Minnick v. Commissioner—9th Circuit’s Unpublished Holdings in Conservation Easement Donation Case
In an unpublished opinion issued the same day, Minnick v. Commissioner, _ Fed. Appx. _, 2015 WL 4747103 (9th Cir. 2015), the 9th Circuit addressed the remaining issues in the case, holding for the IRS on each point.
No Excuses
The Minnicks argued that their failure to timely subordinate the mortgage should be excused for three reasons.
- So Remote As To Be Negligible. The Minnicks argued that Treasury Regulation § 1.170A-14(g)(3), which provides that a “deduction shall not be disallowed…merely because the interest which passes to…the donee organization may be defeated by the performance of some act or the happening of some event, if on the date of the gift it appears that the possibility that such act or event will occur is so remote as to be negligible,” excused their noncompliance with the subordination requirement. The Minnicks appear to have argued that the possibility that they would default on the mortgage and the easement would be extinguished was “so remote as to be negligible.” The 9th Circuit rejected this argument, noting that the so-remote-as-to-be-negligible provision does not override Treasury Regulation § 1.170A-14(g)(2)’s mortgage subordination requirement. This is consistent with the 10th Circuit’s holding in Mitchell v. Commissioner, 775 F.3d 1243 (10th Cir. 2015).
- Intent. The Minnicks argued that their failure to obtain a timely subordination agreement should be excused because there was “verifiable evidence of original intent to enforce the easement in perpetuity” in the easement deed, which specifically stated that there were “no outstanding mortgages … in the Property that have not been expressly subordinated to the Easement.” The 9th Circuit rejected this argument, explaining that, even if the statement in the deed evidenced an intent to subordinate, intent is irrelevant. A mortgage must be subordinated at the time of the gift.
- Cy Pres. The Minnicks argued that Idaho’s cy pres doctrine, which “restricted the Minnicks from abandoning or otherwise encumbering the easement,” adequately ensured that the easement would continue in perpetuity and, thus, the subordination requirement was satisfied. The 9th Circuit rejected this argument, noting that the “cy pres doctrine is inapplicable here because it has no effect on the ability of the bank holding the unsubordinated mortgage to extinguish the easement by foreclosure.” Cy pres would have no effect on the ability of the bank to extinguish the easement in such event because the easement had been granted to the land trust holder subject to the mortgage and, thus, the bank’s rights had priority over those of the holder and the public.
Prejudice
The Minnicks argued that they suffered prejudice because they lacked notice that subordination would be an issue at trial (the Tax Court had granted the IRS permission to file an amended answer on the morning of trial). The 9th Circuit dismissed this argument, explaining that the Minnicks were aware of and prepared to argue the subordination issue at trial.
Penalty
The Minnicks argued that the Tax Court improperly imposed a 20% negligence penalty on them under IRC § 6662(a). The 9th Circuit rejected this argument as well, explaining that, even if the Minnicks’ ignorance of the subordination requirement was in good faith, they did not have reasonable cause for claiming a deduction because Mr. Minnick had a law degree, and reading the Treasury Regulations would have given him notice that subordination may have been required.
Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law