BC Ranch II, L.P. v. Comm'r of Internal Revenue

• Decision Date: 11 August 2017
• Docket Number: No. 16-60068,Cons w/16-60069,16-60068
• Citation: 867 F.3d 547
• Parties: BC RANCH II, L.P., also known as Bosque Canyon Ranch II, L.P.; BC Ranch I, Incorporated, Tax Matters Partner, Petitioners-Appellants v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee Bosque Canyon Ranch, L.P.; BC Ranch, Incorporated, Tax Matters Partner, Petitioners-Appellants v. Commissioner of Internal Revenue, Respondent-Appellee
• Court: U.S. Court of Appeals — Fifth Circuit

867 F.3d 547

BC RANCH II, L.P., also known as Bosque Canyon Ranch II, L.P.; BC Ranch I, Incorporated, Tax Matters Partner, Petitioners-Appellants

v.COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee

Bosque Canyon Ranch, L.P.; BC Ranch, Incorporated, Tax Matters Partner, Petitioners-Appellants

v.Commissioner of Internal Revenue, Respondent-Appellee

No. 16-60068

Cons w/16-60069

United States Court of Appeals, Fifth Circuit.

Filed August 11, 2017

Jeffrey Scott Levinger, Levinger, P.C., Val J. Albright, Gardere Wynne Sewell, L.L.P., Joseph Carl Cecere, Jr., Attorney, Cecere, P.C., Dallas, TX, for Petitioners-Appellants.

Bethany Buck Hauser, Esq., U.S. Department of Justice, Tax Division, Appellate Section, Robert R. Di Trolio, U.S. Tax Court, Kathryn Keneally, Gilbert Steven Rothenberg, Esq., Senior Attorney, U.S. Department of Justice, Tax Division, U.S. Department of Justice, Tax Division, Appellate Section, William J. Wilkins, Internal Revenue Service, Washington, DC, for Respondent-Appellee.

George Asimos, Esq., Saul Ewing, L.L.P., Harrisburg, PA, Harry Dean Shapiro, Esq., Saul Ewing, L.L.P., Baltimore, MD, Amicus Curiae for NORTH AMERICAN LAND TRUST.

Before WIENER, DENNIS, and HAYNES, Circuit Judges.

WIENER, Circuit Judge:

Petitioners-Appellants, BC Ranch I, L.P. ("BCR I"), and B.C. Ranch II, L.P. ("BCR II"), (collectively the "BCR Partnerships" or "Appellants"), claim that Respondent-Appellee, the Commissioner of Internal Revenue (the "Commissioner"), wrongfully disallowed their charitable deductions for two conservation easements. Appellants contend that in ruling for the Commission, the Tax Court wrongfully classified the sale of limited partnership interests as disguised sales and wrongfully imposed a gross valuation misstatement penalty. We vacate and remand.

I. FACTS AND PROCEEDINGS

A. Factual Background

In 2003, BCR I, purchased a 3,744 acre tract of land called Bosque Canyon Ranch (the "ranch"). On December 20, 2005, BCR I conveyed approximately 1,866 acres of the ranch to BCR II.

1. The Conservation Easements

Beginning in 2003, the ranch developers worked with North American Land Trust ("NALT") to determine if the ranch would qualify for a tax-deductible conservation easement. NALT advised them that the ranch would qualify and that one benefit of such an easement would be to permanently protect the nesting areas and habitat of the gold-cheeked warbler, a listed endangered species.

Extensive documentation was assembled from NALT's various site visits, including photographs from a 2003 visit, an aerial photograph of the ranch, numerous property maps, details of the site visit of a NALT biologist, and maps of the gold-cheeked warbler habitat. On NALT's recommendation, the ranch hired Integrated Environmental Solutions ("IES") to consult on plant ecology and avian biology and to provide recommendations for how the property should be developed to ensure compliance with the Endangered Species Act. IES completed a report that included detailed aerial photographs and topographic maps depicting the habitat surveys conducted in April 2004 and December 2005, showing the gold-cheeked warblers' probable nesting areas. Ultimately, NALT and the BCR Partnerships assembled two binders of "baseline documents" detailing the conservation easements.

BCR I donated a conservation easement to NALT on December 29, 2005. BCR II donated a conservation easement to NALT on September 14, 2007. Both easements contained substantially identical terms. They protected and preserved (1) the habitat for the gold-cheeked warblers and other birds and game, (2) watershed, (3) scenic vistas, and (4) mature forest. The easements "voluntarily, unconditionally, and absolutely" granted NALT, its successors and assigns, "perpetual easement[s] in gross" over the conservation areas, subjecting the property to a series of "covenants and restrictions in perpetuity" that prohibit most residential, commercial, industrial, and agricultural uses. The easements reserved narrow rights to the grantors that NALT and the BCR Partnerships agreed "could be conducted ... without having an adverse effect on the protected Conservation Purpose."

The easements could be amended only with NALT's consent and then only to modify the boundaries of the homesite parcels, but not to increase their areas above five acres. NALT continues to monitor the conservation area and has repeatedly found it to be in good condition and in compliance with the terms of the easements.

2. The Limited Partnership Interests

Around February 2005, BCR I started to market limited partnership interests. It specified that limited partners could build ranch homes on select five-acre sites (the "homesite parcels") and reserved the rest of the land for conservation, recreational, and agricultural use. Each purchaser of a limited partnership interest was required to execute a subscription agreement and make a capital contribution of $350,000 per unit to become a limited partner of BCR I. If BCR I elected to grant a conservation easement on the property, it would "at a later date convey" to each limited partner the fee simple title to one of twenty-four five-acre homesite parcels. BCR I also promised to convey to each limited partner "a membership interest" in the "to be formed Bosque Canyon Ranch Association" ("BCRA"), which would own all of the ranch property other than the homesite parcels.¹ Twenty-four limited partners were admitted to BCR I. In April 2006, one five-acre homesite parcel was deeded to each of them.

Subsequently, BCR II offered partnership interests on substantially the same terms for capital contributions ranging from $367,500 to $550,000. Twenty-three limited partners were admitted to BCR II. Between October 2007 and January 2008, five-acre homesite parcels were deeded to the limited partners of BCR II.

B. Procedural Background

BCR I filed its federal partnership tax return for tax year 2005, claiming a charitable deduction of $8,400,000 for the value of the conservation easement that it had donated to NALT. BCR II filed its return for tax year 2007, claiming a deduction of $7,500,000 for the value of the conservation easement that it had donated to NALT. Each return listed the limited partners' capital contributions and their shares of the charitable deduction.

The Commissioner disallowed the charitable deductions and asserted that the BCR Partnerships were liable for gross valuation misstatement penalties. Each partnership filed a separate petition for readjustment before the Tax Court, which that court consolidated.

Following almost four weeks of trial, the Tax Court issued its Memorandum Findings of Fact and Opinion. It disallowed the charitable deductions, holding that (1) the conservation easements failed to qualify as deductible charitable contributions because they were not given in perpetuity, (2) the sales of the limited partnership interests were actually disguised sales of partnership property, and (3) the gross valuation misstatement penalty was applicable.

The BCR Partnerships timely appealed the Tax Court's ruling. NALT filed a Brief of Amicus Curiae, also urging reversal of the Tax Court's rulings.²

II. STANDARD OF REVIEW

We review the Tax Court's decisions using the same standards that are applicable to district court decisions.³ We review issues of law de novo and findings of fact for clear error.⁴

III. ANALYSIS

A. The Charitable Deductions

1. Applicable Law

A taxpayer has the burden of proving entitlement to a claimed deduction.⁵ Congress has provided a tax deduction for the charitable contribution of a conservation easement, which has enjoyed decades of bipartisan support.⁶ To be entitled to that deduction under § 170(h) of the Internal Revenue Code ("IRC"), which section governs conservation easements, a taxpayer must contribute a "qualified real property interest" to a "qualified organization ... exclusively for conservation purposes."⁷ Such a taxpayer may deduct the value of a contribution of a partial interest in property if the contribution constitutes a "qualified conservation contribution."⁸ A "qualified conservation contribution" is defined as a contribution of "qualified real property interest" to an IRC § 501(c)(3) organization, exclusively for conservation purposes.⁹ An easement qualifies under this section of the IRC if it is a "restriction (granted in perpetuity) on the use which may be made of the real property."¹⁰

2. Analysis

a. The Perpetuity Requirement

As noted, both easements at issue in this case were created, at least in part, to preserve the habitat of the gold-cheeked warbler, an endangered species, as well as the habitats of other birds and animals. The BCR Partnerships "voluntarily, unconditionally and absolutely" granted NALT (a § 501(c)(3) organization), its successors and assigns, "perpetual easement[s] in gross." They subjected the land covered by the easements to a series of covenants and restrictions "in perpetuity" which prohibited residential, commercial, industrial, and agricultural uses over most of the property, including the cutting of trees, dumping, changing of topography, and the introduction of non-native plant or animal species in the conservation areas.

The easements specified a few "reserved rights" that NALT and the BCR Partnerships agreed "could be conducted ... without having an adverse effect on the protected Conservation Purposes." These reserved rights included constructing staff buildings, barns, recreational or meeting areas, swimming pools, ponds, shelters, pavilions, skeet-shooting stations, facilities for utilities, deer-hunting stands, roads, trails, and driveways.

With NALT's consent, the property covered by the easements could be amended, but only to the limited extent needed to modify the boundaries of the five-acre homesite parcels, and even then wholly within the ranch property and without increasing the homesite parcels above five acres. For such a modification to occur, NALT, the BCR Partnerships, and the owner of the...