EXECUTIVE SUMMARY: The U.S. District Court for the District of Minnesota ruled in favor of the Mayo Clinic and held that in determining whether an organization meets the definition of an educational organization under Code §170(b)(1)(A)(ii), the primary function test imposed by regulation is invalid.

FACTS: The Mayo Clinic sought to exclude debt-financed passive income from unrelated business income by qualifying as an organization described in Code §170(b)(1)(A)(ii). That provision describes an organization that is:

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.

The Government acknowledged that the Mayo Clinic “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.” However, the Government argued that the Mayo Clinic was not an “educational organization” within the meaning of the statute since the Clinic did not meet the primary function. . .