Bosque Canyon Ranch in Texas is home to the habitat of the gold-cheeked warbler, a listed endangered species. It also is the subject of a far-reaching Circuit Court decision that halted the IRS’s attempt to invalidate a conservation easement put in place to save those warblers. The controversy started when the IRS convinced the Tax Court in 2015 that charitable deductions should be denied to the Ranch’s developers because the conservation easements they conveyed contained provisions allowing the internal boundaries within the easements to be modified. The Tax Court also backed the IRS’s contention that the ranch partnerships had not provided adequate “baseline documentation.”
Court Okays Internal Boundary Changes
Bosque Canyon Ranch appealed the Tax Court ruling, and now the 5th Circuit Court of Appeals has vacated that judgment and remanded the case for further consideration. (B.C. Ranch II, L.P. v. Commissioner) The Appeals Court disagreed with the IRS’s assertion that possible boundary modifications meant the easement was not given in perpetuity. The Court pointed to the fact that only internal boundaries could be modified, not external boundaries. Also, the easements could be amended only with the holder of the easement, North American Land Trust’s, consent and then only to modify the boundaries of the reserved 5-acre homesite parcels, not to increase their areas above five acres. The amount of land set aside for conservation would not change.
The Court noted that the boundary modification provisions reflected a “common sense” approach to addressing unforeseen circumstances, such as the need to avoid the nesting sites for the warblers. This flexibility “clearly benefits all parties, and ultimately the flora and fauna that are their true beneficiaries,” the Court concluded.
The taxpayers also convinced the Appeals Court that they had provided adequate documentation regarding the boundary modification rights. IRS regulations require that donors of conservation easements must give the donee sufficient documentation about any special conditions attached to an easement at the time of the gift. This is known as “baseline documentation” and includes: (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.
In the Bosque Canyon case, the documentation given to the Land Trust included: aerial photographs and detailed maps; a recorded copy of the deed; existing conditions report; a habitat assessment; a site plan showing homesite parcels; and a signed owner acknowledgement that the documents were an accurate representation of the condition of the land. The site survey described the golden-cheeked warbler habitat and a conservation biologist’s notes.
The 5th Circuit found that this was “more than sufficient” to meet the documentation requirements, saying the Tax Court had failed to consider significant information presented by the taxpayers. The 5th Circuit admonished that 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.”
Reasons for Remand
Although the 5th Circuit sided with the taxpayer on many issues, it sent the case back down to the lower court to consider other grounds on which the IRS wanted to invalidate the easements. The IRS seeks to characterize the limited partners’ capital contributions to the ranchland partnerships as disguised sales, and the value of appurtenant rights are in question.
Despite the remand, the take-away from this case is that limited boundary modification rights retained in the granting of a conservation easement will not invalidate the charitable deduction. However, it is key that boundary modifications only affect the internal boundaries of the land and that any changes do not affect the amount of land set aside in the easement.