Thursday, December 9, 2021
In November, the IRS issued an Action on Decision in the case of Mayo Clinic v. United States, 997 F.3d 789 (8th Cir. 2021),
rev’g, 412 F.Supp.3d 1038 (D. Minn. 2019). They will follow the precedent in the 8th Circuit, but refuse to accept the interpretation of the 8th Circuit reading out the Treasury regulation requiring formal instruction to be a primary function of an educational organization under section 170(b)(1)(a)(ii). I previously wrote about this case here.
It involves whether Mayo Clinic may use an exception to the unrelated business income tax provided to educational organizations under section 514(c)(9)(C)(i). Mayo Clinic claims to be "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." The IRS, relying upon Treasury regulations, that require that an educational organization must have as "its primary function . . . the presentation of formal instruction," did not allow Mayo the exception.
The district court held that the primary function test was not a legitimate interpretation of the statute. While the Appeals court disagreed in part, it held that the IRS was wrong in its application of a primary function test. It remanded the case to the district court with instructions to ensure that Mayo Clinic primarily promotes education.
I expressed concern regarding the case because I think it provides an easy path to public charity status for any organization that is primarily educational by normally having 1 faculty and some students. I did not expect the IRS to appeal, but thought they may choose to fight the case in other circuits. They have expressly taken this latter path.
In supporting its reasons the IRS stated: "We disagree with the Eighth Circuit’s invalidation of the long-standing regulatory requirement that the primary function of an educational organization described in section 170(b)(1)(A)(ii) must be formal instruction (the formal instruction requirement). First, in concluding that the formal instruction requirement “has no long history of congressional acceptance,” the Eighth Circuit did not consider the numerous times Congress has amended section 170(b), increasing the percentage of the allowable deduction and adding to the categories of organizations eligible for the preferential allowable deduction, since the regulations under section 170(b)(1)(A)(ii) were published in 1958, which is persuasive evidence of Congressional acceptance of such regulations. See, e.g., CFTC v. Schor, 478 U.S. 833, 846 (1986) (“It is well established that when Congress revisits a statute giving rise to a longstanding administrative interpretation without pertinent change, the ‘congressional failure to revise or repeal the agency’s interpretation is persuasive evidence that the interpretation is the one intended by Congress.’”). Second, the Eighth Circuit did not consider that the faculty-curriculum student-place requirement provides a statutory basis for the formal instruction requirement in the regulations. Finally, the Eighth Circuit did not consider the Government’s arguments regarding over one dozen Code sections cross-referencing section 170(b)(1)(A)(ii) (many of which predated the regulation’s 1958 publication), which further support the position that the purpose of the formal instruction requirement is to ensure that section 170(b)(1)(A)(ii) “could not reach very far, if at all, beyond schools, colleges, and universities in its coverage.” Brundage v. Commissioner, 54 T.C. 1468, 1474 (1970)."