Mortgage Must be Subordinated To Get Charitable Deduction For Donated Conservation Easement.

In a prior opinion, Mitchell v. Comr., T.C. Memo. 138 T.C. No. 16 (2012), the Tax Court disallowed the petitioner's charitable deduction for a permanent conservation easement donation due to the failure to satisfy the mortgage subordination requirement of Treas. Reg. Sec. 1.170A-14(g)(2).  In the prior case, the petitioner argued that the conservation purpose of easement was protected in perpetuity even without a subordination agreement because the probability of default on the mortgage was negligible.  However, the court rejected that argument on the basis that the Treasury Regulations require a subordination agreement.  In a subsequent Tax Court case, the petitioner argued that Kaufman v. Comr., 687 F.3d 21 (1st Cir. 2012) required the Tax Court to reconsider its prior decision.  The Tax Court disagreed, noting that Kaufman was not binding on the Tax Court because it addressed different legal issues.  Kaufman involved the "proceeds" regulation governing entitlement to proceeds upon judicial extinguishment of an easement, while the present case involved the mortgage subordination regulation.  The court also noted that the subordination regulation is specific and there is no "functional" subordination contemplated by the regulation.  The court also rejected the petitioner's argument that Carpenter v. Comr., T.C. Memo. 2012-1 created a safe harbor and that the regulation should be read as a safe harbor.  Instead, the court noted that Treas. Reg. Sec. 1.170A-14(g) is specific, mandatory and cannot be ignored.  The petitioner argued that the court should create a general rule with respect to the perpetuity requirement of I.R.C. Sec. 170(h)(5)(A) based on Kaufman.  However, the court rejected that argument on the basis that Kaufman did not create a general rule that protecting proceeds from extinguishment of a conservation easement would satisfy the perpetuity requirement of Treas. Reg. Sec. 1.170A-14(g)).  Mitchell v. Comr., T.C. Memo. 2013-204.  On further review, the Tenth Circuit affirmed.  The appellate court specifically noted that Treas. Reg. Sec. 1.170A-14(g)(3) does not relieve a donor from having to meet the subordination requirement when the probability of default on the mortgage is negligible.  Mitchell v. Comr., No. 13-9003, 2015 U.S. App. LEXIS 116 (10th Cir. Jan. 6, 2015). 

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