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December 7, 2021

IRS will not acquiesce in Mayo Clinic UBIT case addressing whether an 'educational organization' must primarily provide formal, traditional instruction

In an Action on Decision (AOD 2021-04), the IRS announced it will not acquiesce in the Eighth Circuit Court's decision inMayo Clinic v. United States, 997 F.3d 789 (8th Cir. 2021). Reversing a district court's summary judgment for the Mayo Clinic (Mayo), the Eighth Circuit concluded that Treas. Reg. Section 1.170A-9(c)(1) was partially valid but the record before the court was insufficient to determine how the Code's definition of an educational organization applied to Mayo in the tax years at issue.


Mayo, a tax-exempt IRC Section 501(c)(3) organization, had sued for refund of unrelated business income tax (UBIT) it had paid on income received from certain partnerships. Among other activities, Mayo operates five distinct medical schools. Following an audit, the IRS assessed UBIT on certain income Mayo received from the partnerships, contending that Mayo did not qualify as an educational organization because education is not its primary function.

The district court hearing Mayo's refund claim concluded that the government exceeded its authority by requiring, through Treas. Reg. Section 1.170A-9(c)(1), an educational organization under IRC Section 170(b)(1)(A)(ii) to have education as its primary function (primary-function test) and other activities as merely incidental (merely incidental test). Finding Mayo met the requirements described in IRC Section 170(b)(1)(A)(ii), the district court concluded Mayo was entitled to the refund. Further, the lower court held Treas. Reg. Section 1.170A-9(c)(1) is invalid because it adds requirements (the primary-function and merely incidental tests) that Congress did not intend to include in the statute. (For more on the district court opinion, see Tax Alert 2019-1464.)

On appeal, the Eighth Circuit considered whether Mayo constitutes a "qualifying organization" exempt from UBIT under IRC Section 514(c)(9)(C)(i). This would include an organization described in IRC Section 170(b)(1)(A)(ii) that "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 appeals court explained.

The circuit court agreed with the district court that Treas. Reg. Section 1.170A-9(c)(i) adds unreasonable conditions to the statutory requirements for a qualified educational organization and thus unreasonably limits "educational organizations" to those that principally provide formal instruction. However, the Eighth Circuit also concluded that the primary-function and merely incidental tests can be useful in interpreting the statute. Ultimately, the appeals court concluded Treas. Reg. Section 1.170A-9(c)(1) is partially valid. (For details, see Tax Alert 2021-1023.)

AOD reasoning

In the AOD, the IRS explains it will not acquiesce in Mayo Clinic v. US because the IRS "disagree[s] with the Eighth Circuit's invalidation of the long-standing regulatory requirement that the primary function of an educational organization described in [IRC Section] 170(b)(1)(A)(ii) must be formal instruction." First, the IRS disagreed with the Eighth Circuit's conclusion that requiring an entity to provide formal instruction to qualify an educational organization "has no long history of congressional acceptance." The AOD asserts that Congress has not taken the initiative to modify IRC Section 170(b)(1)(A)(ii) requirements since the regulations thereunder were established in 1958, "which is persuasive evidence of [c]ongressional acceptance" of the regulations. Second, the AOD notes that the appeals court "did not consider that the faculty-curriculum-student-place requirement provides a statutory basis for the formal instruction requirement in the regulations." Finally, the AOD says the Eighth Circuit failed to consider the government's argument that cross references of IRC Section 170(b)(1)(A)(ii) in numerous IRC sections indicate that the formal instruction requirement was essentially intended to limit the category of qualified "educational organizations" to schools, colleges and universities.

The IRS recognizes the precedential effect of the Eighth Circuit's decision in the Eighth Circuit (which encompasses Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota), but will not acquiesce to the decision in the other circuits. Further, because neither court considered the statutory faculty-curriculum-student-place requirement in IRC Section 170(b)(1)(A)(ii), the IRS will continue to apply this requirement nationwide.


This AOD decision memorializes the IRS's determination that it will not follow the Eighth Circuit's holding of Mayo Clinic v. US, in particular its invalidation of the formal instruction requirement of Treas. Reg. Section 1.170A-9(c)(1), and will continue to litigate this issue in all courts that are not appealable to the Eighth Circuit. Therefore, outside of the Eighth Circuit, the IRS will continue to hold that the primary function of an education organization described in IRC Section 170(b)(1)(A)(ii) must be the presentation of formal instruction. If a tax-exempt organization's primary purpose is educational but it does not offer formal instruction, the IRS could challenge its status as an educational organization under IRC Section 170(b)(1)(A)(ii) if the organization is outside of the Eighth Circuit.

During the pendency of litigation on this issue, it is very unlikely that the IRS would be willing to recognize or reclassify any tax-exempt health care organization like Mayo Clinic as an educational organization described in IRC Sections 170(b)(1)(A)(ii) and 514(c)(9), which would qualify the organization to exclude debt-financed income incurred in acquiring or improving real property under IRC Section 514(c)(9). Rather, the IRS is more likely to determine that the primary function of such an organization is providing medical care rather than education, and thereby recognize it as a health care organization described in IRC Section 170(b)(1)(A)(iii).


Contact Information
For additional information concerning this Alert, please contact:
Exempt Organization Tax Services
   • Steve Clarke (
   • Kristen Farr Capizzi (
   • Morgan Moran (
   • Bridget O’Connell (