The US Court of Appeals for the Eighth Circuit’s decision in Mayo Clinic v. US spotlights the tension between the IRS’s narrower interpretation of “educational organization” and the court’s fact-intensive approach.
The court’s endorsement in July of Mayo’s integrated model—linking education, patient care, and research—has practical implications for academic medical centers and others navigating unrelated business income tax, or UBIT, concerns and perhaps exemption eligibility.
This decision, closely watched across the sector, may signal a shift in how courts approach certain UBIT rules under the Internal Revenue Code and possibly even the operational test under Section 501(c)(3).
At issue in Mayo Clinic was whether an academic medical center whose educational, clinical, and research activities are deeply integrated could qualify as a Section 170(b)(1)(A)(ii) educational organization and thus could benefit from the Section 514(c)(9) exception to UBIT on debt-financed property.
Mayo sought a refund of UBIT paid of more than $11.5 million. The IRS argued for a narrow reading, focusing on formal instruction as the primary function, while Mayo and the courts emphasized a broader, fact-driven analysis.
Legal Framework
Section 501(c)(3) exempts organizations that are organized and operated exclusively for educational purposes from federal income tax. Section 170(b)(1)(A)(ii) defines an educational organization as one 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.”
Treasury Regulation Section 1.170A-9(c)(1) adds that an educational organization’s “primary function” must be the presentation of formal instruction, and noneducational activities must be “merely incidental.”
Sections 511 to 514 of the tax code impose UBIT on otherwise tax-exempt organizations for income derived from activities that are regularly carried on and unrelated to their exempt purposes, including income from debt-financed property.
However, Section 514(c)(9) provides an exception for “qualified organizations,” including educational organizations under Section 170(b)(1)(A)(ii), exempting income derived from certain debt-financed real property from UBIT.
Eighth Circuit Approach
The Eighth Circuit affirmed the district court’s conclusion that Mayo qualifies as an educational organization, despite the IRS’s argument that Mayo’s primary function wasn’t the presentation of formal instruction. The government had appealed the district court’s holdings on how to measure educational versus noneducational activities and whether such purposes were “inextricably intertwined.”
The appellate court found that Mayo’s educational, clinical, and research functions are inextricably intertwined and that education is a substantial part of Mayo’s activities. The court emphasized that the IRS’s focus on formal instruction doesn’t reflect the realities of modern academic medical centers, where education also takes place in clinics and research labs.
The Eighth Circuit also referenced the district court’s intensive review of Mayo’s history, citing its evolution into a nationally recognized medical center that takes an innovative and collaborative approach to treatment—a result of its focus on medical education and training.
The court concluded that the proper interpretation of “primary” is “substantial” rather than “most important.” Drawing on US Supreme Court precedent, it reasoned that an activity may be primary if it is substantial, even if not predominant. The court found that Mayo’s educational purpose was substantial and that its patient care and research activities were integral to its educational mission.
The court disagreed with the government’s assertion on the applicability of another Supreme Court decision, which determined that “primarily” means “of first importance” or “principally” in deciding the tax treatment of income.
Here, the Eighth Circuit reasoned that Mayo “can have more than one substantial function (medical education and patient care) and other noneducational functions such as its extensive administrative operations that are merely incidental to education.”
Looking Ahead
The Mayo decision marks a significant development in tax-exempt organizations law. It clarifies that academic medical centers with integrated missions may qualify as Section 170(b)(1)(A)(ii) educational organizations and therefore benefit from the Section 514(c)(9) debt-financed property exception.
The Eighth Circuit’s fact-intensive analysis suggests that as long as education is a substantial purpose and noneducational activities are related, an organization may be educational even if patient care and research are also significant.
The court cautioned that its determination in Mayo Clinic is highly fact-specific and didn’t foreclose the possibility that other similarly situated organizations could fail to meet the definition of an educational organization if their noneducational purposes are substantial and unrelated to education.
The decision doesn’t overturn the operational test or eliminate the need for careful structuring and documentation, even if it does look to the operational test to inform its interpretation of “primary.”
But the Eighth Circuit also noted that the tax code doesn’t indicate that an organization may only qualify under one Section 170(b)(1)(A) category.
This leaves open the possibility that an organization may qualify as a 170(b)(1)(A)(ii) educational organization for UBIT purposes and the charitable contribution deduction limitation available for a Section 170(b)(1)(A)(iii) organization, for example, because the court declared this question irrelevant at present.
The IRS’s disagreement, as articulated in a November 2021 Action on Decision, may keep challenging organizations whose educational activities are integrated with other functions. Organizations—especially those with complex, hybrid missions—should expect continued scrutiny of similar UBIT positions.
Yet the Mayo Clinic decision may prompt regulatory reform or further litigation to clarify the boundaries of educational organization status.
The case is Mayo Clinic v. United States, 8th Cir., No. 23-2246, decided 7/25/25.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.
Author Information
Carrie Garber Siegrist is a senior associate in Goodwin’s tax-exempt organizations practice.
Susan Abbott contributed to this article.
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