Attorney-at-Law

SUBORDINATE OR YOU LOSE

In Uncategorized on 04/03/2012 at 17:20

That’s the lesson Judge Haines has for Ramona Mitchell in the eponymous Ramona L. Mitchell, 138 T.C. 15, filed 4/3/12.

It’s another conservation easement case, so back to Section 170(h)(5)(a) and Regulation 1.170A-14(g)(2). Ramona, through the family limited partnership she and her late husband set up when his health was failing, gives Montezuma Land Conservancy, a qualified donee, the appropriate easement in gross, files the Form 8283 and appraisal. IRS wants to contest the appraisal, but as Tax Court disallows the deduction altogether, that never is decided.

The land was encumbered by a purchase money mortgage Ramona and her late husband had given to Lonesome Charley Sheek years before, that was being paid currently.

Judge Haines: “At the time the easement was granted, the deed of trust securing the debt to Sheek was not subordinated to the conservation easement held by Conservancy. From 2003 to 2005 the partnership had the money to pay off the promissory note, which the deed of trust secured, at any time. There were no lawsuits, potential or otherwise; all bills were paid; payments on the promissory note to Sheek were current, and casualty insurance was in place. Two years after the conservation easement was granted, Sheek agreed to subordinate his deed of trust to the conservation easement but received no consideration for the subordination. On December 22, 2005, Sheek signed the Subordination to Deed of Conservation Easement in Gross (subordination agreement).” 138 T.C. 15, at pp.6-7 (footnote omitted.)

We all know the easement must be “in perpetuity”, but we also know that “perpetuity” is a long time, and a lot can happen between now and then, so there is the Regulation 1.170A-14(g)(3) saver, “so remote as to be negligible.”

Ramona argues that between 2003 and 2005, when she finally got Lonesome Charley to subordinate, the risk of forfeiture was so remote as to be negligible, and she and Lonesome Charley had an oral agreement protecting the property.

IRS argues Regulation 1.170A-14(g)(2), and not (g)(3), controls. The mortgage was not subordinated, her oral agreement did not prevent Lonesome Charley from foreclosing, and the specific statutory enactment controls–as of date of granting the easement, any mortgage must be subordinated.

Case of first impression, says Judge Haines, because Ramona got a subordination, albeit two years too late. But the caselaw says that remoteness has nothing to do with subordination. See Gordon and Lorna Kaufman, 136 T.C. 13, filed almost a year ago to the day, 4/4/11, and my blogpost “A Joy Forever”, of the same date.

Judge Haines: “Though the subordination regulation is silent as to when a taxpayer must subordinate a preexisting mortgage on donated property, we find that the regulation requires that a subordination agreement be in place at the time of the gift. In order to be eligible for the charitable contribution deduction for 2003, petitioner had to meet all the requirements of section 170(h) and the underlying regulations, including the requirement that the Sheek deed of trust be subordinate to the conservation easement deed of trust. See sec. 1.170A-14(g)(2), Income Tax Regs. Sheek did not subordinate his deed of trust to the conservation easement deed of trust until December 22, 2005. Had petitioner defaulted on the promissory note before that date, Sheek could have instituted foreclosure proceedings and eliminated the conservation easement. The conservation easement was therefore not protected in perpetuity at the time of the gift. As a result, petitioner failed to meet the requirements of section 170(h) and the underlying regulations for 2003.” 138 T.C. 15, at p. 14.

It doesn’t matter that Ramona had cash on hand so she could have paid Lonesome Charley in full at any time during the two years. Congress said mortgages are never too remote to be negligible.

But Ramona avoids the accuracy penalty, in light of all the facts and circumstances. “We found all of petitioner’s witnesses to be credible and truthful. Petitioner attempted to comply with the requirements for making a charitable contribution of a conservation easement. Petitioner hired an accountant and an appraiser; however, she inadvertently failed to obtained [sic] a subordination agreement from Sheek. That said, upon being made aware of the need for a subordination agreement she promptly obtained one. Given the circumstances, we find that petitioner acted with reasonable cause and in good faith. Therefore we hold that petitioner is not liable for the accuracy-related penalty under section 6662(a) for 2003.” 138 T.C. 15, at pp. 27-28.

Thanks for setting out the reasonable cause parameters, Judge Haines.

 

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