Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-13-73234/USCOURTS-ca9-13-73234-0/pdf.json

Parties Involved:
Commissioner of Internal Revenue
Appellee
A.K. Lienhart
Appellant
Walter C. Minnick
Appellant

Document Text:

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

WALTER C. MINNICK; A.K.

LIENHART,

Petitioners-Appellants,

v.

COMMISSIONER OF INTERNAL 

REVENUE,

Respondent-Appellee.

No. 13-73234

Tax Ct. No.

29632-09

OPINION

Appeal from a Decision of the

United States Tax Court

Argued and Submitted

July 6, 2015—Seattle, Washington

Filed August 12, 2015

Before: Andrew J. Kleinfeld, Jacqueline H. Nguyen, and 

Michelle T. Friedland, Circuit Judges.

Per Curiam Opinion

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2 MINNICK V. CIR

SUMMARY*

Tax

The panel affirmed the Tax Court’s decision, holding 

that for a taxpayer to take a charitable 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.

Taxpayers took out a loan secured by an undeveloped 

plot of land, for purposes of developing that land, then 

donated a conservation easement on parts of the land that 

would not be developed. The land was still subject to the 

mortgage, the mortgage had not been subordinated to the 

easement, and the bank was not informed of the easement. 

Taxpayers then claimed a charitable deduction. The panel 

deferred to the Internal Revenue Service’s reasonable 

interpretation of its own regulations that require a mortgagee 

to subordinate its rights in the property to the right of the 

qualified organization to enforce the conservation purposes 

of the gift in perpetuity.

 * This summary constitutes no part of the opinion of the court. It has 

been prepared by court staff for the convenience of the reader.

 

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MINNICK V. CIR 3

COUNSEL

Tim A. Tarter (argued), Woolston & Tarter, P.C., Phoenix, 

Arizona, for Petitioners-Appellants.

Tamara W. Ashford, Principal Deputy Assistant Attorney 

General; Bethany B. Hauser (argued) and Francesca Ugolini, 

Attorneys, Department of Justice, Washington, D.C., for 

Respondent-Appellee.

OPINION

PER CURIAM:

We are asked to decide whether Treasury Regulation 

§ 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. We hold that this is 

required by the regulation and thus affirm the decision of the 

Tax Court to that effect.

I. Background

Walter C. Minnick and A.K. Lienhart (“Taxpayers”) are 

a married couple. In 2005, Minnick took out a $400,000 loan 

from U.S. Bank. The loan was secured by an undeveloped 

plot of land Minnick already owned in Ada County, Idaho. 

Minnick intended to use the funds to develop that land. After 

Minnick received preliminary approval to develop parts of 

the land, the loan amount was increased to $1.4M in March 

2006, and then to $1.5M in August 2006.

In September 2006, Minnick received final approval of 

the development plans. Two days later, Minnick donated to 

the Land Trust of Treasure Valley a conservation easement 

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4 MINNICK V. CIR

on parts of the plot that would not be developed. Despite 

warranties in the easement agreement to the contrary, the 

land was still subject to the mortgage. The mortgage had not

been subordinated to the easement.

Taxpayers did not inform U.S. Bank of the easement in 

2006. An appraiser hired by Minnick valued the easement 

at $941,000, and Taxpayers claimed a charitable deduction 

of $389,517 on their amended 2006 tax return, carrying over 

the remainder to their 2007 and 2008 joint individual returns.

In September 2009, the Internal Revenue Service (“IRS” 

or “Commissioner”) issued a Notice of Deficiency to 

Taxpayers for the 2007 and 2008 tax years. The Notice 

informed Taxpayers that the deduction for the conservation 

easement had been disallowed, explaining that 

“[d]ocumentation of fair market value was not provided.”

Taxpayers timely filed a redetermination petition in Tax 

Court in December 2009. The Tax Court held a trial in 

October 2011.

A. Pretrial Motions and Events

In July 2011, as the case was approaching trial, Minnick 

contacted U.S. Bank to request a subordination of the 

mortgage to the easement. The bank conducted an appraisal 

of the property, which showed that, as a result of “market 

conditions,” the value of the property as a whole had 

declined 41 percent since the last time the loan had been 

renewed. The appraiser also found that the conservation 

easements “would not impact a buyer’s perception” of the 

land. Accordingly, after further negotiation, Taxpayers and 

U.S. Bank entered into a subordination agreement as well as 

a “Waiver, Release, and Indemnification agreement” in 

September 2011.

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MINNICK V. CIR 5

Also in September 2011, the Commissioner filed a 

pretrial memorandum with the Tax Court. That 

memorandum argued, inter alia, that Taxpayers were not 

entitled to deduct the conservation as a gift because “the 

mortgagee did not subordinate its rights in the property to 

the rights of the qualified organization to enforce the 

conservation purposes of the gift in perpetuity.”

B. Trial and the Tax Court’s Order

Following trial but before the Tax Court had ruled in 

Taxpayers’ case, the Tax Court decided Mitchell v. 

Commissioner (Mitchell I), which held that mortgages must 

be subordinated at the time of the donation in order to be

deductible under Treas. Reg. § 1.170A-14(g)(2). 138 T.C. 

No. 16 (T.C. 2012), vacated on denial of reconsideration by 

Mitchell v. Comm’r, 106 T.C.M. (CCH) 215 (T.C. 2013).

In December 2012, the Tax Court ruled for the 

Commissioner, citing Mitchell I. The Tax Court concluded 

that, under Mitchell I, a mortgage must be subordinated at 

the time of the gift in order to be in compliance with the “in 

perpetuity” requirement of 26 U.S.C. § 170 and the more 

specific subordination requirements of Treasury Regulation 

§ 1.170A-14(g)(2). Taxpayers moved for reconsideration, 

which the Tax Court denied.

Taxpayers timely filed a notice of appeal with this court. 

While this appeal was pending, the Tenth Circuit affirmed 

the Tax Court in Mitchell I, agreeing with the Tax Court’s 

reasoning. See Mitchell v. Comm’r (Mitchell II), 775 F.3d 

1243 (10th Cir. 2015).

II. Standard of Review

We review the Tax Court’s legal conclusions de novo. 

Ann Jackson Family Found. v. Comm’r, 15 F.3d 917, 920 

(9th Cir. 1994).

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6 MINNICK V. CIR

III. Discussion

The Tax Court held that Taxpayers were deficient in 

taxable years 2007 and 2008, affirming the Commissioner’s 

disallowance of the charitable deduction for those years 

because of Taxpayers’ failure to ensure the subordination of 

the mortgage held by U.S. Bank at the time of the gift. 

Taxpayers challenge this decision, arguing that the 

requirement to subordinate a mortgage need not be met at 

the time of the gift. We reject Taxpayers’ argument and 

hold, like the Tenth Circuit in Mitchell II, that Treasury 

Regulation § 1.170A-14(g)(2) requires that the mortgage be 

subordinated at the time of the gift for the gift to be 

deductible.

Under 26 U.S.C. § 170(h)(5)(A), a deduction for the 

donation of a conservation easement is permitted only if the 

easement’s “conservation purpose is protected in 

perpetuity.” Treasury Regulations interpreting this 

provision specify that when a piece of 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.” Treas. Reg. § 1.170A14(g)(2).

Regulations are interpreted according to the same rules 

as statutes, applying traditional rules of construction. 

Christopher v. SmithKline Beecham Corp., 635 F.3d 383, 

392 (9th Cir. 2011), aff’d, 132 S. Ct. 2156 (2012). If the 

meaning of the regulation is clear, the regulation is enforced 

according to its plain meaning. Id. If the regulation is 

unclear, we defer to the IRS’s interpretation so long as it is 

not “plainly erroneous or inconsistent with the regulation.” 

Id. (quoting Auer v. Robbins, 519 U.S. 452, 461 (1997)); see 

also Christensen v. Harris Cty., 529 U.S. 576, 588 (2000) 

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MINNICK V. CIR 7

(“Auer deference is warranted only when the language of the 

regulation is ambiguous.”). Tax deductions are considered 

an act of “legislative grace” and are therefore “strictly 

construed.” INDOPCO, Inc. v. Comm’r, 503 U.S. 79, 84 

(1992); Durando v. United States, 70 F.3d 548, 550 (9th Cir. 

1995) (“[W]e strictly construe Code provisions granting 

exemptions and deductions.”).

To begin, the plain language of the regulation supports 

the Tax Court’s interpretation. See Mitchell II, 775 F.3d 

at1250 (“[The taxpayer’s] interpretation is foreclosed by the 

plain language of the regulation.”). The regulation specifies 

that “no deduction will be permitted under this section for an 

interest in property which is subject to a mortgage unless the 

mortgagee subordinates its rights in the property.” Treas. 

Reg. § 1.170A–14(g)(2). Strictly construed, this language 

makes clear that “subordination is a prerequisite to allowing 

a deduction.” Mitchell II, 775 F.3d at 1250. In 2006, when 

Taxpayers made the donation and requested a deduction, 

there is no dispute that U.S. Bank had not subordinated its 

rights in the property. Thus, under the plain meaning of the 

regulation, no deduction is permitted.

Even if ambiguity arguably exists in the language of the 

regulation with respect to when subordination is required, 

this would not change the outcome, because under Auer we 

defer to the IRS’s reasonable interpretation of its own 

regulations. Here, at the Tenth Circuit, and in front of the 

Tax Court, the IRS has consistently argued that the 

regulation requires subordination at the time of the gift, so 

there is no “reason to suspect that the interpretation does not 

reflect the agency’s fair and considered judgment on the 

matter in question.” Auer, 519 U.S at 462.

Further, the IRS’s interpretation is reasonable and is not 

“plainly erroneous or inconsistent with the regulation.” Id.

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8 MINNICK V. CIR

at 461. As the Tenth Circuit held, “[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.” Mitchell II, 775 F.3d at 1251. 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 conservation trust.

IV. Conclusion

For the foregoing reasons, we hold that, in order for the 

donation of a conservation easement to be protected “in 

perpetuity,” any prior mortgage on the land must be 

subordinated at the time of the gift.1

AFFIRMED.

 1 We address Taxpayers’ remaining arguments in a concurrently filed 

memorandum disposition.

 

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