Mayo Clinic v. United States Archives

IRS Announces Nonacquiescence in Mayo Tax Regulation Invalidity Holding

We previously wrote here and here about decisions made by the District Court of Minnesota and the US Court of Appeals for the Eighth Circuit in Mayo Clinic v. United States regarding challenges to the validity of certain Treasury Regulations promulgated under Internal Revenue Code (Code) Section 170. In that case, the Eighth Circuit held for the taxpayer in part and the government in part and remanded to the district court to further develop the record and address certain issues.

The Internal Revenue Service (IRS) recently announced in an Action on Decision (AOD) that it will not acquiesce in the Eighth Circuit’s holding, which invalidated Treas. Reg. § 1.170A-9(c)(1)’s requirement that the primary function of an education organization described in Code Section 170(b)(1)(A)(ii) must be the presentation of formal instruction. This means that in all cases not appealable to the Eighth Circuit, the IRS will not follow this holding and will continue to litigate the issue.

The IRS’s policy is to announce at an early date whether it will follow the holdings in certain cases, and it does so by making an announcement in an AOD. A nonacquiescence is not binding on courts or the taxpayers but merely signals the IRS’s position that it disagrees with a court decision. (Sometimes the IRS will acquiesce in a decision.) Given that an AOD is published in the Internal Revenue Bulletin, it could be argued that the IRS’s action constitutes published guidance taxpayers can rely on. The IRS’s list of AODs, with links to each action, can be found here.

Eighth Circuit Holds the Mayo in Tax Regulation Invalidity Case

In the latest tax regulation deference case, the Eighth Circuit provided guidance to taxpayers and tax practitioners on the “analytical path” to resolve the question of whether a tax regulation is a valid interpretation of the Internal Revenue Code. The court held that the regulation was invalid in part because it unreasonably added conditions to the statutory requirements for qualified educational organizations, however, it was valid as to its interpretation regarding the permissible scope of the taxpayer’s activities to fit within the applicable statute. The opinion is noteworthy for its detailed examination of statutory and legislative history, judicial interpretations and agency position during legislation in its analysis of Congress’ intent.

Deference is one topic that captivates many, and tax cases referencing Chevron, Skidmore and Auer (and more recently Kisor) always grab attention. The latest deference case in the tax area is Mayo Clinic v. United States, No. 19-3189 (8th Cir. May 13, 2021). For some background on deference, including the district court proceedings in the Mayo Clinic case, see here.

In the Mayo Clinic case, the question was whether the taxpayer was a “qualified organization” exempted from paying unrelated business income tax (UBIT) on unrelated debt-financed income under Internal Revenue Code (Code) Section 514(c)(9)(C)(i). Answering this question required determining whether the taxpayer 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 activity are regularly carried on” within the meaning of Code Section 170(b)(1)(A)(ii). Relying in part on Treasury Regulation Section 1.170A-9(c)(1), the government asserted that the taxpayer was not a qualified organization because it was not an educational organization because its primary function was not the presentation of formal instruction (primary-function requirement) and its noneducational activities were not merely incidental to the educational activities (merely-incidental requirement). The district court – Mayo Clinic v. United States, 412 F.Supp.3d 1038 (D. Minn. 2019) – held in favor of the taxpayer and invalidated the regulation, holding that the primary-function requirement and the merely-incidental requirement were not intended by Congress to be included in the statute. The Eighth Circuit reversed and remanded the decision. Implementing the longstanding two-pronged deference test under Chevron U.S.A. Inc. v. NRDC, 467 U.S. 837 (1984) and acknowledging recent precedent in Kisor v. Wilkie, 139 S.Ct. 2400 (2019), the Mayo Clinic court emphasized that the question before it was whether the government “stayed within the bounds of its statutory authority.” To answer this question, the court stated that to determine whether the statute was unambiguous required examining the statutory history and applying traditional tools of statutory construction. This led the Eighth Circuit to trace the evolution of the Code over more than a century, focusing on changes to statutory language, legislative history, agency positions during the legislative process and judicial interpretations of the law.

Based on this exhaustive analysis of the evolution of [...]

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