IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 16-60068

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

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BOSQUE CANYON RANCH, L.P.; BC RANCH, INCORPORATED, Tax 

Matters Partner, 

 

 Petitioners - Appellants 

v. 

COMMISSIONER OF INTERNAL REVENUE, 

 Respondent - Appellee

Appeals from the Decision of the 

United States Tax Court

United States Court of Appeals

Fifth Circuit

FILED

August 11, 2017

Lyle W. Cayce

Clerk

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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 taxdeductible 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,

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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.

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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 

 

1 On October 10, 2007, BCRA was formed.

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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

 

2 NALT sets forth many policy reasons for flexibility with respect to conservation 

easements and maintains that the Tax Court’s opinion will chill the interest of landowners 

in making conservation easement donations. 

3 Rodriquez v. Comm’r, 722 F.3d 306, 308 (5th Cir. 2013). 

4 BMC Software, Inc. v. Comm’r, 780 F.3d 669, 674 (5th Cir. 2015).

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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 

 

5 See Tax Court Rule 142(a).

6 See Tax Treatment Extension Act, Pub. L. No 96-541, § 6(b), 94 Stat. 3204, 3206 

(1980). 

7 26 U.S.C. § 170(h)(1)(A)-(C); 26 C.F.R. § 1.170A-14.

8 26 U.S.C. § 170(f)(3)(B)(iii). 

9 26 U.S.C. § 170(h)(1), (3)(B).

10 26 U.S.C. § 170(h)(2)(C).

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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 

homesite parcel in question would have to be in agreement. Modification would 

be permitted only if: (1) “[t]he boundary line modification does not, in [NALT’s] 

reasonable judgment, directly or indirectly result in any material adverse 

effect on any of the Conservation Purposes,” (2) “[t]he area of each Homestead 

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Parcel [does] not increase,” and (3) the modification is properly documented 

and recorded. 

The Tax Court agreed with the Commissioner that the homesite 

boundary modification provision violated the perpetuity requirement of § 

170(h)(2)(C). The court held that because the homesite parcel boundaries could 

be changed to include property within the original easement, the easement was 

not granted in perpetuity. It cited Belk v. Commissioner11 for the proposition 

that an easement is not qualified real property if the boundaries of the property 

subject to the easement may be modified. We view Belk as distinguishable. In 

that case, the Fourth Circuit affirmed the Tax Court’s holding that a provision 

which allowed the parties to substitute other land for the land that was 

originally restricted under the easement did not meet the perpetuity 

requirement of § 170(h).12

Here, the Tax Court’s reliance on Belk is misplaced.13 The easements at 

issue in this case differ markedly from the easement in Belk. Among other 

distinctions, the instant easements allow only the homesite parcels’ boundaries 

to be changed and then only (1) within the tracts that are subject to the 

easements and (2) without increasing the acreage of the homesite parcel in 

question. They do not allow any change in the exterior boundaries of the

easements or in their acreages. Thus, neither the exterior boundaries nor the 

total acreage of the instant easements will ever change: Only the lot lines of

 

11 140 T.C. 1, 10-11 (2013), aff’d, 774 F.3d 221 (4th Cir. 2014). 

12 774 F.3d at 226. 13 The Tax Court cited no other case law to support this holding or the argument that 

a change to the boundary of an easement disqualifies such easement from becoming a 

charitable deduction. The Commissioner cites no other cases in support of this holding. 

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one or more the five-acre homesite parcels are potentially subject to change

and then only (1) within the easements and (2) with NALT’s consent.

Unlike here, the easement in Belk could be moved, lock, stock, and 

barrel, to a tract or tracts of land entirely different and remote from the 

property originally covered by that easement.14 The court in Belk reasoned 

that, because the donor of the easement could develop the same land that it 

had promised to protect, simply by lifting the easement and moving it

elsewhere, it was not granted in perpetuity.15 The Belk court also reasoned 

that such parcel-swapping could undermine the “qualified appraisal of [the] 

property.”16

Those concerns are not present here. Only discrete five-acre residential 

parcels, entirely within the exterior boundaries of the easement property, could 

be moved – for example, to account for locations subsequently chosen as 

nesting sites by the warblers. Even the Commissioner’s own expert confirmed 

that the unencumbered homesite parcels have roughly the same per-acre value 

as the rest of the ranch which is encumbered by the easements. Thus, changing 

the boundaries of some of the homesite parcels would not return any value to 

the easement donors.

The easements in this case more closely resemble the conservation 

façade easements in Commissioner v. Simmons17 and Kaufman v. Shulman18

than the easement in Belk. In those cases, the circuit courts ruled that 

conservation easements were perpetual even though the trusts could consent 

 

14 774 F.3d at 225. 

15 Id. at 226-27.

16 Id. at 226. 

17 646 F.3d 6, 9-11 (D.C. Cir. 2011).

18 687 F.3d 21, 27-28 (1st Cir. 2012). 

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to the partial lifting of the restrictions to allow repairs and changes to the 

façades of buildings. Both circuits held that, “clauses permitting consent and 

abandonment . . . have no discrete effect upon the perpetuity of easements . . . 

.”19 Even though those cases addressed the perpetuity requirement in § 

170(h)(5(A) rather than the one in § 170(h)(2)(C), the common-sense reasoning 

that they espoused, i.e., that an easement may be modified to promote the

underlying conservation interests, applies equally here. The need for flexibility 

to address changing or unforeseen conditions on or under property subject to a 

conservation easement clearly benefits all parties, and ultimately the flora and 

fauna that are their true beneficiaries. 

The benefit to NALT is especially significant in this case in which the 

perpetuity of the easements is further ensured by NALT’s virtually 

unrestricted discretion to withhold consent to any modifications. The easement

grants in this case specify that NALT may withhold consent to adjustments in 

its “reasonable judgment.” Furthermore, neither the BCR Partnerships nor 

individual limited partners may seek anything beyond declaratory relief to 

challenge NALT’s withheld consent, and even then they must show that NALT 

acted in an “arbitrary or capricious manner.”

One final point: Most IRC provisions that intentionally create narrow

“loopholes” to cover narrowly specific situations are deemed to have been 

adopted in an exercise of legislative grace and thus are subject to strict 

construction. That does not apply, however, to deductions for conservation 

easements granted pursuant to IRC §170(h). It was adopted (1) at the behest 

of conservation activists, not property-owning, potential-donor taxpayers (2) by

 

19 Id. at 28 (quoting Simmons, 646 F.3d at 10). 

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an overwhelming majority of Congress (3) in the hope of adding untold 

thousands of acres of primarily rural property for various conservation 

purposes – acreage that would never become available for conservation if landowning potential donors were limited to the traditional method of conveyance, 

i.e., transferring the full fee simple title of such properties. Therefore, the 

usual strict construction of intentionally adopted tax loopholes is not 

applicable to grants of conservation easements made pursuant to §170(h). 

Rather, we analyze tax deductions for the grant of conservation easements 

made pursuant to that article of the IRC under the ordinary standard of

statutory construction. And, when we apply that level of construction here, we 

are satisfied that our treatment of the issue of perpetuity stands the test.

Mindful of the old proverb, “One picture is worth more than 10,000 

words,”20 we attach to this opinion, as Exhibit 1, a copy of the Conservation 

Easement Plan of Bosque Canyon Ranch, prepared for NALT and filed as an 

exhibit in the trial of this case. It pictures the 3,729.22 acre trapezoid that 

contains (1) the 2005 Conservation Area of 1,750.1 acres, (2) the 2007 

Conservation Area of 1,731.63 acres, and (3) the 47 five-acre homesites totaling 

235 acres. This exhibit makes immediately apparent the facts that (1) the vast 

majority of the homesites are tightly clustered, largely contiguous, and located 

in the northernmost tip of the ranch; (2) together, they closely resemble a 

typical suburban subdivision; (3) almost every homesite shares one or two

common side line boundaries with one or more other homesites; and (4) most

homesites are located on or in close proximity to the only road inside the 

easements, which road provides the sole access to the nearest public roads 

 

20 John Bartlett, Familiar Quotations, 14th Edition, 1968, p. 149.

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(Route 22 and County Road 1070). Given this subdivision-like layout and the 

homesites’ contiguity or close proximity to each other and to the only interior 

road providing ingress and egress to and from the public roads, the 

Conservation Easement Plan of the ranch visually eschews any realistic 

likelihood of significant future changes in homesite location – at most, only 

theoretical or hypothetical changes. In sum, Exhibit A visually confirms that, 

realistically and practically, the perpetuity requirement of the Conservation 

Easement is not invalidated by the provision for homesite parcel adjustment. 

To conclude otherwise would be to violate the universally recognized maxim, 

de minimis non curat lex.21

We are satisfied that any potential future tweaking of the boundaries of 

one or a few homesite locations cannot conceivably detract from the 

conservation purposes for which these easements were granted, especially in 

light of the requirement for NALT’s prior approval of any such change. We

therefore conclude that the homesite adjustment provision does not prevent 

the grants of the conservation easements here at issue from satisfying the 

perpetuity requirement of §170(h)(2)(C) and thus does not prevent the grantors 

of these easement from taking the applicable charitable deductions.

b. The “Baseline Documentation” Requirements

If the donor of a conservation easement retains rights to property subject 

to the easement “the exercise of which may impair the conservation interests . 

. . for a deduction to be allowable . . . the donor must make available to the 

donee, prior to the time the donation is made, documentation sufficient to 

 

21 “The law does not concern itself with trifles.” De minimis non curat lex, BLACK’S 

LAW DICTIONARY (10th ed. 2014).

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establish the condition of the property at the time of the gift.”22 The purpose of 

this requirement, which is referred to as “baseline documentation,” is to 

“protect the conservation interests associated with the property, which 

although protected in perpetuity by the easement, could be adversely affected 

by the exercise of the reserved right.”23

The regulation governing “baseline documents,” states that they may

include: (1) survey maps showing the property line and other protected areas, 

(2) a map of the area showing man-made improvements, vegetation, flora and 

fauna (including rare species locations), (3) land use history, and distinct 

natural features, (4) an aerial photograph of the property taken as close as 

possible to the date of the donation, and (5) on-site photographs taken at 

appropriate locations on the property.24 By using the words “may include” 

rather than “shall include,” the regulation makes clear that the list is flexible 

and illustrative rather than rigid. 

 The Tax Court held that appellants failed to make documentation 

available to NALT that satisfied § 1.170A-14(g)(5)(i). The court labeled the 

documentation that they did furnish “unreliable, incomplete, and insufficient 

to establish the condition of the relevant property on the date the respective 

easements were granted.” The Tax court determined that (1) the 

documentation was untimely, (2) some of the documents were created too early, 

(3) some of the documents were created too late, and (4) some of the documents 

were inaccurate. The court focused on the fact that documentation for the 

December 2005 easement included a report that was completed in March 2007, 

 

22 26 C.F.R. § 1.170A-14(g)(5)(i). 

23 Id.

24 26 C.F.R. § 1.170A-14(g)(5)(i)(D). 

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15 months after the date of transfer. The Tax Court also highlighted that the 

description of the ranch was from April 2004, but the deed was executed in 

December 2005, and the description of the property was no longer the same 

because of construction and development during the interim.

But, inexplicably to us, in reaching this determination the Tax Court 

failed to consider significant information contained in the record, including: (1) 

aerial photographs and detailed maps, (2) photographs of the ranch taken by a 

NALT biologist on April 1, 2004, (3) the “Habitat Assessment” report prepared 

by IES, based on site surveys in April 2004 and December 2005, (4) 

photographs of the ranch taken by NALT’s president in August 2003, (5) the 

NALT biologist’s April 12, 2004 report on the presence and approximate 

habitat of the gold-cheeked warblers, and (6) a site plan BCR I sent to NALT 

in September 2005 depicting the location of homesite parcels in relation to the 

habitat areas that IES identified. Together with the documents that the Tax 

Court did acknowledge in its opinion, these documents are more than sufficient 

to establish the condition of the property prior to the donation.

As for timing, the statute relevant to prescribed aerial photographs 

requires that they be “taken as close as possible to the date the donation is 

made.”25 The rest of the documentation must be “ma[d]e available to the donee, 

prior to the time the donation is made.”26 The six items listed above show a 

great deal of collaboration between the donee and donor prior to the donation,

making sure that the donee had documentation sufficient to convey the 

condition of the property at the time of the gift.27 The “Site Survey Report” 

 

25 26 C.F.R. § 1.170A-14(g)(5)(i)(C).

26 26 C.F.R. § 1.170A-14(g)(5)(i).

27 Id.

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which the Tax Court found to be “too late” because it bore the date of March 

2007, was actually a compilation of notes of Christopher Wilson, a NALT 

biologist, from an April 2004 visit to the ranch, prior to the donation. Neither 

was the “Site Survey Report” “too early” because, as reflected by the record,

the property did not change, other than “common ranch improvements,” during 

the time between Wilson’s visit and the 2007 easement grant.

Appellants claim that the Tax Court in this case is the first ever to disallow 

a deduction for the contribution of a conservation easement based on the 

inadequacy of the “baseline documentation,” and the Commissioner cites no 

authority to the contrary.28 Such a holding contradicts the very language of the 

provision which states that the baseline documentation may include these on

the list of potential documents, indicating that a flexible approach on 

documentation is appropriate.29 The Tax Court’s hyper-technical requirements 

for baseline documentation, if allowed to stand, would create uncertainty by 

imposing ambiguous and subjective standards for such documentation and are 

contrary to the very purpose of the statute. If left in place, that holding would

undoubtedly discourage and hinder future conservation easements. NALT had 

documentation before it that was more than sufficient to establish the 

 

28 Appellants also assert that all § 1.170A-14(g)(5)(i) requires is “substantial 

compliance.” They cite an analogous provision, § 1.170A-13(c)(3) in which the tax court has 

found that a similar requirement “is directory, requiring substantial compliance, rather than 

mandatory, requiring strict compliance.” Zarlengo v. Comm’r, T.C. Mem. 2014-161, at *13 

(2014). It is true that “the doctrine of substantial compliance has been applied most often in 

cases involving procedural regulatory requirements.” Averty v. Comm’r, T.C. Mem. 2012-198, 

at *4 n.5 (2012). However, the court need not decide if “substantial compliance” is the 

appropriate standard in this case to find that appellants complied with what was required 

for “baseline documentation.” 

29 See 26 C.F.R. § 1.170A-14(g)(5)(i)(D).

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condition of the property prior to the donation of the conservation easement.

The Tax Court clearly erred in finding to the contrary.

3. Conclusion

We vacate the Tax Court’s holding regarding the perpetuity of the 

easements and the baseline documentation, and we remand this case to that

court to consider the other grounds30 asserted by the Commissioner to support 

the disqualification of the easements as charitable deductions but not 

addressed by the Tax Court.31

B. Disguised Sales32

1. Applicable Law 

When a partner makes a capital contribution to a partnership in 

exchange for an interest in the partnership, the transaction is tax-free to both 

the partner and partnership.33 If “(i) The transfer of money or other 

consideration would not have been made but for the transfer of the property; 

and (ii) In cases in which the transfers are not made simultaneously, the 

subsequent transfer is not dependent on the entrepreneurial risks of 

partnership operations,” such a contribution is considered a disguised sale and 

treated as income.34

 

30 The Commissioner advanced other contentions in support of the disallowance of the 

conservation easement charitable deduction, including, that the easements were not 

exclusively for conservations purposes, that the BCR Partnerships lacked charitable intent, 

and that, even if the easements were deductible, they were overvalued. Red.

31 Appellants also request that this court clarify the Tax Court’s ruling regarding 

whether the charitable deductions may be allocated to the limited partners. This question is 

more appropriately addressed at the first instance at the Tax Court level.

32 The question of disguised sales was not raised in the Commissioner’s notice of final 

partnership administrative adjustment to appellants and was a new matter before the Tax 

Court. That court held that the Commissioner met the burden on this point. 

33 See 26 U.S.C. § 721. 

34 Treas. Reg. § 1.707-3(b)(1)(i), (ii).

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2. Analysis 

The Tax Court held that the following facts and circumstances 

established that the property transfers from the BCR Partnerships to the 

limited partners were disguised sales: (1) “the timing and amount of the 

distributions to the limited partners were determinable with reasonable 

certainty at the time the partnerships accepted the limited partners’ 

payments”; (2) “the limited partners had legally enforceable rights, pursuant 

to LP agreements, to receive their Homesite parcels and appurtenant rights”;

(3) “the transactions effectuated exchanges of the benefits and burdens of 

ownership relating to the Homesite parcels”; (4) “the distributions to the 

partners were disproportionately large in relation to the limited partners’ 

interest in the partnership profits”; and (5) “the limited partners received their 

Homesite parcels in fee simple without an obligation to return them to the 

partnerships.” The Tax Court concluded that the BCR Partnerships’ receipt of 

the limited partners’ entire contributions, ranging from $350,000 to $550,000,

were receipts from disguised sales. 

Appellants do not contest the determination that the homesite parcels 

were the objects of disguised sales; rather they contest the Tax Court’s holding 

that the limited partners’ entire contributions were receipts from disguised 

sales. The Commissioner’s expert valued the homesite parcels at $16,500. The 

local tax assessor valued the homesite parcels at $28,000. Appellants contend 

that, even attributing the “appurtenant rights” to the homesite parcels, the fair 

market value of the parcels and such rights are nowhere near the entire 

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amount that the limited partners contributed, which ranged from $350,000 to 

$550,000.35

The Commissioner counters that the unencumbered area of the ranch 

and the amount that the limited partners believed would be a pass-through tax 

deduction for the conservation easement should be included in the amount that 

is attributable to the disguised sale. The Commissioner’s expert valued the 

unencumbered area of the ranch at $10,338,814.36 The Commissioner claims

that $100,000 of the amount paid by each limited partners is attributable to 

the attempt to purchase a tax deduction. Combining these values with the 

value of the homesite parcels, the Commissioner concludes that the value of 

each disguised sale was approximately $336,500 per limited partner.37

a. The Appurtenant Rights

It appears that the term “appurtenant rights” refers to the limited 

partners’ rights in the common areas of the ranch. We cannot imagine how the 

fair market value of such rights could equal the entire amount of limited 

partner contributions. 

There is no ownership interest in the common areas: The limited 

partners’ rights in those areas are only limited rights of use. The Commissioner 

claims the Appellants stipulated that, under each subscription agreement, the 

limited partner is entitled to “ownership (via such limited partner’s interest in 

BCR I [or BCR II – whichever is appropriate]) in the assets of BCR I [or BCR 

 

35 It is not clear what the Tax Court includes as the limited partners’ “appurtenant 

rights.”

36 The Commissioner contends that dividing this value by the 47 limited partners, 

each limited partners’ interest would be approximately $220,000. 

37 The Commissioner asserts that this is close to the value paid by those limited 

partners paid $350,000 and that the limited partners who paid $550,000 obtained homesite 

parcels with the best view equating to the greater value of disguised sale. 

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II], which included the portion of Bosque Canyon Ranch owned by BCR I [or 

BCR II].” To the contrary the limited partnership agreements are 

unambiguously clear that each limited partner receives only (1) one five-acre

homesite parcel, (2) a future membership interest in the yet-to-be-formed 

BCRA, and (3) an ownership interest in one of the partnerships – not in the 

partnership’s underlying property. The evidence in this case confirms beyond 

cavil that the BCR Partnerships retain ownership of, viz., title to, the common 

areas, as well as the right to sell significant portions of the common areas. 

There is no evidence that the BCR Partnerships are holding the property for 

the “benefit of the limited partners.”38

Neither is there any record evidence of the value of the limited partners’

right to use the common areas. Without evidence of the value of such right,

there is nothing to support the inclusion of any specific dollar amount for a 

disguised sale attributable to the “appurtenant rights.” 

b. The Pass-Through Tax Deduction

The Commissioner also contends that $100,000 of the amount paid by 

each limited partner is attributable to the attempt to purchase a charitable tax 

deduction for the conservation easement and should be included in the value 

of the disguised sale.39 Nothing in the Tax Court’s opinion suggests that it

 

38 It is true that the limited partners agreements provided that the BCR Partnerships 

would eventually contribute the ranch common areas to BCRA; however, that would not be 

a transfer of the common areas to the limited partners themselves. They merely received a 

membership interest in BCRA. Furthermore, as a Texas non-profit corporation, BCRA is 

prohibited from distributing property to its members. See Blocker v. State, 718 S.W.2d 409, 

415 (Tex App. – Houston [1st Dist.] 1986, writ. ref’d n.r.e.). 

39 The Commissioner alleges that limited partners were encouraged to think they 

would get a $100,000 tax deduction. However, there is also evidence that the BCR 

Partnerships cautioned the limited partners that the IRS might disallow the charitable 

deduction. 

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included such value in determining that the entirety of the limited partners’ 

contributions should be included as disguised sales. In addition, we cannot

comprehend how such an inclusion would be consistent with the Tax Court’s 

determination that appellants were not entitled to such a deduction. 

3. Conclusion

We vacate the Tax Court’s determination that the entirety of the limited 

partners’ contributions were disguised sales, and we remand40 for that court to 

determine the correct amount of any taxable income that results from the 

disguised sales. 

C. Gross Valuation Misstatement Penalty 

1. Applicable Law

IRC § 6662(h) provides that a taxpayer is liable for a 40% penalty on the 

portion of an underpayment of tax liability that is attributable to a gross 

valuation misstatement.41 BCR I’s and BCR II’s statements are governed by 

different standards. Under IRC § 6662(h) (2005), which applies to BCR I’s 

return, a 40 percent gross valuation misstatement penalty may be assessed if 

any tax underpayment “is attributable” to a “gross valuation misstatement,” 

which occurs when “the value of any property (or the adjusted basis of any 

property) claimed on any return . . . is 400 percent or more of the amount 

determined to be the correct amount of such valuation or adjusted basis.”42 By 

contrast, IRC § 6662(h) (2006), which applies to BCR II’s return, specifies that 

the gross valuation misstatement need only be by 200 percent.43 When the 

 

40 Because we are remanding, we need not consider the potential circularity of the 

argument that the tax benefit itself of a charitable deduction is taxable value.

41 26 U.S.C. § 6662(e), (h). 

42 26 U.S.C. § 6662(e), (h) (2005). 

43 26 U.S.C. § 6662(e), (h) (2006). 

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actual value of the property is zero and the value claimed is any amount 

greater than zero, the gross valuation misstatement penalty applies.44

2. Analysis

Appellants argue that because the denial of the charitable deductions 

was based on technical grounds only, any underpayment was not attributable 

to a misstatement about the value of any property. The Tax Court held that 

there is no distinction between legal and factual misstatements and that,

because the BCR Partnerships conservation easements were not deductible,

the limited partners should be assessed the gross valuation misstatement 

penalty. The court cited one case to support its gross valuation misstatement 

penalty, United States v. Woods. In that case, the IRS imposed a gross 

valuation misstatement penalty based on underpayments “resulting from a 

basis-inflating transaction subsequently disregarded for lack of economic 

substance.”45

On appeal, Appellants and the Commissioner agree that the holding and 

reasoning in Woods is not applicable to this case.46 In addition, as we concluded

above, the easements are not disallowable as charitable deductions based on 

the grounds relied on by the tax court. 

The Commissioner nevertheless maintains that, regardless of the Tax 

Court’s misplaced reliance on Woods, the penalty remains applicable because 

the easements themselves were grossly overvalued. The Commissioner argues 

 

44 See Treas. Reg. § 1.6662-5(g). 45 134 S. Ct. 557, 560 (2013). 

46 In a motion for leave to file a motion to reconsider, the Commissioner explained that 

Woods did not hold that “whenever a claimed deduction is disallowed the value or adjusted 

basis of the item deducted is zero.” The Tax Court denied leave to file the motion because it

filed after the 30-day deadline. 

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that because Congress has made it more burdensome for taxpayers who 

overvalue charitable deduction property to rely on the “reasonable-cause” 

exception to which most tax penalties are subject, the policy behind the statute 

supports the conclusion that the gross valuation misstatement penalty is 

appropriate here, even if the misstatement was not explicitly based on value.47

But, the values of the easements themselves present a question that is entirely 

different from the partnerships’ entitlement to a charitable deduction for the 

easements. Both parties acknowledge that the Tax Court did not make a 

finding of the values of the easements and that there is a difference between 

the values advanced by the Appellants’ appraiser and by the Commissioner’s 

appraiser.48

3. Conclusion

We vacate and remand to the Tax Court for it to determine whether the

gross valuation misstatement penalty is applicable and if so, the proper 

amount of any penalty. 

 

47 For BCR I’s tax year, each taxpayer was allowed to rely on the “reasonable-cause” 

exception only if it had obtained a “qualified appraisal” from a “qualified appraiser” and 

“made a good faith investigation of the value of the contributed property.” 26 U.S.C. § 

6664(c)(2) (2005). In 2006, Congress eliminated the “reasonable-cause” exception altogether 

for gross valuation misstatement of charitable deduction property. See 26 U.S.C. § 6664(c)(3). 

The Tax Court opined that BCR I might be entitled to a “reasonable cause” defense for the 

2005 easement because it had obtained the report of a “qualified appraiser” and had 

conducted a good faith investigation of the 2005 easements’ value. However, the Tax Court 

went on to discuss the problems with the “baseline documents,” then determined that BCR I 

had failed to make any plausible contentions sufficient to establish “reasonable cause.” 

Should the Tax Court conclude that the 2005 easement was grossly overvalued, BCR I might

have a valid argument for “reasonable cause.”

48 In addition, appellants agree that the “issue [of the gross valuation misstatement 

penalty] should be remanded to the tax court . . . if this Court reverses the tax court’s 

disallowance of deductions based on the perpetuity and baseline documentation 

requirements.” 

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IV.

CONCLUSION

We VACATE the Tax Court’s judgment and REMAND for it to rule anew 

according to the foregoing opinion.

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JAMES L. DENNIS, Circuit Judge, dissenting in part and concurring in part:

In my view, Part III.A.2.a of the majority opinion erroneously reverses 

the Tax Court’s holding that the conservation easements granted by the BCR 

Partnerships were not granted in perpetuity, as required by IRC § 170(h)(2)(c), 

and thus did not constitute qualified real property interests for which the

Partners develop land that was initially protected by the easements simply by

hips could claim $15.9 million in charitable contribution income tax 

deductions.1 The majority opinion also applies an impermissibly lax standard 

when reviewing the claimed deduction, contrary to the Supreme Court’s 

instructions in INDOPCO, Inc. v. C.I.R., 503 U.S. 79, 84 (1992), that tax 

deductions be “strictly construed” and that “the burden of clearly showing the 

right to the claimed deduction is on the taxpayer,” and creates a split with the 

Fourth Circuit by refusing the apply the rule established in Belk v. 

Commissioner, 774 F.3d 221 (4th Cir. 2014).

As an initial matter, we must be mindful of the well-established rule that 

tax deductions are a matter of legislative grace, and that they are therefore 

“strictly construed and allowed only as there is a clear provision therefor.” 

INDOPCO, 503 U.S. at 84 (internal quotations and citations removed). 

Contrary to the majority opinion’s assertion,2 this rule applies with equal force 

 

1 Because I conclude that the easements failed to meet the perpetuity requirement, I 

need not discuss the Tax Court’s alternative conclusions with respect to baseline 

documentation. 

2 In support of its assertion that “the usual strict construction of intentionally adopted 

tax loopholes is not applicable to grants of conservation easements made pursuant to 

§170(h),” the majority opinion notes that the provision was adopted “by an overwhelming 

majority of Congress.” Op. at 11. Never before has this court relied on the size or nature of 

the majority by which a statutory provision was passed in order to determine its scope. 

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to a deduction for the donation of a conservation easement.3 Belk, 774 F.3d at 

225 (applying INDOPCO to the conservation easement deduction provision); 

see also Minnick v. C.I.R., 796 F.3d 1156, 1159 (9th Cir. 2015) (same); 

Scheidelman v. C.I.R., 755 F.3d 148, 154 (2d Cir. 2014) (same); Esgar Corp. v. 

C.I.R., 744 F.3d 648, 653 (10th Cir. 2014) (same).

The value of any qualified charitable contribution made during the 

taxable year is allowed as a deduction. § 170(a)(1). If the charitable 

contribution is of a partial interest in property—“an interest in property which 

consists of less than the taxpayer’s entire interest in such property”—the Code 

allows a deduction only in limited circumstances. § 170(f)(3)(A). One such 

circumstance exists if the donation qualifies as a “qualified conservation 

contribution.” § 170(f)(3)(B)(iii). The Code defines a “qualified conservation 

contribution” as “a contribution (A) of a qualified real property interest, (B) to 

a qualified organization, (C) exclusively for conservation purposes.” 

§ 170(h)(1). The Code further provides that a “qualified property interest” 

includes “a restriction (granted in perpetuity) on the use which may be made 

 

3 I am sensitive to the majority opinion’s implication that a broader interpretation of 

§ 170(h) would assist conservation efforts by encouraging the donation of conservation 

easements. However, all tax deductions are designed to serve some public good and yet are 

narrowly and strictly construed. It is not our domain to decide that the goal served by this 

deduction is more important than that served by any other. See Battelstein v. Internal 

Revenue Serv., 631 F.2d 1182, 1185 (5th Cir. 1980) (“We note further that even were this 

Court of the opinion that there are . . . equitable considerations in this case favoring the 

[taxpayers], it has long been established that we may not allow such considerations to play a 

part in our decision. As panels of this Court have recently had occasion to reiterate, citing 

recent and established Supreme Court precedent, tax deductions are matters of legislative 

grace and must be narrowly construed.”); Dosher v. United States, 730 F.2d 375, 376 (5th Cir. 

1984) (“[Tax deductions] are exclusively items of legislative grace. Deductions in the code 

are not found by weighing or balancing equities; they are discovered by a parsing of the 

legislative language, and, in the case of an ambiguity, a review of the legislative history. 

Deductions are narrowly construed and the taxpayer bears the burden of proving 

entitlement.”).

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of the real property.” § 170(h)(2)(C). As the Belk court convincingly reasoned, 

“[t]he placement of the article ‘the’ before ‘real property’ makes clear that a

perpetual use restriction must attach to a defined parcel of real property rather 

than simply some or any (or interchangeable parcels of) real property.” 774

F.3d at 225 (citing American Bus Ass’n v. Slater, 231 F.3d 1, 4–5 (D.C. Cir. 

2000)). Furthermore, the statutory requirement that “[i]n the case of 

contributions of property for which a deduction of more than $500,000 is 

claimed . . . a qualified appraisal of such property” must accompany the tax 

return, 26 U.S.C. § 170(f)(11)(D), and the regulatory requirement that a donor 

of a conservation easement make available to the donee “documentation 

sufficient to establish the condition of the property,” Treas. Reg. § 1.170A–

14(g)(5)(i), would be rendered meaningless if a donor were permitted to change 

the boundaries of the conservation easement after the donation was made and 

the deduction was claimed, see Belk, 774 F.3d at 226–27. Thus, “a conservation 

easement must govern a defined and static parcel.” Id. at 227. “[T]he Code 

requires a donor to grant an easement to a single, immutable parcel at the 

outset to qualify for a charitable deduction.” Id. (footnote and emphasis 

omitted).

The easement at issue in the present case fails because the real property 

contributed to NALT is not subject to a use restriction in perpetuity. As in 

Belk, “[t]he [e]asement purports to restrict development rights in perpetuity 

for a defined parcel of land, but upon satisfying the conditions in the 

[modification] provision, the taxpayers may remove land from that defined 

parcel and substitute other land.” 774 F.3d at 226. And contrary to the 

majority opinion’s assertion, this effect is more than merely de minimis. There 

is no time limit within which the homesite modifications must occur. There is 

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no limit upon the distance or the number of times a homesite can be relocated 

within the outer boundaries of the tract. The forty-seven five-acre homesites

that may be substituted with initially-protected land represent 6.69 percent of 

the 3,509-acre easement tract—a significant portion of the total. See Balsam 

Mountain Investments, LLC v. C.I.R., 109 T.C.M. (CCH) 1214, at *3 (T.C. 2015) 

(an easement is not a “qualified real property interest” of the type described in 

§ 170(h)(2)(C) even where a modification provision allowed substitution for 

“only 5%” of the land initially subject to the easement). Because the easement 

does not govern a “defined and static” parcel of land, it does not constitute a 

“qualified conservation contribution” under § 170(h), and the Tax Court was 

correct in holding that the BCR Partnerships were not entitled to claim a 

deduction for the contribution. Belk, 774 F.3d at 226–27. 

The majority opinion attempts to distinguish Belk. Respectfully, I find 

the attempted distinction unpersuasive. As the majority opinion correctly 

notes, “[t]he court in Belk reasoned that, because the donor of the easement 

could develop the same land that it had promised to protect, simply by lifting 

the easement and moving it elsewhere, it was not granted in perpetuity.” Op. 

at 9–10. The majority opinion states that the same concern is not implicated 

in the present case because “[o]nly discrete five-acre residential parcels, 

entirely within the exterior boundaries of the easement property, could be 

moved.” Id. at 9–10. I do not see how this distinction obviates the concern 

expressed by the Belk court: using the modification provision, the BCR 

Partnerships can lift the easement and swap the previously unprotected fiveacre homesites for initially protected land, thereby converting conservation 

habitat into residential development. 

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In their opening brief, the BCR Partnerships likened the easements to 

“a slice of Swiss cheese,” with forty-seven five-acre homesites representing the 

holes. The “defined parcel of real property,” Belk, 774 F.3d at 225, to which 

the conservation easement initially attached is one particular slice of cheese, 

with holes in specific locations. And just like the holes in a slice of cheese are 

not themselves cheese, the forty-seven homesites are not a part of the land 

protected by the conservation easement. By permitting the BCR Partnerships 

to change the placement of the homesite parcels, the modification provision 

expressly permits the substitution of nonprotected land—land within the 

holes—for land that was originally protected by the easement. Such 

substitution changes what real property is subject to the easement. In other 

words, any modification produces a different slice of cheese with a different 

pattern of holes. This is precisely what the Fourth Circuit disallowed in Belk. 

See id. at 226 (“The Easement purports to restrict development rights in 

perpetuity for a defined parcel of land, but upon satisfying the conditions in 

the substitution provision, the taxpayers may remove land from that defined 

parcel and substitute other land.”). That the substitution occurs within the 

outer boundaries of the total 3,744-acre ranch tract makes no meaningful 

difference. Even if most of the initially-protected land will remain 

undeveloped, the easements do not attach to in perpetuity to the initially 

defined parcel of real property. See id. at 225; see also Balsam Mountain 

Investments, LLC, 109 T.C.M. (CCH) 1214, at *3.

Similarly, the majority opinion’s reliance on the Conservation Easement 

Plan of Bosque Canyon Ranch is misplaced. We are bound to look at what the 

easement allows the parties to do, not what the parties actually plan on doing. 

See § 170(h)(2)(C) (a “qualified property interest” includes “a restriction 

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(granted in perpetuity) on the use whic may be made of the real property”

emphasis added)); see also Belk, 774 F.3d at 226 (“The [e]asement purports to 

restrict development rights in perpetuity for a defined parcel of land, but upon 

satisfying the conditions in the [modification] provision, the taxpayers may

remove land from that defined parcel and substitute other land.” (emphasis 

added)). A picture may be worth 10,000 words, but it cannot replace the plain 

language of the easements or the governing statutory and regulatory 

provisions. The terms of the easements would allow the limited partners to 

move the homesites anywhere within the outer boundaries of the ranch tract, 

subject to the NALT’s “reasonable judgment”; there is nothing in the 

modification provision that would stop the limited partners from later deciding 

that they would rather not be organized as a stereotypical subdivision and 

spread the sites across the tract or from deciding that they would prefer that 

the homesites be grouped in the northwest corner of the easement rather than 

the northeast. Furthermore, as I read section 3.21 of the easements, there is 

nothing to prevent a limited partner from seeking modification of his or her 

homesite even after a ranch home has been constructed. While the NALT could 

have grounds for declining to approve such a modification, it could also have 

reasons for not doing so. What is important is that the modification provision 

would allow such a change. Congress did not intend for possibly enormous tax 

deductions to be based on the likelihood of continued agreement between the 

donor-taxpayer and the non-profit donee as to the land designated as subject 

to the conservation easement; rather, it specifically and unequivocally required 

that a qualified conservation easement be perpetual. § 170(h).

Furthermore, I do not think that Commissioner v. Simmons, 646 F.3d 6, 

9–11 (D.C. Cir. 2011), and Kaufman v. Shulman, 687 F.3d 21, 27–28 (1st Cir. 

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2012), which the majority opinion cites, are relevant to the case at hand. The 

modification provisions in Simmons and Kaufman allowed the donee trusts to 

consent only to physical modifications of the historic buildings’ facades. They 

did not permit modifications of the easements themselves, that is, changes to 

what property was protected. Unlike in Belk and in this case, the same real 

property in those cases remained protected in perpetuity. The majority opinion 

asserts that “the common-sense reasoning that [Simmons and Kaufman] 

espoused, i.e., that an easement may be changed to promote the underlying 

conservation interests, applies equally here.” Op. 10. But there is nothing in 

the record to suggest that the modification provisions in this case were 

designed to promote the underlying conservation interests. While the BCR 

Partnerships asserted at oral argument that the modification provisions could

be used to move a homesite if the site’s original location was discovered to be 

the nesting grounds for an endangered bird, contrary to the majority opinion’s 

suggestion, the terms of the easement do not include any requirement that the 

modification serve conservation purposes. Instead, the provision merely 

requires that any modification “does not, in [the NALT’s] reasonable judgment, 

directly or indirectly result in any material adverse effect on any of the 

Conservation Purposes.” This subprovision suggests that any modifications 

will more likely be made by, and for the benefit of, the BCR Partnerships and 

the homeowners rather than by the NALT or for the benefit of conservation 

goals.4 

 

4 It appears to me that a swap of a homesite for a five-acre tract of initially-protected 

land would in most instances be detrimental to the purposes of the conservation easement. 

Because most of the homesites are grouped together as a typical residential subdivision, they 

are not as valuable for wildlife conservation purposes as land within the heart of the 3,744-

acre tract. 

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Following Belk’s persuasive reasoning, and mindful of the Supreme 

Court’s direction that deductions be strictly construed, see INDOPCO, 503 U.S. 

at 84, I must conclude that the easements at issue in this case did not comply 

with the requirement in § 170(h)(2)(C) that a defined parcel of real property be 

protected in perpetuity. Because Part III.A.2.a of the majority opinion directly 

and inexplicably conflicts with these principles, I respectfully dissent from that 

part.

*

Except as noted in the foregoing dissent and footnote 1, I concur in 

vacating the Tax Court’s judgment and in remanding for the purposes stated 

by the majority opinion.

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