DOJ Seeks to Overturn Mayo Clinic’s Win in UBIT Refund Case

C. Mayo

Mayo is a nonprofit corporation that is exempt from federal income tax because it is described in §501(c)(3). (App. 154-155; R.Doc. 331/Op., at 10-11; Add. 10-11.) Mayo (and its predecessor) was formed to act as the parent corporation of a very large healthcare organization that includes more than 70 hospitals, medical clinics, and research centers throughout the country. (Id.; App. 82-85; R.Doc. 298, at 1-2.) In 2010, Mayo reorganized its operations. (App. 154-155; R.Doc. 331/Op., at 10-11; Add. 10-11.) 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. (Id.) In 2010, the parent organization merged with one of its wholly owned hospital subsidiaries that directly provided patient care (Mayo Clinic Rochester). (Id.) After the merger, the resulting organization conducted both patient care and parent-corporation functions.⁵ (App. 38-39; R.Doc. 1, at 4-5.)

Mayo has described its functions in its application for tax exemption and annual information returns. (App. 154; R.Doc. 331/Op., at 10; Add. 10; App. 97-108; R.Doc. 298, at 1-2.) Prior to the merger, Mayo represented that it “conduct[s] the usual activities associated with parent corporations in the tax-exempt healthcare field,” including coordinating system-wide activities, accounting, fund-raising, human resources, budget planning, legal compliance, and managing the “investment pool for its subsidiaries.” (App. 154; R.Doc. 331/Op., at 10; Add. 10.) After the merger, Mayo represented that it conducts “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.” (App. 101; R.Doc. 298, at 1-2.)

In addition to providing extensive management services for its healthcare 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. (App. 167; R.Doc. 331/Op., at 23; Add. 23.) 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. (App. 168; R.Doc. 331/Op., at 24; Add. 24.)

Although Mayo's “main focus is on treating patients” (App. 207; R.Doc. 331/Op., at 63; Add. 63), its world-renowned medical care is provided in an “'integrated environment of practice, research, and education'” (App. 199; R.Doc. 331/Op., at 55; Add. 55 (quoting Mayo report)). As an academic medical center⁶ (App. 176; R.Doc. 331/Op., at 32; Add. 32), Mayo integrates its extensive clinical practice with its educational and research functions (App. 194-198; R.Doc. 331/Op., at 50-54; Add. 50-54). The large number of patients seen at Mayo's health clinics and hospitals provide training and research opportunities for Mayo's staff and students. (App. 153; R.Doc. 331/Op., at 9; Add. 9.) Mayo integrates the education provided to students through its schools with the clinical practice provided at its hospitals and other healthcare subsidiaries in order to provide “outstanding healthcare” to its patients. (App. 120; R.Doc. 316, at 149; see App. 205; R.Doc. 331/Op., at 61; Add. 61.)

D. Mayo's tax-refund claims

One of Mayo's functions as a parent organization is managing the investment pool for its numerous healthcare subsidiaries. (App. 154; R.Doc. 331/Op., at 10; Add. 10.) In that capacity, Mayo received income from debt-financed real property during the years at issue. (App. 41-42; R.Doc. 1, at 7-8.) 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 the latter. (Id.)

The IRS rejected Mayo's claim. It concluded that Mayo did not qualify as an “educational organization” within the meaning of §170(b)(1)(A)(ii) and §514(c)(9)(C)(i), and therefore owed UBIT on income received from its debt-financed real property. (App. 39-41; R.Doc. 1, at 5-7.) After paying the tax, Mayo filed refund claims totaling approximately $11.5 million for the tax years at issue. (App. 41; R.Doc. 1, at 7.)

E. District Court summary-judgment proceedings

After the IRS denied its refund claims, Mayo brought the instant refund suit. (App. 35-53; R.Doc. 1, at 1-19.) The parties cross-moved 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).

The Government did not dispute that Mayo's medical schools satisfied §170(b)(1)(A)(ii)'s faculty/curriculum/students/place requirements. (R.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 a non-primary function, maintains schools. (Id. at 6-18.) 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 predominant purpose and function, and (ii) that Mayo's predominant purpose and function was providing healthcare to patients (and managing subsidiaries that provide such care), not operating schools for students. (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. (R.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.” Reg. §1.170A-9(c)(1).

The District Court granted Mayo's motion for summary judgment and denied the Government's cross-motion. (R.Doc. 210, at 31.) 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 qualified for §514(c)(9)(C)(i)'s UBIT exception.

The District Court determined that “the term 'educational organization' is ambiguous” (R.Doc. 210, at 21) and that “the extent to which an organization must engage in education to qualify as 'educational'” is an open “question” (id. at 24). It nevertheless rejected Treasury's resolution of that question in Reg. §1.170A-9(c)(1), invalidating “the regulation's primary-function and merely-incidental requirements.” (Id. at 21.)

After rejecting both parties' definitions 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.” (R.Doc. 210, at 30.) 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 (R.Doc. 155).

F. Prior appeal

On appeal, this Court agreed with the Government that the District Court had erred in invalidating the regulation's primary-function and merely-incidental tests. The Court held that the regulation validly “interpret[ed] the statute as requiring that a qualifying organization's primary purpose be 'educational' and that its noneducational activities be merely incidental to that primary purpose.” Mayo, 997 F.3d at 800. The Court explained that the overarching statutory test for tax-exempt status under §501(c)(3) is whether an organization is “organized and operated exclusively” for a charitable purpose, and that the “settled” interpretation of that phrase is an organization whose “'primary purpose' was one or more qualifying charitable uses, and whose noncharitable activities were 'merely incidental' to those purposes.” Id. And, as the Court further explained, “Congress limited the charitable tax advantage in §170(b)(1)(A)(ii) to only one of the charitable uses enumerated in §501(c)(3)” — “educational” — and, therefore, to come within the scope of §170(b)(1)(A)(ii), an organization must be organized and operated exclusively for “educational” purposes. Id.

In so ruling, the Court relied on the Better Business Bureau test for educational organizations. Mayo, 997 F.3d at 796, 802. The Court also held that Reg. §1.170A-9(c)(1)'s “primary function” and “merely incidental” requirements had a “valid role in interpreting the statute.” Id. at 799-800. The Court determined, however, that Reg. §1.170A-9(c)(1) went too far in requiring the organization's primary function to be the presentation of “formal” instruction and invalidated that aspect of the regulation. Id. at 799-800. In so ruling, the Court held that “the proper frame of reference” for the meaning of “educational” for purposes of §170(b)(1)(A)(ii) is the “broad view of a tax-exempt educational purpose” reflected in the regulation defining “educational” for purposes of §501(c)(3). Id. at 800. Under that regulation, educational included all types of instruction, whether formal or not. Reg. §1.501(c)(3)-1(d)(3).

The Court remanded the case and directed the District Court to determine whether Mayo was organized and operated “'exclusively' for educational rather than other purposes” by (i) determining the meaning of “primary” and (ii) balancing Mayo's “educational [purpose] against [its] noneducational [purposes]” to determine whether its educational purpose was primary and its noneducational purposes merely incidental. 997 F.3d at 802. The Court observed that “Mayo's status as an academic medical center means that its medical and educational purposes — and the operations supporting those functions — are inextricably intertwined.” Id. But it further observed that “[s]eparating out the wheat from the chaff — the educational from the noneducational — while difficult, is not impossible.” Id. Quoting Better Business Bureau, the Court emphasized that “'the presence of a single non-educational purpose, if substantial in nature, will destroy the [UBIT] exemption regardless of the number or importance of truly educational purposes.'” Id. (alteration in original).

G. District Court proceedings on remand

On remand, the Government argued that, during the refund years, Mayo was not an educational organization because its noneducational purpose (i.e., patient care) was substantial. (App. 70, 74-75; R.Doc. 258, at 14, 18-19.) The Government further argued that, for purposes of determining whether Mayo's primary purpose was educational, “primary” means “of first importance.” (App. 71-74; R.Doc. 258, at 15-18.) Mayo, for its part, argued that “primary” means merely “substantial” in the context here. (App. 135-139; R.Doc. 323, at 101-105.) It further argued that it did not operate for a substantial noneducational purpose because, even though its activities served “other purposes (e.g., healthcare)” (App. 138; R.Doc. 323, at 104), they also served an educational purpose and therefore none of its activities were “solely” noneducational — they all served both educational and noneducational (healthcare) purposes (App. 55-56; R.Doc. 248, at 2, 18).

A trial was held to determine the extent of Mayo's educational and noneducational purposes and activities. During the years at issue, Mayo's Articles of Incorporation stated that it was organized for several tax-exempt purposes: “charitable, educational, and scientific purposes.” (App. 160; R.Doc. 331/Op., at 16; Add. 16.) According to those Articles, Mayo conducted the “practice of medicine” and “medical research,” in addition to “medical education.” (App. 161; R.Doc. 331/Op., at 17; Add. 17.) Its Bylaws likewise emphasized all three purposes: “care of the sick,” “medical education for better trained doctors,” and “research.” (App. 162; R.Doc. 331/Op., at 18; Add. 18.) This “three-part mission” also animated Mayo's governance documents. (App. 164; R.Doc. 331/Op., at 20; Add. 20.) As Mayo explained in its Mission Statement: “Mayo will provide the best care to every patient every day through integrated clinical practice, education and research.” (App. 166; R.Doc. 331/Op., at 22; Add. 22.)

Mayo's trial witnesses echoed its Mission Statement. Mayo's former Chief Legal Officer (Mr. Oviatt) testified that Mayo's “primary value” was “the needs of the patient come first.” (App. 110; R.Doc. 315, at 48.) The former dean of Mayo's Graduate Medical Education School (Dr. Warner) likewise testified that “the needs of the patient is the primary value.” (App. 111-113; R.Doc. 315, at 62, 198-199.) Mayo's former CEO (Dr. Noseworthy) concurred, testifying that Mayo's “primary value” was providing “the best care” to “patients.”⁷ (App. 115-116, 118; R.Doc. 316, at 76-77, 89.)

The District Court concluded that Mayo was an “educational organization” during the refund years. That conclusion was based on the court's determinations that (i) Mayo's “primary purpose” was “educational” (App. 219-229; R.Doc. 331/Op., at 75-85; Add. 75-85), and (ii) Mayo had “no substantial noneducational purpose” (App. 229-230; R.Doc. 331/Op., at 85-86; Add. 85-86).

With regard to its determination of Mayo's “primary purpose,” the District Court agreed with Mayo that “primary” means “substantial,” rather than “most important.” (App. 219-220; R.Doc. 331/Op., at 75-76; Add. 75-76.) It thus held that an organization is organized and operated “exclusively” as an educational organization as long as it has a substantial educational purpose, even if education is not its “most important” purpose. (Id.) The court concluded that Mayo was organized and operated exclusively for educational purposes because its Articles of Incorporation, Bylaws, governance documents, Mission Statement, day-to-day operations, and finances all reflected its “substantial educational purposes.” (App. 225-227; R.Doc. 331/Op., at 81-83; Add. 81-83.) In so concluding, the court relied on the fact that Mayo's “education, research, and clinical practice are inextricably intertwined” and that the “health care” provided by Mayo to patients also served an “educational function.”⁸ (App. 228-229; R.Doc. 331/Op., at 84-85; Add. 84-85.)

With regard to its determination that Mayo had no substantial noneducational purpose, the District Court acknowledged that Mayo's patient-care function “is certainly substantial.” (App. 233; R.Doc. 331/Op., at 89; Add. 89.) But, in the court's view, the fact that Mayo's substantial patient care furthers “noneducational purposes” did not preclude the activity from being “exclusively” educational. (App. 232; R.Doc. 331/Op., at 88; Add. 88.) As the court explained, the relevant inquiry (in its view) was not whether a particular activity had “some purpose in addition to education” but whether that activity had “no educational purpose” and was substantial. (Id.) In other words, the court continued, “[i]f a particular activity furthers both educational and noneducational purposes, that activity may still be 'exclusively' educational for purposes of applying the UBIT [exception].” (Id.) The court concluded that the “substantial” patient-care purpose served by Mayo's extensive clinical practice did not disqualify it from being organized and operated exclusively for educational purposes because that practice also served Mayo's educational purpose. (Id.)

The District Court concluded that Mayo qualified as an educational organization under §170(b)(1)(A)(ii) for purposes of the UBIT exception provided in §514(c)(9)(C) and granted Mayo's refund claims totaling $11,501,621, plus statutory interest. (App. 242; R.Doc. 331/Op., at 98; Add. 98.) After Mayo moved for clarification, the court amended the judgment to grant Mayo a specific amount of interest. (R.Doc. 358.)

SUMMARY OF ARGUMENT

Mayo is a world-renowned healthcare organization that operates an extensive network of hospitals and other medical facilities throughout the United States. For purposes of claiming a narrow exception from the unrelated-business-income tax on the income it received from debt-financed real property, Mayo claimed to be an educational organization described in §170(b)(1)(A)(ii) during the tax years at issue. In a prior appeal, this Court held that Mayo could not qualify for this exception if (i) its educational purpose was not “primary” or (ii) its “other purposes” were “substantial.” Mayo, 997 F.3d at 802.

On remand, the District Court concluded that Mayo qualified for the limited exception, even though it found that Mayo was organized and operated to both educate students and care for patients and that its patient-care purpose was substantial. In so concluding, the court made two legal errors; the correction of either requires reversal and entry of judgment for the United States.

1. Mayo cannot qualify as an educational organization if it also had a noneducational purpose that was substantial. The Supreme Court made this clear decades ago in Better Business Bureau, as the courts — including this Court in the prior Mayo appeal — have confirmed. See Mayo, 997 F.3d at 802 (stating that the “'presence of a single non-educational purpose, if substantial in nature, will destroy the [UBIT] exemption'” that Mayo claimed) (quoting Better Bus. Bureau, 326 U.S. at 283) (alteration by this Court). And the governing Treasury regulation, which this Court upheld in relevant part in the prior appeal, states that an educational organization “does not include organizations engaged in both educational and noneducational activities unless the latter are merely incidental to the educational activities.” Reg. §1.170A-9(c)(1).

Applying these legal standards to the District Court's findings, it is clear that Mayo was not an “educational organization” because it operated a nationwide network of hospitals for the benefit of its patients and that substantial patient-care purpose was not merely incidental to its educational operations. The court's justification for sidestepping the Better Business Bureau test and the regulation cannot withstand scrutiny. The court held that if an activity like patient care served dual purposes — one qualifying (educational) and one nonqualifying (medical) — the nonqualifying purpose could not destroy the qualification, even if (as here) it is substantial. But this reasoning conflicts with Better Business Bureau, this Court's prior directive, and every court that has addressed the issue.

2. The District Court further erred as a matter of law in determining that an organization's “primary” purpose is education as long as education is a “substantial” purpose. As the Government argued below, the weight of authority establishes that “primary” in this context means “of first importance” (i.e., predominant) and not merely substantial. The District Court's contrary determination conflicts with the language of the relevant statutes and regulations, applicable case law, and dictionary definitions of “primary.” It also erases the distinction Congress made between educational organizations (described in §170(b)(1)(A)(ii)) and organizations like teaching hospitals and academic medical centers (described in §170(b)(1)(A)(iii)) that operate substantially, but not predominantly, for educational purposes.

ARGUMENT

The District Court erred in concluding that Mayo qualifies for a UBIT tax exception that is limited to educational organizations

Standard of review

The Government challenges two legal rulings made by the District Court: (i) that an organization can be an “educational organization” even if it has substantial noneducational purposes and activities, and (ii) that “primary” means merely “substantial” for purposes of §170(b)(1)(A)(ii) and §501(c)(3). Both legal conclusions are reviewed de novo. Medtronic, Inc. & Consol. Subs. v. Commissioner, 900 F.3d 610, 613 (8th Cir. 2018). As a taxpayer seeking a refund, Mayo bears the burden of proving that it qualifies for the tax exception at issue. Armstrong v. United States, 366 F.3d 622, 625-626 (8th Cir. 2004).

A. Introduction

This case involves an organization described in §501(c)(3) that earned income on its debt-financed real property. All §501(c)(3) organizations must pay tax on such income unless they fall within an exception, such as one of four narrow exceptions provided in §514(c)(9)(C)(i)-(iv). Mayo claims to qualify for the exception provided in §514(c)(9)(C)(i) for an “educational organization” described in §170(b)(1)(A)(ii).

There is no dispute in this case that Mayo — as an academic medical center — operates for both “medical and educational purposes,” as this Court previously recognized. Mayo, 997 F.3d at 802. Mayo is the parent organization of a sprawling healthcare system that includes numerous hospitals, clinics, and medical research facilities in more than 70 communities across the country. (App. 154-156; R.Doc. 331/Op., at 10-12; Add. 10-12; App. 82-85; R.Doc. 298, at 1-2.) Although it operates five medical schools through its unincorporated Mayo Clinic College of Medicine, Mayo also provides, and supports subsidiaries that provide, substantial amounts of patient care. (App. 233; R.Doc. 331/Op., at 89; Add. 89.)

This Court held in the prior appeal that, to qualify for the tax exception at issue, Mayo must establish that (i) its “primary purpose” was educational and (ii) its noneducational purposes were not substantial and were “merely incidental” to its primary purpose of educating medical students. Mayo, 997 F.3d at 799-800 (validating Reg. §1.170A-9(c)(1) to the extent that it imposed these two requirements). Under that standard, “'the presence of a single non-educational purpose, if substantial in nature, will destroy [Mayo's refund claim] regardless of the number or importance of truly educational purposes.'” Id. at 802. (quoting Better Bus. Bureau, 326 U.S. at 283). Accordingly, this Court directed the District Court to “balance” Mayo's “educational” purpose against its “noneducational” purposes and determine (i) whether its educational purpose was “primary” and (ii) whether its “other purposes” were “substantial.” Id. The District Court failed in both tasks.

As demonstrated below, Mayo did not qualify as an educational organization described in §170(b)(1)(A)(ii) during the years at issue because providing medical care to patients was one of Mayo's “substantial” purposes, as the District Court's findings establish. See, below, §B.1. The court's contrary determination is based on the legally erroneous assumption that, if an activity like patient care served dual purposes — one qualifying (educational) and one nonqualifying (medical) — the nonqualifying purpose could not destroy the qualification, even if (as here) it is substantial. See, below, §B.2. Moreover, the court further erred as a matter of law in concluding that Mayo's educational purpose need only be substantial, and not predominant, to qualify it as an “educational organization.” See, below, §C.1-2.

B. The District Court erred in concluding that Mayo was an “educational organization” despite its substantial noneducational (i.e., medical) purpose and activities

As noted above, this Court previously held that both the Better Business Bureau test and Reg. §1.170A-9(c)(1)'s merely-incidental limitation apply to determine whether an organization is an “educational organization” under §170(b)(1)(A)(ii) and §514(c)(9)(C)(i). Mayo, 997 F.3d at 799-800, 802. Under Better Business Bureau, if Mayo had “'a single non-educational purpose'” during the tax years at issue that was “'substantial in nature,'” then it would not qualify for the limited UBIT tax exception, “'regardless of the number or importance of truly educational purposes'” that also animated Mayo's activities. Id. (quoting Better Business Bureau). The same result is reached under the regulation's “merely incidental” limitation. See Reg. §1.170A-9(c)(1) (stating that an educational organization “does not include organizations engaged in both educational and noneducational activities unless the latter are merely incidental to the educational activities”).

Under Better Business Bureau and the regulation, being organized and operated for multiple purposes — one qualifying and one not — does not necessarily preclude qualification as long as the nonqualifying purpose is insubstantial. As this Court explained, the medical purpose served by Mayo's system-wide parent activities and its nationwide hospital operations would not preclude it from being an educational organization as long as that purpose was “'merely incidental to,'” and only a “'means of furthering,'” its “educational purposes.” Mayo, 997 F.3d at 795, 800 (citation omitted). Thus, the fact that “some of [Mayo's] educational purposes and functions also fall within other charitable categories — and vice versa — would not disqualify it from being an educational organization.” Id. at 802. But if its noneducational purpose was “'substantial,'” Mayo would be so disqualified. Id. at 802 (quoting Better Business Bureau). As the Court summed up, the “balance is educational against noneducational.” Id.

1. The District Court's findings establish that Mayo is disqualified from being an “educational organization” because it was organized and operated for the substantial purpose of providing medical care to patients

The findings made by the District Court on remand demonstrate that Mayo was organized and operated for the substantial noneducational purpose of providing medical care to patients. In this regard, the court found:

• Mayo's founders aimed to achieve “the highest quality patient care” (App. 147; R.Doc. 331/Op., at 3; Add. 3);

• Mayo's “field” was “tax-exempt healthcare” (App. 154; R.Doc. 331/Op., at 10; Add. 10);

• Mayo's Articles of Incorporation stated that it was organized to (among other things) “conduct the practice of medicine” (App. 161; R.Doc. 331/Op., at 17; Add. 17);

• Mayo's Mission Statement provided that it was dedicated to providing “the best care to every patient” (App. 166; R.Doc. 331/Op., at 22; Add. 22);

• Mayo had more than 1 million patient registrations in 2010 (App. 176; R.Doc. 331/Op., at 32; Add. 32);

• Mayo spent $2 billion on patient care in 2007 (App. 186; R.Doc. 331/Op., at 42; Add. 42);

• Mayo's Board of Trustees characterized its “primary business model” as “destination medical care” (App. 199; R.Doc. 331/Op., at 55; Add. 55);

• Mayo envisioned itself as “the premier preferred global healthcare provider” (App. 201; R.Doc. 331/Op., at 57; Add. 57);

• Mayo's executives represented that “Mayo Clinic's main focus is on treating patients” and that its “primary mission” was “patient care” (App. 206-207; R.Doc. 331/Op., at 62-63; Add. 62-63); and

• Patient care was a “substantial” purpose of Mayo's operations (App. 233; R.Doc. 331/Op., at 89; Add. 89).

Those findings demonstrate that patient care was a substantial purpose at Mayo and not merely incidental to its educational activities. Because Mayo was organized and operated to provide medical care to patients (App. 161, 199; R.Doc. 331/Op., at 17, 55; Add. 17, 55), and that purpose was “substantial” (App. 233; R.Doc. 331/Op., at 89; Add. 89), Mayo is disqualified from being an educational organization under the Better Business Bureau test recited by this Court in the first appeal. See Mayo, 997 F.3d at 802.

For similar reasons, Mayo is also disqualified by Reg. §1.170A-9(c)(1)'s “merely incidental” limitation. A noneducational activity or purpose is “merely incidental” to an educational activity or purpose where it is only a “'means of furthering'” its “educational purposes.” Mayo, 997 F.3d at 795, 800 (citation omitted). Pursuing a nonqualifying purpose as an “end in itself rather than merely a means of accomplishing [a qualifying] goal” precludes qualification. Senior Citizens Stores, Inc. v. United States, 602 F.2d 711, 714 (5th Cir. 1979). Mayo's patient-care activities were not merely incidental to its educational purpose because patient care was an “end in itself” for Mayo, not merely a means of furthering its educational goals. The District Court did not — and could not — find that Mayo treated patients merely as a means of training doctors. To the contrary, the court's findings establish that Mayo's caring for patients was a substantial goal in itself (App. 161, 166, 199, 206-207; R.Doc. 331/Op., at 17, 22, 55, 62-63; Add. 17, 22, 55, 62-63) — an activity that served a “medical or hospital care” purpose, §170(b)(1)(A)(iii). Those findings are confirmed by multiple sources, including Mayo's Articles of Incorporation (“practice of medicine”) (App. 161; R.Doc. 331/Op., at 17; Add. 17), its Mission Statement (“best care to every patient”) (App. 166; R.Doc. 331/Op., at 22; Add. 22), and testimony by its executives that serving patients — and providing them the best care possible — was Mayo's “primary value” (App. 110-113, 116-118, 120; R.Doc. 315, at 48, 62, 198-199, R.Doc. 316, at 77, 81, 89, 149).

2. The District Court's rationale for disregarding Mayo's substantial medical purpose conflicts with Better Business Bureau and this Court's prior directive

The District Court concluded (App. 233; R.Doc. 331/Op., at 89; Add. 89) that being organized and operated for a “substantial” medical purpose could not render Mayo ineligible for the UBIT tax exception unless its extensive patient care (and its supporting management functions) served no educational purpose. That conclusion is incorrect. As the Supreme Court made clear in Better Business Bureau, even if an activity served an “educational purpose,” that same activity nevertheless “destroyed” qualification as an educational organization if it also served another purpose (e.g., promoting “a profitable business community”) that was “substantial.” 326 U.S. at 283. In other words, an activity that served dual purposes — i.e., serving both educational and noneducational purposes — precludes an organization from being an ”educational organization” if the noneducational purpose is substantial and not merely incidental. This Court endorsed this foundational point in the prior appeal. Mayo, 997 F.3d at 802 (holding that a “'single non-educational purpose, if substantial in nature, will destroy the [UBIT] exemption'”) (quoting Better Bus. Bureau, 326 U.S. at 283) (alteration in original).

The District Court failed to follow this binding precedent. It dismissed the fact that “Mayo has other purposes,” deeming it not “dispositive.” (App. 232; R.Doc. 331/Op., at 88; Add. 88.) The court was wrong. Having “other purposes” precludes qualification where (as here) those purposes are “'substantial,'” as both the Supreme Court and this Court have explained. Mayo, 997 F.3d at 802 (quoting Better Bus. Bureau, 326 U.S. at 283). Although “'treating patients'” and “'instructing students'” may frequently occur “'simultaneously'” at Mayo (App. 234; R.Doc. 331/Op., at 90; Add. 90 (citation omitted)), those activities serve distinct purposes: providing both (i) medical care to patients and (ii) medical education to students. And providing both medical care to patients and medical education to students is a qualifying purpose under §170(b)(1)(A)(iii), but not under §170(b)(1)(A)(ii). See Mayo, 997 F.3d at 796 n.5 (explaining that the term “'[e]ducational organization' isolates taxpayers exempt because they are 'organized and operated exclusively' for educational purposes as opposed to other charitable purposes”).

That Mayo integrated its “three mission activities” (App. 194, 208; R.Doc. 331/Op., at 50, 64; Add. 50, 64) — clinical practice, education, and research — does not mean that the resulting integrated activity served only one purpose (education). “A single activity may be carried on for more than one purpose.” Living Faith, Inc. v. Commissioner, 950 F.2d 365, 370 (7th Cir. 1991). If an organization is engaged in a single activity that is “directed toward multiple purposes, both exempt and nonexempt,” and “the nonexempt purpose is substantial in nature,” then “the organization will not satisfy the operational test.” Redlands Surgical Servs. v. Commissioner, 113 T.C. 47, 71 (1999), aff'd, 242 F.3d 904 (9th Cir. 2001).

To illustrate, take the seminal decision, Better Business Bureau. The Supreme Court concluded that the Better Business Bureau did not qualify as an “educational organization” because “an important” purpose of the organization was promoting a “profitable business community.” 326 U.S. at 283. The fact that the organization furthered business interests by “educat[ing]” that community, and thereby integrated its educational and business purposes, did not preserve tax-exempt status because the presence of that substantial business purpose “destroyed” any claim that “education is the sole aim of” the organization. Id. at 284.

This analysis applies equally here. Mayo's integrated activity served multiple purposes, one qualifying under §170(b)(1)(A)(ii) (educating medical students) and others nonqualifying under §170(b)(1)(A)(ii) (caring for its medical patients and conducting research). The District Court should have addressed whether Mayo's medical-care purpose was substantial, and not merely incidental to Mayo's educational purpose, so as to preclude Mayo from qualifying as an educational organization.⁹ As this Court directed, if Mayo is organized and operated for a purpose “other” than education, and that other purpose is “'substantial,'” then Mayo is disqualified from being an “educational organization,” regardless of the “'importance of [its] truly educational purposes.'” 997 F.3d at 802 (quoting Better Business Bureau).

That Mayo's “medical and educational purposes are inextricably intertwined” (App. 231; R.Doc. 331/Op., at 87; Add. 87) does not immunize it from the Better Business Bureau test or the regulatory merely-incidental limitation, as the District Court wrongly assumed. As explained above, a “single activity may be carried on for more than one purpose,” and if a nonqualifying purpose is substantial, the qualification is destroyed. Living Faith, 950 F.2d at 370. This Court recognized this principle in the prior appeal. Mayo, 997 F.3d at 802. There, the Court observed that “Mayo's status as an academic medical center means that its medical and educational purposes” are “inextricably intertwined.” Id. But the Court nevertheless directed — in the very next sentence — that the “noneducational” and “educational” purposes be “[s]eparat[ed]” and “balance[d]” for purposes of determining whether Mayo was an educational organization. Id. And, the Court further instructed, that required separation and evaluation was not “impossible,” though it might be “difficult.” Id.

The District Court disregarded this Court's directive by refusing to separately evaluate Mayo's “educational” and “other” purposes in order to determine whether Mayo's noneducational purposes were substantial and therefore disqualifying. Its conclusion (App. 232; R.Doc. 331/Op., at 88; Add. 88) that an activity that “furthers both educational and noneducational purposes” is nevertheless “exclusively” educational — even if the noneducational purpose is “substantial” — conflicts with Better Business Bureau, Reg. §1.170A-9(c)(1), and this Court's prior ruling.¹⁰

The District Court's analysis also disrupts what was previously well-settled case law. Prior to the court's ruling, courts addressing whether an organization was organized and operated exclusively for an exempt purpose uniformly had evaluated whether the organization's nonexempt purpose was substantial, even if it was intertwined with the organization's exempt purpose and activities. Living Faith illustrates this foundational point. There, an organization that was organized and operated for religious purposes operated vegetarian restaurants and health food stores in furtherance of its religious mission. Living Faith, 950 F.2d at 367. Although that activity served a religious purpose, it was also “imbued with a substantial commercial purpose.” Id. at 371. The presence of the substantial nonexempt commercial purpose precluded exemption as an organization organized and operated exclusively for religious purposes. Id. at 376.

Further examples abound. For instance, in Redlands the organization at issue engaged in a single activity — providing health care — that served both a “charitable purpose” and a non-charitable purpose (“profit-making objectives”). 113 T.C. at 78. The Tax Court concluded that the organization was “not operated exclusively for charitable purposes” within the meaning of §501(c)(3) because the profit-making purpose was substantial and there was “no obligation to put charitable purposes ahead of profit-making objectives.” Id. at 78, 92-93. See also Christian Manner Int'l, Inc. v. Commissioner, 71 T.C. 661, 668 (1979) (holding that, if an organization's “activity was engaged in to further both an exempt and nonexempt purpose,” then the court “must decide whether the nonexempt purpose was sufficient[ ] to deny the exemption or was so incidental to the exempt purpose as not to disqualify” the exemption).

What these cases illustrate — and what the District Court failed to recognize — is that it is insufficient for Mayo to show that all or almost all of its activities served an educational purpose. Rather, Mayo additionally must show that those same activities did not also serve a noneducational purpose in more than an incidental way. See St. David's Health Care Sys. v. United States, 349 F.3d 232, 237 (5th Cir. 2003) (explaining that “we do not simply consider whether the organization's activities further its charitable purposes. We must also ensure that those activities do not substantially further other (non-charitable) purposes”).

In sum, the fact that Mayo — like other academic medical centers — integrated its clinical practice with its educational and research activities does not mean that it was organized and operated exclusively for educational purposes. Rather, it only means that those various endeavors operated as a single activity. But, as noted above, a single activity can serve dual purposes, and it is the presence of the second, noneducational purpose that disqualifies Mayo from being an educational organization because that second purpose (medical care) was “substantial,” Better Bus. Bureau, 326 U.S. at 283, not “merely incidental,” Reg. §1.170A-9(c)(1). Although the medical-care and educational purposes were intertwined, they were nevertheless distinct purposes, only one of which qualifies under §170(b)(1)(A)(ii).

Indeed, Congress enacted a separate provision for organizations that operate for the dual purposes of providing medical education and medical care — organizations described in §170(b)(1)(A)(iii). Although such organizations are not organized and operated primarily for educational purposes, and thus are not described in §170(b)(1)(A)(ii), they can be organized and operated primarily for the dual purposes of providing “medical education” and “medical care,” §170(b)(1)(A)(iii). And — critically — the UBIT exception provided in §514(c)(9)(C) specifically applies only to organizations described in subpart (ii) of §170(b)(1)(A) and not to organizations described in subpart (iii) of §170(b)(1)(A). If Congress had wanted to extend the UBIT exception at issue to both types of organizations, it could have done so as it has elsewhere in the Code. See §119(d)(4)(A)(i)&(ii), (B)(i) (extending an exception to both educational organizations described in §170(b)(1)(A)(ii) and “academic health center[s]” described in §170(b)(1)(A)(iii)).

The District Court's expansion of §170(b)(1)(A)(ii)'s educational organization category to include academic medical centers like Mayo has broad ramifications. There are more than 100 organizations in the United States that describe themselves as academic medical centers, and more than 1,000 teaching hospitals, as Mayo's expert acknowledged. (App. 126, 129; R.Doc. 316, at 177, R.Doc. 317, at 48.) See Tucker, Mayo Clinic v. United States: Are Tax-Exempt Academic Medical Centers “Educational Organizations” Under U.S. Tax Law?, 39 Rev. Banking & Fin. L. 161, 173-174 (2019) (observing that (i) “education is not the primary purpose of an [academic medical center's] work under a commonsense understanding of the word 'primary'” and (ii) an academic medical center's “non-educational activities (like patient care)” are more than “'merely incidental'”). And, like Mayo, these organizations frequently generate large amounts of income from real-property investments that, but for the limited UBIT exception extended by the District Court to Mayo, would otherwise be subject to tax. Id. Nothing in the text or context of the statute indicates that Congress intended to sweep an entire industry of healthcare organizations into a narrow exception specifically limited to educational organizations.

C. The District Court erred in interpreting “primary” to mean merely “substantial” for purposes of determining whether educating students was Mayo's “primary purpose”

In addition to failing to apply the Better Business Bureau test to the findings in this case, the District Court further erred as a matter of law in interpreting the term “primary” to mean merely “substantial” for purposes of determining Mayo's primary purpose or function.¹¹ (App. 219-220; R.Doc. 331/Op., at 75-76; Add. 75-76.) As this Court explained, an organization is not organized and operated “exclusively” for “educational” purposes within the meaning of §170(b)(1)(A)(ii) and §501(c)(3), unless its “primary purpose” is educational and all of its other purposes are “merely incidental to that primary purpose.” Mayo, 997 F.3d at 800; accord Reg. §1.170A-9(c)(1). In that context, “primary” must mean more than “substantial.” See, below, §C.1. The District Court's contrary ruling is incorrect. See, below, §C.2.

1. In the context of §170(b)(1)(A)(ii) and Reg. §1.170A-9(c)(1), “primary” means predominant and not merely substantial

The Government's interpretation of “primary” to mean more than merely “substantial” is supported by the relevant statutory and regulatory provisions, case law, dictionary definitions, and Congress's election to extend the UBIT tax exception to §170(b)(1)(A)(ii) educational organizations but not to §170(b)(1)(A)(iii) academic medical centers and teaching hospitals (even though their educational activities are substantial). As those sources indicate, in the context here, primary means of first importance or principal (i.e., predominant).

a. Regulation §1.170A-9(c)(1) makes clear that “primary” does not mean merely “substantial”

Regulation §1.170A-9(c)(1) and its predecessors have long required an “educational organization” described in §170(b)(1)(A)(ii) to have the provision of education as its “primary function.” See 23 Fed. Reg. 1759, 1761 (1958). The regulation defines the scope of that primary educational function by contrasting it with the organization's permitted noneducational function. In this regard, the regulation — after setting out the “primary function” requirement — provides that an “[educational organization] does not include organizations engaged in both educational and noneducational activities unless the latter are merely incidental to the educational activities.” Reg. §1.170A-9(c)(1) (emphasis added). By explicitly disqualifying organizations that engage in both educational and noneducational activities unless the latter are “merely incidental” to the former, the regulation makes clear that primary means all but insubstantial functions. In other words, if an organization's noneducational purposes and activities must be “merely incidental,” then its educational purposes and activities must — by definition — be predominant as compared to the contrasting subordinate incidental ones. In this way, the regulatory “merely incidental” limitation forecloses interpreting “primary” to mean merely “substantial.”

That interpretation of primary is supported by other language in Reg. §1.170A-9(c)(1). The regulation provides that “[a]n educational organization is described in section 170(b)(1)(A)(ii) if its primary function” is providing education. Reg. §1.170A-9(c)(1) (emphasis added). By using the pronoun “its” before “primary function,” as opposed to “a primary function” or “one of its primary functions,” the regulation indicates that education must be the singular primary function of the organization and thus must be more than substantial. An organization may have multiple substantial functions but only one singular function that is primary. As Mayo's expert witness explained, if primary is defined as “substantial,” then an organization like Mayo could have “multiple primary functions,” with each function representing one third of the organization's activities and purposes. (App. 130-132; R.Doc. 317, at 56-58.) If two thirds of an organization's activities and purposes are in furtherance of something other than education, then it could not be said that education is the singular function of the organization. The use of “its” to modify “primary” forecloses interpreting primary to mean merely “substantial.”

b. Courts have interpreted “exclusively” as used in §501(c)(3) and related statutes to mean more than “substantial”

The broader context of §170(b)(1)(A)(ii) and Reg. §1.170A-9(c)(1) confirms that “primary” does not mean merely substantial. See Union Pacific R.R. Co. v. Surface Transp. Bd., 863 F.3d 816, 825 (8th Cir. 2017) (holding that legal text should not be read in “isolation” but can only be understood in “context”). The “primary function” requirement in Reg. §1.170A-9(c)(1) is derived from the definition of “exclusively” as used in §501(c)(3), as this Court explained in the prior appeal, Mayo, 997 F.3d at 800, and that context precludes interpreting “primary” to mean merely “substantial.”

In upholding the validity of the “primary function” requirement in Reg. §1.170A-9(c)(1), this Court traced the requirement's statutory basis to §501(c)(3)'s foundational standard for tax-exempt educational organizations, i.e., that they be “'organized and operated exclusively' for . . . educational purposes.” Mayo, 997 F.3d at 799-800 (quoting §170(c)(2)(B)) (emphasis added). As the Court explained, the term “exclusively” as used to delineate tax-exempt status has long been interpreted to mean “primarily.” Id. at 795-796. And although an organization that operates for multiple exempt purposes can qualify under §501(c)(3), as long as — taken together — those purposes constitute the organization's exclusive/primary function, Mayo 997 F.3d at 795, to qualify under §170(b)(1)(A)(ii), the organization must operate for “only one” specific purpose — educational, id. at 800 (emphasis added). Therefore, to qualify as a §170(b)(1)(A)(ii) “educational organization,” an organization's primary purpose must be educational and all of its other purposes — including other purposes that support exemption under §501(c)(3), such as charitable patient care or scientific research — can only be “incidental” to the organization's educational purpose. Id.

A substantial exempt purpose has never — until the District Court's ruling here — been sufficient to satisfy §501(c)(3)'s “exclusively” threshold requirement for tax exemption. To the contrary, courts have applied the term “substantial” as a maximum ceiling for nonexempt purposes — i.e., only insubstantial nonexempt purposes were permitted for exemption under §501(c)(3) — and never as a minimum floor for exempt purposes. E.g., Fed'n Pharmacy Servs., Inc. v. Commissioner, 625 F.2d 804, 807 (8th Cir. 1980) (“'The test of 'exclusivity' has been defined by Treasury Regulations and case law to mean that a substantial nonexempt purpose or activity will disqualify the organization's exempt status, but insubstantial nonexempt activities do not destroy the exemption.'”) (citation omitted). In Better Business Bureau, the Court did not have to address the extent of the organization's exempt purpose because — no matter how strong that exempt purpose was — its nonexempt purpose was “substantial” and thus disqualifying. 326 U.S. at 283. Most courts have followed the approach taken in Better Business Bureau, focusing on whether the nonexempt purpose was substantial so as to exceed the maximum ceiling on nonexempt functions rather than on the degree of the exempt purpose. E.g., Ohio Teamsters Educ. & Safety Training Tr. Fund v. Commissioner, 692 F.2d 432, 436 (6th Cir. 1982) (holding that the “critical inquiry” is whether the organization has “any substantial non-charitable purpose”).