Minnick v. Commissioner – 9th Circuit Affirms Tax Court, Mortgages Must Be Subordinated When Conservation Easement is Donated

In Minnick v. Commissioner, _ F.3d _ (9th Cir. 2015), the 9th Circuit Court of Appeals affirmed the Tax Court’s holding that, to be eligible for a deduction for the donation of a conservation easement under Internal Revenue Code § 170(h), any outstanding mortgages on the underlying property must be subordinated to the rights of the holder of the easement at the time of the gift. The 10th Circuit held the same in a similar case in January 2015: Mitchell v. Commissioner, 775 F.3d 1243 (10th Cir. 2015) (Mitchell III).

Citing to Mitchell III, the 9th Circuit explained that the plain language of Treasury Regulation § 1.170A–14(g)(2) (the “mortgage subordination” regulation) supports the Tax Court’s interpretation. The regulation specifies that “no deduction will be permitted … unless the mortgagee subordinates its rights in the property.” Strictly construed, said the 9th Circuit, that language makes clear that “subordination is a prerequisite to allowing a deduction.” Since there was no dispute that Minnick’s lender had not subordinated its rights in the subject property when Minnick donated the easement at issue (despite warranties in the easement deed to the contrary), under the plain meaning of the regulation no deduction is permitted.

The 9th Circuit further explained that, even if ambiguity arguably existed in the language of the regulation with respect to when subordination is required, that would not change the outcome. Under Auer v. Robbins, 519 U.S. 452 (1997), courts defer to the IRS’s reasonable interpretation of its own regulations and, said the 9th Circuit, the IRS’s interpretation is reasonable and not plainly erroneous or inconsistent with the regulation. The 9th Circuit quoted the analysis on this point in Mitchell III: “[b]ecause a conservation easement subject to a prior mortgage obligation is at risk of extinguishment upon foreclosure, requiring subordination at the time of the donation is consistent with the Code’s requirement that the conservation purpose be protected in perpetuity.” The 9th Circuit emphasized:

An easement can hardly be said to be protected ‘in perpetuity’ if it is subject to extinguishment at essentially any time by a mortgage holder who was not a party to, and indeed (as here) may not even have been aware of, the agreement between the Taxpayers and a [land] trust.

Mr. Minnick (a former member of the U.S. House of Representatives from Idaho) is suing his attorney for malpractice. The Idaho Supreme Court recently ruled that suit is not barred by the statute of limitations.

Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law