July 22, 2019

Tenth Circuit: Plain Language of Regulation Requires Mortgage Subordination at Date of Conservation Easement Donation

The Tenth Circuit Court of Appeals issued its opinion in Mitchell v. Commissioner of Internal Revenue on Tuesday, January 6, 2015.

Ms. Mitchell and her late husband purchased property from Mr. Sheek subject an agreement to pay the balance to Mr. Sheek in yearly installments. In 2003, they granted a conservation easement on part of their property to the Montezuma Land Conservancy. At the time of the donation, the Mitchells did not obtain a mortgage subordination agreement from Mr. Sheek, but they did obtain one in 2005. The Mitchells claimed a charitable contribution deduction on their 2003 tax return.

In 2010, the Commissioner of the IRS mailed a notice of deficiency to Ms. Mitchell disallowing the charitable contribution for failure to meet certain Code requirements, specifically for not obtaining a mortgage subordination agreement at the time of the donation. Ms. Mitchell challenged the Commissioner’s determination in Tax Court, but the Tax Court denied the claimed charitable contribution, concluding the Code and its implementing regulations mandated that the mortgage be subordinated on the date of the donation. Ms. Mitchell appealed to the Tenth Circuit.

The Tenth Circuit first analyzed the applicable Code provisions, in particular noting the Code mandates that a contribution shall not be treated as exclusively for contribution purposes unless the contribution is protected in perpetuity. The Commissioner developed the mortgage subordination provision as a means to protect the conservation in perpetuity. The Tenth Circuit accordingly focused its inquiry on whether the regulations can be interpreted to entitle Ms. Mitchell to the deduction despite the undisputed fact that the mortgage was not subordinated on the date of the donation.

The Tenth Circuit first turned to Ms. Mitchell’s claim that, because the regulations are silent on the date of subordination, she is entitled to the deduction because the mortgage was eventually subordinated. The Tenth Circuit disagreed, finding the plain language of the regulation precluded her interpretation, and even if they were to view the regulation as ambiguous, they would defer to the Commissioner’s reasonable interpretation.

Ms. Mitchell next argues that strict compliance with the regulation was unnecessary because the risk of foreclosure was so remote as to be negligible, and because of a Deed provision that allegedly protected the property in perpetuity. The Tenth Circuit found that the plain language of the regulation required it to reject Ms. Mitchell’s arguments.

The Tenth Circuit affirmed the Tax Court’s decision.

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