Source: https://taxlitigator.me/2015/08/28/subordination-of-mortgage-is-required-before-conservation-easement-donation-by-krista-hartwell/
Timestamp: 2019-04-22 00:54:23+00:00

Document:
The “enforceable in perpetuity” provision of the 1.170A-14 regulations was at issue in Minnick because there was a mortgage on the donated property at the time of donation. Regulation 1.170A-14(g)(2) “Protection of a conservation purpose in case of a donation of property subject to a mortgage,” states: “In the case of conservation contributions made after February 13, 1986, no deducion [sic] 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 to the right of the qualified organization to enforce the conservation purposes of the gift in perpetuity. For conservation contributions made prior to February 14, 1986, the requirement of section 170 (h)(5)(A) [26 USCS § 170 (h)(5)(A)] is satisfied in the case of mortgaged property (with respect to which the mortgagee has not subordinated its rights) only if the donor can demonstrate that the conservation purpose is protected in perpetuity without subordination of the mortgagee’s rights.” .
In Minnick, the taxpayers took out a loan secured by an undeveloped plot of land for the purpose of developing the land. The following year, the taxpayers increased the loan amount twice. Two days after receiving final approval to develop the land, the taxpayers donated a conservation easement to Land Trust of Treasure Valley on parts of the land that would not be developed. Although the easement agreement contained warranties that the land was not subject to a mortgage, it was in fact subject to a mortgage at the time of donation, and the taxpayers did not inform the lender of the easement at the of the easement donation. The taxpayers hired an appraiser who appraised the value of the conservation easement at $941,000 and the taxpayers claimed a charitable deduction of $389,517 on their then current year return. They carried forward the remainder of the deduction on their tax returns for the two following tax years.
Subordination of the Mortgage. The IRS issued a Notice of Deficiency for the two carry forward years on the ground that “documentation of fair market value was not provided.” The taxpayers filed a Tax Court petition, and shortly before trial they contacted the lender bank to request a subordination of the mortgage to the easement. After an appraisal and some negotiation, the taxpayers and the bank entered into a subordination agreement. At the same time as the taxpayers entered into the subordination agreement, the IRS argued in its pre-trial memorandum that the taxpayers were not entitled to deduct the conservation easement as a gift because the mortgagee did not subordinate its rights in the property to the rights of the qualified organization to the enforce the conservation purposes of the gift in perpetuity.
Mortgage Must be Subordinated at the Time of the Donation to be Deductible. Before the Tax Court ruled in the taxpayers’ case (but after trial concluded), the Tax Court decided Mitchell v. Commissioner, which held that mortgages must be subordinated at the time of the donation in order to be deductible under Regulation section 1.170A-14(g)(2).  The taxpayers in Mitchell moved for reconsideration, which the Tax Court denied. The taxpayers in Mitchell then filed an appeal in the Tenth Circuit and the Tenth Circuit affirmed the Tax Court’s decision.  The Ninth Circuit in Minnick followed the Tenth Circuit’s holding in Mitchell that Regulation section 1.170A-14(g)(2) requires that the mortgage be subordinated at the time of the gift for the gift to be deductible.
 Minnick v. Comm’r, 2015 U.S. App. LEXIS 14097 (9 h Cir. 2015).
 26 USC § 170(f)(3)(B)(iii); 26 CFR § 1.170A-14(a).
 Mitchell v. Comm’r, 138 T.C. No. 16 (2012), vacated on denial of reconsideration by Mitchell v. Comm’r, 106 T.C.M. 215 (2013).
 Mitchell v. Comm’r, 775 F.3d 1243 (10th Cir. 2015).

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