Minnick v. Commissioner , 611 F. App'x 477 ( 2015 )

NOT FOR PUBLICATION FILED
UNITED STATES COURT OF APPEALS AUG 12 2015
MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
FOR THE NINTH CIRCUIT
WALTER C. MINNICK and A.K. No. 13-73234
LIENHART,
Tax Ct. No. 29632-09
Petitioners - Appellants,
v. MEMORANDUM *
COMMISSIONER OF INTERNAL
REVENUE,
Respondent - Appellee.
Appeal from a Decision of the
United States Tax Court
Argued and Submitted July 6, 2015
Seattle, Washington
Before: KLEINFELD, NGUYEN, and FRIEDLAND, Circuit Judges.
Walter C. Minnick and A.K. Lienhart (“Taxpayers”) appeal the Tax Court’s
decision to grant the Internal Revenue Service (“Commissioner”) permission to file
an amended answer on the morning of trial, the Tax Court’s judgment disallowing
the deduction of a conservation easement because it was subject to a mortgage that
*
This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.
was not subordinated at the time of the donation, and the Tax Court’s imposition of
a negligence-related penalty.
Taxpayers appeal the ruling on the motion to file an amended answer,
arguing that they suffered prejudice because they lacked notice that subordination
would be an issue at trial. Tax Court rules permit parties to amend their pleadings
at any time “by leave of Court” and provide that leave “shall be given freely when
justice so requires.” Tax Ct. R. 41(a). We review the Tax Court’s decision to
allow amendment for abuse of discretion. Estate of Ashman v. Comm’r, 231 F.3d
541, 542 n.2 (9th Cir. 2000). The record shows that Taxpayers were in fact aware
of and prepared to argue the subordination issue at trial. Taxpayers also have not
shown that they suffered any prejudice as a result of the Commissioner’s delay in
amending the answer. There is no dispute about the date of the gift or the date of
the mortgage subordination agreement, which are the only relevant facts for
determining whether Taxpayers were entitled to a charitable deduction of the
conservation easement—more notice that the subordination issue would be
included in the trial would not have changed either fact. Therefore, the Tax Court
did not abuse its discretion by granting the Commissioner leave to amend the
answer.
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In our concurrently filed opinion, we hold that deductions for conservation
easements may be taken only if any mortgage on the property was subordinated to
the easement at the time of the gift. Taxpayers argue that their failure to
subordinate nevertheless should be excused for three reasons. First, Taxpayers
argue that Treas. Reg. § 1.170A-14(g)(3), which provides that a “deduction shall
not be disallowed under . . . this section merely because the interest which passes
to . . . the donee organization may be defeated by the performance of some act or
the happening of some 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,” excuses any non-
compliance with the subordination requirement found elsewhere in the regulation.
But however certain Taxpayers are now that they would stay current on their
mortgage and ultimately obtain a subordination from their bank, this provision
does not override § 1.170A-14(g)(2)’s subordination requirement. Second,
Taxpayers argue that there is “verifiable evidence of original intent to enforce the
easement in perpetuity” in the easement’s warranty, which averred that there were
“no outstanding mortgages . . . in the Property that have not been expressly
subordinated to the Easement.” Even if this were evidence of an intent to
subordinate the mortgage to the easement, Taxpayers’ intent to subordinate is not
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relevant because it is undisputed that the mortgage was not subordinated at the
time of the gift. Third, Taxpayers’ argue that Idaho’s cy pres doctrine, which
restricts Taxpayers from abandoning or otherwise encumbering the easement,
adequately ensures that the easement will continue in perpetuity to satisfy the
subordination requirement. But Idaho’s cy pres doctrine is inapplicable here
because it has no effect on the ability of the bank holding the unsubordinated
mortgage to extinguish the easement by foreclosure.
Finally, Taxpayers argue that the Tax Court improperly imposed a 20
percent accuracy-related negligence penalty under 26 U.S.C. § 6662(a). As an
initial matter, we are unpersuaded by Taxpayers’ argument that the Commissioner
failed to raise the negligence penalty, because the Notice of Deficiency specifically
referenced penalties for negligence under § 6662(a). The record supports the Tax
Court’s finding of fact that Taxpayers were negligent, so this finding was not
clearly erroneous. Even if Taxpayers’ ignorance of the subordination requirement
was in good faith, it was not clear error for the Tax Court to find that Taxpayers
“did not have reasonable cause for claiming a charitable-contribution deduction”
because Minnick has a law degree and reading the Treasury Regulation would
have given him notice that subordination may have been required.
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AFFIRMED.
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