Washington, DC, partner and Health Care tax attorney T.J. Sullivan was quoted in an August 8, 2019, Tax Notes article titled “Court Sides with Mayo Clinic in $11.5M Tax Refund Dispute.” The refund suit arose from an IRS notice asserting that the medical center, based in Rochester, Minnesota, owed taxes on income generated by debt-financed real estate investments. According to the IRS, Mayo wasn’t a “qualified organization” for purposes of the section 514(c)(9)(C) exception for unrelated debt-financed income. However, Judge Eric C. Tostrud of the U.S. District Court for the District of Minnesota held that the challenged regulation “does more than the law allows because it adds requirements—the primary-function and merely incidental tests—Congress intended not to include in the statute.”
T.J. questioned whether the decision will directly affect other nonprofits because the facts that gave rise to the Mayo dispute aren’t common. “Nevertheless, the case provides some lessons,” he said.“The chief lesson may be that just because an IRS examination agent proposes an adjustment, and just because the IRS backs him or her up in technical advice, it doesn’t mean the IRS position is always correct or will always prevail. Here, a federal judge carefully examined the code and the regulations … and in a well-reasoned opinion, determined that Treasury and the IRS had impermissibly added to the congressional definition of an educational organization in a manner that contravened congressional intent,” he concluded.