, the Mayo Properties Association, renamed the Mayo Foundation,
merged with the Associates of the Mayo Clinic. The IRS determined that the merger
did not affect the Foundation’s 501(c)(3) status because the Associates “contribute[d]
importantly to” the Foundation’s “educational and scientific research purposes and
is commensurate in size with those activities.” By 1969, Mayo employed more than
400 physicians, surgeons, and scientists and treated approximately 200,000 patients
annually. Eighty percent of the physicians held academic rank; 1,500 to 1,800
physicians visited Mayo each year to observe its medical activities.
Having trained physicians and health professionals since the late 1800s, Mayo
began to formalize more of its educational offerings in the early 1970s. In 1972, it
established the Mayo Clinic School of Medicine, a fully-accredited medical school
offering a traditional four-year M.D. curriculum. It established the Mayo School of
Health Sciences in 1973 to train allied health professionals. The School of Medicine
and the School of Health Sciences are two of the five schools Mayo operated during
the Tax Years. The Mayo Clinic School of Graduate Medical Education, offering
residency and fellowship training, dates back to 1915, one of the world’s first formal
graduate training programs for physicians. During the Tax Years, it offered the most
accredited residency and fellowship programs in the country. The Mayo Clinic
School of Continuous Professional Development, with origins in the Mayo brothers’
Surgeons Club, was formally established in 1997. It offers courses in continuing
medical education for physicians and allied health professionals. The Mayo Clinic
Graduate School of Biomedical Sciences, which offers M.S. and PhD degrees in
biomedical sciences, conferred its first PhD degree in the early 1900s in partnership
with the University of Minnesota. It was formally established in 1989.
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At trial, four witnesses testified about Mayo’s history, operations, and finances:
(1) Jonathan Oviatt, Mayo’s Chief Legal Officer and Corporate Secretary from 2002
to 2015; (2) Dr. Mark A. Warner, Dean of the Mayo School of Graduate Medical
Education from 2005 to 2012 and Executive Dean of Education from 2012 to 2016;
(3) Dr. John Noseworthy, Mayo’s Chief Executive Officer from 2009 to 2018; and
(4) Melvin “Chip” Hurley, an expert witness who opined on the integration of its
educational and clinical operations and its primary educational function. The district
court analyzed Mayo’s system-wide operations and concluded that Mayo’s substantial
purpose is educational, and even though its patient care functions are substantial, they
are not noneducational. The court highlighted certain features of Mayo’s structure
and operations in its lengthy post-trial findings of fact and conclusions of law.
First, the court found, Mayo’s organization and governance reflect the principal
role of education. The 1919 Deed of Gift places “the promotion of medical, surgical
and scientific learning, skill, education and investigation” at the core of Mayo’s
purpose, conditioning its continued existence on a commitment to the Mayo family’s
philosophy of serving the general good of humanity. Mayo’s corporate governance
documents and modern mission statement during the Tax Years emphasized its
educational purpose. Mayo’s Articles of Incorporation stated that it “is organized and
shall be operated exclusively for charitable, educational, and scientific purposes.”
The preamble to Mayo’s bylaws states that, after compensating staff, “the rest of the
[Clinic] earnings should be used for the benefit of the public . . . through better care
of the sick, medical education for better trained doctors, research and the general
welfare of the public.” Mayo’s mission statements during the Tax Years reaffirmed
a commitment to “integrated clinical practice, education and research.”
Second, the district court found that Mayo’s extensive educational offerings
and day-to-day operations reflect its substantial educational purpose. Each of Mayo’s
five schools offers high-quality medical education, reflected in their stellar
accreditation records. Mayo also had the highest first-time board certification rate in
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the country for a number of resident and fellowship specialty programs. Day-to-day,
Dr. Warner testified that students are taught in the classroom and also “anywhere that
there’s patient care,” from the operating room to the hallways. Mayo physicians are
expected to participate in education and obtain academic rank. The court found that
Mayo’s facilities are predominantly used for educational purposes, and “the medical
treatment and research at Mayo nearly always serves an educational purpose -- even
when involving students renders health care more expensive.”
Mayo has invested substantially in the growth of its schools. As enrollment
increased, Mayo ensured that it maintains a high volume of patients and a large
population of patients with complex diseases. For example, Dr. Warner testified that
each year Mayo flies in up to fifty patients with congenital heart disease from
Mongolia, at an annual cost of $5 million, to ensure that cardiovascular surgery
fellows can meet their treatment requirements for board certification. In addition,
Mayo spends $2 million annually in partnership with the University of Minnesota to
offer genetic counseling internships. Mayo is recognized as one of the best academic
medical centers globally. The School of Medicine consistently ranks in the top
twenty programs in the United States.
Third, the district court found that Mayo’s finances reflect its substantial
educational purpose. During each Tax Year, its educational and research activities
operated at a significant net financial loss. As net income from its clinical practice
did not cover these losses, Mayo spent more on education and research than it made
from patient care. Mayo also spent, by one estimate, 35.6% of the fair market value
of its endowment on education during the Tax Years.
Based on the trial record, the district court concluded that Mayo has a
substantial educational purpose. In Mayo I, we held that, for an organization to
qualify as educational under § 170(b)(1)(A)(ii), it cannot have any substantial,
noneducational purposes. 997 F.3d at 802. Turning to that question, the district court
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reasoned that even if one of Mayo’s activities furthered both educational and
noneducational purposes, it could still be considered “exclusively” educational: “The
relevant inquiry is not whether a particular activity has some purpose in addition to
education, but whether a particular function has no educational purpose and is a
substantial part of Mayo’s organizational purpose.” After weighing the trial
evidence, the district court concluded that Mayo has no substantial, noneducational
purposes because it uniquely integrates education, research, and clinical practice
across all of its operations. Mayo’s educational functions are “inextricably
intertwined with its other functions.” The trial evidence “did not identify a
‘substantial’ clinical practice function at Mayo that did not further the goal of
providing training and education to the students at its colleges.” Though Mayo’s
governing documents reference noneducational activities including patient care and
medical practice, and statements by Mayo representatives have emphasized the
importance of patient care, the court concluded that “[w]hile patient care is certainly
substantial, it is not noneducational at Mayo” because of its careful integration of
education and clinical practice.
The government argued that Mayo does much more than provide medical
education. Its “three-part mission” -- clinical practice, education, and research -- is
reflected on its logo featuring three interlocking shields. In 1986 and 1987, Mayo
expanded to Jacksonville, Florida, and Scottsdale, Arizona, respectively. In the early
1990s, it began acquiring clinics and hospitals within a two-hundred-mile radius of
Rochester to form what is now referred to as the Mayo Clinic Health System
(“MCHS”). In Tax Year 2007, Mayo reported $2 billion in patient care expenses.
The district court concluded that Mayo’s ownership of the MCHS network and
clinics in Florida and Arizona did not demonstrate a substantial, noneducational
purpose because trial evidence and testimony demonstrated that MCHS was started
to improve Mayo’s educational offerings. Education occurs at almost every MCHS
site. Broadening Mayo’s catchment area beyond Rochester improves its educational
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offerings by drawing patients with less common conditions and diseases. And at least
97% of Mayo’s physicians at locations in Rochester, Florida, and Arizona have
academic rank. Though it is possible that patients could receive care with little or no
student contact, the “overwhelming majority of evidence show[s] that Mayo
integrates its education, patient care, and research functions.” In addition, the court
found that research, the third core mission, was “integral” to its graduate programs.
More than half of Mayo Medical School students publish a paper in a peer-reviewed
publication by the time they graduate. This research mission operated at a significant
net financial loss during each of the Tax Years.
In an interview for the Yale School of Management, Mayo’s museum director
summarized how Mayo differs from traditional academic medical centers:
Principally, the key innovation of Mayo Clinic goes back to our earliest
days, and that’s the integrated group practice of medicine. So you have
here a collection of physicians, scientists, allied health professionals
who unite all their different skills around one mission: serving patients.
And that’s supported by education and research. Unlike a typical
university academic setting, research and education here support the
patient-care mission. That really is our major contribution.
This fusion of Mayo’s healthcare, education, and research functions was the basis for
the district court’s conclusion that Mayo has no substantial, noneducational purpose.
III. Discussion
The government raises two issues on appeal. Both issues were framed in our
opinion in Mayo I, 997 F.3d at 802:
First, how to measure educational activity as opposed to noneducational
activity, as well as the degree to which education must be Mayo’s
primary purpose, are disputed. . . . [T]he government believes that
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education . . . must be the § 501(c)(3) taxpayer’s principal or most
important purpose while Mayo contends it need only be substantial. . . .
Second, Mayo’s status as an academic medical center means that its
medical and educational purposes -- and the operations supporting those
functions -- are inextricably intertwined. Separating out the wheat from
the chaff -- the educational from the noneducational -- while difficult,
is not impossible.
In a taxpayer refund action, the taxpayer bears the ultimate burden of proving that it
qualifies for a claimed tax exemption. Armstrong v. United States, 366 F.3d 622,
625-26 (8th Cir. 2004). We review the district court’s legal conclusions and mixed
questions of law and fact de novo, and its factual findings for clear error. Medtronic,
Inc. & Consol. Subsidiaries v. Comm’r, 900 F.3d 610, 613 (8th Cir. 2018).
A. The Proper Interpretation of “Primary” in “Primary Purpose.” In
Mayo I, we traced judicial interpretations of the phrase “organized and operated
exclusively” and held that “it is valid to interpret [§ 170(b)(1)(A)(ii)] as requiring that
a qualifying organization’s primary purpose be ‘educational’ and that its
noneducational activities be merely incidental to that primary purpose.” 997 F.3d at
800. But we did not decide whether education must be Mayo’s “principal or most
important purpose” (the government’s position) or only a “substantial” purpose
(Mayo’s position). After the bench trial, the district court ruled that the issue should
be determined by analyzing Mayo’s system-wide activities and, viewed in that
context, “primary” means “substantial.” On appeal, the government argues that its
interpretation of “primary” to mean more than “substantial” is supported by the
relevant statutory and regulatory provisions, case law, and dictionary definitions.
The district court reasoned that its interpretation of “primary” was strongly
supported by the Supreme Court’s interpretation of that term in Board of Governors
of Federal Reserve System v. Agnew, 329 U.S. 441 (1947). In Agnew, the Court
considered whether the Federal Reserve Board could order the removal of a bank’s
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directors because they were also employees of a firm “primarily engaged” in
underwriting securities in violation of the Banking Act of 1933. Id. at 443-44. The
firm’s gross income from underwriting comprised at most 39% of its gross income
during the years considered. The Court concluded that the firm was “primarily
engaged” in underwriting:
It is true that ‘primary’ when applied to a single subject often means
first, chief, or principal. But that is not always the case. For other
accepted and common meanings of ‘primarily’ are ‘essentially’ or
‘fundamentally.’ An activity or function may be ‘primary’ in that sense
if it is substantial. If the underwriting business of a firm is substantial,
the firm is engaged in the underwriting business in a primary way
though by any quantitative test underwriting may not be its chief or
principal activity.
Id. at 446 (citations omitted). Interpreting primary otherwise, the Court noted, would
mean that the firm was not primarily engaged in any line of business, even though it
conducted a substantial amount of business in both underwriting and brokerage
(which also did not account for more than 50% of its business):
If ‘primarily’ is not used in the sense we suggest then the firm is not
‘primarily engaged’ in any line of business though it specializes in at
least two . . . . One might as well say that a professional man is not
‘primarily engaged’ in his profession though he . . . devotes substantial
time to the practice but makes the greater share of his income on the
stock market.
The Court also noted that interpreting primary to mean substantial was “more
consonant with the legislative purpose” of the Banking Act. Id. at 446-47. Likewise
in this case, the district court concluded that the Treasury Regulation giving examples
of organizations that are “educational,” like the Banking Act in Agnew, is
inconsistent with the government’s position that education must be the “most
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important” purpose because the regulation includes “[m]useums, zoos, planetariums,
symphony orchestras, and other similar organizations” in its examples of “educational
organizations.” Treas. Reg. § 1.501(c)(3)-1(d)(3)(ii), Example 4. The court observed
that “[s]ymphonies, for example, are considered entertainment as much as they are
considered educational.” Few would dispute that the Minnesota Orchestra primarily
engages in the provision of musical entertainment though its performances. Yet such
an organization qualifies as educational under the Treasury Regulations.
We agree the reasoning of Agnew applies to this case. Like the underwriting
firm in that case, it is difficult to pinpoint a singular, predominant activity for Mayo,
an academic medical center whose education, patient care, and research functions are
inextricably intertwined. In remanding, we instructed that the Treasury Regulations
interpreting the meaning of “organized and operated exclusively,” including
§ 1.501(c)(3)-1(d)(3)(i)-(ii), serve as the “proper frame of reference.” Mayo I,
997 F.3d at 800. Those provisions “carry forward [a] broad view of a tax-exempt
educational purpose.” Id. Mayo’s reading of “primary” better aligns with the
relevant regulatory provisions and reflects the judicial “consensus . . . that the word
‘exclusively’ should not be interpreted literally if the purposes underlying income tax
exemptions and charitable deductions were to be achieved.” Id. at 795.
The government contends that the district court’s interpretation disregards
Treasury Regulation § 1.170A-9(c)(1)’s “merely incidental” limitation -- if
noneducational activities can only be merely incidental, then educational activities
must be predominant. As in the district court, the government relies on Malat v.
Riddell, where the Supreme Court considered whether profits from real estate “held
by the taxpayer primarily for sale to customers in the ordinary course of . . . business”
should be treated as ordinary income or capital gains. 383 U.S. 569, 571-72 (1966).
The Court ruled that “primarily” meant “of first importance” or “principally,”
adopting a literal reading of “primarily” to differentiate between the two possible tax
treatments. Id. at 572. We agree with the district court that Malat is distinguishable.
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An organization like Mayo can have more than one substantial function (medical
education and patient care) and other noneducational functions such as its extensive
administrative operations that are merely incidental to education.
We conclude that the district court did not err in its interpretation of “primary”
in this context. Moreover, even if we adopted the government’s interpretation of
“primary,” the district court was not foreclosed from finding, as it did, that Mayo’s
substantial patient care activities are not noneducational, given Mayo’s careful
integration of education and clinical practice. We agree with that finding. Thus,
Mayo’s patient care function need not be merely incidental to its educational
offerings, as the government argues.
B. Does Mayo Have a Substantial, Noneducational Purpose? In Mayo I,
we held that “the presence of a single non-educational purpose, if substantial in
nature, will destroy the [UBIT] exemption regardless of the number or importance of
truly educational purposes.” 997 F.3d at 802, quoting Better Bus. Bureau, 326 U.S.
at 283. The government argues that Mayo’s nationwide hospital network and
extensive patient care activities disqualify it from categorization as an educational
organization because these functions represent a substantial, noneducational purpose.
The government contends that the district court in concluding otherwise
“sidestepped” the Supreme Court’s decision in Better Business Bureau and Treasury
Regulation § 1.170A-9(c)(1) as we upheld it in Mayo I. As the district court
recognized, this is a difficult issue of first impression in this context.
The issue in Better Business Bureau was whether the Bureau was exempt from
paying social security taxes because it was organized and operated exclusively for
educational purposes. 326 U.S. at 280. The Supreme Court rejected the Bureau’s
contention that all of its activities were directed towards educating businesspeople
and the public because there was a “commercial hue permeating” the organization.
Closely examining the Bureau’s corporate title, charter provisions, and activities, the
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Court found it “apparent beyond dispute that an important if not the primary pursuit
of [the] organization is to promote not only an ethical but also a profitable business
community. The exemption is therefore unavailable.” Id. at 283. The government
asserts that because the district court found Mayo to have a substantial purpose of
providing medical care to patients, Mayo is likewise disqualified from being
designated an educational organization under IRC § 170(b)(1)(A)(ii). We disagree.
In Mayo I, we made clear that the fact that “some of its educational purposes
and functions also fall within other charitable categories -- and vice versa -- would
not disqualify [Mayo] from being an educational organization” unless a substantial,
noneducational purpose exists, as in Better Business Bureau. 997 F.3d at 802. Based
on its extensive findings of fact, the district court concluded that “[w]hile patient care
is certainly [a] substantial [purpose,] it is not noneducational at Mayo.” The court
reviewed Tax Court and other judicial decisions recognizing that participating in
patient care is integral to medical education and concluded:
At trial, the evidence did not identify a “substantial” clinical practice
function at Mayo that did not further the goal of providing training and
education to the students at its colleges. In other words, statements
emphasizing the importance of high-quality patient care at Mayo do not
show that patient care is a substantial noneducational purpose of Mayo.
Our decision in Mayo I did not address this issue or foreclose concluding that a
§ 501(c)(3) charitable organization with a hybrid function that furthers another
charitable purpose as well as education can still qualify as a § 170(b)(1)(A)(ii)
“educational organization.” What will disqualify the organization is if the other
charitable purpose is substantial and unrelated to the organization’s educational
functions. That is a fact intensive inquiry.
The government does not challenge the district court’s ultimate fact findings
for clear error; it simply points to other findings suggesting, in the government’s
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view, that patient care is a substantial and noneducational purpose at Mayo. The
district court acknowledged that the trial evidence supports finding that patient care
is a substantial function at Mayo. But the weight of evidence supports the court’s
conclusion that patient care is not noneducational at Mayo.
In Better Business Bureau, the Bureau’s efforts to root out dishonest business
practices were “directed fundamentally to ends other than that of education.”
326 U.S. at 284. Here, for more than a century, Mayo’s careful integration of patient
care and education has resulted in a patient care function that is not noneducational
and therefore does not disqualify it from being an “educational organization” as
defined in § 170(b)(1)(A)(ii), in applicable Treasury Regulations, and in the extensive
legislative history describing the evolution of these complex income tax provisions.
As Dr. Warner testified, Mayo’s students are taught in the classroom and also
“anywhere that there’s patient care,” from the operating room to the hallways.
We consider Living Faith, Inc. v. Commissioner an analogous case, where the
Seventh Circuit considered the § 501(c)(3) tax-exempt status of a nonprofit
corporation that operated vegetarian restaurants and health food stores in keeping
with the doctrine of the Seventh-day Adventist Church. 950 F.2d 365, 367 (7th Cir.
1991). The court explained that “[a] single activity may be carried on for more than
one purpose. The fact that an organization’s primary activity may constitute a trade
or business does not, of itself, disqualify it from classification under § 501(c)(3),
provided the trade or business furthers or accomplishes an exempt purpose.” Id. at
370. However, the court agreed with the Tax Court that the Living Faith organization
was ineligible for tax-exempt status because its religious functions were “peripheral
and incidental to the substantial commercial purpose of its restaurants and health food
stores.” Id. at 371-72 (quotation omitted). By contrast, Mayo has joined and
integrated its noneducational patient care functions with its educational offerings.
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The government points to Redlands Surgical Services v. Commissioner, in
which the Tax Court, citing language from Better Business Bureau that we cited in
Mayo I, held that a nonprofit corporation involved in the operation of an outpatient
surgical center through a general partnership was not exempt under § 501(c)(3).
113 T.C. 47, 48-50, 71-72 (1999), aff’d, 242 F.3d 904 (9th Cir. 2001). “If the
nonexempt purpose is substantial in nature, the organization will not satisfy the
operational test.” Id. at 71. However, the court did not reach the question whether
an organization’s substantial commercial purpose could be charitable in nature
because in Redlands, the nonprofit corporation “ceded effective control of the . . .
Surgery Center’s activities to for-profit parties, conferring on them significant private
benefits” and thus did not operate exclusively for a charitable purpose. Id. at 78. No
for-profit party, including Mayo’s employed physicians and surgeons, has effective
control over Mayo’s organization and operations.
The Tax Court’s decision in Dumaine Farms v. Commissioner, 73 T.C. 650
(1980), also supports the district court’s analysis of substantial overlapping purposes.
In that case, a trust seeking exempt status under § 501(c)(3) operated an experimental
model farm to “demonstrate to local farmers and the general public the economic
feasibility of experimental farming practices which will conserve the area’s ecology
and native wildlife,” and also sold the farm’s crops and timber for profit. Id. at 652-
53. Addressing “whether each substantial activity carried on is directed towards the
accomplishment of one or more exempt purposes,” the court held that the farm
qualified for exempt status because all its activities “directly further its purposes of
testing and demonstrating the economic feasibility of practicing environmental
conservation theories on a working farm.” Id. at 663-64. Though the farm carried
on a commercial purpose by selling its crops, the purpose was “to demonstrate the
commercial viability of petitioner’s modern, ecologically sound farming techniques
and alternatives to established cash crops,” and the farm retained all profits to finance
other conservation activities and connect with the public. Id. at 669. Thus, the farm’s
commercial, educational, and scientific functions did not defeat exempt status
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because all served to advance the farm’s exempt purposes. Here, the district court
determined that the purpose of Mayo’s allegedly noneducational patient care
activities is to advance its educational purposes and they are therefore not
noneducational. We agree this is a valid interpretation of the UBIT exemption at
issue.
The government further argues that the district court disregarded the governing
Treasury Regulations in holding that Mayo is an educational organization despite its
substantial patient care purpose. The government emphasizes that Treasury
Regulation § 1.170A-9(c)(1) states that “educational organization” as used in
§ 170(b)(1)(A)(ii) “does not include organizations engaged in both educational and
noneducational activities unless the latter are merely incidental to the educational
activities.” But Treasury Regulation § 1.501(c)(3)-1(d)(3)(i) broadly states that the
term “educational” relates to “[t]he instruction or training of the individual for the
purpose of improving or developing his capabilities” or “[t]he instruction of the
public on subjects useful to the individual and beneficial to the community.”
Subsection 1(d)(3)(ii) gives examples of educational organizations that include
“[m]useums, zoos, planetariums, symphony orchestras, and other similar
organizations.”
In February 1969, the Associates of Mayo Clinic, which then employed over
400 physicians, surgeons, and medical scientists and treated approximately 200,000
patients each year, merged into the Mayo Foundation (Mayo’s predecessor). In a
letter ruling, the IRS determined that the Associates of Mayo Clinic “contribute[d]
importantly” to the Foundation’s “educational and scientific research purposes and
is commensurate in size with those activities” and therefore the merger did not affect
the Foundation’s § 501(c)(3) status. This is strong if not conclusive evidence that
Mayo’s integrated medical education, patient care, and research missions comprise
the type of “similar organization” encompassed by Treasury Regulation § 1.501(c)(3)-
1(d)(3)(ii), which we held in Mayo I is the “proper frame of reference” for defining
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the primary purpose and function of an “educational organization” in
§ 170(b)(1)(A)(ii). 997 F.3d at 800.
The district court found that patient care is a substantial purpose and function
at Mayo, not one that is “merely incidental to the educational activities.” Our
decision in Mayo I did not foreclose the court from finding, based on extensive trial
evidence, that in Mayo’s fully integrated organization and operations the substantial
patient care purpose and functions are not noneducational. Therefore, this is not a
case where patient care is “an end in itself rather than merely a means of
accomplishing a charitable goal.” Senior Citizens Stores, Inc. v. United States,
602 F.2d 711, 714 (5th Cir. 1979). Patient care at Mayo cannot be completely
detached from medical education. The district court’s decision is not inconsistent
with the governing regulations.
Finally, the government argues that Mayo is more appropriately categorized as
a teaching hospital or medical research organization under § 170(b)(1)(A)(iii), to
which § 514(c)(9)(C) does not extend the UBIT debt-financed real property
exception, rather than a § 170(b)(1)(A)(ii) educational organization to which the
exception does apply. The § 170(b)(1)(A) provisions limit the amount of an
individual’s deduction for charitable contributions in § 170(a) to “50 percent of the
taxpayer’s contribution base for the taxable year.” Section 514(c)(9)(C) cross-
references § 170(b)(1)(A)(ii) in defining a “qualified organization” to which the term
“acquisition indebtedness” does not apply. The statute does not say that an
organization may only qualify under one § 170(b)(1)(A) category, and the proposition
is counterintuitive. The district court did not discuss the issue (if it was even
presented), and the government cites no supporting authority. The district court
concluded that Mayo is an “educational organization” under § 170(b)(1)(A)(ii). If
that conclusion was sound, as we have concluded, that the court could have
concluded that Mayo also qualifies for the limitation on charitable deductions in
§ 170(b)(1)(A)(iii) is simply irrelevant. Warning of a tax avoidance parade of
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horribles, the government argues that the effect of the district court’s “erroneous
interpretation of § 170(b)(1)(A)(ii) is to except all academic medical centers and
teaching hospitals operating in the United States from the reach of § 514’s tax on
debt-financed real property.” But that assertion disregards the district court’s
thorough fact-based determination, based on an extensive trial record.
For the foregoing reasons, the judgment of the district court is affirmed.
GRASZ, Circuit Judge, concurring in the judgment.
Mayo I upheld Treasury Regulation § 1.170A-9(c)’s requirement that an
organization qualifies as an “educational organization” for purposes of IRC
§ 170(b)(1)(A)(ii) only if its “primary function” is educational because “an
‘educational organization’ as used in § 170(b)(1)(A)(ii) must be ‘organized and
operated exclusively for . . . educational purposes.’” Mayo Clinic v. United States,
997 F.3d 789, 799–800 (8th Cir. 2021) (Mayo I) (ellipses in original) (quoting IRC
§ 170(b)(1)(A)(ii)). Therefore, since “primary function” acts as a stand-in for an
organization’s “exclusive” purpose, I do not believe the regulatory language can be
stretched so far as to equate “primary” with “substantial.” To do so defies plain
English. It also contradicts our precedent, which directs us to “narrowly construe[]”
tax exemptions. Storall Mfg. Co. v. United States, 755 F.2d 664, 665 (8th Cir. 1985).
The metamorphosis of the qualification requirement from “primary” function to
“substantial” purpose is not consistent with a narrow construction. Notably, to reach
this result the court concludes that the reasoning of Board of Governors of Federal
Reserve System v. Agnew, 329 U.S. 441 (1947), applies to this case. Ante, at 14. I
do not find Agnew’s reasoning persuasive because it reflects a purposive rather than
textual approach to statutory construction. See ante, at 13 (“The [Agnew] Court . . .
noted that interpreting primary to mean substantial was ‘more consonant with the
legislative purpose of the Banking Act.’” (quoting Agnew, 329 U.S. at 446–47)).
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When this case was previously remanded to the district court, we directed the
court to separate “the wheat from the chaff” in terms of Mayo’s educational and non-
educational purposes. Mayo I, 997 F.3d at 802. The district court undertook this task
and decided all the potential chaff was actually wheat, finding Mayo’s educational
purposes were inextricably intertwined with its multi-billion-dollar network of patient
care. While this finding may be debatable, it is not clearly erroneous. And the
district court made the alternative finding that even “[i]f ‘primary’ meant ‘most
important,’ [it] would still find [as fact] that Mayo’s most important or principal
purpose is education.” Based on this alternative finding, I concur in affirming the
district court.
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