Nonacquiescence to Eighth Circuit’s decision invalidating part of Reg. section 1.170A-9(c)(1), primary function of education organization

Action on Decision (AOD) 2021-4 announces the IRS’s nonacquiescence to a May 2021 decision of the Eighth Circuit

Invalidating part of Reg. section 1.170A-9(c)(1)

Action on Decision (AOD) 2021-4—which appears in the Internal Revenue Bulleting 2021-47 [PDF 673 KB] (dated Monday, November 22, 2021)—announces the IRS’s nonacquiescence to a May 2021 decision of the Eighth Circuit that invalidated a requirement under Reg. section 1.170A-9(c)(1) that the primary function of an educational organization described in section 170(b)(1)(A)(ii) must be the presentation of formal instruction.

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This AOD indicates that the IRS will continue to challenge an organization seeking to take the position that it is an “educational organization” within the meaning of section 170(b)(1)(A)(ii) (and thus a “qualified organization” described in section 514(c)(9)(C)) if its primary function is not presenting formal instruction. However, the IRS will recognize the precedential effect of the May 2021 decision in cases arising within the Eighth Circuit.


The U.S. Court of Appeals for the Eighth Circuit reversed and remanded a federal district court’s decision that had found requirements in regulations defining an “educational organization” to be invalid. The Eighth Circuit held that these regulations were valid in requiring an educational organization’s “primary” purpose to be educational but invalid in requiring a primary function of presenting formal instruction.

The case is: Mayo Clinic v. United States, 997 F.3d 789 (8th Cir. 2021). Read the Eighth Circuit’s decision [PDF 123 KB] that includes a concurring opinion.


The taxpayer (a Minnesota nonprofit corporation and tax-exempt organization) is the parent organization of several hospitals, clinics, and a college of medicine and science.

After conducting an audit, the IRS asserted in 2009 that the taxpayer owed tax on certain income it received from partnerships because it was not an educational organization described in section 170(b)(1)(A)(ii) and therefore was not entitled to an exception in the unrelated debt-financed income rules available to those “qualified organizations.” Specifically, applying two tests from the applicable regulation, the IRS determined that: (1) the taxpayer’s primary function was not the presentation of formal instruction; and (2) its non-educational activities were more than merely incidental to its educational activities.

The taxpayer filed an action in a federal district court, which granted summary judgment for the taxpayer on a determination that the taxpayer was an “educational organization” and therefore qualified for an exception in the unrelated debt-financed income rules and was entitled to an $11.5 million refund of unrelated business income tax (UBIT) paid in prior years. The federal district court further concluded that because Congress did not include a primary-function requirement in the relevant statute, Treasury exceeded its authority by including such a requirement in the regulations.

On appeal, the Eighth Circuit in May 2021 concluded that the regulations were valid, but only in part, and that application of the statute as reasonably construed by the regulations to the taxpayer’s tax years could not be determined as a matter of law by summary judgment.

The Eight Circuit agreed with the district court that Reg. section 1.170A-9(c)(1) “adds unreasonable conditions to the statutory requirement,” but only by limiting “educational organizations” to those principally providing “formal instruction.” By contrast, the terms “primary function” and “merely incidental” activities in the regulation “have a valid role in interpreting the statute,” the Eighth Circuit concluded. More specifically, the appeals court noted that, to qualify as an “educational organization” within the meaning of section 170(b)(1)(A)(ii), an organization’s primary purpose must be “educational” and its noneducational activities must be merely incidental to that primary purpose.

The Eighth Circuit observed that the question whether the taxpayer is an educational organization is a mixed question of law and fact—one that neither party directly addressed on appeal. Hence, the case was remanded to the lower court to determine whether the taxpayer’s primary purpose is educational.

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For more information, contact a tax professional with KPMG’s Washington National Tax practice:

Ruth Madrigal | +1 202 533 8817 |

Preston Quesenberry | +1 202 533 3985 |


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