Mayo Clinic v. United States

642 F.Supp.3d 831

MAYO CLINIC, a Minnesota Corporation, on its own behalf and as successor in interest to Mayo Foundation, Plaintiff, v. UNITED STATES of America, Defendant.

File No. 16-cv-03113 (ECT/ECW)

United States District Court, D. Minnesota

Signed November 22, 2022

Mark P. Rotatori, Jones Day, Chicago, IL; Erin Sindberg Porter and Annamarie A. Daley, Jones Day, Minneapolis, MN, for Plaintiff Mayo Clinic.

Curtis J. Weidler, U.S. Department of Justice Tax Division, Washington, DC, for Defendant United States of America.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

Eric C. Tostrud, United States District Court Judge

Mayo Clinic brought this case to obtain $11,501,621 in refunds of unrelated business income tax (or "UBIT") on certain investment income it received from the investment pool it manages for its subsidiaries. At issue are tax years 2003, 2005-2007, and 2010-2012. Mayo qualifies for the tax refunds it seeks if, during the tax years in question, it was:

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.

26 U.S.C. § 170(b)(1)(A)(ii). To answer this question, "it must be determined whether Mayo's overall purpose and operations establish that it is 'organized and operated exclusively' for educational rather than other purposes," understanding that the term "exclusively" has a specialized, "non-literal construction" in the non-profit tax context. Mayo Clinic v. United States, 997 F.3d 789, 800-02 (8th Cir. May 13, 2021). Because this is a tax refund proceeding, Mayo bears the burden of proof. Helvering v. Taylor, 293 U.S. 507, 514, 55 S.Ct. 287, 79 L.Ed. 623 (1935).

A bench trial was held from April 25-29, 2022. Four witnesses testified: Jonathan Oviatt, Mayo's Chief Legal Officer and Corporate Secretary from 2002 to 2015; Mark A. Warner, M.D., a Mayo physician and professor who served as the Dean of the Mayo School of Graduate Medical Education from 2005 to 2012 and as the Executive Dean of Education from 2012 until 2016; John Noseworthy, M.D., who served as Mayo's CEO from 2009 until 2018; and Melvin "Chip" Hurley, an expert witness retained by Mayo. The Government called no additional witnesses. A list of the parties' admitted exhibits can be found at ECF Nos. 309-10. Following trial and the parties' submission of proposed findings of fact and conclusions of law, a hearing was held on July 6, 2022, for the purpose of entertaining what were in substance closing arguments and arguments concerning the parties' competing proposed findings and conclusions.

Based on the following Findings of Fact and Conclusions of Law, judgment will be entered for Mayo. The better answer on the trial record is that, during the refund years, Mayo was organized and operated exclusively for educational purposes and had no noneducational purpose that was substantial in the relevant sense.

FINDINGS OF FACT¹

Mayo's Relevant Organizational and Operational History Preceding the Refund Years

Mayo's Formation and Early Years — 1863 to 1919

1. Mayo traces its roots to the medical practice of Dr. William Worrall Mayo, who settled in Rochester, Minnesota, in 1863, and his two sons, Dr. William J. Mayo and Charles H. Mayo ("Mayo Brothers"), who joined the practice in the 1880s. ECF No. 275 ¶ 9.

2. "Education has been an integral part of the Mayo Clinic mission from its earliest days. Mayo's founders shared the conviction that the highest quality patient care is best achieved in an environment of academic inquiry and continuous learning." P-93 at 112; see also Tr. 286:21-287:6 (Warner).

3. The Mayo Brothers had a deep commitment to education and research. For example, the Mayo Brothers founded educational programs to train nurse anesthetists, histology technicians, and surgical assistants. Tr. 279:10-23 (Warner).

4. In the 1880s, the Mayo Brothers began hosting physicians from around the world in order to share their knowledge about medical techniques. During the day, the visitors would observe surgeries in amphitheaters. At night, the Mayo Brothers, or their colleagues, would deliver lectures to the visitors. In 1905, the Mayo Brothers formalized this practice, calling it the International Surgeon's Club. Tr. 281:12-282:8 (Warner).

5. In 1905, the Mayo Brothers started offering fellowships to physicians. They provided visiting physicians with room and board, and the visiting physicians learned from the Mayo Brothers and their colleagues at Saint Marys Hospital in Rochester.² Between 1905 and 1915, the Mayo Brothers trained 50 fellows. Tr. 282:9-22 (Warner).

6. In 1915, the Mayo Brothers created the Mayo Foundation for Medical Education and Research ("MFMER"), a Minnesota nonprofit corporation. Tr. 110:5-13 (Oviatt), 283:21-284:1 (Warner).

7. The Mayo Brothers donated $2,000,000 from their personal wealth to serve as an endowment to fund education at MFMER. Id.; P-155 at 8-9.

8. MFMER operated the Mayo School of Graduate Medical Education ("MSGME"), which trained residents and fellows in Rochester. Tr. 283:1-5, 283:21-284:3 (Warner).

9. In 1917, Mayo transferred the endowment to the management of the University of Minnesota, on the condition that the funds could only be used to support medical education in Rochester. Tr. 110:14-18 (Oviatt); P-155 at 8-10.

10. The University of Minnesota granted the degrees for MSGME graduates until MSGME later became independently accredited, but Mayo provided the clinical training to MSGME students. Tr. 110:14-25 (Oviatt); see Tr. 109:17-23 (Oviatt).

11. In 1919, the Mayo Brothers formed the Mayo Properties Association, which was a Minnesota nonprofit corporation. Tr. 97:10-12 (Oviatt).

12. At this time, the Mayo Brothers had a substantial clinical practice, which came to be known as "Mayo Clinic." They employed 30 physicians and scientists, 24 fellows, and eight interns. Prior to 1919, all of the property and equipment associated with Mayo was personally owned by the Mayo Brothers. Tr. 97:18-98:1 (Oviatt); P-155 at 1.

The Deed of Gift — 1919

13. On October 8, 1919, the Mayo Brothers executed a Deed of Gift, which transferred all of the assets related to their clinical practice to the Mayo Properties Association. Tr. 97:1-3, 97:23-98:1 (Oviatt); P-155 at 5-6.

14. The Deed of Gift stated that prior to 1919, Mayo was operated to serve "the general good of humanity," rather than operated solely for profit. As an example, the Deed of Gift referred to the creation of MFMER in 1917. P-155 at 3.

15. The purpose of the gift was to facilitate education and research:

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.

Tr. 99:10-100:2 (Oviatt); P-155 at 7.

16. (The purpose of the Deed of Gift would become the purpose of the Mayo parent entity throughout the Refund Years.) Tr. 97:13-15 (Oviatt); see also Tr. 128:4-129:6 (Oviatt); P-112 at 3-4; P-113 at 1-2; P-114 at 1-2; P-87 at 1-2.

17. The Deed of Gift placed two conditions on the gift to the Mayo Properties Association. First, if the Mayo Properties Association ever determined that it was unable to fulfill the purpose of the gift, it could transfer the gift "to a Medical School or to a University or College maintaining one." Tr. 99:10-100:12, 102:3-17 (Oviatt); P-155 at 7-8, 11-13.

18. Second, the Deed of Gift contained a condition subsequent, which required reversion of the gift to the Mayo Brothers or their heirs if the purposes of the gift were not fulfilled. Tr. 101:13-102:2 (Oviatt); P-155 at 10.

19. The assets that were the subject of the gift have never been transferred to a medical school, university, or college and have never reverted to the Mayo Brothers or their heirs. Tr. 102:18-25 (Oviatt).

20. As will be explained, though its name has changed over time, the legal entity first called the Mayo Properties Association (Tax Employer Identification Number ("EIN") XX-XXXXXXX) has served as the parent entity to the Mayo organization throughout its history except from 2000 to the end of 2009. Tr. 103:8-104:3, 113:6-21 (Oviatt).

The Mayo Properties Association and the Associates of Mayo Clinic Are Legally Separate, Collaborating Organizations — 1919 to 1969

21. Around the time of the formation of the Mayo Properties Association, the Mayo Brothers created the Associates of Mayo Clinic, which was a hybrid between a nonprofit and partnership. Tr. 104:4-10 (Oviatt).

22. After the execution of the Deed of Gift, all physicians, scientists, and employees worked for the Associates of Mayo Clinic. None of the employees were allowed to have a personal stake in the profits of the Associates of Mayo Clinic or the Mayo Properties Association. Instead, all employees were provided a fixed salary. Tr. 104:11-18 (Oviatt); ECF No. 275 ¶ 13.

23. The Associates of Mayo Clinic's net income was transferred to the Mayo Properties Association as compensation for the Associates' use of the Mayo Properties Association's real estate and equipment. Tr. 104:16-20, 105:14-22 (Oviatt).

24. The Mayo Properties Association used its income and assets to fund education and research efforts. Tr. 105:14-22 (Oviatt).

25. In 1965, the IRS determined that the Associates of Mayo Clinic was a tax-exempt entity under 501(c)(3). P-72 at 1.

The Mayo Foundation and the Associates of Mayo Clinic Merge — 1969

26. By 1969, the Mayo Properties Association had been renamed Mayo Foundation. Tr. 103:8-104:3 (Oviatt).

27. On January 29, 1969, Mayo requested a letter ruling from the IRS regarding whether a merger between the Mayo Foundation and the...