On August 11, the U.S. Court of Appeals for the Fifth Circuit decided the case of BC Ranch II, LP, et al., v. Commissioner of Internal Revenue, which involved charitable tax deductions based on the creation of conservation easements. After reviewing the record, the Fifth Circuit, in a split decision, disagreed with both the Commissioner and the Tax Court, placing heavy stress on the Internal Revenue Code’s public policy goals:
[T]he 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.
Plaintiffs, developers of ranch properties, worked with the North American Land Trust to develop and document these conservation easements to protect the gold-cheeked warbler, an endangered species. The easements were created in 2005 and 2007, and the plaintiffs filed federal partnership tax returns seeking nearly $16 million in deductions.
Plaintiffs argued that both the Commissioner and the Tax Court wrongfully disallowed the charitable deductions they claimed for two conservation easements, and that the Tax Court wrongfully classified the sale of limited partnerships as disguised sales, and erroneously imposed a gross valuation misstatement penalty. Both the Commissioner and the Tax Court took the view that these easements were not created in perpetuity, and rejected the claimed deductions.