Mitchell v. CIR , 775 F.3d 1243 ( 2015 )

FILED
United States Court of Appeals
Tenth Circuit
PUBLISH
January 6, 2015
UNITED STATES COURT OF APPEALS
Elisabeth A. Shumaker
Clerk of Court
TENTH CIRCUIT
RAMONA L. MITCHELL,
Petitioner - Appellant,
v. No. 13-9003
COMMISSIONER OF INTERNAL
REVENUE,
Respondent - Appellee.
On Appeal from the United States Tax Court
(Tax Court No. 10891-10)
Larry D. Harvey, Englewood, Colorado, 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.
McHUGH, Circuit Judge.
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.
BACKGROUND
A. Factual Background1
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
1
We take the facts, which are not in dispute, largely from the opinions of the Tax
Court. See Mitchell v. Comm’r, 138 T.C. 324 (2012), vacated by Mitchell v. Comm’r, 106
T.C.M. 215 (2013) (memorandum opinion) (vacating the opinion to consider a motion to
reconsider but ultimately denying the motion to reconsider). We accept the Tax Court’s
findings of fact unless clearly erroneous. See Esgar Corp. v. Comm’r, 744 F.3d 648, 652
(10th Cir. 2014).
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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
2
The Partnership is now known as the “Lone Canyon Ranch Limited Liability
Limited Partnership.”
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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.
B. Procedural Background
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.
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DISCUSSION
A. Standard of Review
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).
B. Internal Revenue Code and Regulatory Framework
To put our analysis in context, we first examine the Code and its implementing
regulations 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)); see 26 C.F.R.
§ 1.170A-14 (“a deduction . . . is generally not allowed for a charitable contribution of
any interest in property that consists of less than the donor’s entire interest in the
property.”). 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).
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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 (1984) (recognizing that 26 U.S.C. § 7805 delegates to the Commissioner the
authority to prescribe all “needful rules and regulations” for the enforcement of the
Code); Mayo Found. for Med. Educ. & Research v. United States, 562 U.S. 44, ___, 131
S. Ct. 704, 713 (2011) (concluding the Treasury Department has the power to fill any
gaps in the Code left by Congress); see also In re FCC 11-161, 753 F.3d 1015, 1040–41
(10th Cir. 2014) (“If . . . the statute is silent or ambiguous with respect to the specific
issue, the question for the court is whether the agency’s answer is based on a permissible
construction of the statute.”).
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.
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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 remote future event provision). 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 (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.” See 26 U.S.C. §170(h)(5). The
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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 focuses not on the enforceability
of the regulations, but on whether they can be interpreted to entitle Ms. Mitchell to the
deduction despite the undisputed fact that the Lone Canyon Ranch was subject to Mr.
Sheek’s unsubordinated mortgage at the time of the donation.
Ms. Mitchell makes two arguments in favor of such an interpretation. First, she
notes the mortgage subordination provision contains no explicit timeframe for
compliance and asks us to interpret it to allow subordination to occur at any time.
Second, and in the alternative, Ms. Mitchell claims the regulations entitle her to the
deduction despite any failure to comply strictly with the mortgage subordination
provision. She offers two reasons why we should interpret the regulations in this way.
Ms. Mitchell claims she is entitled to the deduction despite the failure to subordinate the
mortgage at the time of conveyance because the Deed contained sufficient safeguards to
protect the conservation purpose in perpetuity. In addition, she argues the remote future
event provision acts as an exception to the mortgage subordination provision, forgiving
“remote and harmless errors.” Aplt. Br. at 24. In support, she points to the language in the
provision, that a deduction will not be disallowed “under . . . this section” if the
possibility of defeasance is so remote as to be negligible, as an indication it is an
exception to the otherwise strict subordination requirement. According to Ms. Mitchell,
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subordination was unnecessary in the instant case because the risk the Partnership would
default on Mr. Sheek’s loan was so remote as to be negligible.3
Conversely, the Commissioner urges us to interpret the mortgage subordination
provision as a bright line requirement, which requires any existing mortgage to be
subordinated to the rights of the charitable organization, irrespective of the risk of
foreclosure or any alternate safeguards. The Commissioner also asserts the provision
mandates that subordination occur at the time of the donation. Otherwise, the
Commissioner posits, the easement’s conservation purpose is not protected in perpetuity
because the easement is vulnerable to extinction upon foreclosure, which could occur
after donation but prior to subordination. According to the Commissioner, this risk is
contrary to the express language of the Code, which prohibits taxpayers from taking a
3
Ms. Mitchell also claims the mortgage subordination provision is arbitrary and
capricious, and therefore unenforceable. We need not consider this argument because it is
raised for the first time on appeal and is directed at reversing the decision of the Tax
Court. See United States v. Holmes, 727 F.3d 1230, 1237 (10th Cir. 2013) (“[W]e do not
permit new arguments on appeal when those arguments are directed to reversing the
district court.”); Richison v. Ernest Grp., Inc., 634 F.3d 1123, 1128 (10th Cir. 2011)
(precluding appellate review of claims forfeited before the district court that are directed
at reversal unless the litigant can establish plain error—clear legal error that implicates a
miscarriage of justice); McKissick v. Yuen, 618 F.3d 1177, 1189 (10th Cir. 2010) (noting
that where a party’s arguments were forfeited before the district court, the failure to
explain on appeal how they survive the plain error standard waives the arguments in this
court). But even if we were to exercise our discretion to consider the argument on the
merits, see United States v. Black, ___ F.3d ___, 14-1000, 2014 WL 6892493, at *1 n.2
(10th Cir. Dec. 9, 2014), Ms. Mitchell’s challenge would fail. As explained, the mortgage
subordination provision is enforceable as a reasonable exercise of the Commissioner’s
authority to implement the statute.
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charitable deduction for such donations unless the conservation purpose is protected in
perpetuity.
For the reasons explained below, we agree with the Commissioner.
C. Interpretation of the Regulations
In interpreting the relevant regulations, we apply the same rules we use to interpret
statutes. Time Warner Entm’t Co., L.P. v. Everest Midwest Licensee, L.L.C., 381 F.3d
1039, 1050 (10th Cir. 2004). We begin by examining the plain language of the text,
giving each word its ordinary and customary meaning. See United States v. Manatau, 647
F.3d 1048, 1051 (10th Cir. 2011) (interpreting federal sentencing guidelines). If, after
engaging in this textual analysis, the meaning of the regulations is clear, our analysis is at
an end, and we must enforce the regulations in accordance with their plain meaning. See
Tierdael Const. Co. v. Occupational Safety & Health Review Comm’n, 340 F.3d 1110,
1114 (10th Cir. 2003).
If, by contrast, the meaning of the regulations is not plain, we defer to the
Commissioner’s reasonable interpretations, even those advanced in his legal brief, unless
“‘plainly erroneous or inconsistent with the regulation[s],’” or there is any other “‘reason
to suspect that the interpretation does not reflect the agency’s fair and considered
judgment on the matter in question.’” See Chase Bank USA, N.A. v. McCoy, 562 U.S.
195, ___, 131 S. Ct. 871, 880–81 (2011) (quoting Auer v. Robbins, 519 U.S. 452, 462
(1997)); accord Christopher v. SmithKline Beecham Corp., ___ U.S. ___, 132 S. Ct.
2156, 2166 (2012) (holding an agency’s interpretation of its regulations is entitled to
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deference unless there exists reason to suspect the interpretation does not reflect the
agency’s fair and considered judgment on the matter in question and noting such
suspicion exists, if, for example, the agency’s interpretation conflicts with a prior
interpretation, it appears the interpretation is nothing more than a convenient litigating
position, or represents a post hoc rationalization advanced by an agency seeking to
defend past agency action against attack (internal citations and brackets omitted)); see,
e.g., Union Carbide Corp. & Subsidiaries v. Comm’r, 697 F.3d 104, 108 (2d Cir. 2012)
(giving Auer deference to the Commissioner’s regulatory interpretation contained in his
legal brief where the interpretation was consistent with the purpose of the statute);
Huffman v. Comm’r, 518 F.3d 357, 368 (6th Cir. 2008) (holding the Commissioner’s
interpretation of what constitutes a “change in method of accounting” was entitled to
controlling weight where not plainly erroneous or inconsistent with the regulation); Am.
Express Co. v. United States, 262 F.3d 1376, 1381–84 (Fed. Cir. 2001) (giving Auer
deference to the Commissioner’s reasonable interpretation of the scope of the word
“services” contained in a regulation).
With this framework in mind, we first address Ms. Mitchell’s claim that she is
entitled to the deduction because Mr. Sheek did subordinate the mortgage, albeit not until
2005. We then examine her argument that the regulations allow taxpayers to take a
deduction for donations of interests in real property subject to an existing mortgage
without subordination so long as the conservation purpose is protected in other ways or
the risk of foreclosure is so remote as to be negligible.
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1. The mortgage subordination provision does not allow subordination at any time.
Ms. Mitchell advances an interpretation of the mortgage subordination provision
that would allow her to claim the deduction for the 2003 tax year, despite the fact the
mortgage was not subordinated until 2005. In support, she notes the mortgage
subordination provision contains no express timing requirement.
Ms. Mitchell’s interpretation is foreclosed by the plain language of the regulation.
Although she is correct the provision contains no explicit reference to the time at which
subordination must occur, the provision expressly provides that subordination is a
prerequisite to allowing a deduction. The provision states “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.” 26 C.F.R. § 1.170A-14(g)(2)
(emphasis added). It is undisputed that in 2003, when the Mitchells requested a charitable
deduction for the donation of the easement to the Conservancy, the Lone Canyon Ranch
was subject to Mr. Sheek’s unsubordinated mortgage. As a result, she was not entitled to
a deduction under the plain language of the regulation.
Even if we were to view the regulation as ambiguous with respect to timing, the
result would be no different because we must defer to the Commissioner’s reasonable
interpretation on this point.4 The Commissioner’s interpretation—that to be entitled to a
4
The Commissioner has not asked us to defer to his regulatory interpretation
under Auer, asserting instead that the regulations plainly required the Mitchells to
subordinate the mortgage at the time of the donation. Nevertheless, we are entitled to
Continued . . .
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deduction, a mortgage must be subordinated at the time of the donation—is not plainly
erroneous or inconsistent with the mortgage subordination provision’s plain language.
Rather, it represents a reasonable interpretation of the provision’s mandate that no
deduction will be permitted for an interest in property that is subject to a mortgage unless
the mortgage is subordinated. See id.
Nor is there any reason to suspect the interpretation does not reflect the
Commissioner’s fair and considered judgment on the matter. The Commissioner’s
interpretation is consistent with the Code, which requires the conservation purpose of the
easement to be protected in perpetuity. Because a conservation easement subject to a
prior mortgage obligation is at risk of extinguishment upon foreclosure, requiring
subordination at the time of the donation is consistent with the Code’s requirement that
the conservation purpose be protected in perpetuity. See 26 U.S.C. § 170(h)(5)(A).
______________________________________
Cont.
defer to the Commissioner’s interpretation in the event of any ambiguity. See Planned
Parenthood of Kan. & Mid-Mo. v. Moser, 747 F.3d 814, 837 (10th Cir. 2014) (stating we
are “‘not limited to the particular legal theories advanced by the parties, but rather
retain[ ] the independent power to identify and apply the proper construction of
governing law’”) (quoting U.S. Nat’l Bank v. Indep. Ins. Agents of Am., Inc., 508 U.S.
439, 446 (1993))); United States v. Lott, 310 F.3d 1231, 1242 n.7 (10th Cir. 2002)
(stating we may “affirm a district court decision on any grounds for which there is a
record sufficient to permit conclusions of law, even grounds not relied upon by the
district court” (quotations omitted)).
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Accordingly, the Tax Court correctly concluded the donation failed to comply
with the mortgage subordination requirement because Mr. Sheek’s mortgage
encumbering the Lone Canyon Ranch was not subordinated until after the donation.
2. The Commissioner is entitled to demand strict compliance with the mortgage
subordination provision, irrespective of the likelihood of foreclosure.
Having determined the Mitchells’ donation did not strictly comply with the
mortgage subordination provision, we turn our attention to Ms. Mitchell’s alternate
argument that she is entitled to the deduction, despite technical noncompliance with the
mortgage subordination provision. In support of this interpretation, Ms. Mitchell asserts
strict compliance was unnecessary due to provisions in the Deed that allegedly protect the
conservation purpose in perpetuity, and because the risk of foreclosure here was so
remote as to be negligible. We disagree with Ms. Mitchell’s interpretation of the
regulations and conclude the Commissioner is entitled to demand strict compliance with
the mortgage subordination provision, irrespective of the likelihood of foreclosure in any
particular case.
a. Subordination was required despite any alleged alternative safeguards contained
in the Deed.
The plain language of the mortgage subordination provision requires us to reject
Ms. Mitchell’s claim that she was entitled to the deduction in the absence of Mr. Sheek’s
subordination. As explained, the provision plainly states, “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.” 26 C.F.R. § 1.170A-14(g)(2)
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(emphasis added). The provision provides for one narrow exception to this unambiguous
requirement, for donations occurring prior to 1986. In the case of such a donation, a
taxpayer may be entitled to a deduction without subordination if the donor can
demonstrate the conservation purpose is otherwise protected in perpetuity. Id. But the
negative implication of the express, time-limited exception is that no alternative to
subordination will suffice for post-1986 donations, such as the Mitchells’. We therefore
decline Ms. Mitchell’s invitation to adopt a functional subordination rule for donations
occurring after 1986, where neither the Legislature nor the Commissioner has done so.
b. The Commissioner is entitled to demand strict compliance with the mortgage
subordination provision, irrespective of the likelihood of foreclosure.
Likewise, we do not read the remote future event provision as modifying the
mortgage subordination requirement. The remote future event provision provides that a
deduction will not be disallowed “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 act or event will occur is so remote as to
be negligible.” 26 C.F.R. § 1.170A-14(g)(3). That a deduction will not be disallowed
“merely” because of a remote possibility of defeasance presumes the taxpayer has
otherwise complied with the specific prerequisite of subordination.
In addition, the remote future event provision cannot be reasonably interpreted to
include the relatively unexceptional risk of foreclosure, which exists any time a taxpayer
donates an interest in property subject to a mortgage. The Tax Court has defined “so
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remote as to be negligible” as “a chance which persons generally would disregard as so
highly improbable that it might be ignored with reasonable safety in undertaking a
serious business transaction” or “a chance which every dictate of reason would justify an
intelligent person in disregarding as so highly improbable and remote as to be lacking in
reason and substance.” Wachter v. Comm’r, No. 9213-11, 2014 WL 941618, at *6 (T.C.
Mar. 11, 2014) (internal quotation marks and citations omitted);5 see also Kaufman v.
Shulman, 687 F.3d 21, 27 (1st Cir. 2012) (holding that the remote future event provision
applies to “improbable events,” and that one does not establish compliance with the
regulations by establishing that the risk of a future event is “unexpected”). The risk of
foreclosure fails to meet this high standard.
Indeed, the provision’s use of a discrete example of what qualifies as a remote
future event illustrates the regulation cannot be reasonably read to apply to the risk of
foreclosure. See Begay v. United States, 553 U.S. 137, 142 (2008) (a statute’s use of
examples defines the statute’s intended scope). The provision describes a state statutory
requirement that a use restriction must be rerecorded every 30 years and identifies the
risk that sometime in the future the donee will neglect to rerecord as an example of the
type of event that should not prevent a deduction. 26 C.F.R. § 1.170A-14(g)(3). This is
easily distinguishable from the risk of foreclosure. The remoteness of the risk involved in
5
“Rulings by the Tax Court on matters of tax law are . . . persuasive authority,”
particularly where “uniform administration would be promoted by conforming to them
where possible.” Esgar Corp., 744 F.3d at 652.
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the example is inherent in the unlimited rerecording requirement. The possibility that
sometime in perpetuity—30, 60, 90, 120, or more years after the donation—the donee
may neglect to renew the easement is considerably more remote than the risk of
foreclosure under a mortgage obligation limited to a finite repayment period. As such, the
risk of foreclosure “is simply too unlike the provision’s listed example[] for us to believe
that [the Commissioner] intended the provision to cover it.” See Begay, 553 U.S. at 142.
Thus, the plain text of the remote future event provision indicates it does not
encompass the risk of foreclosure as a remote future event. Nevertheless, Ms. Mitchell
asks us to read the remote future event provision as an exception to the subordination
requirement because the former provision states “[a] deduction shall not be disallowed
under . . . this section” if the possibility of defeasance is so remote as to be negligible.”
See 26 C.F.R. § 1.170A-14(g)(3) (emphasis added). Because the mortgage subordination
provision is in the same “section” of the regulations as the remote future event provision,
she claims subordination is not required if the risk of foreclosure is so remote as to be
negligible. We disagree.
Even if we were to assume the remote future event provision could be reasonably
interpreted to have general applicability to the mortgage subordination provision, we are
required to enforce the terms of the specific subordination requirement to prevent the
requirement from becoming meaningless. Where the Commissioner “has enacted a
comprehensive scheme and has deliberately targeted specific problems with specific
solutions,” we will not enforce a general exception to that rule, even if the general
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exception is seemingly broad enough to include it. See RadLAX Gateway Hotel, LLC v.
Amalgamated Bank, ___ U.S. ___, 132 S. Ct. 2065, 2071 (2012). In such a case, to avoid
the “superfluity of a specific provision that is swallowed by the general one,” we require
compliance with the specific provision. See id. (holding a detailed provision that spelled
out the requirements for selling collateral free of liens governed, and rejecting debtors’
argument that they should be excused from noncompliance because they complied with a
different, more general, statutory provision).
Here, the existence of the subordination requirement is evidence that in
promulgating the rules, the Commissioner specifically considered the risk of mortgage
foreclosure to be neither remote nor negligible, and therefore chose to target the
accompanying risk of extinguishment of the conservation easement by strictly requiring
mortgage subordination. See Kaufman v. Comm’r, 136 T.C. 294, 307 (2011), vacated in
part on other grounds by Kaufman v. Shulman, 687 F.3d 21 (1st Cir. 2012). As the Tax
Court reasoned, “The drafters . . . saw taxpayers defaulting on their mortgages as more
than a remote possibility. Therefore[,] they drafted a specific provision which would
absolutely prevent a default from destroying a conservation easement’s grant in
perpetuity.” Mitchell v. Comm’r, 138 T.C. 324, 327 (2012), vacated by Mitchell v.
Comm’r, 106 T.C.M. 215 (2013) (memorandum opinion) (vacating the opinion to
consider the motion to reconsider but ultimately denying the motion to reconsider).
Accordingly, even if the use of the phrase “this section” in the remote future event
provision could suggest general application to the mortgage subordination provision, we
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cannot apply it in a manner that would render meaningless the more specific
subordination mandate. See RadLAX, 132 S. Ct. at 2071; Fourco Glass Co. v. Transmirra
Prods. Corp., 353 U.S. 222, 228–29 (1957) (“However inclusive may be the general
language of a statute, it will not be held to apply to a matter specifically dealt with in
another part of the same enactment. Specific terms prevail over the general in the same or
another statute which otherwise might be controlling.” (internal quotation marks
omitted)).
Despite Ms. Mitchell’s argument to the contrary, this interpretation is also
consistent with the D.C. Circuit’s decision in Commissioner v. Simmons, 646 F.3d 6
(D.C. Cir. 2011). There, the court applied the remote future event provision in holding
that a taxpayer was entitled to a deduction where the mortgage was subordinated but the
deeds granting the easements contained a clause allowing the donee organization to
change or abandon its rights to the easements. Id. at 8–9. Specifically, the D.C. Circuit
rejected the Commissioner’s argument that the conservation purpose was not protected in
perpetuity due to the language in the deeds. Id. at 10–11. It reasoned that the donee
organization had never before abandoned its rights in an easement although it had been
holding and monitoring these types of easements since the 1970s, and the deeds
expressed the organization’s intention to ensure the property “remained essentially
unchanged.” Id. at 10. Therefore, the court held the taxpayer’s deduction could not be
“disallowed based upon the remote possibility [the organization would] abandon the
easements.” Id.
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Unlike what Ms. Mitchell asks for in the instant case, the D.C. Circuit in Simmons
did not excuse the taxpayer from complying with the mortgage subordination
requirement, or excuse noncompliance with any express precondition to taking a
deduction contained in the regulations. Rather, it applied the remote future event
provision to allow a deduction despite the risk of noncompliance with § 1.170A-14’s
more general perpetuity requirements. Thus, Simmons does not support an interpretation
of the remote future event provision that would excuse noncompliance with the mortgage
subordination provision’s plain and specific mandate that “no deduction will be permitted
. . . unless” the mortgage is subordinated. See 26 C.F.R. § 1.170-14(g)(2).6
For all these reasons, we conclude the remote future provision cannot be
reasonably read as modifying the strict mortgage subordination requirement. But even if
the regulations were unclear with respect to the interplay between these provisions, Ms.
Mitchell would not prevail. We are required to defer to the Commissioner’s interpretation
to resolve any ambiguity on this point unless it is “plainly erroneous or inconsistent with
the regulations” or there is any other “reason to suspect the interpretation does not reflect
the agency’s fair and considered judgment on the matter.” See Chase Bank USA, N.A. v.
McCoy, 562 U.S. 195, ___, 131 S. Ct. 871, 880–81 (2011) (internal quotation marks
6
Although Ms. Mitchell also directs our attention to the First Circuit’s reasoning
in Kaufman v. Shulman, 687 F.3d 21 (1st Cir. 2012), the decision provides little guidance
here. The First Circuit held a taxpayer was entitled to a deduction because the donation
satisfied the in perpetuity requirement, but it specifically declined to address whether the
taxpayer had complied with the mortgage subordination provision or to base its holding
on the remote future event provision. Id. at 27 & n.5.
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omitted). As illustrated by the discussion above, rather than being plainly erroneous or
inconsistent with the regulations, the Commissioner’s interpretation—that the mortgage
subordination is unmodified by the remote future event provision—is consistent with the
regulation’s plain meaning.
Nor is there any “reason to suspect that the interpretation does not reflect the
agency’s fair and considered judgment on the matter in question.” Id. at 881. Rather, it is
reasonable for the Commissioner to adopt an easily-applied subordination requirement
over a case-by-case, fact-specific inquiry into the financial strength or credit history of
each taxpayer. As scholar Nancy McLaughlin explained,
The specific requirements in the Code and Treasury Regulations establish
bright-line rules that promote efficient and equitable administration of the
federal tax incentive program. If individual taxpayers could fail to comply
with such requirements and claim that their donations are nonetheless
deductible because the possibility of defeasance of the gift is so remote as
to be negligible, the Service and the courts would be required to engage in
an almost endless series of factual inquiries with regard to each individual
conservation easement donation.
Nancy A. McLaughlin, Internal Revenue Code Section 170(h): National Perpetuity
Standards for Federally Subsidized Conservation Easements Part 1: The Standards, 45
Real Prop. Tr. & Est. L.J. 473, 505–06 (2010) (footnote omitted).
In sum, we conclude the regulations do not permit a charitable contribution
deduction unless any existing mortgage on the donated property has been subordinated,
irrespective of the likelihood of foreclosure. Therefore, the Tax Court correctly held the
Commissioner was entitled to disallow the Mitchells’ charitable contribution deduction
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because Mr. Sheek’s mortgage encumbering the Lone Canyon Ranch was not timely
subordinated.
CONCLUSION
For the foregoing reasons, we AFFIRM the decision of the Tax Court.
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