               FOR PUBLICATION

 UNITED STATES COURT OF APPEALS
      FOR THE NINTH CIRCUIT


WALTER C. MINNICK; A.K.                 No. 13-73234
LIENHART,
            Petitioners-Appellants,         Tax Ct. No.
                                             29632-09
                 v.

COMMISSIONER OF INTERNAL                    OPINION
REVENUE,
             Respondent-Appellee.


            Appeal from a Decision of the
              United States Tax Court

                Argued and Submitted
          July 6, 2015—Seattle, Washington

                Filed August 12, 2015

Before: Andrew J. Kleinfeld, Jacqueline H. Nguyen, and
         Michelle T. Friedland, Circuit Judges.

                 Per Curiam Opinion
     2                   MINNICK V. CIR

                           SUMMARY *



                                 Tax

    The panel affirmed the Tax Court’s decision, holding
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.

    Taxpayers took out a loan secured by an undeveloped
plot of land, for purposes of developing that land, then
donated a conservation easement on parts of the land that
would not be developed. The land was still subject to the
mortgage, the mortgage had not been subordinated to the
easement, and the bank was not informed of the easement.
Taxpayers then claimed a charitable deduction. The panel
deferred to the Internal Revenue Service’s reasonable
interpretation of its own regulations that require a mortgagee
to subordinate its rights in the property to the right of the
qualified organization to enforce the conservation purposes
of the gift in perpetuity.




 *
   This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
                      MINNICK V. CIR                        3

                           COUNSEL

Tim A. Tarter (argued), Woolston & Tarter, P.C., Phoenix,
Arizona, for Petitioners-Appellants.

Tamara W. Ashford, Principal Deputy Assistant Attorney
General; Bethany B. Hauser (argued) and Francesca Ugolini,
Attorneys, Department of Justice, Washington, D.C., for
Respondent-Appellee.


                           OPINION

PER CURIAM:
    We are asked to decide whether Treasury Regulation
§ 1.170A-14(g)(2) requires that, for a taxpayer to take a
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. We hold that this is
required by the regulation and thus affirm the decision of the
Tax Court to that effect.
                      I.    Background
    Walter C. Minnick and A.K. Lienhart (“Taxpayers”) are
a married couple. In 2005, Minnick took out a $400,000 loan
from U.S. Bank. The loan was secured by an undeveloped
plot of land Minnick already owned in Ada County, Idaho.
Minnick intended to use the funds to develop that land. After
Minnick received preliminary approval to develop parts of
the land, the loan amount was increased to $1.4M in March
2006, and then to $1.5M in August 2006.
    In September 2006, Minnick received final approval of
the development plans. Two days later, Minnick donated to
the Land Trust of Treasure Valley a conservation easement
     4                MINNICK V. CIR

on parts of the plot that would not be developed. Despite
warranties in the easement agreement to the contrary, the
land was still subject to the mortgage. The mortgage had not
been subordinated to the easement.
    Taxpayers did not inform U.S. Bank of the easement in
2006. An appraiser hired by Minnick valued the easement
at $941,000, and Taxpayers claimed a charitable deduction
of $389,517 on their amended 2006 tax return, carrying over
the remainder to their 2007 and 2008 joint individual returns.
    In September 2009, the Internal Revenue Service (“IRS”
or “Commissioner”) issued a Notice of Deficiency to
Taxpayers for the 2007 and 2008 tax years. The Notice
informed Taxpayers that the deduction for the conservation
easement had been disallowed, explaining that
“[d]ocumentation of fair market value was not provided.”
   Taxpayers timely filed a redetermination petition in Tax
Court in December 2009. The Tax Court held a trial in
October 2011.
A.       Pretrial Motions and Events
    In July 2011, as the case was approaching trial, Minnick
contacted U.S. Bank to request a subordination of the
mortgage to the easement. The bank conducted an appraisal
of the property, which showed that, as a result of “market
conditions,” the value of the property as a whole had
declined 41 percent since the last time the loan had been
renewed. The appraiser also found that the conservation
easements “would not impact a buyer’s perception” of the
land. Accordingly, after further negotiation, Taxpayers and
U.S. Bank entered into a subordination agreement as well as
a “Waiver, Release, and Indemnification agreement” in
September 2011.
                      MINNICK V. CIR                        5

    Also in September 2011, the Commissioner filed a
pretrial memorandum with the Tax Court.               That
memorandum argued, inter alia, that Taxpayers were not
entitled to deduct the conservation as a gift because “the
mortgagee did not subordinate its rights in the property to
the rights of the qualified organization to enforce the
conservation purposes of the gift in perpetuity.”
B.     Trial and the Tax Court’s Order
    Following trial but before the Tax Court had ruled in
Taxpayers’ case, the Tax Court decided Mitchell v.
Commissioner (Mitchell I), which held that mortgages must
be subordinated at the time of the donation in order to be
deductible under Treas. Reg. § 1.170A-14(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 “in
perpetuity” requirement of 26 U.S.C. § 170 and the more
specific subordination requirements of Treasury Regulation
§ 1.170A-14(g)(2). Taxpayers moved for reconsideration,
which the Tax Court denied.
    Taxpayers timely filed a notice of appeal with this court.
While this appeal was pending, the Tenth Circuit affirmed
the Tax Court in Mitchell I, agreeing with the Tax Court’s
reasoning. See Mitchell v. Comm’r (Mitchell II), 775 F.3d
1243 (10th Cir. 2015).
             II.       Standard of Review
    We review the Tax Court’s legal conclusions de novo.
Ann Jackson Family Found. v. Comm’r, 15 F.3d 917, 920
(9th Cir. 1994).
   6                    MINNICK V. CIR

                 III.        Discussion
    The Tax Court held that Taxpayers were deficient in
taxable years 2007 and 2008, affirming the Commissioner’s
disallowance of the charitable deduction for those years
because of Taxpayers’ failure to ensure the subordination of
the mortgage held by U.S. Bank at the time of the gift.
Taxpayers challenge this decision, arguing that the
requirement to subordinate a mortgage need not be met at
the time of the gift. We reject Taxpayers’ argument and
hold, like the Tenth Circuit in Mitchell II, that Treasury
Regulation § 1.170A-14(g)(2) requires that the mortgage be
subordinated at the time of the gift for the gift to be
deductible.
    Under 26 U.S.C. § 170(h)(5)(A), a deduction for the
donation of a conservation easement is permitted only if the
easement’s “conservation purpose is protected in
perpetuity.”    Treasury Regulations interpreting this
provision specify that when a piece of property is subject to
a mortgage, “no deduction will be permitted . . . 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.” Treas. Reg. § 1.170A-
14(g)(2).
     Regulations are interpreted according to the same rules
as statutes, applying traditional rules of construction.
Christopher v. SmithKline Beecham Corp., 635 F.3d 383,
392 (9th Cir. 2011), aff’d, 132 S. Ct. 2156 (2012). If the
meaning of the regulation is clear, the regulation is enforced
according to its plain meaning. Id. If the regulation is
unclear, we defer to the IRS’s interpretation so long as it is
not “plainly erroneous or inconsistent with the regulation.”
Id. (quoting Auer v. Robbins, 519 U.S. 452, 461 (1997)); see
also Christensen v. Harris Cty., 529 U.S. 576, 588 (2000)
                      MINNICK V. CIR                         7

(“Auer deference is warranted only when the language of the
regulation is ambiguous.”). Tax deductions are considered
an act of “legislative grace” and are therefore “strictly
construed.” INDOPCO, Inc. v. Comm’r, 503 U.S. 79, 84
(1992); Durando v. United States, 70 F.3d 548, 550 (9th Cir.
1995) (“[W]e strictly construe Code provisions granting
exemptions and deductions.”).
    To begin, the plain language of the regulation supports
the Tax Court’s interpretation. See Mitchell II, 775 F.3d
at1250 (“[The taxpayer’s] interpretation is foreclosed by the
plain language of the regulation.”). The regulation specifies
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.” Treas.
Reg. § 1.170A–14(g)(2). Strictly construed, this language
makes clear that “subordination is a prerequisite to allowing
a deduction.” Mitchell II, 775 F.3d at 1250. In 2006, when
Taxpayers made the donation and requested a deduction,
there is no dispute that U.S. Bank had not subordinated its
rights in the property. Thus, under the plain meaning of the
regulation, no deduction is permitted.
    Even if ambiguity arguably exists in the language of the
regulation with respect to when subordination is required,
this would not change the outcome, because under Auer we
defer to the IRS’s reasonable interpretation of its own
regulations. Here, at the Tenth Circuit, and in front of the
Tax Court, the IRS has consistently argued that the
regulation requires subordination at the time of the gift, so
there is no “reason to suspect that the interpretation does not
reflect the agency’s fair and considered judgment on the
matter in question.” Auer, 519 U.S at 462.
    Further, the IRS’s interpretation is reasonable and is not
“plainly erroneous or inconsistent with the regulation.” Id.
     8                  MINNICK V. CIR

at 461. As the Tenth Circuit held, “[b]ecause a conservation
easement subject to a prior mortgage obligation is at risk of
extinguishment upon foreclosure, requiring subordination at
the time of the donation is consistent with the Code’s
requirement that the conservation purpose be protected in
perpetuity.” Mitchell II, 775 F.3d at 1251. An easement can
hardly be said to be protected “in perpetuity” if it is subject
to extinguishment at essentially any time by a mortgage
holder who was not a party to, and indeed (as here) may not
even have been aware of, the agreement between the
Taxpayers and a conservation trust.
                  IV.          Conclusion
   For the foregoing reasons, we hold that, in order for the
donation of a conservation easement to be protected “in
perpetuity,” any prior mortgage on the land must be
subordinated at the time of the gift. 1
     AFFIRMED.




 1
  We address Taxpayers’ remaining arguments in a concurrently filed
memorandum disposition.
