Mitchell v. Commissioner

US Court of Appeals, 10th Circuit, No. 13-9003, January 6, 2015: No deduction for conservation easement without mortgage subordination at time of grant.

This decision affirms the US Tax Court decision in Mitchell v. Commissioner, 138 T.C. 324 (2012) (Mitchell I) (of which the Tax Court rejected reconsideration in Mitchell II, T.C. Memo. 2013-204, August 29, 2013), denying a charitable contribution deduction for a conservation easement on real estate subject to a mortgage that was not subordinated to the easement at the time of the donation. Obtained a mortgage subordination after donating the conservation easement did not cure the failure to comply with Internal Revenue Code and implementing Treasury Regulations.

In 2003 Mitchell granted a conservation easement to the Montezuma Land Conservancy (the Conservancy) a conservation easement over her land that was subject to a mortgage and then claimed a federal tax deduction. In 2005, the mortgage holder agreed to subordinate the mortgage to the easement. The IRS denied Mitchell’s deduction claim, she appealed and the matter went to the Tax Court. The Tax Court agreed with the IRS. Mitchell appeal to the higher Appeals Court.

The Appeals Court found no ambiguity in the Regulation’s requirement (Treas. Regs. § 1.170A-14(g)(2)) that subordination is a prerequisite to allowing a deduction, and that even if there were some ambiguity, the IRS’s interpretation of the Regulations is reasonable, not plainly erroneous or inconsistent with the mortgage subordination provision’s plain language.

Mitchell unsuccessfully tried to assert that the “so remote as to be negligible” exception applies to the subordination requirement.  That exception (Treas. Regs. § 1.170A-14(g)(3)) is that strict compliance should not be required when the risk that the event to be avoided by noncompliance (in this case, foreclosure) is so remote as to be a negligible risk. The Court said there must be strict compliance with the subordination requirement, and the risk of foreclosure is unexceptional.

The Court distinguished its “so remote as to be negligible” holding here from other holdings including: Wachter v. Comm’r, 142 T.C. 7, Mar. 11, 2014 (improbability of event), Kaufman v. Shulman, 687 F.3d 21, 27 (1st Cir. 2012) (improbability of event), Commissioner v. Simmons, 646 F.3d 6 (D.C. Cir. 2011) (remoteness based on easement holder’s record of enforcement of easement).


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