Minnick v. Commissioner of Internal Revenue (Minnick II)

US Court of Appeals Ninth Circuit, No. 13-73234, August 12, 2015: Mortgage subordination at the time of easement gift, not later, required for deduction.

The US Tax Court held in Minnick v. Commissioner (Minnick I), 2012 T.C. Memo 345, December 17, 2012,  that Treasury Regulations §1.170A-14(g)(2) requires that, for a taxpayer to take a deduction for the donation of a conservation easement, any mortgage on the property must be subordinated to the easement at the time of the donation, not afterward. Minnick appealed, but in this decision the 9th Circuit Court of Appeals affirmed the decision of the Tax Court.

In 2006, Minnick granted a conservation easement to a land trust. The land was subject to a mortgage that was not subordinated to the conservation easement until five years later.  Minnick claimed a deduction and the IRS disallowed it.  The Tax Court decided that the deduction was not allowed because the mortgage was not subordinated at the time of the grant of the conservation easement, citing its own then recent decision in Mitchell v. Commissioner, 138 T.C. 324, 332 (2012) (Mitchell I). Mitchell I was subsequently upheld by the 10th Circuit Court of appeals in Mitchell v. Commissioner, 775 F.3d 1243 (10th Cir. 2015) (Mitchell II).

Treas. Reg. § 1.170A-14(g)(2) says that when a conservation or preservation easement property is subject to a mortgage, “no deduction will be permitted . . . unless the mortgagee subordinates its rights in the property to the right of the qualified organization to enforce the conservation purposes of the gift in perpetuity.” The Regulation does not expressly say when the subordination must occur.  In the current case, the court first held that the “plain meaning” of §1.170A-14(g)(2), “strictly construed,” is that “subordination is a prerequisite to allowing a deduction,” as stated in Mitchell II.  The court went on to say that even if §1.170A-14(g)(2) were deemed ambiguous regarding when subordination is required, precedents require that courts defer to the IRS’s reasonable interpretation of its own regulations when the IRS’s interpretation is reasonable and is not “plainly erroneous or inconsistent with the regulation.” The court found that the IRS’ interpretation at issue here met this standard.

Decision available at http://cdn.ca9.uscourts.gov/datastore/opinions/2015/08/12/13-73234.pdf.

1 comment to Minnick v. Commissioner of Internal Revenue (Minnick II)

  • Patricia Carson

    While I am generally in favor of giving deference to administrative agencies, and their interpretation in this instance is a reasonable interpretation of the regs, the result is unfortunate. I think that imposing a reasonable time frame makes sense, but disallowing the deduction when subordinations come any time after closing may be inconsistent with the intent of the regulation. What if, for instance, the subordination occurred after the closing of the easement but within the same tax year? Seems like a legal distinction could be made and a sound argument to allow this deduction, and is distinguished from a subordination occurring 5 years later.

    What do others think?