Reg. ยง 1.170Aโ14(g)(2). 138 T.C. No. 16 (T.C.2012), vacated on denial of reconsideration by Mitchell v. Comm'r, 106 T.C.M. (CCH) 215 (T.C.2013).In December 2012, the Tax Court ruled for the Commissioner, citing Mitchell I. The Tax Court concluded that, under Mitchell I, a mortgage must be subordinated at the time of the gift in order to be in compliance with the โin perpetuityโ requirement of 26 U.S.C. ยง 170 and the more specific subordination requirements of Treasury Regulation ยง 1.170Aโ14(g)(2).
"A charitable contribution is a gift of property to a charitable organization, made with charitable intent and without the receipt or expectation of receipt of adequate consideration." Mitchell v. Comm'r, 138 T.C. No. 16, 2012 WL 1109342, at *4 (2012) (citing Hernandez v. Comm'r, 490 U.S. 680, 690 (1989); United States v. Am. Bar. Endowment, 477 U.S. 105, 116-18; 26 C.F.R. ยง 170A-1(h)(1)-(2)). "While a taxpayer is generally not allowed a charitable deduction for a gift of property consisting of less than an entire estate in that property, an exception is made for a 'qualified conservation contribution.'"
Hence, the first use of the extinguishment proceeds was to further the donor taxpayer's interest in repaying the mortgage on the property, with the grantee conservation organization's receiving only a residual amount of money. Id.; see also Mitchell v. Commissioner, 138 T.C. ___ (Apr. 3, 2012); 1982 East, LLC v. Commissioner, T.C. Memo. 2011-84. Our conclusions in those cases (i.e., denying the deduction) reflect the purpose of the regulation.
The Minnicks opposed the motion, but on January 5, 2012, the tax court granted the IRS leave to amend. On April 3, 2012, a decision was issued in another tax court case, Mitchell v. Commissioner, 138 T.C. 324 (T.C.2012). In addressing a question of first impression, the court in Mitchell established that a mortgage must be subordinated prior to the grant of a conservation easement, specifically finding that this error cannot be cured ex post facto by recording the subordination after the charitable gift is made.