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Subordination of Mortgages after Conveyance of Property Precludes Charitable Deduction

(Parker Tax Publishing July 2017)

The Eighth Circuit joined the Ninth and Tenth Circuits in holding that a taxpayer is not entitled to a charitable tax deduction for the donation of an easement to a charitable organization where a mortgage on the easement property is not subordinated to the charitable organization at the time of the donation. The lack of such subordination means that the easement is not protected in perpetuity, and the donation is, therefore, not a deductible qualified conservation contribution. RP Golf v. Comm'r, 2017 PTC 297 (8th Cir. 2017).


In 1997 and 1998, RP Golf, LLC acquired land in Platte County, Missouri. It developed two private golf clubs, The National and The Deuce. To fund the purchase, RP Golf obtained loans from two banks: Hillcrest and Great Southern. Hillcrest financed the original purchase in 1997. Great Southern gave a development loan in 2001. Both loans were secured by deeds of trust on the property.

In December 2003, RP Golf granted a permanent conservation easement to Platt County Land Trust (PLT), a Missouri not-for-profit corporation. The easement's purpose was to "further the policies of the State of Missouri designed to foster the preservation of open space and open areas, conservation of the state's forest, soil, water, plant and wildlife habitats, and other natural and scenic resources."

On April 14, 2004, Great Southern and Hillcrest signed subordinations of their mortgages to PLT's right to enforce the easement. Both subordinations state an effective date of December 31, 2003. Also on April 14, RP Golf filed its 2003 partnership tax return claiming a $16.4 million tax deduction for a charitable qualified conservation contribution under Code Sec. 170(b)(1)(E). The IRS disallowed the deduction, claiming it did not meet the requirements for a qualified conservation contribution under Code Sec. 170(b)(1)(E). RP Golf challenged the IRS's decision in Tax Court.


Code Sec. 170(b)(1)(E) allows a deduction for qualified conservation contributions to the extent the aggregate of such contributions does not exceed the excess of 50 percent of the taxpayer's contributions base over the amount of all other allowable charitable contributions. Reg. Sec. 1.170A-14(a) provides that a qualified conservation contribution is a contribution of -

(1) a real property interest;

(2) to a qualified organization;

(3) exclusively for conservation purposes.

Code Sec. 170(h)(4)(A) defines what qualifies as a conservation purpose while Code Sec. 170(h)(5)(A) provides that the conservation purpose must be protected in perpetuity. Reg. Sec. 1.170A-14(g)(2) precludes any deduction 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. At issue in this case was whether the property was donated "exclusively for a conservation purpose."

The Tax Court held that RP Golf's easement was not protected in perpetuity, and, therefore, was not a qualified conservation contribution. The Tax Court cited its decision in Mitchell v. Comm'r, 138 T.C. 324 (2012), as affirmed by the Tenth Circuit (775 F.3d 1243 (10th Cir. 2015)), where it concluded that although 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 must be in place at the time of the gift." RP Golf appealed to the Eighth Circuit, arguing that it met the "protected in perpetuity" requirement even if the subordination of the mortgages by the banks occurred after the conveyance of the easement. According to RP Golf, because the Code is silent about the timing of a subordination, such subordination is allowed to take place after the conveyance of an easement.

The Eighth Circuit affirmed the Tax Court and held that because the subordination of the mortgage was not in place at the time of the donation, no charitable deduction is available. The Eighth Circuit cited the Tenth Circuit's decision affirming the Tax Court's holding in Mitchell, as well as the Ninth Circuit's decision in Minnick v. Comm'r, 796 F.3d 1156 (9th Cir. 2015). In Minnick, the Ninth Circuit concluded that, for a taxpayer to take a charitable deduction for the donation of a conservation easement, any mortgage on the property must be subordinated to the easement at the time of the donation. In the instant case, the Eighth Circuit said, in order to take a qualified conservation contribution deduction, Hillcrest and Great Southern had to have subordinated their mortgages to PLT's interest before RP Golf conveyed the easement in December 2003.

For a discussion of the requirements for a charitable donation deduction for easement contributions, see Parker Tax ¶84,155.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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