June 20, 2018; Star Tribune (Minneapolis, MN)
When people think of the Mayo Clinic, they think of doctors and nurses providing health care to patients from all over the world. Mayo is also well known for its rich history of medical research and education. A seemingly minor provision of the US Tax Code, however, makes it very important to define which aspect of the organization is its primary activity.
Here’s the details: 501c3 organizations that make money on debt-financed real estate investments typically owe unrelated business income taxes (UBIT) because that income is unrelated to their charitable purpose. However, educational institutions are exempted from this provision and do not owe the tax.
Mayo Clinic claims its primary function is as an educational institution. They have 3,800 enrolled students and provide part-time instruction for up to 100,000 health care professionals annually. Mayo says it meets the legal standard for an educational institution: “a regular faculty and curriculum for a regularly enrolled group of students attending at a place where teaching is normally carried out.” Based on this, Mayo is seeking more than $11 million in refunds of taxes paid since the early 2000s on its debt-financed real estate investments.
The IRS, on the other hand, looks at Mayo’s March 2018 $16.3 billion balance sheet and $2.6 billion in health care services revenue earned in the first quarter of the year and determines that its primary activity is health care. Adding strength to this finance-based argument is the omission in Mayo’s financials of any specific mention of revenue earned from providing educational services.
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The Star Tribune points out that, in support of Mayo’s claim, “it’s impossible to tease out education from the other activities of any organization set up and run like the Mayo Clinic. Physicians who staff the Mayo are also the faculty and often the researchers. The people enrolled in its schools see patients and assist on research.” NPQ reported on Mayo’s exit from an integration agreement with the former Satilla Regional Medical Center in Waycross, Georgia, saying it had determined that “operating community hospitals is ‘not the highest and best use of Mayo’s time and capital.’”
Mayo’s IRS Form 990 filings, accessed using the nonprofit’s GuideStar page, reveal an interesting discrepancy in how its activities are prioritized. Part 1, question 1 of Mayo’s 2016 990 says Mayo’s “mission or most significant activities” are “education, research and patient care.” However, in Part III, question 1, where Mayo reports the organization’s mission as approved by its governing board, the order is different. The board-approved mission is “to inspire hope and contribute to health and well-being by providing the best care to every patient through integrated clinical practice, education and research.”
This may seem like a minor point, but on such minor points are multimillion dollar tax decisions made. (And we haven’t even plumbed the potential legal ramifications of omitting the serial comma from the three listed “significant” activities.)
How a nonprofit represents itself and its activities on the Form 990 and elsewhere can materially affect how federal, state, and local governments treat the taxation of organizational revenue. That determination has the potential to affect how nonprofits organize their corporate structures and identify the activities they may—or may not—pursue to fulfill their charitable missions.—Michael Wyland