DOJ Tax Cites Memorial Hermann Semantics Against Mayo Clinic
The semantics of tax exemption jurisprudence are really getting out of hand. I wrote about that problem in another post today. Here is yet another example. To be exempt from an $11.5 million unrelated debt financed income tax, Mayo Clinic has to prove that it is operated exclusively for educational purposes and has no substantial non-educational purpose. Mayo has been successful thus far, even though it engages in health care to a substantial extent a whole lot. The lower court ruled that Mayo’s health care services are part and parcel of its educational purpose. The Eighth Circuit heard oral arguments last Thursday and four days later the Fifth Circuit decided Memorial Hermann.
DOJ Tax, after sensibly and successfully arguing in Memorial Hermann that there is no meaningful difference between “substantial” and “primary” purposes, filed a notice of supplemental authority in Mayo a few days ago. The Notice cites Memorial Hermann’s holding to bolster the Government’s argument that Mayo Clinic is liable for the unrelated debt financed income tax. I think the effort will fail and the Government will lose because its just semantics, a restatement of an already wordy argument with more words. The issue in Mayo will more likely be decided on the substantive harm to the statute or the policy caused by declaring , or not, that Mayo’s health care services are part of its overall educational purpose.
My guess is that DOJ is attempting to negate any assertion that although Mayo’s health care activities are primary central to what Mayo does, they do not prove Mayo is operating for a substantial major non-educational purpose. That argument fails if substantial major and primary central mean the same thing. If they are synonymous and they both define “exclusively” in (c)(3) and (c)(4), can we just clean up the regulations? Please?!
I am not sure the argument will make a difference since the lower court ruled that the Mayo’s educational and health care services are two inseparable parts of its substantial major and central educational teaching purpose. That hardly seems illogical. Whatever the difference between “exclusive,” “substantial,” and “primary,” total, major and central, Memorial Hermann helps DOJ only if Mayo’s educational and health care services are separable. The lower court said they weren’t and of course physicians and med students have to treat patients even in the educational setting. That’s why they have residencies.
Anyway, here is the gist of DOJ’s Notice of Supplemental Authorities:
Pursuant to Fed. R. App. P. 28(j), we submit the recent decision in Memorial Hermann Accountable Care Organization v. Commissioner, No. 23-60608 (5th Cir. Oct. 28, 2024), a case concerning whether an organization qualified as an organization “operated exclusively for the promotion of social welfare” within the meaning of I.R.C. §501(c)(4). The Fifth Circuit held that the governing test for whether an organization “operated exclusively” for a particular purpose in the tax exemption context is the “substantial nonexempt purpose test from Better Business Bureau of Washington, D.C. v. United States, [326 U.S. 279, 283 (1945)].” In so ruling, the court observed that “other circuits have endorsed the substantial nonexempt purpose test from Better Business Bureau” for determining whether an organization operated exclusively for a particular purpose. Op.6 (collecting cases). This Court is no different. See Fed’n Pharmacy Servs., Inc. v. Commissioner, 625 F.2d 804, 807 (8th Cir. 1980) (the “exclusively” requirement means that “a substantial nonexempt purpose or activity will disqualify the organization’s exempt status”) (citing Better Business Bureau); U.S.-Br. 52-53 (citing Fed’n Pharmacy).
Memorial Hermann provides further support for our argument that the Better Business Bureau standard governs here. Mayo must be “operated exclusively” for “educational rather than other purposes” to qualify for the tax exception at issue. And, under Better Business Bureau, “exclusively” means that “‘the presence of a single non-educational purpose, if substantial in nature, will destroy the [UBIT] exemption regardless of the number or importance of truly educational purposes.’ It is undisputed that Mayo operates for the “substantial purpose” of caring for patients and that caring for patients is not merely incidental to instructing Mayo’s medical students. Mayo’s substantial medical-care purpose is “non-educational” because healing patients is a different purpose than instructing students. That Mayo’s clinical practice serves both purposes simultaneously does not mean that Mayo operates exclusively for educational purposes.
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I can’t help but think DOJ is hopelessly lost in semantics. Why is the UDFI exception limited to substantial educational activities and how does allowing its use in blended, unquestionably interrelated teaching and health care activities defeat the reason for the UDFI exemption? That is the issue. Not semantics.
darryll k. jones