Mitchell v. Commissioner, 2015 U.S. App. LEXIS 116

Background

In 2003 C.L. Mitchell Properties, LLLP (the Partnership) granted a perpetual conservation easement over 180 acres of Lone Canyon Ranch to Montezuma Land Conservancy; the property was encumbered by an unsubordinated deed of trust held by Clyde Sheek.
The Mitchells claimed a charitable contribution deduction on their 2003 joint return for the easement (valued at $504,000).
The mortgagee (Sheek) did not sign a subordination agreement until 2005, two years after the conveyance.
The IRS disallowed the 2003 deduction, asserting 26 C.F.R. § 1.170A-14(g)(2) requires mortgage subordination for post-1986 donations to satisfy the statutory “protected in perpetuity” requirement.
The Tax Court denied the Mitchells’ petition and motion for reconsideration; the Tenth Circuit reviews legal conclusions de novo and fact findings for clear error and affirms the Tax Court.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether a mortgage must be subordinated at the time of donation to claim a §170 deduction for a conservation easement	Mitchell: regulation contains no explicit timing requirement; subordination can occur after conveyance	IRS: regulation is a bright‑line prerequisite and subordination must exist at the time of the gift	Held: subordination must exist at the time of donation; deduction denied for 2003
Whether alternative deed safeguards can substitute for mortgage subordination for post‑1986 donations	Mitchell: deed terms adequately protect the conservation purpose in perpetuity	IRS: post‑1986 regulation provides no alternative to subordination	Held: post‑1986 rule bars substitutes; deed safeguards do not excuse subordination
Whether the “remote future event” provision excuses failure to subordinate when foreclosure risk is negligible	Mitchell: remote‑future clause creates an exception for negligible foreclosure risk	IRS: the remote‑event clause does not reach ordinary foreclosure risk and does not modify the subordination rule	Held: remote‑event provision does not apply to ordinary foreclosure risk and cannot nullify the specific subordination requirement
Whether the Commissioner’s regulatory interpretation is arbitrary and capricious	Mitchell (raised on appeal): regulation is arbitrary and capricious	IRS: regulation is a reasonable exercise of delegated authority; bright‑line rule promotes administrability	Held: argument forfeited on appeal; even on merits regulation is a reasonable exercise of authority

Key Cases Cited

Esgar Corp. v. Comm’r, 744 F.3d 648 (10th Cir. 2014) (describing qualified conservation contribution framework)
Commissioner v. Engle, 464 U.S. 206 (U.S. 1984) (Treasury authority to promulgate rules to enforce the Code)
Mayo Foundation for Medical Education & Research v. United States, 562 U.S. 44 (U.S. 2011) (deference to reasonable agency interpretations)
Koch Industries, Inc. v. United States, 603 F.3d 816 (10th Cir. 2010) (deference to Commissioner where reasonable)
Auer v. Robbins, 519 U.S. 452 (U.S. 1997) (deference to an agency’s interpretation of its own regulations)
Begay v. United States, 553 U.S. 137 (U.S. 2008) (use of statutory examples to define scope)
Fourco Glass Co. v. Transmirra Products Corp., 353 U.S. 222 (U.S. 1957) (specific provisions prevail over general ones)
RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 567 U.S. 243 (U.S. 2012) (do not let a general provision swallow a specific one)
Kaufman v. Shulman, 687 F.3d 21 (1st Cir. 2012) (interpreting the remote future event provision in a conservation easement context)
Commissioner v. Simmons, 646 F.3d 6 (D.C. Cir. 2011) (applied remote‑event provision where mortgage was subordinated)