T.C. Mem o. 2 01 5- 13 0

UNITED STAT ES TAX COURT BOSQUE CANYON RANCH, L.P., BC RANCH, INC., TAX MATTERS

PARTNER, Pet it io ne r v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt BC RANCH II , L.P. a.k.a. BOSQUE CANYON RANCH II, L.P., BC RANCH I,

INC., TAX MATTERS PARTNER, Peti ti on er v . COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No s. 1 06 7- 09 , 25 94 6- 11 . Fi le d J ul y 14 , 20 15 .
Val J . Alb rig ht , Ky le R. Co le m an , andJi m Sco tt(sp eci al ly recog ni zed ), fo r pe ti ti on ers . Ani taA. Gill , ErinR. Hin es , Ali ci a A. Mazu rek , andAlex an dr a E. Nich ol ai de s, fo r res po nd en t.- 2 -

[* 2] MEMORANDUM FINDINGS OF FACT AND OPINION FOLEY, Jud ge : Th e is su es for de ci si on , rel at in g t o 2 00 5 a nd20 07 , are whe th er Bo sque Can y on Ran ch , L.P. (BCR I), an d B C Ran chII, L.P. (BCR I I), were en ti tl edto ch ari tabl e co nt rib ut io n d educ ti on s re la ti ng to th ei r do na ti on s o f co ns erv at io n e as em en ts , whet he r BCR I an d B CR II (pa rtn ers hi ps ) were re qu ire d to reco gn iz e in co m e rel at in g t o s al es of p artne rs hi p p ro pe rty, andwhet he r th e pa rtn ers hi ps are l iabl e fo r se ct io n 6 66 2( h) gro ss va lu at io n m is st at em en t p en al ti es . 1 FINDINGS OF FACT I. BCR I BCR I was f orm edinJu ly 200 3 a s a Tex as li m it edpa rtn ers hi p. BC Ran ch , In c. (wh ol ly owne d b y

Alan Fri edm an ), was B CR I’s g en eral an d t ax m at te rs pa rtn er an d h el d a0.0 1% i nt eres t the rei n. BC Ran chI, L.P. (own edby Mr. Fri edm anan d B C Ran ch , Inc .), an d Ad di so n P artne rs , L.P. (own edby Rand ol ph Add is on , Sr., andRan do lp h Ad di so n, J r.), were B CR I’s l im it edpartn ers , own in g 83 .33 % an d 1 6.6 6% i nt eres ts , res pe ct iv el y .

Unl es s o th erwi se in di cat ed , all sec ti on refe ren ces are t o the Int ern al 1 Rev enue Co de ineffe ctforth e y ears inis su e, an d a ll Ru le refe ren ces are t o the Tax Co urt Ru le s o f Prac ti ce an d P ro cedur e.- 3 -

[* 3] On Ap ril 4, 2 00 3, Tri se pt , Inc ., who ll y own edby Mr. Frie dm an , ent eredin to anag reem en t wi th th e Ja ck Jay Powel l Es ta te to purch as e a 3 ,72 9- acre tra ctin Bo sque Co un ty, Tex as . On Aug us t 4 , 20 03 , Tris ep t, In c., as si gn edit s i nt eres t i n th e ag reem en t t o B CR I an d, o n Au gu st15 , 20 03 , BCR I p ur ch as ed , for ap pr ox im at el y

$4 ,94 0,0 00 , th e 3 ,72 9- acre tra ct . On Dece m be r 11 , 20 03 , BCR I pu rch as ed , forap pr ox im at el y $3 4,5 16 , an a djac en t 1 5- acre tra ct . Im m ed ia te ly fo ll owi ng th es e p ur ch as es BCR I own edBo sque Can y onRan ch(BC R an ch ), a 3,7 44 -acr e tr act . Between20 03 an d 2 00 5 B CR I m ad e $ 2,2 00 ,65 8 o f im pr ov em en ts to BC Ran ch(e.g ., ren ov at io n o f a h ou se ; co m pl et io n o f a m an m ad e lake ; an d the in st al la ti onof f

en ces , roa ds , andpo ol s) . In 2 00 4, atMr. Fri edm an ’s di rect io n, BCR I co m m en cedm ark et in g l im it edpa rtn ers hi p i nt eres ts (LP un it s) an d furn is he d p ro sp ect iv e p ur ch as ers off eri ng do cu m en ts pre pa redby the Add is on Law Firm , P.C. Thes e d oc um en ts in cl ud eda co nf id en ti al pri va te pl acement m em or an du m

(PPM ); asubs cri pt io n a gr eem en t; a m em or an du m pre pa redby a cert ifi edpubl ic acco un tant , MarkE. Mit ch el l, d et ai li ng tax is su es ; an un si gn ed dr aftdo cu m en t en ti tl ed“ Bo sque Can y on Ran chDecl arat io n o f Co ve nant s, Co nd it io ns an d R es tri ct io ns ” (d ecl arat io n o f co ve nant s) ; an d an uns ig ne d draft ag reem en t o f li m it edpa rtn ers hi p (LP ag reem en t). Th e PPM pro vi de d tha t the- 4 -

[* 4] ge ne ral partn er h adno t re qu es te d o r rec ei ve d aleg al op in io n re la ti ng to th e ta x c on se qu en ces of a n i nv es tm en t i n B CR I. Inad di ti on , itpro vi de d tha t the Add is on Law Firm , P.C., had“ ren de redcert ai n s erv ic es co nc ern in g thi s tra ns act io n” bu t h ad“ no t p erfo rm edan y tax rel at edservi ces or r en de redan y tax op in io ns ”. In20 04 BCR I co m

m en cedm ark et in g LP uni ts at $ 35 0,0 00 pe r un it . Each pu rch as er wo ul d b eco m e a l im it edpa rtn er o f BCR I, an d the pa rtn ers hi p wo ul d subs eque nt ly dis tri bu te to th atli m it edpa rtn er a fe e si m pl e in te res t i n a n un de ve lo pe d fi ve -acr e p arce l o f pr op erty (Hom es it e p arce l). The d is tri bu ti on of 2 Hom es it e p arce ls was c on di ti on edon BCR I gra nt in g the Nort h Am eri canLand Trus t (NALT) a co ns erv at io n e as em en t re la ti ng to 1,7 50 acre s o f BC R an ch . On Dec em

be r 29 , 20 05 , pu rs ua ntto a de edof c on se rv at io n e as em en t (2 00 5 de ed ), BCR

I gr an te d a n e as em en t (2 00 5 e as em en t) t o the NALT, a se ct io n 50 1( c)(3 ) or gani zat io n. Th e 2 00 5 d eedpro vi de d tha t p orti on s o f th e are a subjec t to th e eas em en t i nc lu de d h ab it atof t he go ld en -ch eek edwarb le r, anen da ng ered sp eci es of b irden de m ic to , andne st in g o nl y in , Texa s. Pro pe rty subjec t t o the
BCR I advi se d p ur ch as ers th atth e p artne rs hi p p lann edto co nt rib ut e 2 ap pr ox im at el y

1,8 66 acre s o f BC R an chto BCR I I, whi chwou ldsubs eque nt ly sell it s o wn LP u ni ts to pu rch as ers insubs tant ia ll y si m il ar tran sa ct io ns . BCR I wo ul d co nt in ue to ownap pr ox im at el y 1,8 77 acre s o f BC R an ch .- 5 -

[* 5] 20 05 eas em en t co ul d n otbe us edforres id en ti al , comm erci al , in st itut io na l, in du st ria l, o r ag ric ul tu ral pu rp os es . In ad di ti on , BCR I re ta in edva rio us rig ht s rel at in g t o the pro pe rty, inc lu di ng rig ht s t o ra is e li ve st oc k; hu nt ; fi sh ; trap ; cu t do wn trees ; an d c on st ru ctbu il di ng s, re crea ti on al faci li ti es , sk eetsh oo ti ng st at io ns , de er h un ti ng st an ds , wil dl ife vi ewin g t owe rs , fen ces , po nd s, ro ad s, trai ls , and well s. The Hom es it e p arce l o wne rs an d the NALT co ul d, b y m utua l ag reem en t, m od ify the bo un da rie s o f th e Hom es it e p arce ls , pro vi de d tha t an y su ch
m od ifi cat io n c ou ldno t “ in th e Tru st ’s reas on ab le jud gm en t, d ire ct ly or in di rect ly res ul t i n a ny m at eri al adve rs e eff ecton an y

of t he Co ns erv at io n P ur

po se s” an d

“ [t]he areaof e ach Hom es it e p arce l * * * [co ul d] no t b e in crea se d.” At BC R I’s d ire ct io n, the NALT pr ep aredba se li ne do cu m en ta ti on rel at in g to th e 2 00 5 e as em en t (2 00 5 b as el in e d oc um en ta ti on ). The 2 00 5 b as el in e do cu m en ta ti on , dat edDecem be r 29 , 20 05 , in cl ud ed : m ap s, a re co rd edco py of th e 20 05 de ed , ph ot og rap hs tak enin20 04 , exi st in g c on di ti on s re po rts (i.e ., in cl ud in g a “ Si te Surv ey

Rep ort” da te d M arch 20 07 an d p rep aredby PeterSm ith, a co ns erv at io n b io lo gi st ), an d asi gn edown er ac kn owl ed ge m en t (i .e., pu rs ua ntto whi chRan do lp h Ad di so n, J r., cert ifi edth atBCR I “ rece iv edan d fu ll y rev ie wed th e at ta ch edBas el in e Doc um en ta ti on init s en ti rety an d tha t i t i s an accu rat e- 6 -

[* 6] rep res en ta ti on of t he ph y si cal co nd it io n o f th e Co ns erv at io n Are a”). Th e Si te Surv ey Rep ort d es cri be d B C Ran chan d i ts go ld en -ch eek edwarb le r habi ta t. Mr . Sm ith, i n 2 00 7, co m

pl et edth e rep ort u si ng no te s C hr is to ph er Wils on , NALT ’s co ns erv at io n b io lo gi st , to okdu rin g a n Ap ril 20 04 BC Ra nc h v is it . Ran do lp h Add is on , Jr., was res po ns ib le forrev ie win g a ndex ecu ti ng th e d oc um en ta ti on . BetweenOcto be r an d Dec em be r 20 05 BCR I rece iv edsi gn edsubs cri pt io n ag reem en ts an d p aym en ts to ta li ng $8 ,40 0,0 00 fro m 24 LP un itpu rch as ers . The LP ag reem en t was ex ecu te d o n Dec em be r 31 , 20 05 . Each l im it edpa rtn er re cei ve d a Hom es it e p arce l an d the rig ht s t o b ui lda ho us e o n the parcel an d u se BC Ra nc h fo r va rio us act iv it ie s (e .g., s wimm in g, h ik in g, b ik in g, h or se ba ckrid in g, an d hu nt in g) . No p artne r was requi redto co nt rib ut e ad di ti on al cap it al to th e pa rtn ers hi p; an y

ne t ca sh flo w wou ldbe di st rib ut edon ly to BC Ran ch , Inc ., BC Ran chI, L.P., andAdd is on Partne rs , L.P.; BCR I co ul d n ot , witho utth e co ns en t o f th e li m it edpa rtn ers , eng ag e inan y bu si ne ss un rel at edto ho ld in g a ndim pr ov in g i ts po rti onof B C Ran ch ; an d B CR I d idno t an ti ci pa te co nduc ti ng an y for -p ro fit act iv ity , gen erat in g a ny netcas hf lo w, or d is tri bu ti ng to th e li m it edpa rtn ers an yth in g o th er than Ho m es it e p arce ls . On anun de te rm in edfutur e d at e BCR I wou ldco nv ey

BC Ra nc h, s ub

ject t o the co ns erv at io n e as em en t, t o the Bo sque Can y on Ran chAss oc ia ti on (BCRA), a no t-f or -p ro fitho m eo wne rs ass oc iati on .- 7 -

[* 7] Eachli m it edpa rtn er wo ul d re cei ve anin te res t i n the BCRA an d p ay an an nu al fee re la ti ng to th e m ai nt en an ce o f BC R an ch ’s comm on area s. Th e LP un it s i n B C Ran ch , pro sp ect iv e m em be rs hi p i n the BCRA, an d the rig htto us e th e co m m on area s, were ap purte nantto , andin se pa rab le fro m , eachHom es it e p arce l. On Ap ril 3, 2 00 6, the Hirs h Val ua ti on Group (Hi rs h) pro vi de d B CR I an ap pr ai sa l re po rt, e ffec ti ve Nov em be r 28 , 20 05 , val ui ng th e 2 00 5 e as em en t at $8 ,40 0,0 00 . BCR I i n Ap ril 20 06 ex ecu te d the de cl arat io n o f co ve na nt s. Durin g th atm on thBCR I ex ecu te d s pe ci al warran ty deed s tran sf erri ng Hom es it e p arce ls to th e 2 4 l im it edpa rtn ers . II. BCR II BCR II was form edinDecem

be r 20 05 as aTexa s l im it edpa rtn ers hi p. On Decem be r 20 , 20 05 , BCR I d eed edap pr ox im at el y 1,8 66 acre s o f BC R an chto BCR II. On Ap ril 3, 2 00 6, BC R I as si gn edit s i nt eres t i n B CR II to BC Ranc h I, 3 In c., BC Ra nc h I, L.P., an d Ad di so n P artne rs , L.P. BC Ran chI, Inc ., was BC R II’s g en eral an d t ax m atte rs pa rtn er an d h el d a0.0 1% i nt eres t the rei n. BC Ran chI, L.P., andAdd is onPartne rs , L.P., were BCR II ’s li m it edpa rtn ers , own in g 8 3.3 3%

BCR II’s co stba si s i n i ts po rti on of B C Ran ch , as o f th atdate , was 3 $2 ,48 4,0 83 .- 8 -

[* 8] an d 1 6.6 6% i nt eres ts , res pe ct iv el y . Duri ng 20 06 an d 2 00 7 B CR II in cu rred
ran chim pr ov em en t ex pe ns es of $ 11 6,5 62 .40 an d $ 81 6,4 85 .21 , res pe ct iv el y . In20 06 BCR I I co m

m en cedm ark et in g LP u ni ts ran gi ng fro m $3 85 ,00 0 t o $5 50 ,00 0 p er u ni t. The term s o f BCR II’s of feri ng do cu m en ts were s ub st an ti al ly si mil ar t o the term s o f BCR I’s off eri ng do cu m en ts . Each p ur ch as er wo ul d be co m e a l im it edpa rtn er o f BCR II, an d the pa rtn ers hi p wo ul d s ub se qu en tl y di st rib ut e to th atli m it edpa rtn er a Ho m es it e p arce l. The di st rib ut io n o f Hom es it e pa rcel s was co nd it io ne d o n B CR II gra nt in g the NALT a co ns erv at io n e as em en t (2 00 7 e as em en t) r el at in g t o 1 ,73 2 a cres of B C Ran ch . On Se pt em

be r 14 , 20 07 , pu rs ua ntto a de edof c on se rv at io n e as em en t (2 00 7 de ed ), BCR

II g ran te d the 20 07 eas em en t t o the NALT. The m at eri al term s o f th e 20 07 de edwere s ub st an ti al ly the same as th os e o f th e 2 00 5 d eed(i.e ., th e d eed co nt ai ne d n earl y

id en ti cal pro vi si on s re la ti ng to go ld en -ch eek edwarb le r habi ta t, ret ai ne d ri gh ts , andbo un da ry m od ifi cat io ns ). At BCRII’s di rect io n the NALT pr ep aredba se li ne do cu m en ta ti on rel at in g t o the 20 07 eas em en t (2 00 7 b as el in e do cu m en ta ti on ). The 2 00 7 b as el in e d oc um en ta ti on , dat edSep te m be r 24 , 20 07 , in cl ud ed : m ap s, a re co rd edco py of th e 2 00 7 d eed , ph ot og rap hs tak enin Nov em be r 20 08 , exi st in g c on di ti on s re po rts (e.g ., a cop y of t he 20 07 Sit e Su rv ey Rep ort i nc lu de d i n the 20 05 ba se li ne do cu m en ta ti on ), an d aparti al ly execu te d- 9 -

[* 9] own er ac kn owl ed ge m en t. Ran do lp h Ad di so n, J r., was re sp on si bl e fo r 4
rev ie win g a ndex ecu ti ng th e d oc um en ta ti on . Thro ug ho ut20 07 BCR I I rec ei ve d s ig ne d s ub sc rip ti onag reem en ts an d pa ym en ts to ta li ng $9 ,95 7,5 00 fro m 23 pu rch as ers . On Dece m be r 7, 2 00 7, Hi rs h pr ov id edBCR I I anap pr ai sa l re po rt, e ffec ti ve Sep te m be r 12 , 20 07 , val ui ng th e 20 07 eas em en t at$7 ,50 0,0 00 . BCR II’s LP ag reem en t, d at edDecem be r 20 , 20 05 , was ex ecu te d o n Dec em

be r 14 , 20 07 . Betwe enOcto be r 20 07 an d Ap ril 20 08 BCR II ex ecu te d s pe ci al warran ty deed s, tran sf erri ng Hom es it e p arce ls to th e 2 3 l im it ed pa rtn ers . Fol lo win g the se tra ns fers , th e 4 7 l im it edpa rtn ers of B CR I an d B CR II own edap pr ox im at el y

23 5 a cres , and3,4 82 of t he rem ai ni ng 3,5 09 acre s wer e subjec t t o the 20 05 an d 2 00 7 e as em en ts . III. Pro cedur al His to ry On i ts 20 05 Fo rm

10 65 , U.S. Retu rnof P artne rs hi p In co m e, pr ep aredby Mr. Mi tc he ll , BCR I c la im edan$8 ,40 0,0 00 ch ari tabl e co nt rib ut io n d educ ti on rel at in g to th e d on at io n o f th e 2 00 5 e as em en t. Inad di ti on , BCR I re po rte d c ap it al co nt rib ut io ns of $ 8,4 00 ,00 0. OnDecem be r 29 , 20 08 , res po nd en t s en t BC Ran ch , In c., a no ti ce o f fi na l p artne rs hi p a dm in is tra ti ve ad jus tm en t (2 00 5 F PAA) de te rm in in g tha t BC R I was no t en ti tl edto a ch ari tabl e co nt rib ut io n d educ ti on an d The do cum en t was si gn edby the NALT bu t was no t s ig ne d b y BCR I I. 4- 10 -

[* 10 ] th atitwas l iabl e fo r a g ro ss va lu at io n m is st at em en t p en al ty and/o r an accu racy-rela te d p en al ty pur su an t t o s ect io n 6 66 2( h) an d (a ), res pe ct iv el y . In an am en de d a ns wer fi le d Ap ril 26 , 20 10 , res po nd en t co nt en de d tha t the purch as ers of BCR I LP un it s wer e n otbo nafid e li m it edpartn ers an d, ac co rd in gl y , di d n otm ak e bo nafid e cap it al co nt rib ut io ns to BCR I . Res po nd en t fu rth er co nt en de d tha t the tra ns act io ns at i ss ue were, i n s ub st an ce, s al es of r eal pro pe rty. On i ts 20 07 Fo rm

10 65 , pre pa redby Mr. Mit ch el l, BC R II cl ai m eda $7 ,50 0,0 00 ch ari tabl e co nt rib ut io n d educ ti on rel at in g t o the do na ti on of t he 20 07 eas em en t. Inad di ti on , BCR II rep orte d c ap it al co nt rib ut io ns of $ 9,9 57 ,50 0. On Aug us t 2 3, 2 01 1, re sp on de ntsen t BC Ran chI, Inc ., a no ti ce o f fi na l p artne rs hi p adm in is tra ti ve ad

jus tm en t (2 00 7 F PAA) de te rm in in g tha t BC R II was no t en ti tl ed to a ch ari tabl e co nt rib ut io n d educ ti on ; tha t the pu rch as ers of B CR II LP un it s wer e no t b on a fi de li m it edpa rtn ers an d, ac co rd in gl y , di d n otm ak e b on a fi de cap it al co nt rib ut io ns to BCR I I; a ndth atBCR I I was li ab le fora gr os s v al ua ti on m is st at em en t p en al ty and/o r anaccu racy-rela te d p en al ty pur su an t t o s ect io n 66 62 (h ) an d (a ), res pe ct iv el y . Res po nd en t d idno t co nt en d tha t the tra ns act io ns at is su e were s al es of r eal pro pe rty.- 11 -

[* 11 ] BCR

I an d B CR II m ai nt ai ne d the ir p rin ci pa l p la ces of b us in es s i n Dal la s, Tex as , at the ti m es th ei r res pe ct iv e ta x m at te rs pa rtn ers fil edpe ti ti on s wi th th e Co urt. The Co urt co ns ol id at edpe ti ti on ers ’ cas es . OPINION I. BCR I a ndBCR I I Are No t En ti tl edto Ch ari tabl e Co nt rib ut io n Deduc ti on s Inge ne ral , a tax pa y er m ay no t cl ai m

a de du ct io n re lati ng to a ch ari tabl e co nt rib ut io n o f pr op erty

co ns is ti ng of l es s tha n the tax pa y er’s en ti re i nt eres t i n the pr op erty . See s ec. 1 70 (f)(3 ). A tax pa y er m ay , ho wev er, d educ t the va lu e o f a co nt rib ut io n o f a p art ia l i nt eres t i n p ro pe rty if th e co nt rib ut io n c on st itut es a

“ qu al ifi edco ns erv at io n c on tri bu ti on .” See s ec. 1 70 (f)(3 )(B) (ii i). In ge ne ral , a

“ qu al ifi edco ns erv at io n c on tri bu ti on ” is a co nt rib ut io n o f a “ qu al ifi edreal pro pe rty in te res t” to a se ct io n 5 01 (c)( 3) org an iz at io n e xc lu si ve ly for co ns erv at io n p ur po se s. See s ec. 1 70 (h )(1 ), (3 )(B) . A “ qu al ifi edreal pro pe rty int eres t” in cl ud es “ a res tri ct io n (g ran te d i n p erp etui ty) onth e u se whi chm ay be m ad e o f th e rea l pr op erty .” See s ec. 1 70 (h )(2 )(C) . Suc h ares tri ct io n m ay in cl ud e aneas em en t rel at in g t o re al pro pe rty. See sec . 1.1 70 A-1 4( b) (2 ), In co m e Tax Reg s. The 20 05 an d 2 00 7 d eed s p erm itm od ifi cat io ns to th e b ou nd ari es be twee n th e Hom es it e p arce ls an d p ro pe rty subjec t t o the eas em en ts . Res po nd en t co nt en ds th atth e d eed s v io la te th e p erp etui ty requ ire m en t o f se ct io n 1 70 (h )(2 )(C) .- 12 -

[* 12 ] Pet it io ne rs co nt en d tha t the 20 05 an d 2 00 7 d eed s d o n otvi ol at e th is requi rem en t b ecau se an y

m od ifi cat io ns to th e b ou nd ari es of t he Hom es it e p arce ls were s ub ject t o the reas on ab le jud gm en t o f th e NALT; th e ex te rio r bo un darie s o f th e p ro pe rty subjec t t o the eas em en ts co ul d n otbe m od ifi ed ; an d the ov eral l am ountof p ro pe rty subjec t t o the eas em en ts co ul d n otbe de crea se d. Pe ti ti on ers ’ co nt en ti on s re late to irr el ev an t fa ct s. As a res ul t o f th e b ou nd ary m od ifi cat io ns , pr op erty pro te ct edby the 20 05 an d 2 00 7 e as em en ts , at the ti m e th ey were g ran te d, co ul d s ub se qu en tl y

lo se th is pro te ct io n. Thus , th e res tri ct io ns on th e u se of the pr op erty were n otgrant edinpe rp etui ty. See s ec. 1 70 (h )(2 )(C) ; Be lkv. Co m m is si on er, 1 40 T.C. 1, 1 0- 11 (20 13 ) (h ol di ng , pu rs ua ntto sec ti on 17 0( h) (2 )(C) , th ataneas em en t i s n ota qu al ifi edreal pro pe rty int eres t i f th e bo un da rie s o f th e p ro pe rty subjec t t o the eas em en t m ay be m od ifi ed ), supp le m en te d b y

T.C. Mem o. 2 01 3- 15 4, af f’d, 77 4 F .3d22 1 (4 th Cir . 20 14 ). Acco rd in gl y , th e eas em en ts do no t co ns ti tu te qu al ifi edreal pro pe rty int eres ts an d th e p artne rs hi ps are n oten ti tl edto de du ct io ns rel at in g t o qua li fie d c on se rv at io n co nt rib ut io ns . See Be lkv. Co m m is si on er, 1 40 T.C. at 1 0- 11 , 15 . Pet it io ne rs als o fa il edto m ak e av ai labl e to th e NALT do cu m en ta ti on sa ti sf y in g s ect io n 1 .17 0A- 14 (g )(5 )(i ), In co m e Tax Reg s. Th e p artne rs hi ps res erv edrig ht s t o c on du ctva rio us act iv it ie s (i .e., hu nt in g, trap pi ng , con st ru ct io n,- 13 -

[* 13 ] etc .) ha vi ng th e p ot en ti al to im pa ir t he eas em en ts ’ co ns erv at io n i nt eres ts . Pri orto Decem

be r 29 , 20 05 (i.e ., th e 2 00 5 e as em en t’s g ran t d at e), an d S ep te m be r 14 , 20 07 (i.e ., th e 2 00 7 e as em en t’s g ran t d at e), p et it io ne rs were re qu ire d t o m ak e av ai labl e to th e NALT do cu m en ta ti onsu ffi ci en t t o e st ab li sh th e co nd it io n o f BC Ran chon th e d at e o f th e tr an sf er. See id . This requi rem en t en sures th atth e co ns erv at io n i nt eres ts are n ot“ adve rs el y affe ct edby the ex erci se of the res erv ed rig ht s” an d tha t “ th e d on orwil l b e ab le to de du cton ly wha t the do ne e o rg an iz at io n actua ll y rece iv es .” See Gra ev v. Co m m is si on er, 1 40 T.C. 37 7, 3 88 (20 13 ); s ec. 1.1 70 A-1 4( g) (5 )(i ), In co m e Tax Reg s. The 20 05 an d 2 00 7 b as el in e d oc um en ta ti on was u nr el iabl e, in co m pl et e, an d in su ffi ci en t t o e st ab li sh th e co nd it io n o f th e rel ev an t p ro pe rty onth e d at e th e res pe ct iv e eas em en ts were g ran te d. Th e Si te Surv ey Rep ort i nc lu de d i n the Decem be r 20 05 ba se li ne do cu m en ta ti onwas c om pl et edinMarc h 2 00 7, 1 5 m on th s aft er the da te of t he tra ns fer. Th e rep ort d es cri be d B C Ran chas o f Apr il 20 04 , whe reas th e 2 00 5 d eedwas e xe cu te d o n Dec em be r 29 , 20 05 . Con st ru ct io n o n, an d de ve lo pm en t o f, th e p ro pe rty occu rreddu rin g the in te rv en in g 2 0- m on th pe rio d, ren de rin g the de sc rip ti on un ti m el y an d u nr el iabl e. Inad di ti on , th e March 20 07 rep ort was in ex pl ic ab ly inc lu de d i n d oc um en tati on th atpu rp orte d t o b e a “ fu ll y rev ie wed* * * ac cu rat e rep res en ta ti on ” o f th e p ro pe rty, as o f Decem be r 20 05 .- 14 -

[* 14 ] The re fere nc e to th e Si te Surv ey Rep ort i n the 20 05 ba se li ne do cu m en ta ti on ’s tab le of c on te nt s i nd ic at es th atth e tabl e o f co nt en ts was n ot pr ep aredun ti l M arch20 07 , at the earl ie st . In ad di ti on , th e Si te Surv ey Rep ort in cl ud edinth e 2 00 7 b as el in e d oc um en ta ti onwas b as edon a 20 04 BC Ra nc h v is it . Thu s, i t fa il edto pro vi de a ti m el y an d a ccurat e d es cri pt io n o f th e p ro pe rty subjec t to th e 2 00 7 e as em en t. Pet it io ne rs als o c ou ldno t ex pl ai n wh y th e 2 00 7 b as el in e do cu m en ta ti on in cl ud edph ot og rap hs tak eninNov em be r 20 08 . In ra m

bl in g, in co he ren t t es ti m on y , Andrew J oh ns on , pre si de ntof t he NALT, fai le d t o c larif y th es e g larin g i nc on si st en ci es . He app eare d t o b e unf am il iar with the ba se li ne do cu m en ta ti on ; d idno t kno w when itha d b eenpre paredor wh o h adpre pa red va rio us po rti on s; an d a dm it te d h e “ ne ve r fel t tha t we h adto st op pre pa rin g a ba se li ne at s om e art ifi ci al date ” an d tha t p orti on s o f th e d oc um en ta ti on (e.g ., a m ap pu rp orti ng to refl ectth e h ab it atof t he go ld en -ch eek edwarb le r) were “ fai rly im pr eci se ”. The own er ac kn owl ed gm en t (i .e., pro vi di ng th atth e d oc um en ta ti on was fu ll y rev ie wedan d a ccu rat el y de sc rib edth e co nd it io n o f th e p ro pe rty) inth e 2 00 7 ba se li ne do cu m en ta ti on was n otex ecu te d p rio r to th e Sep te m be r 24 , 20 07 , reco rd in g o f th e 2 00 7 e as em en t. Inad di ti on , when ask edwhet he r he ha d s ig ne d th e o wne r ackno wled ge m en t i n the 20 05 ba se li ne do cu m en tati onpri orto- 15 -

[* 15 ] Decem

be r 29 , 20 05 (i.e ., th e 2 00 5 e as em en t’s g ran t d at e), Ran do lp h Add is on , Jr., s ta te d: “ I do n’t kno w whatda y I si gn edth e d oc um en t” . Insu m , th e 2 00 5 b as el in e d oc um en ta ti on an d 2 00 7 b as el in e d oc um en ta ti on were i ns uf

fic ie ntto est ab li sh th e co nd it io n o f th e p ro pe rty pri orto th e d at es of t he tra ns fers . W e fi ndm eri tl es s, an d re ject, p et it io ne rs ’ subs tant ia l co m pl ianc e co nt en ti on . II. The Pro pe rty Trans fers W ere Di sg ui se d S al es Res po nd en t es tabl is he d tha t the pa rtn ers hi ps , ineffe ct , so ldHom es it e pa rcel s an d app urte na ntrig ht s the ret o t o the ir l im it edpa rtn ers for$3 50 ,00 0 t o $5 50 ,00 0. The p artne rs hi ps de ed edth e Hom es it e p arce ls to th ei r li m it edpartn ers

5 withi n fi ve m on th s o f th e p artne rs hi ps ’ acce pt an ce o f th e li m it edpa rtn ers ’ pa ym en ts . See s ec. 7 07 (a)( 2) (B); sec . 1.7 07 -3 (b )(1 ), (c)( 1) , Inc om e Tax Reg s. (p ro vi di ng th ata di sg ui se d s al e o ccu rs if a“ tra ns fer o f m on ey or o th er co ns id erat io n” by one pa rty woul d n otbe m ad e b utforanin it ia l tran sf er o f pr op erty by the othe r pa rty andth attra ns fers be twee n apa rtn ers hi p a nda partn er The di sg ui se d s al e is su e was no t as se rte d i n the FPAAs a ndis th us a ne w 5 m at te r. See Ru le 14 2( a). Res po nd en t, h owe ve r, ha s m ethi s b ur de n. We nee d n ot de te rm in e whe th er the LP un itpurch as ers were b on a fi de li m it edpa rtn ers inth e pa rtn ers hi ps . See s ec. 1 .70 7- 3( a)(3 ), In co m e Tax Reg s. (“ If a p ers on purp orts to tra ns fer p ro pe rty to apa rtn ers hi p i n acap aci ty as a p artne r, th e ru le s o f th is sec ti on ap pl y * * * ev enif i t i s * * * [subs eque nt ly] de te rm in ed* * * tha t s uc h p ers on is no t a p artne r.”).- 16 -

[* 16 ] withi n atwo -y ear p eri odare “pr es um edto be a sa le * * * u nl es s the fact s an d c irc um st an ces cle arl y est ab li sh th atth e tr an sf

ers do no t co ns ti tu te a sa le ”). 6 The fol lo win g fa ct s an d c irc um st an ces est ab li sh th atth e p ro pe rty tran sf ers at i ss ue were d is gu is edsal es : the ti min g a ndam ou ntof t he di st rib ut io ns to th e li mit ed pa rtn ers were d et erm in ab le with re as on ab le cert ai nt y at t he ti m e th e p artne rs hi ps acce pt edth e li m it edpa rtn ers ’ pa ym en ts ; the li m it edpa rtn ers ha d l eg al ly en fo rceabl e ri gh ts , pu rs uantto th e LP ag reem en ts , to rece iv e th ei r Hom es it e pa rcel s an d the ap pu rte na ntrig ht s; th e tr an sa ct io ns effe ctua te d e xc ha ng es of the be ne fit s an d b ur de ns of o wne rs hi p re la ti ng to th e Hom es it e p arce ls ; the di st rib ut io ns to th e p artne rs were d is pr op orti on at el y lar ge inrel at io n t o the li m it ed pa rtn ers ’ in te res ts inpa rtn ers hi p p ro fit s; an d the li m it edpa rtn ers rece iv edth ei r Hom es it e p arce ls infee s im pl e wit ho utanob li ga ti on to return the m to th e pa rtn ers hi ps . See s ec. 1 .70 7- 3( b) (2 ), In co m e Tax Reg s. Whe n tran sf

ers are n otm ad e si m

ul tane ou sl y , a di sg ui se d s al e o ccu rs on ly if

“ th e subs eque nttra ns fer i s n otde pe nd en t o n the en tre pr en euria l ri sk s o f pa rtn ers hi p o pe rat io ns .” See i d. s ub pa ra. (1 )(i i). We rejectpe ti ti on ers ’ co nt en ti on
Sec. 1 .70 7- 3, In co m e Tax Reg s., ap pl ie s t o d is gu is edsal es of p ro pe rty by a 6 pa rtn er t o apa rtn ers hi p. Se c. 1.7 07 -6 (a), In co m e Tax Reg s., p ro vi de s tha t s im il ar ru le s ap pl y

to di sg ui se d s al es of p ro pe rty by a pa rtn ers hi p t o apa rtn er. Acco rd in gl y , we app ly suc h s im il ar ru le s i n thi s ca se .- 17 -

[* 17 ] th atth e li m it edpa rtn ers ’ pa ym en ts wou ldbe at r is k, p ur su an t t o the term s o f th e LP ag reem en ts , if the eas em en ts were n otgra nt ed . The p ro vi si on s i n the ag reem en ts , pu rp orti ng to co nd it io n the di strib ut io ns of Ho m es it e p arce ls on th e do na ti on s o f th e eas em en ts to th e NALT, were in co ns eque nt ia l. The 20 05 eas em en t was gra nt edon Decem be r 29 , 20 05 , two da y s p rio r to th e d at e o n wh ic h th e BCR I LP ag reem en t was ex ecu te d, an d the 20 07 eas em en t was grant edin Sep te m be r 20 07 , th ree m on th s p rio r to th e d at e th e BCR II LP ag reem en t was ex ecu te d. Inad di ti on , Mr. Fri edm anan d R an do lp h Ad di so n, J r., bo th tes ti fie d tha t th e p artne rs hi ps wou ldha ve refu nd edth e am ou nt s p ai d b y th e li m it edpa rtn ers if th e eas em en ts were n otgrant ed . In s um , th e d is tri bu ti on s t o the li mit edpa rtn ers were m ad e in ex ch an ge for th e li m it edpartn ers ’ pa y m en ts an d wer e n otsubjec t t o th e en tre pr en eu ria l ri sk s o f th e p artne rs hi ps ’ op erat io ns . Accor di ng ly, each ex ch an ge co ns ti tu te d adi sg ui se d s al e o f pa rtn ers hi p p ro pe rty by BCR I or B CR II in ex ch an ge for

each li m it edpa rtn er’s p aym en ts . See s ec. 7 07 (a)( 2) (B); sec . 1.7 07 -3 (b )(1 ), In co m e Tax Reg s. Th e p ro pe rty so ldto each li m it edpa rtn er co ns is te d o f a Ho m es it e p arce l an d an app urte na ntrig htto us e BC R an ch ’s co m m on area s (i .e., a on e-fo rty-sev en th in te res t the rei n) . The 2 4 d is gu is edsal es- 18 -

[* 18 ] effe ctua te d b y

BCR I an d the 23 di sg ui se d s al es effe ctua te d b y BCR I I co ns ti tu te d s al es by the pa rtn ers hi ps of a ll of t he ir i nt eres ts inBC Ra nc h. 7 BCR I an d B CR II were re qu ire d t o re co gn iz e, an d i nc lu de inth ei r gr os s in co m e rel at in g t o 2 00 5 a nd20 07 , res pe ct iv el y , any gai ns rel at in g t o the di sg ui se d sa le s (i .e., tak in g i nt o a cco un t ad jus te d b as is inth e p ro pe rty so ld ). See s ecs . 61 (a)( 3) , 70 7( a)(2 )(B) , 10 01 ; s ec. 1 .70 7- 3( a)(2 ), In co m e Tax Reg s. BC R I’s ad jus te d b as is inth e p ro pe rty so ldineach di sg ui se d s al e (i .e., a Hom es it e p arce l an d the ap pu rte na ntrig ht s the ret o) in cl ud edon e twe nty -fo urth of B CR I’s co st ba si s i n B C Ran chan d o ne twen ty-fou rth of t he ran chim pr ov em en t ex pe ns es th e pa rtn ers hi p i nc urredas o f th e d at e o f th e sa le . See s ec. 1 01 6( a); sec . 1.1 01 6- 2( a), In co m e Tax Reg s. Si m il arl y , BCR II ’s adju st edba si s i n the pro pe rty so ldineach di sg ui se d s al e in cl ud edon e twe nt y -th irdof i ts co stba si s i n B C Ran chan d o ne twen ty-th irdof t he ran chim pr ov em en t ex pe ns es th e p artne rs hi p i nc urredas o f th e da te of t he sal e. See s ec. 1 01 6( a); sec . 1.1 01 6- 2( a), In co m e Tax Reg s.

The pa rtn ers hi ps di d n ottra ns fer t it le inth e co m m on area s o f BC R an chto 7 th e li m it edpa rtn ers . The LP ag reem en ts an d the de cl arat io n o f co ve na nt s, ho wev er, p ro vi de d tha t the pa rtn ers hi ps wou ldev en tu al ly con tri bu te BC Ranc h t o th e BCRA, andth atth e li m it edpa rtn ers wou ldrece iv e m em be rs hi p i nt eres ts inth e BCRA. Accor di ng ly, fo ll owi ng th e d is gu is edsal es , th e p artne rs hi ps he ldti tl e to BC Ra nc h fo r th e b en efi t o f th e li m it edpa rtn ers .- 19 -

[* 19 ] The BCR I an d B CR II sal es oc cu rredon Decem be r 31 , 20 05 , and Decem be r 14 , 20 07 , res pe ct iv el y . On tho se date s, the pu rch as ers of t he LP un it s 8 were ad mit te d a s l im it edpa rtn ers , th e p artne rs hi ps in cu rredco ntractua l o bl ig at io ns to tra ns fer the Hom es it e p arce ls , andth e p artne rs hi ps ha d the un res tri ct edrig htto acce ptan d u se th e li m it edpa rtn ers ’ pa y m en ts as c on si de rat io n fo r th e Hom es it e pa rcel s an d app urte na ntrig ht s. See Cal lo way v. Co m m is si on er, 1 35 T.C. 26 , 33
- 34 (20 10 ) (h ol di ng th atfact or s fo r de te rm in in g wh ena sa le oc cu rs in cl ud e “ ho w th e p art ie s treatth e tr an sa ct io n” an d “ whe th er the co nt ractcrea te s a p res en t ob li ga ti on on th e se ll er t o e xe cu te an d d el iv er a d eedan d apre se ntob li ga ti on on th e p ur ch as er t o m ak e p aym en ts ”), aff ’d, 69 1 F .3d13 15 (11 th Cir . 20 12 ); s ec. 1.7 07 -3 (a)( 2) , Inc om e Tax Reg s. (p ro vi di ng th ata di sg ui se d s al e ta ke s p la ce “ on th e d at e th at* * * the pa rtn ers hi p i s co ns id eredth e o wne r of th e p ro pe rty”). III. BCRI an d B CR II Are Liab le forGros s Val ua ti on Mi ss tate m en t Pe na lt ie s Purs uantto sec ti on 66 62 (h ) a t ax pa y er m ay be li ab le fora 40 % pe na lty on th e p orti on of a n u nd erp aym en t o f ta x (i .e., requi redto be sh own on a return) th at
Cert ai n Ho m es it e p arce ls were d eed edto li mit edpa rtn ers of B CR II be fo re 8 Decem be r 14 , 20 07 . On th e d at es th os e d eed s wer e ex ecu te d, BC R II o bt ai ne d the un res tri ct edrig htto th e rel ev an t p aym en ts an d, ac co rd in gl y , th e sa le s o f th os e Hom es it e p arce ls oc cu rredon th os e d at es . See Ca ll owa y v. Co m m is si on er, 1 35 T.C. 26 , 33 -3 4 (2 01 0) , aff’d, 6 91 F.3d13 15 (11 thCir . 20 12 ); s ec. 1 .70 7- 3( a)(2 ), In co m e Tax Reg s.- 20 -

[* 20 ] is att rib ut ab le to a gr os s v al ua ti on mis st at em en t. Fo r returns fil edon or be fo re Au gu st17 , 20 06 , a gr os s v al ua ti on mis st at em en t i s a m is st at em en t o f th e va lu e o f pr op erty

by 400 % or m or e o f th e p ro pe rty’ s v al ue . See s ec. 6 66 2( h) . For returns fil edaft er Au gu st17 , 20 06 , th e p en al ty app li es to m is st at em en ts of t he va lu e o f pr op erty

by 200 %. See Pen si on Pro te ct io n Actof 2 00 6, Pub. L. No. 1 09
- 28 0, s ec. 1 21 9( a)(2 )(B) , 12 0 S ta t. at10 83 . Whe n the actua l v al ue of t he pro pe rty is zero an d the va lu e cl ai m edis gre at er tha n z ero , th e g ro ss va lu at io n m is st at em en t pe na lty ap pl ie s. See sec . 1.6 66 2- 5( g) , Inc om e Tax Reg s. BCR I, onit s 2 00 5 F orm

10 65 , cla im eda ch ari tabl e co nt rib ut io n d educ ti on va lu in g the 20 05 eas em en t at$8 ,40 0,0 00 . Zero was th e co rrec t v al ue rel at in g t o th e 2 00 5 e as em en t b ecau se BCR I was n oten ti tl edto a de du ct io n. Se e Wood s v . Uni te d S tate s, 5 71 U.S. __ _, _

__ , 13 4 S . Ct. 5 57 , 56 6 (2 01 3) (ho ld in g tha t the gr os s v al ua ti on m is st at em en t p en al ty app li es to m is st at em en ts rel at in g t o l eg al , as well as f actua l, erro rs ). Acco rd in gl y , BCR I i s l iabl e fo r a g ro ss va lu at io n 9
The Co urt o f App eal s fo r th e Fi fth Cir cu it , to whi chanap pe al of t hi s ca se 9 wou ldli e, ha s h el d tha t a v al ua ti on mis st at em en t p en al ty doe s n otap pl y whena de du ct io n i s d is al lo wedfora reas on un rel at edto va lu at io n (i .e., itis di sa ll owe d be cau se itis no t l eg al ly perm it te d) . See Heas le y v. Co m m is si on er, 9 02 F.2d38 0 (5 th Cir . 19 90 ), rev ’g T.C. Mem o. 1 98 8- 40 8; Tod d v . Comm is si on er, 8 62 F.2d 54 0 (5 thCir . 19 88 ), aff’g 8 9 T.C. 9 12 (19 87 ). W oo ds reject s the di st in ct io n be twee n l eg al an d fa ctua l v al ua ti on m is st at em en ts . See Wood s v . Uni te d S ta te s, 57 1 U.S. _

__ , __ _, 1 34 S. Ct. 5 57 , 56 6- 56 7 (2 01 3) .- 21 -

[* 21 ] m is st at em en t p en al ty unl es s i t d em on strat es th atitact edreas on ab ly andin go odfai th . See s ec. 6 66 4( c); sec . 1.6 66 2- 5( g) , Inc om e Tax Reg s. BC R I i s en ti tl edto rai se a reas on ab le cau se de fen se , rel at in g t o the 20 05 gro ss va lu at io n m is st at em en t p en al ty, be cau se th e Hir sh rep ort was a qu al ifi edap pr ai sa l b y a qu al ifi edap pr ai se r an d B CR I’s re li an ce o n Hi rs h a ndMr. Mi tc he ll co ns ti tu te d a go od -fai th in ve st ig at io n o f th e 2 00 5 e as em en t’s v al ue . See s ec. 6 66 4( c)(3 ); Ch an dl er v . Comm is si on er, 1 42 T.C. 27 9, 2 96 (20 14 ). Notwiths tand in g i ts act io ns rel at in g t o the qu al ifi edap pr ai sa l o f th e 2 00 5 e as em en t, BC R I d idno t ac t reas on ab ly or in go odfai th with re sp ectto th e d oc um en ta ti on requi rem en ts of se ct io n 1 .17 0A- 14 (g )(5 )(i ), In co m e Tax Reg s. Th e 2 00 5 b as el in e d oc um en ta ti on was in su ffi ci en t, unr el iabl e, an d i nc om pl et e, an d B CR I’s s ub m is si onof t hi s do cu m en ta ti on to th e NALT didno t co ns ti tu te a reas on ab le att em ptto co m pl y with s ect io n 1 70 an d the rel at edreg ul at io ns . Ran do lp h Ad di so n, J r., fai le d t o effe ct iv el y

supe rv is e o r rev ie w th e NALT’ s s li ps ho d p rep arat io n o f th e b as el in e do cu m en ta ti on an d B CR I the reb y fai le d t o s at is fy

it s re sp on si bi li ty relat in g t o the pr ep arat io n o f th e d oc um en ta ti on . Any rel ianc e o n the NALT by BCR I was acco rd in gl y

un reas on ab le . Mor eo ve r, BCR I fai le d t o m ak e an y

pl au si bl e co nt en ti on s s uf

fic ie ntto est ab li sh reas on ab le cau se . Accor di ng ly, BCR I is li ab le fo r a s ect io n 6 66 2( h) gro ss va lu at io n m is st at em en t p en al ty relat in g t o the 20 05- 22 -

[* 22 ] un de rp aym en t o f ta x attrib ut ab le to cla im in g ach ari tabl e co nt rib ut io n de du ct io n. BCR II, on it s 2 00 7 F orm

10 65 , cla im eda ch ari tabl e co nt rib ut io n d educ ti on va lu in g the 20 07 eas em en t at$7 ,50 0,0 00 . Zero was th e co rrec t v al ue rel at in g t o th e 2 00 7 e as em en t b ecau se BCR I I was no t en ti tl edto a de du ct io n. Se e Wood s, 57 1 U.S. at__

_, 1 34 S. Ct. at56 6. Effe ct iv e fo r returns fil edaft er Au gu st17 , 20 06 , tax pa y ers m ay

no t cl ai m

a reas on ab le cau se de fen se for gro ss va lu at io n m is st at em en ts rel at in g t o c ha rit ab le co ntrib ut io n d educ ti on s. See sec . 66 64 (c)( 3) . Acco rd in gl y , BCR II is li ab le fora se ct io n 6 66 2( h) gro ss va lu at io n m is st at em en t pe na lty rel at in g t o the 20 07 un de rp aym en t o f ta x a ttrib ut ab le to cla im in g a ch ari tabl e co nt rib ut io n d educ ti on . Co nt en ti on s we h av e n otad dr es se d a re i rrel ev an t, m oo t, o r m eri tl es s. To re fle ctth e fo reg oi ng , Deci si on s wi ll be en te red un de r Ru le 15 5.