Mitchell v. Commissioner (Mitchell II)

US Tax Court, T.C. Memo. 2013-204, August 29, 2013: Kaufman III is about post-extinguishment proceeds, not subordination. Reconsideration of Mitchell I denied.

In Mitchell v. Commissioner, 138 T.C. 324 (2012) (Mitchell I) Mitchell granted a conservation easement to the Montezuma Land Conservancy (Conservancy) but it was not until two years after the grant was donated and recorded that Mitchell got and record a subordination of a mortgage to the easement. The Mitchell I decision held that the subordination requirements of section 1.170A-14(g)(2) of the Treasury Regulations require that a subordination agreement must be in place at the time of the easement gift and that this regulation creates “strict requirements that may not be avoided.”

Mitchell now argued that the decision in Mitchell I should be reconsidered and vacated in light of the Court of Appeals decision in Kaufman v. Shulman, 687 F.3d 21 (1st Cir. 2012) (Kaufman III). The court refused to reconsider, principally because it understood Kaufman III to turn on legal issues different from the ones in the Mitchell case. As characterized by the court in Mitchell II, “Kaufman III addressed the proper interpretation of the proceeds regulation [described below in this post] and, in particular, the breadth of the donee organization’s entitlement to proceeds from the sale, exchange, or involuntary conversion of property following the judicial extinguishment of a perpetual conservation restriction burdening the property. The Court of Appeals held that it was sufficient that the donee organization have a right to postextinguishment proceeds that was absolute against the owner-donee of the burdened property. … Conservancy’s [the donee in the Mitchell case] right to postextinguishment proceeds was not determinative in Mitchell I as we ruled that petitioner had failed to meet the subordination regulation, and therefore we need not discuss the postextinguishment proceeds.”

In Kaufman III, one issue on which the Court of Appeals overruled the Tax Court had to do with the Treasury Regulations’ requirements that a conservation easement must say that if the easement were ever extinguished a portion of the proceeds of any future sale or the insurance proceeds paid because of destruction of a historic structure subject to a preservation easement (“postextinguishment proceeds”) must be paid to the donee (the grantee of the easement). Mitchell read the essence of Kaufman III as holding that if the conservation easement deed protected the proceeds to be paid to Conservancy in perpetuity upon termination of the conservation easement, thereby perpetuating an easement’s purpose as opposed to the conservation easement itself, the conservation easement satisfied the requirements of section 1.170A-14(g), Income Tax Regs.  The court in Mitchell II rejected this interpretation. As described by the court in this decision, Kaufman III merely held that if the owner-donor is subject to a contractual right to the required share of the proceeds in favor of the donee (as distinct from an absolute right that runs with the land), that is sufficient to satisfy the requirements of Treasury Regulation section 1.170A-14(g)(6). Thus the court in Mitchell II wrote that Kaufman III did not state a general rule that protecting the proceeds from an extinguishment of a conservation easement would satisfy the in-perpetuity requirements of section 1.170A-14(g) generally.

Mitchell also argued that the subordination regulation should be read in tandem with the so-remote-as-to-be-negligible standard in section 1.170A-14(g)(3), Income Tax Regs.  The court also rejected this interpretation, saying that in Kaufman II it had found that the so-remote-as-to-be-negligible standard does not modify the proceeds regulation and that in Kaufman III, the Court of Appeals for the First Circuit agreed. The court said that the subordination requirement is a comparably specific requirement to which the so-remote-as-to-be-negligible standard should not apply.

Mitchell also contended that a “functional subordination” of the conservation easement to the mortgage existed at the time of the gift because the donor/grantor of the easement had sufficient funds to discharge the mortgage debt “at all times before the actual subordination two years later” and that this “functional subordination” was as good as a recorded contractual subordination. The court held, “There is no functional subordination contemplated in section 1.170A-14(g)(2), Income Tax Regs., nor do we intend to create such a rule.”

In response to another line of argument from Mitchell, the court wrote that the subordination regulation section 1.170A-14(g)(6) is not merely a “safe harbor” method of subordination, but is a specific provision of section 1.170A-14(g) that is mandatory and may not be ignored.

Decision available at

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