Taxes in your practice: 8th Circuit holds Mayo Clinic exempt from unrelated business income tax

Scott E. Vincent is the founding member of Vincent Law, LLC in Kansas City.

The 8th U.S. Circuit Court of Appeals recently held that the Mayo Clinic is an “educational organization” exempt from unrelated business income tax with respect to certain indebtedness. In Mayo Clinic v. U.S.,¹ the 8th Circuit affirmed the U.S. District Court for the District of Minnesota’s summary judgment in favor of the Mayo Clinic and rejected the government’s argument that the Mayo Clinic’s patient care was a substantial noneducational purpose. Instead, the court affirmed a broad definition of an educational organization for purposes of the unrelated business income tax exemption. 

Background

Internal Revenue Code § 501(c)(3) exempts from taxation corporations and foundations “organized and operated exclusively for religious, charitable, scientific … or educational purposes.” The code also allows individual taxpayers to deduct “charitable contribution[s]” to “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.”² 

Concerned a judicial weakening of the § 501(c)(3) exclusivity requirement had created a tax loophole for for-profit businesses, Congress imposed an unrelated business income tax (UBIT) on § 501(c)(3) organizations.³ In the Tax Reform Act of 1969, Congress expanded UBIT to include acquisition indebtedness of debt-financed property that is held to produce income. The UBIT provision in Code § 514(c) at issue provides that acquisition indebtedness does not include debt incurred by a “qualified organization” in acquiring or improving real property. Qualified organizations include § 501(c)(3) educational organizations as defined in § 170(b)(1)(A)(ii). 

The Mayo Clinic is a Minnesota nonprofit corporation and a § 501(c)(3) tax-exempt organization. The Mayo Clinic operates a nationwide network of hospitals, clinics, and the Mayo Clinic College of Medicine and Science. For the tax years in question, the Mayo Clinic received investment income from debt-financed property and claimed exemption from UBIT under § 514(c)(9)(C)(i), which incorporates the definition of “educational organization” from § 170(b)(1)(A)(ii). 

Following an audit, the IRS denied the Mayo Clinic’s exemption, asserting that its health care operations were more than incidental to its educational activities, and it did not qualify as an “educational organization” under the relevant treasury regulations. The Mayo Clinic paid the assessed UBIT and sought a refund in district court. 

The district court initially ruled in the Mayo Clinic’s favor, holding the “primary function” and “merely incidental” tests in the regulations were invalid. On appeal, the 8th Circuit partially reversed the district court’s ruling, upholding the validity of the “primary function” and “merely incidental” requirements but rejecting the limitation in the regulations to “formal instruction.” The case was remanded for further factual findings, and the district court again found the Mayo Clinic was organized and operated exclusively for educational purposes and had no substantial noneducational purpose. The “fusion” of the Mayo Clinic’s health care, education, and research functions was the basis for the district court’s factual conclusion that the Mayo Clinic has no substantial noneducational purpose. 

The government appealed, and the 8th Circuit issued its decision in July 2025.

8th Circuit analysis and decision 

The 8th Circuit decision focused on two key issues: the meaning of “primary” purpose, and whether there was integration of functions to support a substantial noneducational purpose. 

Meaning of “primary” purpose 

The government argued that to qualify as an educational organization, education must be the organization’s predominant purpose and not merely a substantial one. The 8th Circuit rejected this argument, affirming the district court’s interpretation that “primary” means “substantial” rather than exclusive or predominant. The 8th Circuit relied on Board of Governors v. Agnew,⁴ where the U.S. Supreme Court held that “primary” can mean “essentially” or “fundamentally.” The 8th Circuit further reasoned that this interpretation aligns with treasury regulations recognizing organizations such as museums, zoos, and symphony orchestras may have multiple substantial purposes and still qualify as educational organizations. 

Based on this analysis, the 8th Circuit concluded that the district court did not err in its interpretation of “primary” as meaning substantial. The 8th Circuit also noted that even under the government’s definition of “primary,” the district court properly found that the Mayo Clinic’s substantial patient care activities are educational based on the Mayo Clinic’s careful integration of education and clinical practice. 

Substantial noneducational purpose and integration of functions 

The government also argued that the Mayo Clinic’s expansive clinical practice represented a substantial noneducational purpose in the form of a commercial business. The 8th Circuit determined the proper test is whether a nonexempt purpose is substantial, not whether the organization engages in activities that could also be conducted for profit. The court noted that a single activity can serve more than one purpose and that commercial activities can further a tax-exempt purpose. Relying on the district court’s factual findings showing that education, research, and clinical practice at the Mayo Clinic are fully integrated, the 8th Circuit concluded that the Mayo Clinic’s patient care is a vehicle for delivering medical education rather than a separate noneducational function. 

The court acknowledged that the presence of a substantial noneducational purpose could disqualify an organization from the UBIT exemption but found no evidence that the Mayo Clinic’s clinical practice existed independently of its educational mission. The 8th Circuit also rejected the government’s argument that the Mayo Clinic should be treated as a hospital or research organization rather than as an educational organization, holding that the Mayo Clinic’s characteristics as an educational institution entitled it to the UBIT exemption.

Based on this analysis, the 8th Circuit affirmed the district court holding that the Mayo Clinic is an “educational organization” exempt from acquisition indebtedness UBIT. 

Conclusion 

The 8th Circuit’s decision in Mayo Clinic provides lawyers with important guidance for tax-exempt organizations with multiple integrated purposes. The court’s adoption of a “substantial” standard for the “primary” purpose test allows a potentially more forgiving factual analysis for academic medical centers and other similarly integrated institutions. Importantly, the government arguments and appeals in this litigation may indicate that the IRS intends to further challenge educational organization exemptions in this context and otherwise. The court’s analysis in Mayo Clinic emphasizes the importance of integrating educational activities with other organizational functions and the factual scrutiny lawyers should expect in these cases.

Endnotes

1 Mayo Clinic v. United States, 145 F.4th 877 (8th Cir. 2025)
2 IRC § 170(b)(1)(A)(ii).
3 See IRC § 512-14
4 Board of Governors of Federal Reserve System v. Agnew, 329 U.S. 441 (U.S. 1947)