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Government Seeks Reversal of $11.5 Million Refund to Mayo Clinic

JAN. 17, 2020

Mayo Clinic v. United States

DATED JAN. 17, 2020
DOCUMENT ATTRIBUTES

Mayo Clinic v. United States

MAYO CLINIC, a Minnesota Corporation, on its own behalf and
as successor in interest to Mayo Foundation,
Plaintiff-Appellee
v.
UNITED STATES OF AMERICA,
Defendant-Appellant

IN THE UNITED STATES COURT OF APPEALS
FOR THE EIGHTH CIRCUIT

ON APPEAL FROM THE JUDGMENT OF THE UNITED STATES
DISTRICT COURT FOR THE DISTRICT OF MINNESOTA

BRIEF FOR THE APPELLANT

RICHARD E. ZUCKERMAN
Principal Deputy Assistant Attorney
General

TRAVIS A. GREAVES
Deputy Assistant Attorney General

FRANCESCA UGOLINI (202) 514-3361
JUDITH A. HAGLEY (202) 514-8126
Attorneys
Tax Division
Department of Justice
Post Office Box 502
Washington, D.C. 20044

Of Counsel:
ERICA H. MACDONALD
United States Attorney

SUMMARY OF THE CASE AND
REQUEST FOR ORAL ARGUMENT

This federal tax case involves a tax exemption limited to “educational organization[s]” that provide formal instruction to students. See 26 U.S.C. §§170(b)(1)(A)(ii), 514(c)(9)(C)(i). The parties disputed whether appellee Mayo Clinic is an educational organization within the meaning of these provisions, and cross-moved for summary judgment. The District Court rejected both parties' interpretations of the statute, holding that “educational organization” was ambiguous. The court also invalidated Treasury's regulation defining that term, a regulatory definition (i) promulgated over 60 years ago, (ii) upheld by the Tax Court 50 years ago, and (iii) cited by Congress without any attempt to overrule it. The court also granted Mayo summary judgment. It did so, however, without defining “educational organization” or addressing the parties' summary-judgment evidence.

Counsel for the United States respectfully inform the Court that they believe that oral argument may be beneficial, and suggest that 20 minutes per side would be adequate to address the issues.


TABLE OF CONTENTS

Summary of the case and request for oral argument

Table of contents

Table of authorities

Glossary

Jurisdictional statement

Statement of the issues

Statement of the case

A. Procedural overview

B. Background

i. Overview: Tax-exempt organizations

ii. §514(c)(9) tax exemption

iii. Educational organizations

C. Mayo

D. District Court proceedings

Summary of argument

Argument

The District Court erred in concluding that Mayo qualified under §514(c)(9)(C)(i) for a tax exemption that is limited to educational organizations described in §170(b)(1)(A)(ii)

Standard of review

A. Introduction

B. The plain language, context, and history of §§170(b)(1)(A)(ii), 514(c)(9)(C)(i) demonstrate that organizations primarily involved in management activities and medical care (like Mayo) do not qualify as educational organizations within the meaning of those provisions

1. Plain language

2. Context

a. The tax exemption provided in §514(c)(9) was specifically designed for a narrow class of tax-exempt organizations and as such should be narrowly construed 40

b. Congress has expressly provided exemptions for noneducational organizations that engage in some educational activities but did not do so in §514(c)(9)(C)(i)

c. Congress has amended §170 over a dozen times but has never altered Treasury's long-standing, consistent interpretation of “educational organization” as requiring the primacy of educational activities

3. Legislative history

C. The District Court disregarded the plain language, context, and history of §§170(b)(1)(A)(ii), 514(c)(9)(C)(i) and relied instead on an inapt canon of construction

D. Alternatively, the Treasury Department's longstanding construction of “educational organization” is reasonable and warrants deference

E. In any event, the District Court erred in granting summary judgment to Mayo

Conclusion

Certificate of compliance

Certificate of service

TABLE OF AUTHORITIES

Cases:

Andrus v. Glover Constr. Co., 446 U.S. 608 (1980) 41, 45 Armstrong v. United States, 366 F.3d 622 (8th Cir. 2004)

Bartels Trust for Benefit of Cornell Univ. v. United States, 617 F.3d 1357 (Fed. Cir. 2010)

Bergman v. United States, 174 F.3d 928 (8th Cir. 1999)

Better Business Bureau of Washington, D.C. v. United States, 326 U.S. 279 (1945)

Bingler v. Johnson, 394 U.S. 741 (1969)

BNSF Ry. Co. v. Loos, 139 S. Ct. 893 (2019)

Brundage v. Commissioner, 54 T.C. 1468 (1970)

Cedars of Lebanon Hosp. v. Los Angeles Cnty., 221 P.2d 31 (Cal. 1950)

CFTC v. Schor, 478 U.S. 833 (1986)

Chapman v. Commissioner, 48 T.C. 358 (1967)

Chevron, U.S.A., Inc. v. Natural Res. Defense Council, Inc., 467 U.S. 837 (1984)

City of Columbus v. Ours Garage & Wrecker Serv., Inc.,536 U.S. 424 (2002)

Commissioner v. Estate of Sanders, 834 F.3d 1269 (11th Cir. 2016)

Cottage Sav. Ass'n v. Commissioner, 499 U.S. 554 (1991)

Dean v. United States, 137 S. Ct. 1170 (2017)

DeBough v. Shulman, 799 F.3d 1210 (8th Cir. 2015)

Henson v. Santander Consumer USA Inc., 137 S. Ct. 1718 (2017)

Home Depot U.S.A., Inc. v. Jackson, 139 S. Ct. 1743 (2019)

Kisor v. Wilkie, 139 S. Ct. 2400 (2019)

Loughrin v. United States, 573 U.S. 351 (2014)

Lutheran Social Serv. of Minn. v. United States, 758 F.2d 1283 (8th Cir. 1985)

Mayo Found. for Med. Educ. & Res. v. United States, 562 U.S. 44 (2011)

Milwaukee Reg'l Med. Ctr., Inc. v. City of Wauwatosa, 735 N.W.2d 156 (Wisc. 2007)

Nat'l Sec. Archive v. U.S. Dep't of Defense, 880 F.2d 1381 (D.C. Cir. 1989)

NRA Special Contribution Fund v. Bd. of Cnty. Comm'rs, 591 P.2d 672 (N.M. Ct. App. 1978)

Rubin v. Islamic Republic of Iran, 138 S. Ct. 816 (2018)

Russello v. United States, 464 U.S. 16 (1983)

Smiley v. Citibank (S.D.), N.A., 517 U.S. 735 (1996)

Spiritual Outreach Soc'y v. Commissioner, 927 F.2d 335 (8th Cir. 1991)

Sunoco, Inc. v. United States, 908 F.3d 710 (Fed. Cir. 2018)

Sw. Tex. Elec. Coop., Inc. v. Commissioner, 68 T.C.M. (CCH) 285 (1994), 1994 WL 395017

Taniguchi v. Kan Pac. Saipan, Ltd., 566 U.S. 560 (2012)

Union Pacific R.R. Co. v. Surface Transp. Bd., 863 F.3d 816 (8th Cir. 2017)

United States v. Cleveland Indians Baseball Co., 532 U.S. 200 (2001)

United States v. Detroit Med. Ctr., 833 F.3d 671 (6th Cir. 2016)

United States v. Lara-Ruiz, 681 F.3d 914 (8th Cir. 2012)

Ussery v. United States, 296 F.2d 582 (5th Cir. 1961)

W. Cent. Coop. v. United States, 758 F.2d 1269 (8th Cir. 1985)

Statutes:

Deficit Reduction Act of 1984, Pub. L. 98-369, §1034(a)

Internal Revenue Code (26 U.S.C.):

§119(d)(4)(A)(i)

§119(d)(4)(A)(i)-(ii)

§151(c)

§151(e) (1954 Code)

§152(f)

§170

§170(b)

§170(b)(1)(A)

§170(b)(1)(A)(i)

§170(b)(1)(A)(i)-(ix)

§170(b)(1)(A)(ii)

§170(b)(1)(A)(iii)

§170(b)(1)(A)(vi)

§170(c)(2)(B)

§401

§403(b)

§501

§501(c)

§501(c)(3)

§501(c)(25)

§503(b)(2) (1954 Code)

§511

§511(a)

§512

§514

§514(b)(1)

§514(c). 45

§514(c)(9)

§514(c)(9)(C)

§514(c)(9)(C)(i)

§514(c)(9)(C)(i)-(iv)

§514(c)(9)(C)(ii)

§514(c)(9)(C)(ii)-(iv)

§514(c)(9)(C)(iii)-(iv)

§932

§4041(g)

§4221(d)(5)

§4253(j)

§6501

§6501(g)(2)

§6511(a)

§6532(a)(1)

§7422

Internal Revenue Code of 1954, Pub. L. 83-591, §151(e)

Internal Revenue Code of 1954, Pub. L. 83-591, §170(b)(1)(A)(i)-(iii)

Miscellaneous Revenue Act of 1980, Pub. L. 96-605, §110(a)

Protecting Americans from Tax Hikes (PATH)

Act of 2015, P.L. 114-113, §331(a)

Pub. L. 84-1022, §1 (1956)

Revenue Act of 1943, Pub. L. 78-235, §117(a)

Revenue Act of 1950, Pub. L. 81-814, §331

Revenue Act of 1964, P.L. 88-272, §209(a)

Tax Reform Act of 1969, Pub. L. 91-172, §201(a)(1)

28 U.S.C.:

§1291

§1331

§1346(a)(1)

§2107(b)

Rules and Regulations:

21 Fed. Reg. 5867 (1956)

23 Fed. Reg. 1759 (1958)

38 Fed. Reg. 12 (1973)

73 Fed. Reg. 52528 (2008)

Fed. R. App. P. 4(a)(1)(B)

Regulations 86, Art. 101(6)-1 (1935)

Regulations 91, Art. 12 (1936)

Rev. Rul. 56-262, 1956-1 C.B. 131

Rev. Rul. 58-433, 1958-2 C.B. 102

Rev. Rul. 76-416, 1976-2 C.B. 57

Rev. Rul. 78-95, 1978-1 C.B. 71

Treasury Regulations (26 C.F.R.):

§1.170-2(b)(3)

§1.170A-9(b)(1)

§1.170A-9(c)(1)

§1.501(c)(3)-1(d)(3)(ii)

Miscellaneous:

Black's Law Dictionary (3d ed. 1933)

Black's Law Dictionary (4th ed. 1951)

Black's Law Dictionary (11th ed. 2019)

Federal Tax Coordinator ¶K-3722 Primary Activity Requirement for 50% Charities (2019)

H.R. Rep. 83-1337 (1954)

H.R. Rep. 88-749 (1963)

H.R. Rep. 91-413 (Part 1) (1969)

Hearing on S. 927, S. 1183 and H.R. 2163 Before the Subcomm. on Taxation and Debt Management of the S. Comm. on Finance (1983-1984 Misc. Tax Bills — V), 98th Cong. (1st Sess.) (1983)

Hearing before the Senate Finance Committee, 91st Cong. (October 1969)

Hearings before the House of Representatives Committee on Ways and Means, Part 3, 88th Cong. (Feb. 26, March 4-8, 11 & 12, 1963)

Joint Committee on Taxation, Description of Tax Bills before House Committee on Ways and Means, JCS-22-282 (1982)

Joint Committee on Taxation, General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984, JCS-41-84 (1984)

Joint Committee on Taxation, Technical Explanation of the PATH Act of 2015, JCX-144-15 (2015)

Liles & Blum, Development of the Fed. Tax Treatment of Charities, 39 Law and Contemporary Problems Journal 6 (1975)

8 Mertens Law of Fed. Income Tax'n §31:72 (2019)

9 Mertens Law of Fed. Income Tax'n §34:11 (2019)

S. Rep. 81-2375 (1950)

S. Rep. 83-1622 (1954)

S. Rep. 96-1036 (1980)

S. Rep. 99-146 (1985)

Taxation of Exempt Organizations ¶8.05, 2003 WL 1891141

GLOSSARY

Add

Appellant's Separate Addendum

Appx

Appellant's Separate Appendix

Doc.

District Court docket entries

IRS

Internal Revenue Service

Mayo

Appellee Mayo Clinic

Op/Add

District Court opinion as contained in the Separate Addendum filed with the Government's opening brief

PATH

Protecting Americans from Tax Hikes

UBIT

unrelated-business-income tax


JURISDICTIONAL STATEMENT

Mayo Clinic (Mayo) brought this suit, seeking a refund of $11,501,621 in federal income tax for 2003, 2005-2007, and 2010-2012. (Appx18.) Before filing suit, Mayo filed timely refund claims, which the IRS disallowed. (Appx23-24.) See §§6511(a), 6532(a)(1), 7422.1 The District Court had jurisdiction under 28 U.S.C. §§1331, 1346(a)(1). The District Court rendered a final judgment on August 7, 2019, disposing of all claims of all parties.2 (Add32.) The Government filed its notice of appeal on October 4, 2019, within the 60 days allowed by Fed. R. App. P. 4(a)(1)(B). (Appx228-229.) See 28 U.S.C. §2107(b). This Court's jurisdiction over the appeal rests upon 28 U.S.C. §1291.

STATEMENT OF THE ISSUES

1. Whether the District Court erred in concluding that the tax exemption provided in §514(c)(9)(C)(i) for an “educational organization” described in §170(b)(1)(A)(ii) is not limited to organizations primarily engaged in educational activities.

2. Whether the District Court erred in invalidating Treasury's 60 year-old definition of “educational organization” provided in Reg. §1.170A-9(c)(1).

3. Whether the District Court erred in concluding on summary judgment that Mayo qualified as an “educational organization” without defining that term or addressing the Government's evidence regarding Mayo's noneducational activities.

The most apposite authorities are: §170(b)(1)(A);

§514(c)(9)(C);

Reg. §1.170A-9(c)(1);

Mayo Found. for Med. Educ. & Res. v. United States, 562 U.S. 44 (2011);

Better Business Bureau of Washington, D.C. v. United States, 326 U.S. 279 (1945);

Brundage v. Commissioner, 54 T.C. 1468 (1970); and Chapman v. Commissioner, 48 T.C. 358 (1967).

 

STATEMENT OF THE CASE

A. Procedural overview

Mayo is the parent company of a large healthcare system that is generally exempt from income tax. Like all tax-exempt entities, however, Mayo is subject to tax on its “unrelated business income.” §511. This case concerns a specific exemption from such tax (unrelated-business-income tax (UBIT)). That exemption is limited to educational organizations that provide formal instruction to students (described in §170(b)(1)(A)(ii)). See §514(c)(9)(C)(i) (cross-referencing §170(b)(1)(A)(ii)). For over 60 years, the Treasury Department has interpreted “educational organization” under §170(b)(1)(A)(ii) to mean an organization primarily providing formal instruction and only incidentally engaging in noneducational activities. E.g., Reg. §1.170A-9(c)(1).

The IRS denied Mayo's multi-million dollar refund claim, determining that Mayo did not qualify as an educational organization under the statute or its implementing regulation because Mayo was not primarily engaged in providing formal instruction. After Mayo filed suit for refund, the parties cross-moved for summary judgment. The District Court denied the Government's motion, rejecting its interpretation of the statute and invalidating the regulation. The court also rejected Mayo's interpretation of the statute but nevertheless granted it summary judgment. It did so without defining “educational organization” or addressing the Government's evidence demonstrating (in the Government's view) that Mayo, as a factual matter, was not an educational organization. The Government has appealed.

B. Background

i. Overview: Tax-exempt organizations

This case concerns the meaning of “educational organization” as described in §170(b)(1)(A)(ii), which is incorporated by reference in §514(c)(9)(C)(i). Both provisions are part of a comprehensive statutory scheme that generally exempts charities dedicated to certain purposes from income taxation (see §501), and provides for the deduction of contributions to certain tax-exempt organizations (some at preferential percentage limitations) (see §170), but still imposes tax on certain income that is unrelated to the exempt function (see §§511-514).

By way of brief background, certain organizations are exempt from federal income tax, §501(c)(3), and contributions to them are generally deductible by donors, §170(c)(2)(B). To qualify for these benefits, an organization must (among other things) be organized and operated exclusively for certain delineated charitable purposes, including “educational purposes.” §501(c)(3). These tax benefits are as old as the federal income-tax laws themselves. See generally Liles & Blum, Development of the Fed. Tax Treatment of Charities, 39 Law & Contemporary Problems Journal 6 (1975).

Prior to 1954, the charitable deduction for individual donors was limited to 20% of the donor's income. Liles & Blum, above, at 30-31. In 1954, the ceiling on an individual's charitable deduction was raised to 30% for contributions to (i) churches, (ii) certain educational organizations, and (iii) hospitals.3 Internal Revenue Code of 1954, Pub. L. 83-591, §170(b)(1)(A)(i)-(iii). Over the years, Congress has amended §170(b) numerous times, increasing the percentage of the allowable deduction and adding to the categories of organizations eligible for the preferential allowable deduction. See Add73-78, 135-136. Nine specific categories now qualify for this preferential deduction, each defined in terms of their primary activity or source of funding.4 Federal Tax Coordinator ¶K-3722 Primary Activity Requirement for 50% Charities (2019); see §170(b)(1)(A)(i)-(ix). This case turns on the meaning of “educational organization” as described in §170(b)(1)(A)(ii) and incorporated by reference in §514(c)(9)(C)(i).

ii. §514(c)(9) tax exemption

Organizations otherwise exempt from federal taxation pursuant to §501(c) remain subject to tax on their “unrelated business taxable income” (as defined in §512). §511(a). In particular, a tax-exempt entity's income from debt-financed real property may be subject to this tax. §514. See Bartels Trust for Benefit of Cornell Univ. v. United States, 617 F.3d 1357, 1360-1363 (Fed. Cir. 2010) (describing §514's operation and purpose).

In 1980, Congress enacted a limited exception to §514's debt-financed-real-property rules for certain pension plans (§401 trusts).

Miscellaneous Revenue Act of 1980, Pub. L. 96-605, §110(a) (now codified at §514(c)(9)(C)(ii)). In 1984, Congress extended this tax exemption to educational organizations described in §170(b)(1)(A)(ii). Deficit Reduction Act of 1984, Pub. L. 98-369, §1034(a) (codified at §514(c)(9)(C)(i)). Congress later granted two other specific organizations this exemption: title-holding companies described in §501(c)(25) and retirement accounts described in §403(b). §514(c)(9)(C)(iii)-(iv).

As discussed in more detail below, of the nine categories of organizations listed in §170(b)(1)(A), only organizations described in §170(b)(1)(A)(ii) qualify for this limited exception to the debt-financed-real-property rules. §514(c)(9)(C)(i)-(iv). In particular, Congress did not extend the exception to teaching hospitals and medical research organizations described in §170(b)(1)(A)(iii). These organizations, along with the others listed in §170(b)(1)(A), must pay tax on income from debt-financed real property.

iii. Educational organizations

When Congress extended the debt-financed-real-property exception to §170(b)(1)(A)(ii) organizations in 1984, it did not legislate on a blank slate. Rather, the phrase “educational organization” under §170(b)(1)(A)(ii) had a robustly developed and long understood meaning dating back to the 1950s.

By way of brief background, any organization that provides some form of instruction on subjects useful and beneficial to the community can qualify as an “educational organization” exempt from tax under §501(c)(3); the instruction need not be in a formal setting with faculty, curriculum, and students. Reg. §1.501(c)(3)-1(d)(3)(ii), Ex. 4. Such organizations include museums, zoos, and symphony orchestras. Id. But educational organizations that provide formal instruction — the subcategory of educational organizations described in §170(b)(1)(A)(ii)5 — have received additional tax benefits (like the exemption in §514(c)(9)(C)(i)) over the years.

Congress first provided a benefit for educational organizations that satisfied the faculty/curriculum/students/place requirements in 1943, exempting them from filing annual returns. Revenue Act of 1943, Pub. L. 78-235, §117(a). It later exempted them from the so-called prohibited-transaction rules enacted in 1950. Revenue Act of 1950, Pub. L. 81-814, §331. In enacting these exemptions, Congress understood “educational organizations” that satisfy the faculty/curriculum/students/place requirements to be “schools and colleges with established faculties and student bodies in attendance.” S. Rep. 81-2375, at 33, 38 (1950). In 1954, Congress provided another benefit for this subset of educational organizations when it increased the permitted charitable-contribution deduction to 30% for contributions to (i) churches, (ii) educational organizations described in §503(b)(2),6 and (iii) hospitals. Internal Revenue Code of 1954, Pub. L. 83-591, §170(b)(1)(A)(i)-(iii).

Congress has never defined “educational organization” for tax purposes, relying instead on Treasury's definitions. Treasury, in turn, has always defined “educational organization” in terms of its primary function. In 1935, Treasury promulgated regulations defining “educational organization” as “one designed primarily for the improvement or development of the capabilities of the individual.” Regulations 86, Art. 101(6)-1 (1935); Regulations 91, Art. 12 (1936). Citing these regulations, the Supreme Court concluded that Treasury's “administrative definition” was “'highly relevant and material evidence of the probable general understanding'” of Congress when it drafted subsequent legislation regarding educational organizations. Better Business Bureau of Washington, D.C. v. United States, 326 U.S. 279, 286 (1945) (citation omitted).

In 1958, Treasury promulgated regulations that defined the subset of educational organizations referenced in §170(b)(1)(A)(ii).7 23 Fed. Reg. 1759 (1958). These regulations provided that “[a]n 'educational organization' within the meaning of section 170(b)(1)(A) is one whose primary function is the presentation of formal instruction and 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.” Reg. §1.170-2(b)(3). The regulations further provided that a §170(b)(1)(A)(ii) educational organization “does not include organizations engaged in both educational and noneducational activities unless the latter are merely incidental to and growing out of the educational activities.” Id. This regulatory definition was later upheld by the Tax Court. See Brundage v. Commissioner, 54 T.C. 1468, 1473-1474 (1970).

After the Tax Court upheld Treasury's definition of “educational organization” in 1970, Treasury re-codified that definition when it promulgated new regulations defining §170(b)(1)(A) organizations in 1973. 38 Fed. Reg. 12 (1973) (Reg. §1.170A-9(b)(1)). This is the regulation (now codified at Reg. §1.170A-9(c)(1)) at issue in the appeal. See 73 Fed. Reg. 52528, 52533 (2008) (redesignating §1.170A-9(b)(1) as §1.170A-9(c)(1)). The substance of the regulatory definition has not changed since first promulgated in 1958.

It has long been understood that “[f]or purposes of Section 170(b)(1)(A)(ii), the organization itself must satisfy the primary function test, and it will not be enough that a division or segment of the organization satisfies that test.” Taxation of Exempt Organizations ¶8.05, 2003 WL 1891141, at *5. Shortly after §170(b)(1)(A)(ii) was enacted in 1954, the IRS ruled that organizations (such as museums) that operate a school as one of its activities, but are primarily engaged in noninstructional activities, do not qualify as educational organizations within the meaning of that section, even if the school itself satisfies the faculty/curriculum/students/place requirements. Rev. Rul. 56-262, 1956-1 C.B. 131, 133; Rev. Rul. 58-433, 1958-2 C.B. 102; 23 Fed. Reg. at 1761. Certain excise-tax provisions in the Code that cross-reference §170(b)(1)(A)(ii) similarly draw a distinction between (i) “an educational organization described in section 170(b)(1)(A)(ii),” on the one hand, and (ii) an “organization described in section 501(c)(3)” that operates a “school” as one of its “activit[ies]” but is not itself an “educational organization described in section 170(b)(1)(A)(ii).” See §§4041(g) (flush language), 4221(d)(5), 4253(j).

As noted above, since enacting §170(b) in 1954, Congress has amended the statute numerous times. Congress, however, has never enacted legislation to change Treasury's criteria of educational organizations that qualify under §170(b)(1)(A)(ii). In 1982, shortly before Congress incorporated §170(b)(1)(A)(ii) into the tax exemption at issue in this case, the Joint Committee on Taxation cited Treasury's regulatory definition when it considered the scope of that provision. See Joint Committee on Taxation, Description of Tax Bills before House Committee on Ways and Means, JCS-22-82 at 16 (1982) (quoting Reg. §1.170A-9(b)(1)) (“1982 Joint Committee Report”).

C. Mayo

Mayo is a nonprofit corporation that is exempt from federal income tax under §501(c)(3). (Op/Add3.) Mayo (and its predecessor) was formed to act as the parent corporation of a very large medical organization that includes numerous hospitals, medical clinics, and research centers throughout the country. (Op/Add3; Appx170, 175-190.) In 2010, Mayo reorganized its operations. Prior to 2010, Mayo (formerly known as Mayo Foundation) provided parent-organization management services for its healthcare subsidiaries but did not directly provide patient care. (Appx21-22.) In 2010, the parent organization merged with one of its wholly owned hospital subsidiaries that directly provided patient care (Mayo Clinic Rochester). (Appx21-22.) After the merger, the resulting organization conducted both patient care and parent-corporation functions.8 (Appx21-22.)

Mayo has described its functions during the tax years at issue on its Form 990 returns.9 On its pre-merger returns, Mayo represented that it “conducts the usual activities associated with parent corporations in the tax-exempt healthcare field,” including the following:

  • “coordination of system-wide activities,”

  • “overall strategic planning,”

  • “overall policy development,”

  • “system-wide medical education and medical research planning,”

  • “capital and operating budgeting,”

  • “capital and resource allocation,”

  • “system-wide fund-raising,”

  • “management of an investment pool for its subsidiaries,”

  • “system-wide human resource planning,”

  • “legal compliance,”

  • “system-wide accounting and reporting,” and

  • “oversight of taxable entities within the system.”

(Appx197.) On its post-merger returns, Mayo represented that it conducted “a variety of programs in direct patient care” as well as its ongoing activities as the “parent organization of a multi-entity organization consisting of hospitals, clinics, health care providers and other entities providing health care related services.” (Appx208-209.)

In addition to providing extensive management services for its subsidiaries and (after 2009) healthcare for patients, Mayo also operated five schools through an unincorporated operating division, the Mayo Clinic College of Medicine, during the tax years at issue. (Appx21.) These schools maintained a regular faculty and curriculum and normally had an enrolled body of students in attendance at the place where the educational activities were carried on. (Op/Add7; Appx226.)

One of Mayo's main functions as a parent organization is managing the investment pool for its subsidiaries. (Appx197, 222.) In that capacity, Mayo received income from debt-financed real property during the years at issue. (Appx24-25, 221-223.) As noted above, Mayo was required to pay tax on such income unless it could demonstrate that it qualified for the narrow exception provided in §514(c)(9)(C) for retirement accounts, title-holding organizations, and educational organizations described in §170(b)(1)(A)(ii). Mayo claimed that it qualified as an organization described in §170(b)(1)(A)(ii). (Appx25.)

The IRS rejected Mayo's exemption claim. It determined that Mayo's primary function was not presenting formal instruction through its medical schools but was instead operating as the parent company of a healthcare system. (Appx226.) It further determined that the formal instruction offered by Mayo's schools was incidental to Mayo's primary function. (Id.) Accordingly, the IRS concluded that Mayo did not qualify as an “educational organization” within the meaning of §§170(b)(1)(A)(ii), 514(c)(9)(C)(i), and therefore owed UBIT on income received from its debt-financed real property. After paying the tax, Mayo sought a refund totaling approximately $11.5 million for the tax years at issue. (Op/Add4.)

D. District Court proceedings

After the IRS denied its refund claim, Mayo brought the instant refund suit. (Appx18-36.) The parties filed cross-motions for summary judgment regarding whether Mayo qualified as an educational organization under §170(b)(1)(A)(ii) so as to fit within the narrow exception provided in §514(c)(9)(C)(i).

Mayo argued that it qualified as an “educational organization” within the meaning of §170(b)(1)(A)(ii) because (in its view) (i) any organization that satisfied the faculty/curriculum/students/place requirements described in that statute qualified as an “educational organization” (no matter how incidental those functions were to its overall operations) and (ii) its schools satisfied those requirements. (Doc. 184 at 6-11.) It further argued that a qualifying organization need not be primarily engaged in educational activities so long as its operations “relat[e] to education.” (Id. at 12 (alteration in original).) Finally, it argued that Congress did not intend to limit the scope of §170(b)(1)(A)(ii) to organizations that primarily engaged in educational activities because it did not use principal-purpose language in §170(b)(1)(A)(ii) but used a similar phrase in the following subpart. (Doc. 184 at 14 (citing §170(b)(1)(A)(iii).) In this regard, §170(b)(1)(A)(iii) describes “an organization the principal purpose or functions of which are the providing of medical or hospital care or medical education or medical research.”

The Government did not dispute that Mayo satisfied §170(b)(1)(A)(ii)'s faculty/curriculum/students/place requirements through the schools that it operated.10 (Doc. 177 at 6.) The Government argued instead that §170(b)(1)(A)(ii) applies only to educational organizations that engage in such activities and not to any organization that, as an incidental function, maintains schools. (Doc. 177 at 6-10.) Citing the text of the statute, the Government argued (i) that the plain meaning of “educational organization” as used in §170(b)(1)(A)(ii) is an organization for which education is its particular purpose and primary function, and (ii) that Mayo's particular purpose and primary function is providing healthcare to patients (and managing subsidiaries that provide such care), not operating schools for students. (Id.)

The Government argued that Mayo's interpretation of the statute rendered the statutory qualifier “educational” superfluous (Doc. 199 at 22-23) and conflicted with the canon of statutory construction requiring tax exemptions to be narrowly construed (id. at 23-24). The Government further argued that Mayo's reliance on the principal-purpose language in §170(b)(1)(A)(iii) was misplaced. (Id. at 25.) As the Government explained, there was no need for Congress to use similar language in §170(b)(1)(A)(ii) because the required primacy of the organization's educational activities was manifest by qualifying the word “organization” with the word “educational.” (Id.)

The Government alternatively argued that, if the statute were ambiguous, the District Court should defer to Reg. §1.170A-9(c)(1), a regulatory definition that traces back to 1958. (Doc. 177 at 19-26.) As noted above, that regulation provides that an organization is not an “educational organization” within the meaning of §170(b)(1)(A)(ii) unless (i) its “primary function is the presentation of formal instruction” and (ii) its “noneducational activities” are “merely incidental to” its “educational activities.” The Government argued that the regulation's long-standing interpretation of the statute was reasonable, as evidenced by (among other things) the fact that Congress had amended §170 over a dozen times without altering Treasury's definition. (Id. at 22-24.) The Government further noted that the regulation's predecessor (Reg. §1.170-2(b)(3)) had been upheld almost a half-century earlier by the Tax Court. (Id. at 25.)

In support of its summary-judgment motion and in opposition to Mayo's, the Government provided extensive evidence that Mayo's particular purpose and primary function was providing (and managing subsidiaries that provided) health care to patients, not formal instruction to students as required by §170(b)(1)(A)(ii). (Appx40-103 (summarizing evidence).) E.g., Appx46, 79-80, 135, 145-149. The bulk of Mayo's revenue and expenses during the tax years at issue (2005-2007, 2010-2012) related to system-wide management and patient care rather than education.11 (Appx173-174.) For example, during 2010-2012, Mayo reported on its Form 990 returns that over 78% of its “Program Service Revenue” was “patient revenue” and that over 70% of its expenses was for patient care.12 (Appx174, 198-203, 216-218.) In sharp contrast, during those same years, Mayo reported on its Form 990 returns that less than 2% of its total revenue was “education revenue” and less than 8% of its expenses was for “education.” (Id.)

The District Court granted Mayo's motion for summary judgment and denied the Government's cross-motion. (Op/Add31.) It concluded that, during the tax years at issue, Mayo was an “educational organization” within the meaning of §170(b)(1)(A)(ii) and therefore was exempt from UBIT under §514(c)(9)(C)(i).

The District Court analyzed §170(b)(1)(A)(ii) and the regulation interpreting that section under the two-step framework set out in Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). (Op/Add7.) The court rejected both parties' interpretations of §170(b)(1)(A)(ii). (Op/Add22-25.) In this regard, the court rejected Mayo's contention that §170(b)(1)(A)(ii) “defines” the term “educational organization” as any organization that satisfies the faculty/curriculum/students/place requirements. (Op/Add20-22.) And the court rejected the Government's argument that “educational organization” as used in §170(b)(1)(A)(ii) unambiguously requires education to be the organization's primary purpose, reasoning that Congress did not use the term “primary” in §170(b)(1)(A)(ii), but did so in §170(b)(1)(A)(iii). (Op/Add10-11, 23-24, 28.)

The District Court determined that “the term 'educational organization' is ambiguous” (Op/Add21) and that “the extent to which an organization must engage in education to qualify as 'educational'” is an open “question” (Op/Add24). It nevertheless rejected Treasury's resolution of that question in Reg. §1.170A-9(c)(1). The court concluded that “the regulation's primary-function and merely-incidental requirements go too far” (Op/Add21) because “Congress unambiguously chose not to include a primary-function requirement” in §170(b)(1)(A)(ii) (Op/Add10). In so ruling, the court relied on the fact that §170(b)(1)(A)(ii) “contains no explicit primary-function requirement, but the equivalent of that very requirement appears in the very next subsection of the statute, §170(b)(1)(A)(iii).” (Op/Add10-11 (emphasis added).) For that same reason, the court further concluded that the regulatory requirement that an organization's noneducational activities be no more than “incidental” also violated the statute. (Op/Add16.)

After rejecting both parties' definition of “educational organization,” the District Court concluded that “Mayo qualifies as an 'educational organization' under §170(b)(1)(A)(ii) and is entitled to summary judgment on its refund claims.” (Op/Add30.) It did so, however, without first defining “educational organization” or addressing the Government's evidence that demonstrated that, at a minimum, there were disputed factual issues regarding the extent of Mayo's educational activities (Doc. 155).

SUMMARY OF ARGUMENT

All tax-exempt organizations that earn income from debt-financed real property must pay tax on that income unless they qualify for an exception, such as §514(c)(9)'s exemption limited to four specific organizations, including organizations described in §170(b)(1)(A)(ii). §514(c)(9)(C)(i). An organization is not described in §170(b)(1)(A)(ii) unless it is an “educational organization” that satisfies certain requirements regarding formal instruction. In this refund suit, the parties disputed whether Mayo Clinic qualified for this narrow exemption. Providing formal instruction to students is not Mayo's primary function. Rather, Mayo's primary function is providing, and managing subsidiaries that provide, healthcare to patients through its numerous hospitals, clinics, and medical research facilities. Although Mayo also operates several medical schools, that activity is incidental to its primary management and patient-care functions, producing in recent years less than 2% of its revenue and less than 8% of its expenses.

The District Court granted Mayo's motion for summary judgment and denied the Government's cross-motion. The court held that Mayo qualified as an “educational organization” for purposes of §§170(b)(1)(A)(ii), 514(c)(9)(C)(i) and thereby allowed Mayo to use its limited medical school activities to shelter from tax all of its debt-financed-real-property investments that benefit its entire hospital system. The court erred as a matter of law.

1. The plain language, context, and history of §§170(b)(1)(A)(ii), 514(c)(9)(C)(i) make clear that the tax exemption at issue is limited to organizations that primarily engage in formal instruction — essentially schools and like institutions — and does not apply to management or medical organizations like Mayo. That interpretation (i) reflects the ordinary meaning of the statutory text, (ii) has been endorsed by the Tax Court for half a century, (iii) is consistent with rulings by state courts interpreting similar state and local tax exemptions, (iv) implements binding precedent by interpreting a tax exemption narrowly, and (v) effectively has been blessed by Congress, which has cited Treasury's long-standing interpretation on a number of occasions but has never overruled it, despite numerous amendments to §170 and lobbying attempts by non-school organizations.

The District Court's contrary ruling rests on a single canon of statutory construction whereby the presence of a phrase in one provision and its absence in another is interpreted as revealing Congressional design. This canon, however, does not apply where (as here) the two statutory provisions being compared are worded or operate differently. Here, §170(b)(1)(A)(ii) contains a limiting adjective (“educational organization”) but the provision cited by the District Court — §170(b)(1)(A)(iii) — does not contain a comparable adjective modifying “organization.” That Congress expressly provided in §170(b)(1)(A)(iii) that organizations within that subpart must have a “principal purpose” of providing medical care does not mean that organizations within §170(b)(1)(A)(ii) need not have a principal purpose of providing education. That primacy requirement is evidenced in §170(b)(1)(A)(ii) by the qualifier “educational” — critical language ignored by the court.

2. Alternatively, even if the statute were ambiguous as the District Court concluded, the court should have deferred to Treasury's reasonable interpretation of §170(b)(1)(A)(ii) that has provided settled guidance for over 60 years. Regulation §1.170A-9(c)(1) requires the “primary function” of a §170(b)(1)(A)(ii) educational organization to be “the presentation of formal instruction” and permits only “noneducational activities” that “are merely incidental to” the “educational activities.” That regulatory definition follows naturally from the statutory language and is a practical method of distinguishing educational organizations from noneducational organizations. Moreover, Treasury's definition was endorsed by the Tax Court 50 years ago, has never been overruled by Congress (despite dozens of amendments to §170), and was expressly cited by Congress when explaining the operation of §170(b)(1)(A)(ii) shortly before it was incorporated by reference in §514(c)(9)(C)(i).

3. Even if — contrary to all indicia of statutory interpretation — the term “educational organization” did not require (or permit through regulation) the primacy of educational activity, the District Court nevertheless erred as a matter of law by ruling that Mayo qualifies as one without first (i) defining “educational organization” and (ii) applying that definition to the undisputed facts. At a minimum, a remand is required to resolve those issues.

ARGUMENT

The District Court erred in concluding that Mayo qualified under §514(c)(9)(C)(i) for a tax exemption that is limited to educational organizations described in §170(b)(1)(A)(ii)

Standard of review

“Summary judgment is reviewed de novo and is only proper if, viewing the evidence in the light most favorable to the non-moving party, there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law.” Bergman v. United States, 174 F.3d 928, 931 (8th Cir. 1999). As a taxpayer seeking a refund, Mayo bears the “burden” of proving that it qualifies for the tax exemption at issue. Armstrong v. United States, 366 F.3d 622, 625-626 (8th Cir. 2004).

A. Introduction

This case involves a tax-exempt organization that earned income on its debt-financed real property. All tax-exempt organizations must pay tax on such income unless they fall within an exception, including one of four narrow categories provided in §514(c)(9)(C)(i)-(iv). Mayo claims to qualify for this limited exemption under §514(c)(9)(C)(i) as an “educational organization” described in §170(b)(1)(A)(ii).

There is no dispute in this case that Mayo is the parent organization of a sprawling healthcare system that includes numerous hospitals, clinics, and medical research facilities in over 70 communities across the country. (Appx175-190.) Although it operates five medical schools through its unincorporated Mayo Clinic College of Medicine, Mayo did not — and could not — demonstrate that that activity is its primary function. Rather, the District Court held that §514(c)(9)(C)(i)'s limited exemption for §170(b)(1)(A)(ii) organizations does not require an organization's primary function to be educational and that any regulatory requirement in this regard was invalid.

By so ruling, the District Court expanded §514(c)(9)(C)(i)'s narrow exception to the debt-financed-property rules well beyond Congressional intent. Congress did not intend to exempt all organizations that provide any amount of education, as evidenced by its failure to exempt entities providing “medical education” described in §170(b)(1)(A)(iii), a category that Mayo claims to fall within (Appx219). Rather, it specifically exempted §170(b)(1)(A)(ii) educational organizations, a category limited to schools and other organizations primarily engaged in formal instruction. Allowing exempt organizations to circumvent the tax on debt-financed real property simply by conducting insubstantial educational activities effectively re-writes §514(c)(9)(C) (and §170(b)(1)(A)(ii)) and allows the exception provided therein to swallow the rule. This unprecedented ruling upsets well-settled law.

Until the District Court's ruling, it was well established that each subpart of §170(b)(1)(A) describes an organization by its “primary activity” or source of funding. Federal Tax Coordinator ¶K-3722 Primary Activity Requirement for 50% Charities (2019); 8 Mertens Law of Fed. Income Tax'n §31:72 (2019) (same). Indeed, this Court has so held in addressing whether an organization qualified as a church under §170(b)(1)(A)(i). Lutheran Social Serv. of Minn. v. United States, 758 F.2d 1283, 1287 (8th Cir. 1985) (holding that a church affiliate did not qualify as a “church” because its “primary activities consist of providing social services to the public at large irrespective of their religious beliefs”) (emphasis added).

As pertinent here, it has long been understood that to be an “educational organization” for purpose of exemption from the federal income tax, the organization must be “'primarily'” engaged in educational activities and only incidentally engaged in noneducational activities. Better Business Bureau, 326 U.S. at 286 (quoting Treasury regulations promulgated in 1935). With regard to the subset of educational organizations described in §170(b)(1)(A)(ii) — organizations that meet the faculty/curriculum/students/place requirements — the organization's “primary function” must be the “presentation of formal instruction,” as Treasury has provided by regulation since 1958. 23 Fed. Reg. at 1761. That regulatory definition was upheld by the Tax Court in 1970, Brundage, 54 T.C. at 1474, and Congress has never taken any step to overrule it, even though Congress has amended §170(b) numerous times over the years. See Add73-78, 135-136. Indeed, in 1982, two years before Congress enacted the tax exemption at issue here (§514(c)(9)(C)(i)), the Joint Committee expressly relied on Treasury's definition, stating that “[a]n educational organization is described in sec. 170(b)(1)(A)(ii) 'if its primary function is the presentation of formal instruction and it normally maintains a regular faculty and curriculum'” and students in attendance. 1982 Joint Committee Report at 16 & n.4 (quoting Reg. §1.170A-9(b)(1) (now codified at §1.170A-9(c)(1))).

As demonstrated below, the District Court's contrary interpretation of §§170(b)(1)(A)(ii), 514(c)(9)(C)(i) conflicts with the plain language, context, and history of those provisions. See, below, §B. The court's statutory analysis cannot withstand scrutiny because it relies on a single canon of construction that by its terms does not apply here.13 See, below, §C. Alternatively, to the extent that the meaning of “educational organization” as utilized in §170(b)(1)(A)(ii) is ambiguous, the court should have deferred to Treasury's long-standing reasonable construction of that term in Reg. §1.170A-9(c)(1). See, below, §D. Under either the statute or the regulation, the Government was entitled to summary judgment because Mayo did not — and could not — demonstrate that operating its schools was its primary function. But, at a minimum, the grant of summary judgment to Mayo must be reversed because the court concluded that “Mayo qualifies as an 'educational organization' under §170(b)(1)(A)(ii)” without defining that term or addressing the Government's evidence regarding Mayo's extensive noneducational activities. (Op/Add30.) See, below, §E.

B. The plain language, context, and history of §§170(b)(1)(A)(ii), 514(c)(9)(C)(i) demonstrate that organizations primarily involved in management activities and medical care (like Mayo) do not qualify as educational organizations within the meaning of those provisions

Statutory interpretation necessarily begins with the text of the statute, and “'the words of a statute must be read in their context and with a view to their place in the overall statutory scheme.'” Home Depot U.S.A., Inc. v. Jackson, 139 S. Ct. 1743, 1748 (2019) (citation omitted). Text cannot be deemed ambiguous — as it was here — unless the court first “determine[s], based on indicia like text, structure, history, and purpose, whether the [law] really has more than one reasonable meaning.” Kisor v. Wilkie, 139 S. Ct. 2400, 2423-2424 (2019). Although the District Court cited this principle (Op/Add9), the court failed to follow it. The plain language of §§170(b)(1)(A)(ii), 514(c)(9)(C)(i), as well as their context and history, evidence that Congress intended those provisions to describe a specific and narrow category of organizations that are primarily engaged in formal instruction, essentially schools and like institutions.

1. Plain language

Section 514(c)(9) provides an exemption from UBIT on debt-financed real property for four specific exempt entities, including as relevant here “an organization described in section 170(b)(1)(A)(ii).” §514(c)(9)(C)(i).14 By its plain terms, §514(c)(9)(C)(i) does not include all organizations that operate schools or otherwise engage in educational activity; it includes only organizations that qualify under §170(b)(1)(A)(ii). In particular, it does not reference teaching hospitals described in §170(b)(1)(A)(iii), even though such organizations provide “medical education.” The narrowness of §514(c)(9)(C)(i) is in keeping with the narrowness of the other “qualified organization” categories eligible for §514(c)(9)'s limited exemption from §511's UBIT (i.e., retirement accounts and title-holding companies). §514(c)(9)(C)(ii)-(iv).

Section 170(b)(1)(A)(ii), in turn, describes one of nine organizations that qualify for §170's preferential charitable-contribution deduction and is limited to:

(ii) 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.

§170(b)(1)(A)(ii). By its plain terms, §170(b)(1)(A)(ii) does not include every organization that satisfies the faculty/curriculum/students/place requirements. Rather, it includes only educational organizations that do so.

The term “educational organization” set out in §170(b)(1)(A)(ii) and incorporated by reference in §514(c)(9)(C)(i) is “undefined” in the Code and thus should be given “its ordinary meaning.” Taniguchi v. Kan Pac. Saipan, Ltd., 566 U.S. 560, 566 (2012). The phrase consists of a single adjective describing a single noun. Congress uses “adjectives” in statutes “to describe the present state of a thing.” Henson v. Santander Consumer USA Inc., 137 S. Ct. 1718, 1722 (2017). Where (as here) a noun (organization) is described by a single adjective (educational), that adjective generally describes the essence of the noun. E.g., United States v. Lara-Ruiz, 681 F.3d 914, 920 (8th Cir. 2012) (analyzing “the plain meaning of the phrase 'physical violence'” and concluding that the “adjective 'physical' in this phrase plainly refers to concrete bodily acts as opposed to, for example, intellectual or emotional acts”). For example, in the phrase “the green car,” green describes a car that is solely or primarily green; it would not accurately describe a car that is primarily non-green, such as a white car with a green stripe.

The same is true of the word “educational” in the phrase “educational organization.” “Educational” describes an organization that is solely or primarily educational; it does not accurately describe an organization that is primarily noneducational and only incidentally educational. Thus, if a noneducational organization satisfies the statute's faculty/curriculum/students/place requirements — such as a church offering Sunday school classes, or a tax-exempt public-law firm offering classes for new attorneys — that organization does not fall within the limited scope of §170(b)(1)(A)(ii) because it is not an educational organization.

This straightforward interpretation of §170(b)(1)(A)(ii) was long ago endorsed by the Tax Court, which observed that the statute does not “encompass an organization which is engaged in noneducational activity but which incidentally engages in some form of educational activity to further its major function.” Chapman v. Commissioner, 48 T.C. 358, 365 (1967) (holding that a “religious organization” did not qualify as an “educational organization” within the purview of §170(b)(1)(A)(ii), even though it “operates one small school and seeks to 'educate' local dentists” because those activities “are merely incidental activities” and not the organization's “major function”). Rather, the court later explained, §170(b)(1)(A)(ii)'s reference to “educational organization” is most naturally read as describing a school or like organization “'whose primary function is the presentation of formal instruction.'” Brundage, 54 T.C. at 1472, 1474 (citation omitted). As the court observed, §170(b)(1)(A)(ii) “could not reach very far, if at all, beyond schools, colleges, and universities in its coverage.” Id. at 1474.

Indeed, this common sense, ordinary reading of “educational organization” is supported by the long-standing definition of the similar phrase “educational institution.” Since 1933, Black's Law Dictionary has defined “educational institution” as a “school, seminary, college, or educational establishment, not necessarily a chartered institution.”15 Black's Law Dictionary at 642 (3d ed. 1933); accord Black's Law Dictionary at 604 (4th ed. 1951) (same); Garner, Black's Law Dictionary at 651 (11th ed. 2019) (same); cf. Nat'l Sec. Archive v. U.S. Dep't of Defense, 880 F.2d 1381, 1383 (D.C. Cir. 1989) (holding that the “ordinary meaning of the term 'educational institution' is 'school'”).

State courts have similarly interpreted the term “educational,” when used as a qualifier for state and local tax exemptions, to have a primacy requirement. E.g., Milwaukee Reg'l Med. Ctr., Inc. v. City of Wauwatosa, 735 N.W.2d 156, 159 (Wisc. 2007) (holding that the taxpayer did not qualify for a tax exemption limited to “educational association[s] because its primary purpose is not educational”); NRA Special Contribution Fund v. Bd. of Cnty. Comm'rs, 591 P.2d 672, 679 (N.M. Ct. App. 1978) (holding that a property tax exemption limited to property used for “educational purposes” required the “primary and substantial use of property that embraces systematic instruction”); Cedars of Lebanon Hosp. v. Los Angeles Cnty., 221 P.2d 31, 36 (Cal. 1950) (observing that, for purposes of a property tax exemption, “'the words 'educational institution,' used in the ordinary and commonly accepted sense, do not include a general hospital which has, as an incident to its main purpose and usefulness, an educational feature'”) (citation omitted). As the Wisconsin Supreme Court explained, to be an “educational association,” the organization must be “primarily devoted to educational purposes” and its “educational function” cannot be “merely incidental.” Milwaukee Reg'l Med. Ctr., 735 N.W.2d at 171.

The District Court never came to grips with the plain language of §170(b)(1)(A)(ii), noting only that it did not “explicitly” contain a primary-function test (Op/Add2). But the statute explicitly limits organizations qualifying under §170(b)(1)(A)(ii) to certain “educational” organizations and the court did not — and could not — explain how an organization could qualify as “educational” if it was not primarily engaged in educational activities. By ignoring the critical qualifier “educational,” the court's analysis “runs afoul of the 'cardinal principle' of interpretation that courts 'must give effect, if possible, to every clause and word of a statute.'” Loughrin v. United States, 573 U.S. 351, 358 (2014) (emphasis added) (citation omitted).

Indeed, the District Court provided no definition of “educational organization” whatsoever, allowing any organization to qualify for tax benefits under §170(b)(1)(A)(ii) — and the multiple provisions that incorporate §170(b)(1)(A)(ii) by reference, including the limited exemption provided in §514(c)(9)(C)(i) — so long as it maintains a faculty that offered a curriculum to students, even if its educational activity is nominal compared to its primary function. The court cited no case to support the anomalous notion that an “educational organization” includes organizations that are primarily engaged in noneducational activities. Instead, it relied on a single canon of construction (Op/Add28) that is inapplicable here, as demonstrated below (§C).

2. Context

The text of a statute should not be read in “isolation” but can only be understood in “context.” Union Pacific R.R. Co. v. Surface Transp. Bd., 863 F.3d 816, 825 (8th Cir. 2017). The context of the statutory provisions at issue further highlights the limited scope of “educational organization.”

a. The tax exemption provided in §514(c)(9) was specifically designed for a narrow class of tax-exempt organizations and as such should be narrowly construed

A critical contextual aspect of the statutory language at issue is that it delineates an exception from taxation. Tax deductions and exemptions are matters of legislative grace and, as such, must be “'construed narrowly.'” Mayo Found. for Med. Educ. & Res. v. United States, 562 U.S. 44, 59-60 (2011) (citation omitted); see W. Cent. Coop. v. United States, 758 F.2d 1269, 1271 (8th Cir. 1985) (holding that “tax exemptions are to be strictly construed against the taxpayer”). That canon of construction applies here. Section 514(c)(9)(C)(i) provides an exception to a tax (UBIT) that is generally applicable to all tax-exempt organizations. Of the dozens of types of tax-exempt organizations (see, e.g., §501(c)), Congress chose to exempt from UBIT only four types in §514(c)(9)(C). “'Where Congress explicitly enumerates certain exceptions . . ., additional exceptions are not to be implied, in the absence of evidence of a contrary legislative intent.'” DeBough v. Shulman, 799 F.3d 1210, 1215 (8th Cir. 2015) (quoting Andrus v. Glover Constr. Co., 446 U.S. 608, 616-617 (1980)).

This fundamental principle of tax law — cited by the Government during the summary-judgment proceedings (Doc. 199 at 23-24) — was inexplicably disregarded by the District Court. By allowing Mayo to take advantage of a tax exemption that was limited to educational organizations — even if its own educational activities were incidental to its noneducational activities — the court broadened a tax exemption in contradiction of binding precedent.

The context of the specific tax exemption provided in §514(c)(9) further supports a narrow reading of “educational organization.”

Section 514(b)(1) defines “debt-financed property” broadly to mean “any property which is held to produce income and with respect to which there is an acquisition indebtedness.” By adopting an expansive definition, Congress intended “to bring within its reach most income-producing property that is acquired or improved by an exempt organization with the use of borrowed funds.” Sw. Tex. Elec. Coop., Inc. v. Commissioner, 68 T.C.M. (CCH) 285 (1994), 1994 WL 395017, at *2.

Section 514(c)(9) provides an exception for debt-financed real property acquired by certain tax-exempt organizations. It was originally enacted as “a limited exception” for only “qualified retirement plans.” S. Rep. 96-1036, at 29 (1980); see Miscellaneous Revenue Act of 1980, Pub. L. 96-605, §110(a). Congress subsequently expanded the exception slightly to include four specific “qualified organizations.” §514(c)(9)(C)(i)-(iv). Tellingly, only one of the nine different types of tax-exempt organizations listed in §170(b)(1)(A) — educational organizations described in §170(b)(1)(A)(ii) — is deemed a qualified organization for purpose of the limited tax exemption provided in §514(c)(9). Congress specifically chose not to provide an exception from the debt-financed income rules for every other category of organization described in §170(b)(1)(A).

Of particular significance, the debt-financed-real-property exception does not extend to medical organizations described in §170(b)(1)(A)(iii), viz., “organization[s] the principal purpose or functions of which are the providing of medical or hospital care or medical education or medical research, if the organization is a hospital, or . . . a medical research organization directly engaged in the continuous active conduct of medical research in conjunction with a hospital.” This disparate exclusion is strong proof that Congress deliberately chose not to extend the exception to organizations, like Mayo, that engage in some education but are primarily medical, and not educational, organizations.

The District Court rejected this point, stating that “an organization may qualify under more than one subsection of §170(b)(1)(A)” and that “[n]either §514 nor §170 explicitly prevent an organization from qualifying under multiple paragraphs of (b)(1)(A).” (Op/Add26.) Not only does this reasoning fail to grasp that §514(c)(9) is a narrowly tailored exception limited to four specific categories of tax-exempt organizations, but analogous reasoning was rejected by the Supreme Court in Better Business Bureau.

The question there was whether the Better Business Bureau, a tax-exempt business league, qualified for a social-security tax exemption that was limited to corporations “'organized and operated exclusively for . . . scientific . . . or educational purposes.'” 326 U.S. at 282 (quoting the social-security statute) (omissions in original). Better Business Bureau claimed to qualify as “educational.” In rejecting that claim, the Supreme Court observed that the social-security tax exemption under consideration “was drawn almost verbatim” from the Code provision “dealing with exemptions from income tax.” Id. at 284. The Court stated, “[s]ignificantly . . . Congress did not write into the Social Security Act certain other exemptions embodied in the income tax provisions, especially the exemption in Section 101(7) of 'business leagues, chambers of commerce, real-estate boards, or boards of trade.'” Id. Noting that the Better Business Bureau “closely resembles such organizations,” the Court concluded that Congress's “manifest desire to include only [educational and scientific organizations] within the” scope of the social-security tax exemption “prevents us from construing the language of that section to include an organization like petitioner.” Id. at 285.

So too here. Congress drew from §170(b)(1)(A), which lists nine different types of tax-exempt organizations, in deciding which organizations to exempt from the debt-financed-real-property rules of §514(c). It did not incorporate an exception for §170(b)(1)(A)(iii) medical organizations that “closely resemble[ ]” Mayo. As the Supreme Court did in Better Business Bureau, the District Court should have given effect to Congress's “manifest desire” to extend the §514(c)(9) exception to only one of the several organizations described in §170(b)(1)(A): educational organizations.16

b. Congress has expressly provided exemptions for noneducational organizations that engage in some educational activities but did not do so in §514(c)(9)(C)(i)

If it had intended for the debt-financed-real-property exception to apply to any tax-exempt organization that operated schools, Congress could have so provided. It chose not to. When Congress wishes to provide a tax benefit for organizations that engage in educational activities — but are not themselves educational organizations — “it left little doubt in the matter” and states so clearly. Henson, 137 S. Ct. at 1723. Numerous Code provisions evidence that “educational organization[s]” as described in §170(b)(1)(A)(ii) must engage primarily in educational activities.

Looking first to §170(b)(1)(A) itself, the language in §170(b)(1)(A)(iii) demonstrates the limited scope of §170(b)(1)(A)(ii). Section 170(b)(1)(A)(iii) applies to certain organizations whose “principal purpose or functions” is to provide “medical or hospital care or medical education or medical research.” As noted above (n.3), “medical education” was added to this category in 1969. That addition to §170(b)(1)(A)(iii) would have been unnecessary if §170(b)(1)(A)(ii) already included an organization that provided any amount of medical education. Interpreting §170(b)(1)(A)(ii) to cover all organizations that provide any quantum of educational instruction (even if the educational activity is insubstantial) renders “medical education” in §170(b)(1)(A)(iii) “superfluous,” in contravention of “'one of the most basic interpretive canons.'” Rubin v. Islamic Republic of Iran, 138 S. Ct. 816, 824-825 (2018) (citation omitted).

Provisions outside §170 that cross-reference §170(b)(1)(A)(ii) further illustrate this point. For example, in §4041(g), Congress provided an excise-tax exemption for both (i) “an educational organization described in section 170(b)(1)(A)(ii)” and (ii) “a school operated as an activity of an organization described in section 501(c)(3)” that satisfies the faculty/curriculum/students/place requirements. There would be no need for this second category if §170(b)(1)(A)(ii) already covered any organization that operates a school that satisfies the faculty/curriculum/students/place requirements, even if such operations are not its primary activity. Similarly worded exemptions are provided in the excise-tax provisions of §§4221(d)(5), 4253(j). To give meaning to the additional language in §§4041(g), 4221(d)(5), 4253(j), one must interpret §170(b)(1)(A)(ii) to apply to organizations that do more than merely operate a school as “an activity.” These provisions undermine the District Court's extension of the tax exemption in §514(c)(9)(C)(i) to Mayo merely because it operated schools as one of its activities. (Op/Add30.) See also §119(d)(4)(A)(i)-(ii) (drawing a distinction between an “institution described in section 170(b)(1)(A)(ii)” and an “academic health center”).17

The District Court dismissed these related statutory provisions, stating that they “appear in comparatively distant sections of the Internal Revenue Code.” (Op/Add28.) To evidence Congressional intent, however, the language at issue need not be in the exact same section of the Code. For example, in Commissioner v. Estate of Sanders, 834 F.3d 1269, 1277 (11th Cir. 2016), the Eleventh Circuit held that “Congress did not contemplate [a] good faith exception” in §932 of the Code based on the fact that, elsewhere in the Code, “Congress has in other situations explicitly granted good faith allowances,” such as §6501(g)(2). That §932 and §6501 were — to use the District Court's terminology — “distant” (Op/Add28) was irrelevant.

The Internal Revenue Code is a massive statute, but when Congress uses the same language in different provisions of it, courts ordinarily accord them the same meaning. E.g., United States v. Detroit Med. Ctr., 833 F.3d 671, 676 (6th Cir. 2016). Although §170 and §§4041(g), 4221(d)(5), 4253(j) may be pages apart in the Code, Congress deliberately brought them together by cross-referencing §170(b)(1)(A)(ii) in each one. And although the District Court supposed these latter exemptions to have “different purposes” (Op/Add28), the court failed to appreciate that, in each instance, Congress was trying to extend an exemption to a certain type or types of organizations, just as it did in §514(c)(9)(C)(i).

c. Congress has amended §170 over a dozen times but has never altered Treasury's long-standing, consistent interpretation of “educational organization” as requiring the primacy of educational activities

Further supporting the Government's interpretation of §170(b)(1)(A)(ii) is its undisturbed longevity, a point emphasized by the Government (Doc. 177 at 22-24) and ignored by the District Court.

When Congress enacted the current version of §170(b)(1)(A)(ii) in 1969, it did so against the backdrop of Treasury's long-standing definitions of (i) “educational organization” and (ii) the subset of “educational organization[s]” that satisfy the faculty/curriculum/students/place requirements. These “administrative definition[s] [are] 'highly relevant and material evidence of the probable general understanding of the times and of the opinions of men who probably were active in the drafting of the statute.'” Better Business Bureau, 326 U.S. at 286 (citation omitted).

Treasury's definition of “educational organization” predates the enactment of §170(b)(1)(A)(ii)'s predecessors. The language that now appears in §170(b)(1)(A)(ii) was first enacted in 1943, in the context of providing an exemption from the filing requirements generally applicable to tax-exempt organizations. See, above, at pp.8-9. At that time, Treasury's regulations required organizations claiming to be “educational organization[s]” to be “primarily” engaged in educational activities. Regulations 86, Art. 101(6)-1 (1935). Congress later enacted §170(b)(1)(A)(ii) and its predecessor provision (§503(b)(2) of the 1954 Code) against this administrative definition. See, above, p.9.

Regulations interpreting the subset of educational organizations described in §170(b)(1)(A)(ii) have been in effect for more than 60 years. Shortly after §170(b)(1)(A)(ii) was enacted in 1954, Treasury promulgated regulations defining the subset of educational organizations that satisfy the faculty/curriculum/students/place requirements of that provision. 23 Fed. Reg. 1759, 1761 (1958) (promulgated as §1.170-2(b)(3)). Those regulations provided that an “'educational organization' within the meaning of section 170(b)(1)(A)” was limited to organizations whose “primary function is the presentation of formal instruction.” Id. This regulatory definition (now codified at §1.170A-9(c)(1)) has remained unchanged for over 60 years. That the “IRS's reading of the [phrase “educational organization”] as it appears in [§170(b)(1)(A)(ii)] has remained constant” for decades is an important consideration for interpreting the statute. BNSF Ry. Co. v. Loos, 139 S. Ct. 893, 898-899 (2019) (adopting statutory interpretation that was “[i]n line with [prior precedent] and the IRS's long held construction”).

Moreover, Congress has repeatedly amended §170(b) over the past 60 years but has never amended the scope of §170(b)(1)(A)(ii) or otherwise overruled Treasury's interpretation. E.g., PATH Act of 2015, P.L. 114-113, §331(a), Div. Q; Tax Reform Act of 1969, P.L. 91-172, §201(a)(1); Revenue Act of 1964, P.L. 88-272, §209(a); see Add73-78, 135-136 (listing over a dozen amendments). “[W]hen Congress revisits a statute giving rise to a longstanding administrative interpretation without pertinent change, the 'congressional failure to revise or repeal the agency's interpretation is persuasive evidence that the interpretation is the one intended by Congress.'” CFTC v. Schor, 478 U.S. 833, 846 (1986) (citation omitted). When Congress last amended §170(b)(1)(A)(ii), in 1969, it did so against the backdrop of Treasury's 1958 regulations requiring §170(b)(1)(A)(ii) “educational organizations” to be primarily engaged in formal instruction. Tax Reform Act of 1969, Pub. L. 91-172, §201(a)(1)(B). That amendment, however, did not alter the substantive description of educational organization in any way; it merely moved the description of “educational organization” from then §503(b)(2) to §170(b)(1)(A)(ii). And despite repeated substantive amendments to other parts of §170(b)(1)(A), the language in §170(b)(1)(A)(ii) remains undisturbed. This long period of legislative inaction — even after a taxpayer unsuccessfully challenged Reg. §1.170-2(b)(3) in Tax Court in 1970 (Brundage) — is compelling evidence that Congress intends to limit “educational organizations” to organizations primarily engaged in formal instruction of students.

Indeed, far from repealing the agency's interpretation, Congress has expressly relied on it. See S. Rep. 99-146, at 370 n.4 (1985) (quoting Reg. §1.170A-9(b)(1) (now codified at §1.170A-9(c)(1))). For example, when Congress considered whether to amend the limitation on charitable deductions for corporations, the Joint Committee cited Treasury's regulations, stating that “[a]n educational organization is described in sec. 170(b)(1)(A)(ii) 'if its primary function is the presentation of formal instruction and it normally maintains a regular faculty and curriculum'” and students in attendance. 1982 Joint Committee Report at 16 n.4 (quoting Reg. §1.170A-9(b)(1)). That Congress was aware of Treasury's interpretation in 1982, and took no steps to override it, is compelling evidence of Congress's intent when it enacted §514(c)(9)(C)(i) two years later in 1984.

3. Legislative history

Nothing in the legislative history supports the District Court's extension of §514(c)(9)(C)(i)'s exemption for educational organizations described in §170(b)(1)(A)(ii) to organizations primarily involved in noneducational activities. To the contrary, the legislative history to both provisions bolsters the most natural reading of the statutory text and confirms that Congress understood that “educational organizations” as described in §170(b)(1)(A)(ii) and its predecessor provisions to be a narrow category of organizations primarily engaged in formal instruction such as colleges and other schools.

Starting with the history to §514(c)(9)(C)(i), prior to 1984, only “qualified pension trust[s]” were exempt from paying UBIT on income derived from debt-financed real property. See Joint Committee on Taxation, General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984, JCS-41-84 at 1150 (1984). When Congress extended this limited exception to include “educational organizations” described in §170(b)(1)(A)(ii), it did so on the understanding that such organizations were “schools.” Hearing on S. 927, S. 1183, and H.R. 2163 Before the Subcomm. on Taxation and Debt Management of the S. Comm. on Finance (1983-1984 Misc. Tax Bills–V), 98th Cong. (1st Sess.) 189 (1983). The sponsor of the amendment justified this extension on the basis that “colleges and schools have the same need as pension plans to diversify their investments and maximize their investment income” and that “schools . . . are unable to buy significant real estate without borrowing money.” Id. (emphasis added). Other proponents of the amendment similarly emphasized that “[h]igher education and private elementary and secondary education . . . are in a financial crisis.” Id. at 220. In its opposition to the amendment, the Treasury Department likewise expressed its understanding that Congress was enacting an exception for “schools,” stating that it did “not agree that the existence of a special exception for pension trusts justifies a similar exception for schools.” Id. at 89 (emphasis added).

The history to §170(b)(1)(A)(ii) likewise demonstrates that Congress equated educational organizations described within that section to be schools and similar institutions. Section §170(b)(1)(A)(ii) was enacted in 1954, when Congress increased the permitted deduction for charitable contributions to 30% for contributions to (i) churches, (ii) certain educational organizations, and (iii) hospitals. See, above, p.9. In the reports accompanying this enactment, Congress stressed the limited scope of these three categories. See H.R. Rep. 83-1337, at 25, A53 (1954); S. Rep. 83-1622, at 207 (1954). When discussing §170(b)(1)(A)(ii)'s “educational organization” category, Congress cited only a “university” and a “college” as examples. H.R. Rep. 83-1337, at A54; S. Rep. 83-1622, at 208.

As part of the same 1954 Act that enacted §170(b)(1)(A)(ii), Congress also enacted another exemption defined in terms of an “educational” entity, former §151(e) (now codified at §§151(c), 152(f)). Internal Revenue Code of 1954, Pub. L. 83-591, §151(e). As originally enacted, §151 allowed a personal exemption for a taxpayer's child who was (among other things) a student at an “educational institution.” “Educational institution” was described in terms almost identical to the language at issue here as “an educational institution which normally maintains a regular faculty and curriculum and normally has a regularly organized body of students in attendance at the place where its educational activities are carried on.” Id. The House and Senate Reports emphasized the limited scope of “educational institution,” stressing that the “term 'educational institution' means a school,” and that it specifically “means primary and secondary schools, preparatory schools, colleges, universities, normal schools, technical and mechanical schools and the like, but does not include noneducational institutions, correspondence schools, on the job training, night schools and the like.” H.R. Rep. 83-1337, at 41A; S. Rep. 83-1622, at 193.

Ten years later, Congress amended §170(b)(1)(A) by adding categories eligible for the higher deduction percentage. Revenue Act of 1964, P.L. 88-272 §209(a) (amending §170(b)(1)(A) to add subparts (v) and (vi)). During the hearings on this legislation, the American Association of Museums lobbied Congress to enlarge the scope of “educational organization” so that museums would be eligible for the benefit provided in §170(b)(1)(A)(ii). Hearings before the House of Representatives Committee on Ways and Means, Part 3, 88th Cong. 1655-1656 (Feb. 26, March 4-8, 11 & 12, 1963) (citing Rev. Rul. 56-26218). Congress declined to do so. See also H.R. Rep. 88-749, at 52 (1963) (observing that, under “present law,” the “additional 10-percent deduction [provided in §170(b)(1)(A)] is available for contributions to churches, schools, hospitals, certain medical research organizations, and certain organizations affiliated with State colleges or universities”) (emphasis added).

The history to the current version of §170(b)(1)(A)(ii) further confirms the limited scope of “educational organization.” As part of the Tax Reform Act of 1969, Congress moved the description of “educational organization” from then §503(b)(2) to §170(b)(1)(A)(ii). Tax Reform Act of 1969, Pub. L. 91-172, §201(a)(1)(B). The House Report referred to organizations described in §170(b)(1)(A)(ii) as “schools.” H.R. Rep. 91-413 (Part 1), at 40 (1969). During the hearings on this legislation, a number of organizations lobbied Congress to expand the term “educational organization” as used in §170(b)(1)(A)(ii) so as to “include not only schools, colleges, and universities, but also an 'organization primarily engaged in fundamental research'” that provided “related instruction to individuals” studying at “colleges or universities” or engaged in “postdoctoral training.” Hearing before the Senate Finance Committee, 91st Cong. 5586 (October 1969) (statement by the Carnegie Institute). Again, Congress refused to do so.

Although the District Court dismissed this extensive history as “not helpful” (Op/Add29), Congress's (i) consistent reference to schools when referring to §170(b)(1)(A)(ii) educational organizations, and (ii) its repeated refusal to expand the category to include non-school institutions such as museums or the Carnegie Institute, undermine the court's judicial expansion of the limited tax exemption provided in §514(c)(9)(C)(i). See Brundage, 54 T.C. at 1473-1474.

C. The District Court disregarded the plain language, context, and history of §§170(b)(1)(A)(ii), 514(c)(9)(C)(i) and relied instead on an inapt canon of construction

Ignoring the explicit language of §514(c)(9)(C)(i) and §170(b)(1)(A)(ii), as well as their context and history, the District Court instead relied on the language in a different subpart, §170(b)(1)(A)(iii), which describes certain medical organizations. In this regard, the court observed that “Section 170(b)(1)(A)(ii) contains no explicit primary-function requirement, but the equivalent of that very requirement appears in the very next subsection of the statute, §170(b)(1)(A)(iii).” (Op/Add10-11 (emphasis added).) Citing this single rule of “construction” (Op/Add11, 28), the court concluded that Congress intended to preclude such a requirement in §170(b)(1)(A)(ii). The court's analysis cannot withstand scrutiny.

The canon of construction cited by the District Court (the Russello presumption) does not apply where (as here) the two statutory provisions being compared are worded or “operate differently.Sunoco, Inc. v. United States, 908 F.3d 710, 717 (Fed. Cir. 2018) (declining to apply presumption where the statutory provisions were not sufficiently similar). As the Supreme Court has emphasized, the “Russello presumption — that the presence of a phrase in one provision and its absence in another reveals Congress' design — grows weaker with each difference in the formulation of the provisions under inspection.” City of Columbus v. Ours Garage & Wrecker Serv., Inc., 536 U.S. 424, 435–436 (2002). Before applying a presumption that relies on Congressional silence, the Court must first examine whether the omitted language is the “sole difference” in the two provisions being compared. Id.

Here, the reference to “principal function” — present in §170(b)(1)(A)(iii) but not in §170(b)(1)(A)(ii) — is not the sole difference between the two provisions. Rather, the term “organization” in §170(b)(1)(A)(ii) is qualified by a single adjective (“educational”) whereas the term “organization” in §170(b)(1)(A)(iii) is not. That difference is critical and forecloses any reliance on the Russello presumption. The single adjective utilized in §170(b)(1)(A)(ii) — “educational” — describes the organization's primary function. See, above, §B.1. The District Court overlooked the fact that §170(b)(1)(A)(ii) and (iii) are syntactically different, thus rendering the Russello presumption inapt.

Each subpart of §170(b)(1)(A) describes an organization by its “primary activity” or source of funding. Federal Tax Coordinator ¶K-3722 Primary Activity Requirement for 50% Charities (2019). What the District Court failed to appreciate is that there are different ways to describe an organization that serves a primary function. One can use a primary-function test (as was done in §170(b)(1)(A)(iii)) or one can use specific nouns or adjectives that produce the same result (as was done in §170(b)(1)(A)(ii)). The first organization listed in §170(b)(1)(A) — churches — illustrates this point. Section 170(b)(1)(A)(i) is limited to “a church or a convention or association of churches.” That subsection does not define church or explicitly contain a primary-function test. Nevertheless, this Court looks to an organization's “primary” activities to determine whether it qualifies as a church. Lutheran Social Serv., 758 F.2d at 1287 (holding that an organization did not qualify as a “church” because its “primary activities consist of providing social services to the public at large irrespective of their religious beliefs”) (emphasis added). As the Court correctly understood, that primacy requirement was implicit in the notion of a church; there was no need for explicit statutory language in this regard. So, too, with “educational organization” in §170(b)(1)(A)(ii).

Indeed, when Congress and commentators summarize the category of organizations described in §170(b)(1)(A)(iii), they utilize an adjective-noun phrase similar to “educational organization” rather than the statute's principal-purpose/function description. E.g., Joint Committee on Taxation, Technical Explanation of the PATH Act of 2015, JCX-144-15 at 195 (2015) (describing §170(b)(1)(A)(iii) organizations as “hospitals and other medical organizations”); 9 Mertens Law of Fed. Income Tax'n §34:11 (2019) (describing §170(b)(1)(A)(iii) organizations as “hospitals and medical research organizations”). As these sources recognize, an adjective-noun phrase and the primary-function description can be interchangeable.

Thus, this is not a situation where “nothing” in the statute supports the Government's interpretation, as was the case in the precedent cited by the District Court (Op/Add11). Dean v. United States, 137 S. Ct. 1170, 1176-1177 (2017). Here, the statutory qualifier — “educational” — supports the Government's interpretation. If an organization primarily engages in noneducational activities, then as a matter of text and common sense, it is not an educational organization. To utilize the example posited above, a white car with a green stripe is not accurately described as a green car. The Government's interpretation does not require the Court to “read an additional limitation into” the statute, id. at 1177; rather, it only requires the Court to give meaning to the limitation that Congress wrote into the statute.

In short, the District Court misread the statute in applying the Russello presumption. There is no “silence” in §170(b)(1)(A)(ii). The court concluded otherwise only by ignoring the explicit qualifier (“educational”) in §170(b)(1)(A)(ii). Given that qualifier, there was no need to provide additional qualifying language, such as that utilized in §170(b)(1)(A)(iii).

D. Alternatively, the Treasury Department's longstanding construction of “educational organization” is reasonable and warrants deference

Even if there were ambiguity in the term “educational organization” as described in §170(b)(1)(A)(ii) and incorporated by reference in §514(c)(9)(C)(i), Treasury's interpretation of that term would warrant deference under the principles of Chevron, which “apply with full force in the tax context.” Mayo, 562 U.S. at 55. Like the regulation validated in Mayo, the regulation here “easily satisfies the second step of Chevron” because it is a “'reasonable interpretation'” of the statute at issue. Id. at 58 (citation omitted).

Treasury — at a minimum — acted reasonably in concluding that to qualify under §170(b)(1)(A)(ii) as an “educational organization” that regularly maintains a faculty, curriculum, and students in attendance, the organization's “primary function” had to be “the presentation of formal instruction” and the organization could not be engaged in “noneducational activities unless [they] are merely incidental to the educational activities.” Reg. §1.170A-9(c)(1). The language of the regulation is suggested by the language of the statute. As explained above (§B.1), the qualifier “educational” evidences that the essence of the organization is educational, and thus any noneducational activities would not be primary, but only incidental. The additional statutory requirements listed in §170(b)(1)(A)(ii) regarding faculty, curriculum, and students in attendance describe formal instruction. Thus, it is reasonable for the regulatory definition of “educational organization” to include a requirement that the organization's primary function be the presentation of formal instruction and a requirement that the organization's noneducational activities not be more than incidental to its educational activities. To rule otherwise would disregard the plain language of the statute.

The District Court's sole basis for invalidating the regulation was its prior conclusion that the Russello principle forecloses a primary-function test in the context of §170(b)(1)(A)(ii). As explained above (§C), that thin reed cannot bear the weight the court placed on it. The court identified no other inconsistency between Reg. §1.170A-9(c)(1) and the text or history of §170(b)(1)(A)(ii). That the regulation looks to an organization's primary function, whereas the statute does not use that “explicit” term (as the court observed (Op/Add10)) is irrelevant. It is reasonable to conclude that the explicit terms utilized in the statute —“educational” and the express faculty/curriculum/students/place requirements — permit the regulatory requirements.

The Supreme Court's analysis in Mayo supports the regulation here. In that case, Mayo sought to benefit from an employment-tax exemption that was limited to students, arguing that its medical residents qualified as students. The Court addressed a Treasury regulation interpreting the statutory term “student” and requiring that the “'educational aspect of the relationship between the employer and the employee'” be “'predominant.'” Mayo, 562 U.S. at 58 (quoting the regulation). The Court concluded that the regulation was a permissible interpretation of the statute, even though the statute did not contain an explicit “predominance” requirement, because the regulation was a “sensible way” to “distinguish between” students and nonstudents. Id. at 59. Similarly, here, Treasury's primary-function and merely-incidental tests are a sensible way to distinguish between an educational organization and a noneducational organization that satisfies §170(b)(1)(A)(ii)'s other requirements. See also Bingler v. Johnson, 394 U.S. 741, 746 (1969) (upholding Treasury regulation that defined statutory term “scholarship” in terms of who “primarily” benefitted, the grantor or the grantee); Ussery v. United States, 296 F.2d 582, 585 (5th Cir. 1961) (same).

This Court's interpretation of §170(b)(1)(A)(i) — the “church” category — further illustrates this point. To provide guidance for defining a church for tax purposes, the IRS has developed a 14-factor test, including whether the organization holds “regular religious services.” Spiritual Outreach Soc'y v. Commissioner, 927 F.2d 335, 338 (8th Cir. 1991). That test was upheld by this Court, which found it “helpful in deciding what constitutes a church” and a reasonable “interpretation of [the] statute.” Id. at 339 & n.4. That §170(b)(1)(A)(i) does not explicitly require a church to “regularly” conduct certain religious activities in no way undermined the test developed by the IRS and applied by this Court. This was true even though another provision in §170(b)(1)(A) — §170(b)(1)(A)(ii) — does explicitly require an educational organization to “regularly” conduct certain educational activities.

Several Tax Court decisions support Treasury's interpretation. Almost 50 years ago, the Tax Court addressed whether Treasury's interpretation of §170(b)(1)(A)(ii) was valid and concluded that it was.

Brundage, 54 T.C. at 1474. There, the taxpayers sought the benefit of the higher percentage deduction allowed in §170(b)(1)(A)(ii) for gifts provided to the City of San Francisco for use in a museum. The museum had an education department and offered courses, but its galleries were far better attended than its class offerings. The taxpayers challenged Reg. §1.170-2(b)(3) (Reg. §1.170A-9(c)(1)'s predecessor) as invalid, on the theory that requiring a primary function of presenting formal instruction went beyond the plain language of §170(b)(1)(A)(ii). The court upheld the regulation as “neither unreasonable nor plainly inconsistent with the statutory language” and history.19Id. at 1474. As the court observed, the statutory language “could not reach very far, if at all, beyond schools, colleges, and universities in its coverage.” See also Chapman, 48 T.C. at 365 (concluding that “[w]e do not believe that [former §503(b)(2) as incorporated by §170(b)(1)(A)(ii)] was intended to encompass an organization which is engaged in noneducational activity but which incidentally engages in some form of educational activity to further its major function”). These decisions support the reasonableness of the “primary function” and “merely incidental” glosses contained in Reg. §1.170A-9(c)(1).

Other factors highlight the reasonableness of the regulation. Treasury's interpretation implements the Supreme Court's “instruct[ions] that 'exemptions from taxation are to be construed narrowly,'” a factor emphasized in Mayo. 562 U.S. at 59-60 (citation omitted). Moreover, Treasury's interpretation is also consistent with the legislative history, which cited schools, colleges, and universities — but no other institutions — as educational organizations described in §170(b)(1)(A)(ii). Finally, Treasury's interpretation has been unwavering for over 60 years. The language now codified at Reg. §1.170A-9(c)(1) was first promulgated in 1958 and has (in all material respects) remained constant since that time. “'Treasury regulations and interpretations long continued without substantial change, applying to unamended or substantially reenacted statutes, are deemed to have received congressional approval and have the effect of law.'” United States v. Cleveland Indians Baseball Co., 532 U.S. 200, 220 (2001) (quoting Cottage Sav. Ass'n v. Commissioner, 499 U.S. 554, 561 (1991)).

The District Court erred in ignoring the longevity of Treasury's regulatory interpretation. As the Supreme Court has emphasized, “agency interpretations that are of long standing come before [the Court] with a certain credential of reasonableness, since it is rare that error would long persist.” Smiley v. Citibank (S.D.), N.A., 517 U.S. 735, 740 (1996). Since enacting it in 1954, Congress has revised §170 multiple times but has never disturbed §170(b)(1)(A)(ii)'s description of an “educational organization” or Treasury's long-standing interpretation of that term, even when asked to do so by non-school institutions that would benefit from an amendment. See, above, §B.3. Indeed, Congress has expressly relied on Treasury's definition of “educational organization” when considering whether to amend portions of the Code that incorporate §170(b)(1)(A)(ii).20 That Congress has chosen to not override Treasury's §170(b)(1)(A)(ii) regulation — and has expressly relied on it — further supports reversing the District Court's determination that the regulation conflicts with Congressional intent.

As demonstrated above, under both the statute and its implementing regulation, an organization cannot qualify as an “educational organization” described in §170(b)(1)(A)(ii) unless it is primarily engaged in formal instruction. Mayo has not — and cannot — demonstrate that it is primarily engaged in formal instruction. To the contrary, Mayo is primarily engaged in providing, and supporting affiliates that provide, medical care, as the Government's summary-judgment evidence demonstrated. This Court should reverse the District Court's denial of summary judgment to the Government and enter a judgment in favor of the Government.

E. In any event, the District Court erred in granting summary judgment to Mayo

At all events, this Court should reverse the District Court's grant of summary judgment to Mayo. That the court rejected the Government's interpretation of §170(b)(1)(A)(ii) and its defense of Reg. §1.170A-9(c)(1) does not mean — as the court assumed (Op/Add30) — that Mayo was entitled to summary judgment; it means only that the Government was not entitled to summary judgment.

Mayo is not entitled to summary judgment unless it qualifies as an “educational organization” for purposes of §§170(b)(1)(A)(ii), 514(c)(9)(C)(i), viewing the facts in a light most favorable to the Government. But here, the District Court expressly rejected Mayo's interpretation of §170(b)(1)(A)(ii), including its argument that an organization qualifies under that subpart so long as it satisfies the faculty/curriculum/students/place requirements. (Op/Add20-21, 24-25.) Nor did the court define “educational organization” and apply it to the undisputed facts. To the contrary, after rejecting both parties' analyses of the statutory term “educational organization,” the court observed that “the extent to which an organization must engage in education to qualify as 'educational'” is an open “question.” (Op/Add24.) The court never answered that question.

By granting Mayo a refund without first defining “educational organization,” the court erred as a matter of law. As a taxpayer seeking a refund, Mayo bears the “burden” of proving that it qualifies for the tax exemption at issue. Armstrong, 366 F.3d at 625-625. It is not enough — as the District Court evidently assumed (Op/Add30) — that the Government “concedes” that Mayo satisfied some of the requirements set out in §170(b)(1)(A)(ii). Mayo had to demonstrate that it satisfied all of the requirements, including the “educational” requirement. It did not do so here.

The District Court compounded that error by granting Mayo a refund in the summary-judgment context without first addressing the Government's extensive opposition to Mayo's purported material undisputed facts (Doc. 196) or viewing those facts in the light most favorable to the non-moving party. Bergman, 174 F.3d at 934 (reversing grant of summary judgment to taxpayer where the relevant facts were in dispute). The court did not so view — or even address — Mayo's summary-judgment evidence. Nor did the court address the Government's extensive evidence regarding Mayo's noneducational purposes and functions. (Appx40-103 (summarizing evidence).)

The damage done by the District Court's decision goes well beyond granting one taxpayer a multi-million dollar refund without first requiring it to prove that it was entitled to the refund. By holding that §170(b)(1)(A)(ii) was ambiguous, and then invalidating the regulation designed to resolve any ambiguity, the court created a void. It swept away 60 years of settled law without providing any substitute guidance for other taxpayers to follow. And it did so for a tax provision that is incorporated by reference throughout the Code and establishes the limits for numerous tax exemptions.

The District Court's speculation that invalidating the “primary-purpose and merely-incidental requirements will not have a substantial impact” on tax enforcement (Op/Add20 n.6) is baseless. Many noneducational organizations may offer formal instruction but still not be an educational organization. For example, a homeless shelter may offer child-rearing classes or interviewing skills to its clientele. A public-interest law firm may offer formal training sessions to its staff. A church may offer Sunday school for the children of its parishioners.

Or a museum may offer art history classes. Indeed, such organizations have lobbied Congress for decades, asking that it expand the scope of §170(b)(1)(A)(ii) so as to include all organizations that offer formal instruction. Congress has repeatedly declined to do so. By granting Mayo's similar request by judicial fiat, the District Court opened the way for other organizations to claim multiple tax benefits that Congress never intended for them to claim, including the extremely narrow tax exemption outlined in §514(c)(9)(C)(i).

CONCLUSION

The judgment of the District Court should be reversed and judgment should be entered for the United States, or alternatively, the case should be remanded.

Respectfully submitted,

RICHARD E. ZUCKERMAN
Principal Deputy Assistant Attorney
General

TRAVIS A. GREAVES

Deputy Assistant Attorney General


/S/ JUDITH A. HAGLEY
FRANCESCA UGOLINI (202) 514-3361
JUDITH A. HAGLEY (202) 514-8126
Attorneys
Tax Division
Department of Justice
Post Office Box 502
Washington, D.C. 20044

Of Counsel:
ERICA H. MACDONALD
United States Attorney

JANUARY 2020 

FOOTNOTES

1Unless otherwise indicated, “§” refers to the Internal Revenue Code (26 U.S.C.). “Reg. §” refers to Treasury regulations (26 C.F.R.).

2Mayo filed an unopposed motion to amend the judgment, requesting that the District Court specify the refund amount. (Doc. 214.) The court granted that motion. (Doc. 216.) The amended judgment was issued on August 30, 2019, but stated that it was entered “as of August 7, 2019, the date on which judgment was originally entered.” (Add33.)

3The hospital category was expanded in 1956 to include medical research organizations and again in 1969 to include medical education organizations. See Pub. L. 84-1022, §1 (1956); Tax Reform Act of 1969, Pub. L. 91-172, §201(a)(1) (1969).

4During the tax years at issue, there were eight categories. See Add61-62. In 2015, the “agricultural research organization” category was added to §170(b)(1)(A). Protecting Americans from Tax Hikes (PATH) Act of 2015, P.L. 114-113, §331(a) (codified at §170(b)(1)(A)(ix)).

5Section 170(b)(1)(A)(ii) describes “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.” (These qualifications regarding formal instruction are referred to herein as the faculty/curriculum/students/place requirements.)

6Section 503(b)(2) described “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.” In 1969, the language describing the educational organizations that qualified for this benefit was moved from §503(b)(2) to §170(b)(1)(A)(ii), where it remains today. See Tax Reform Act of 1969, Pub. L. 91-172, §201(a)(1)(B). Although the section numbers have changed over the years, the substance of the description of this subset of educational organizations has remained unchanged since first enacted in 1943.

7These regulations had been subject to public notice and comment. See 21 Fed. Reg. 5867 (1956) (proposed regulations).

8The reorganization is irrelevant to the legal issues on appeal.

9An IRS Form 990 is an information return that most tax-exempt organizations must file annually.

10If the schools were separately incorporated, they would likely qualify as educational organizations under §170(b)(1)(A)(ii) and the income that they earned from debt-financed real property would be exempt from UBIT. But that question is not before the Court because Mayo has not structured its organization in this manner.

11Whether Mayo qualifies as an “educational organization” is not at issue for 2003. That year is relevant only because Mayo seeks a refund for a net operating loss from 2005 carried back to 2003. (Appx23.)

12As the instructions to Form 990 explain, “program service” is the organization's activity that accomplishes its exempt purpose. (Form 990 instructions are available at www.irs.gov.)

13The canon of “statutory construction” applied by the District Court (Op/Add11-13) is sometimes referred to as the Russello presumption (named after Russello v. United States, 464 U.S. 16, 23 (1983)). Under that canon, Congressional design is inferred when specific language is used in one provision but not in another. The canon does not apply where (as here) there are other differences between the two provisions being compared, as explained further below (§C).

14Section 514(c)(9)(C)(i) also includes certain “affiliated support organizations” of §170(b)(1)(A)(ii) organizations but Mayo does not claim to be an affiliated support organization.

15In the context of §170(b)(1)(A)(ii), Congress uses “organization” and “institution” interchangeably. E.g., §119(d)(4)(A)(i) (referring to “an institution described in section 170(b)(1)(A)(ii)”).

16The District Court misplaced its reliance (Op/Add26) on two revenue rulings in which the IRS recognized that an organization meeting the terms of subsection (vi) of §170(b)(1)(A) — i.e., a publicly funded organization — can also meet the terms of one of the other subsections that describe organizations based on activity. For example, a publicly funded organization under (vi) can also be a hospital under (iii) (Rev. Rul. 76-416, 1976-2 C.B. 57) or a church under (i) (Rev. Rul. 78-95, 1978-1 C.B. 71). That is because (vi) deals with source of funding whereas (i) and (iii) deal with primary activity. These rulings do not support the court's inferential leap that Congress's extension of the debt-financed-real-property exemption to §170(b)(1)(A)(ii) organizations can properly be extended to other organizations described in §170(b)(1)(A). See Andrus, 446 U.S. at 616-617.

17Mayo claims to be an “academic medical center.” (Op/Add24; Doc. 185 at 15.)

18As noted above (p.12), the IRS ruled in Revenue Ruling 56-262 that organizations like museums that operate schools do not qualify as §170(b)(1)(A)(ii) educational organizations unless the operation of the school is their primary function.

19The Tax Court allowed the taxpayers the higher deduction, but only on the theory that the museum was an adjunct of San Francisco's school system and hence qualified under §170(b)(1)(A)(ii) on that ground.

20E.g., S. Rep. 99-146, at 370 n.4 (1985) (“An educational organization is described in sec. 170(b)(1)(A)(ii) 'if its primary function is the presentation of formal instruction and it 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. The term includes institutions such as primary, secondary, preparatory, or high schools, and colleges and universities,' and includes both public and private schools, Treas. Reg. sec. 1.170A-9(b)(1).”).

END FOOTNOTES

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