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          IN THE UNITED STATES COURT OF APPEALS
                   FOR THE FIFTH CIRCUIT      United States Court of Appeals
                                                                                      Fifth Circuit

                                                                                     FILED
                                           No. 16-60068                           August 11, 2017
                                                                                   Lyle W. Cayce
                                                                                        Clerk
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
-----------------------------------------------

Cons w/16-60069

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
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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 tax-
deductible conservation easement. NALT advised them that the ranch would
qualify and that one benefit of such an easement would be to permanently
protect the nesting areas and habitat of the gold-cheeked warbler, a listed
endangered species.
      Extensive documentation was assembled from NALT’s various site
visits, including photographs from a 2003 visit, an aerial photograph of the
ranch, numerous property maps, details of the site visit of a NALT biologist,
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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. Commissioner 11 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. Simmons 17 and Kaufman v. Shulman 18
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 land-
owning 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 grounds 30 asserted by the Commissioner to support
the disqualification of the easements as charitable deductions but not
addressed by the Tax Court. 31
B. Disguised Sales 32
       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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                                       No. 16-60068
                                     Cons. w/ 16-60069

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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                                     No. 16-60068
                                   Cons. w/ 16-60069

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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                                   No. 16-60068
                                 Cons. w/ 16-60069

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 remand 40 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


      40Because 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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                                      No. 16-60068
                                    Cons. w/ 16-60069

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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                                     No. 16-60068
                                   Cons. w/ 16-60069

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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                                No. 16-60068
                              Cons. w/ 16-60069

                                      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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                                24
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                                       No. 16-60068
                                     Cons. w/ 16-60069

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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                                     No. 16-60068
                                   Cons. w/ 16-60069

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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                                 No. 16-60068
                               Cons. w/ 16-60069

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. 16-60068
                               Cons. w/ 16-60069

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 five-
acre homesites for initially protected land, thereby converting conservation
habitat into residential development.


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                                 No. 16-60068
                               Cons. w/ 16-60069

      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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                                No. 16-60068
                              Cons. w/ 16-60069

(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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                                 No. 16-60068
                               Cons. w/ 16-60069

        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.




                                       32
