796 F.3d 1156
9th Cir.2015Background
- In 2005–2006 Walter Minnick (and spouse A.K. Lienhart) increased a loan from U.S. Bank to $1.5M secured by undeveloped land intended for development.
- In September 2006 Minnick donated conservation easements on portions of the land not to be developed, but the property remained subject to the bank mortgage and the bank was not notified or subordinated at that time.
- Taxpayers claimed a charitable deduction for the easement (appraiser valued easement at $941,000; deduction claimed $389,517) on amended 2006 return and carried amounts to 2007–2008.
- IRS issued a Notice of Deficiency for 2007–2008 disallowing the deduction; Taxpayers petitioned the Tax Court and trial occurred in 2011.
- After trial, Tax Court relied on Mitchell and held a mortgage must be subordinated at the time of the gift under Treas. Reg. § 1.170A-14(g)(2); Taxpayers appealed to the Ninth Circuit.
- While appeal was pending, the Tenth Circuit affirmed the same legal rule in Mitchell v. Commissioner (Mitchell II).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Treas. Reg. § 1.170A-14(g)(2) requires mortgage subordination at time of donation for a deduction | Minnick: subordination need not exist at the time of the gift (later subordination suffices) | IRS: regulation requires mortgagee to subordinate rights at time of the gift so conservation purpose is protected in perpetuity | Court: regulation requires subordination at time of donation; deduction disallowed without it |
Key Cases Cited
- Christopher v. SmithKline Beecham Corp., 635 F.3d 383 (9th Cir. 2011) (framework for interpreting agency regulations)
- Auer v. Robbins, 519 U.S. 452 (1997) (deference to agency interpretation of its own regulations when ambiguous)
- Christensen v. Harris Cty., 529 U.S. 576 (2000) (limits on deference to agency interpretations)
- INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992) (tax deductions are matters of legislative grace and construed strictly)
- Ann Jackson Family Found. v. Commissioner, 15 F.3d 917 (9th Cir. 1994) (standard of review for Tax Court legal conclusions)
- Mitchell v. Commissioner, 775 F.3d 1243 (10th Cir. 2015) (affirming rule that mortgage must be subordinated at time of donation)