Court Opinion

ID: 2826750
Source: CourtListenerOpinion
Date Created: 2015-08-12 20:01:27.525596+00
Date Added: 2024-06-11T13:39:50.158902
License: Public Domain

NOT FOR PUBLICATION                         FILED
                     UNITED STATES COURT OF APPEALS                      AUG 12 2015
                                                                      MOLLY C. DWYER, CLERK
                                                                       U.S. COURT OF APPEALS
                             FOR THE NINTH CIRCUIT

 WALTER C. MINNICK and A.K.                      No. 13-73234
 LIENHART,
                                                 Tax Ct. No. 29632-09
              Petitioners - Appellants,

    v.                                           MEMORANDUM *

 COMMISSIONER OF INTERNAL
 REVENUE,

              Respondent - Appellee.

                            Appeal from a Decision of the
                              United States Tax Court

                          Argued and Submitted July 6, 2015
                                Seattle, Washington

Before: KLEINFELD, NGUYEN, and FRIEDLAND, Circuit Judges.

         Walter C. Minnick and A.K. Lienhart (“Taxpayers”) appeal the Tax Court’s

decision to grant the Internal Revenue Service (“Commissioner”) permission to file

an amended answer on the morning of trial, the Tax Court’s judgment disallowing

the deduction of a conservation easement because it was subject to a mortgage that

         *
             This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.
was not subordinated at the time of the donation, and the Tax Court’s imposition of

a negligence-related penalty.

      Taxpayers appeal the ruling on the motion to file an amended answer,

arguing that they suffered prejudice because they lacked notice that subordination

would be an issue at trial. Tax Court rules permit parties to amend their pleadings

at any time “by leave of Court” and provide that leave “shall be given freely when

justice so requires.” Tax Ct. R. 41(a). We review the Tax Court’s decision to

allow amendment for abuse of discretion. Estate of Ashman v. Comm’r, 231 F.3d

541, 542 n.2 (9th Cir. 2000). The record shows that Taxpayers were in fact aware

of and prepared to argue the subordination issue at trial. Taxpayers also have not

shown that they suffered any prejudice as a result of the Commissioner’s delay in

amending the answer. There is no dispute about the date of the gift or the date of

the mortgage subordination agreement, which are the only relevant facts for

determining whether Taxpayers were entitled to a charitable deduction of the

conservation easement—more notice that the subordination issue would be

included in the trial would not have changed either fact. Therefore, the Tax Court

did not abuse its discretion by granting the Commissioner leave to amend the

answer.

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      In our concurrently filed opinion, we hold that deductions for conservation

easements may be taken only if any mortgage on the property was subordinated to

the easement at the time of the gift. Taxpayers argue that their failure to

subordinate nevertheless should be excused for three reasons. First, Taxpayers

argue that Treas. Reg. § 1.170A-14(g)(3), which provides that a “deduction shall

not be disallowed under . . . this section 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,” excuses any non-

compliance with the subordination requirement found elsewhere in the regulation.

But however certain Taxpayers are now that they would stay current on their

mortgage and ultimately obtain a subordination from their bank, this provision

does not override § 1.170A-14(g)(2)’s subordination requirement. Second,

Taxpayers argue that there is “verifiable evidence of original intent to enforce the

easement in perpetuity” in the easement’s warranty, which averred that there were

“no outstanding mortgages . . . in the Property that have not been expressly

subordinated to the Easement.” Even if this were evidence of an intent to

subordinate the mortgage to the easement, Taxpayers’ intent to subordinate is not

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relevant because it is undisputed that the mortgage was not subordinated at the

time of the gift. Third, Taxpayers’ argue that Idaho’s cy pres doctrine, which

restricts Taxpayers from abandoning or otherwise encumbering the easement,

adequately ensures that the easement will continue in perpetuity to satisfy the

subordination requirement. But Idaho’s 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.

      Finally, Taxpayers argue that the Tax Court improperly imposed a 20

percent accuracy-related negligence penalty under 26 U.S.C. § 6662(a). As an

initial matter, we are unpersuaded by Taxpayers’ argument that the Commissioner

failed to raise the negligence penalty, because the Notice of Deficiency specifically

referenced penalties for negligence under § 6662(a). The record supports the Tax

Court’s finding of fact that Taxpayers were negligent, so this finding was not

clearly erroneous. Even if Taxpayers’ ignorance of the subordination requirement

was in good faith, it was not clear error for the Tax Court to find that Taxpayers

“did not have reasonable cause for claiming a charitable-contribution deduction”

because Minnick has a law degree and reading the Treasury Regulation would

have given him notice that subordination may have been required.

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AFFIRMED.

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