Thursday, August 13, 2015
Panel Upholds Tax Penalties Against Ex-Lawmaker, Spouse
By a MetNews Staff Writer
A former congressman—who once practiced tax law—and his wife owe the Internal Revenue Service more than $200,000 in back taxes and penalties related to improper deductions for the donation of a conservation easement, the Ninth U.S. Circuit Court of Appeals ruled yesterday.
The applicable regulation precludes such a deduction where a mortgage on the property was not subordinated to the easement at the time of the donation, the panel concluded, affirming the Tax Court’s ruling against ex-Rep. Walter Minnick and A.K. Lienhart.
Minnick, a Democrat, won election from Idaho’s First Congressional District in 2008, defeating Republican incumbent Bill Sali. He lost the seat two years later to its current occupant, Republican Raul Labrador.
The transaction in question occurred before Minnick was elected. In 2005, he took out a $400,000 loan secured by undeveloped land he owned and intended to develop in Ada County, Idaho. More than $1 million in additional funds were loaned after his development plans obtained preliminary approval.
After obtaining final approval in 2006, he donated to a land trust a conservation easement on parts of the land that would not be developed. The mortgage was not subordinated to the easement at the time, and the bank was not told of it until 2011, as the case was approaching trial in the Tax Court, when Minnick asked that the mortgage be subordinated.
The couple claimed a charitable donation of nearly $400,000 on their amended tax return for 2006, and carryover deductions of more than $500,000 in the following two years. The IRS issued deficiency notices for 2007 and 2008, and the coupled filed a redetermination petition.
Following a Tax Court trial, but before the judge ruled, the Tax Court ruled in another case that mortgages must be subordinated at the time of the donation in order to be deductible.
The judge hearing the Minnick case cited that ruling—which was affirmed earlier this year by the Tenth Circuit—in his decision. He also upheld the assessment of penalties, noting that Minnick was a lawyer who had handled some tax matters, although he had left the practice years earlier to start a successful building-supplies business.
In a per curiam opinion yesterday, Senior Judge Andrew Kleinfeld and Judges Jacqueline Nguyen and Michelle Friedland concluded that the Tax Court’s legal conclusions were correct.
The regulation, the judges explained, provides that ““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.” This plain language supports the Tax Court ruling, the panel said, adding that even if the language were held to be ambiguous, the court would be required to defer to the IRS’s reasonable interpretation of its own regulation.
Otherwise, the judges said, an easement could be extinguished upon foreclosure, contrary to the congressional intent that the conservation purpose be protected “in perpetuity.”
In a separate, unpublished memorandum, the court rejected the couple’s claim that they had reasonable cause to claim the deduction and should not have been assessed a 20 percent negligence penalty.
“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,” the judges wrote.
The case is Minnick v. Commissioner of Internal Revenue, 13-73234.
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