Mitchell v. Comm'r
| Decision Date | 06 January 2015 |
| Docket Number | No. 13–9003.,13–9003. |
| Citation | 775 F.3d 1243 |
| Parties | Ramona L. MITCHELL, Petitioner–Appellant, v. COMMISSIONER of INTERNAL REVENUE, Respondent–Appellee. |
| Court | U.S. Court of Appeals — Tenth Circuit |
OPINION TEXT STARTS HERE
Larry D. Harvey, Englewood, CO, for Appellant.
Bethany B. Hauser, Tax Division, Department of Justice (Francesca Ugolini, Tax Division, Department of Justice, and Tamara W. Ashford, Acting Assistant Attorney General, with her on the brief), Washington, D.C., for Appellee.
Before HOLMES, MATHESON, and McHUGH, Circuit Judges.
The Petitioner, Ramona L. Mitchell, appeals the decision of the United States Tax Court denying a charitable contribution deduction for a donation of a conservation easement on real property that was, at the time of the donation, subject to an unsubordinated mortgage. Specifically, she challenges the Tax Court's conclusion that the donation failed to comply with the Internal Revenue Code (the Code) and its implementing regulations. Exercising jurisdiction pursuant to 26 U.S.C. § 7482, we affirm.
In 1998, Charles and Ramona Mitchell purchased a 105–acre parcel of ranch land in Colorado from Clyde Sheek. Mr. Mitchell purchased an additional, contiguous 351 acres from Mr. Sheek in 2001. The parties agreed that after an initial down payment, Mr. Mitchell would pay the balance of the purchase price in yearly installments. Mr. Mitchell signed a promissory note evidencing that obligation, which was secured by a deed of trust against the property.
The Mitchells then built their home on their 456 acres of ranch land, and called the property the Lone Canyon Ranch. In 2002, Mr. Mitchell and his family formed a family limited liability limited partnership, C.L. Mitchell Properties, LLLP (the Partnership).2 The Mitchells then transferred the Lone Canyon Ranch, subject to Mr. Sheek's deed of trust, to the Partnership along with other investments.
In 2003, the Partnership granted to the Montezuma Land Conservancy (the Conservancy) a conservation easement over 180 acres of unimproved land on the Lone Canyon Ranch. The parties executed a deed of conservation easement in gross (the Deed), which restricted the property for use as an open space, for wildlife, and for agricultural purposes, including agricultural businesses. The terms of the Deed purported to transfer the easement to the Conservancy in perpetuity and in a manner necessary to create a qualified conservation contribution under the Code and any applicable regulations. But what the Mitchells did not do at the time of the donation was obtain from Mr. Sheek a mortgage subordination agreement making his trust deed in the Lone Canyon Ranch subject to the Conservancy's rights in the easement.
In 2004, the Mitchells claimed a charitable contribution deduction on their 2003 joint federal income tax return based on the conservation easement granted to the Conservancy. They valued the easement at $504,000. Mr. Mitchell passed away in 2006.
In 2005, almost two years after the donation, Mr. Sheek agreed to subordinate his interest in the property to the Conservancy's easement. During the entire period between 2003 when the Partnership conveyed the easement to the Conservancy and 2005 when the Mitchells obtained a mortgage subordination agreement from Mr. Sheek, the Partnership paid its debts on time and had sufficient assets to satisfy in full the amounts due under the promissory note secured by the trust deed recorded against the Lone Canyon Ranch.
In 2010, the Commissioner of Internal Revenue Service (the Commissioner) mailed a notice of deficiency to Ms. Mitchell disallowing the charitable contribution deduction for failure to meet certain requirements of the Code and its implementing regulations. In particular, the Commissioner claimed that because the Conservancy's interest in the property was subject to Mr. Sheek's unsubordinated mortgage at the time of the donation, the conservation purpose was not protected in perpetuity as required by the Code. Ms. Mitchell filed a petition with the Tax Court challenging the Commissioner's decision that same year.
The Tax Court denied the Mitchells' claimed charitable contribution deduction, concluding the Code and its implementing regulations strictly required that Mr. Sheek's mortgage be subordinated on the date of the donation. Ms. Mitchell sought reconsideration, but the Tax Court denied her motion. Ms. Mitchell now appeals.
We review the Tax Court's determination and application of law de novo and its findings of facts for clear error. Esgar Corp. v. Comm'r, 744 F.3d 648, 652 (10th Cir.2014).
To put our analysis in context, we first examine the Code and its implementingregulations before addressing Ms. Mitchell's arguments on appeal. “Although taxpayers are generally not permitted to deduct contributions of an interest in property less than their entire interest, Congress has permitted such partial interest contributions where the interest donated is a ‘qualified conservation contribution.’ ” Esgar Corp. v. Comm'r, 744 F.3d 648, 657 (10th Cir.2014) (quoting 26 U.S.C. § 170(f)(3)(B)(iii)); see26 C.F.R. § 1.170A–14 (). Commonly called “conservation easements,” the contribution must meet certain statutory requirements. Esgar Corp., 744 F.3d at 657. In particular, the “term ‘qualified conservation contribution’ means a contribution ... of a qualified real property interest ... to a qualified organization ... exclusively for conservation purposes.” 26 U.S.C. § 170(h)(1). The Code further provides, “A contribution shall not be treated as exclusively for conservation purposes unless the conservation purpose is protected in perpetuity.” Id. § 170(h)(5)(A).
The Code does not define the phrase “protected in perpetuity,” or otherwise describe how a taxpayer may accomplish this statutory mandate. See id. As such, Congress has tasked the Commissioner with promulgating rules to ensure that a conservation purpose be protected in perpetuity. See Comm'r v. Engle, 464 U.S. 206, 226–27, 104 S.Ct. 597, 78 L.Ed.2d 420 (1984) (); Mayo Found. for Med. Educ. & Research v. United States, 562 U.S. 44, ––––, 131 S.Ct. 704, 713, 178 L.Ed.2d 588 (2011) (); see also In re FCC 11–161, 753 F.3d 1015, 1040–41 (10th Cir.2014) ().
Acting pursuant to this authority, the Commissioner promulgated 26 C.F.R. § 1.170A–14(g). Paragraph 14(g)(2) provides for situations in which taxpayers-like the Mitchells—have donated property subject to a mortgage.
In the case of conservation contributions made after February 13, 1986, no deduction 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) 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.
26 C.F.R. § 1.170A–14(g)(2) (emphasis added) (mortgage subordination provision).
The regulations also provide that a deduction will not be disallowed “under ... this section” “merely” because the interest that passes to the donee organization may be defeated by the happening of some future event, “if on the date of the gift it appears that the possibility that such ... event will occur is so remote as to be negligible.” Id. § 1.170.A–14(g)(3) (). The provision provides the following example of an event that would constitute a remote future event: “For example, a state's statutory requirement that use restrictions must be rerecorded every 30 years to remain enforceable shall not, by itself, render an easement nonperpetual.” Id.
Because the Commissioner promulgated these regulations pursuant to the authority granted to him by Congress, they are binding on taxpayers unless “arbitrary and capricious in substance, or manifestly contrary to the statute.” Mayo Found., 131 S.Ct. at 711 (quoting Household Credit Servs., Inc. v. Pfennig, 541 U.S. 232, 242, 124 S.Ct. 1741, 158 L.Ed.2d 450 (2004)). And where Congress has delegated to the Commissioner the power to promulgate regulations for the enforcement of the Code, “we must defer to his regulatory interpretations of the Code so long as they are reasonable.” Koch Indus., Inc. v. United States, 603 F.3d 816, 821 (10th Cir.2010).
Here, the relevant regulations, specifically the mortgage subordination provision, represent the Commissioner's reasoned efforts to implement the Code's requirement that “[a] contribution shall not be treated as exclusively for conservation purposes unless the conservation purpose is protected in perpetuity.” See26 U.S.C. § 170(h)(5). The requirement that an existing mortgage on property that is the subject of a charitable donation be subordinated prevents defeasance in the event of default. In this way, it is reasonably related to Congress's mandate that the conservation purpose be protected in perpetuity. Accordingly, our inquiry in the instant case...
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