Indiana Law Journal Indiana Law Journal
Volume 94 Issue 1 Article 8
Winter 2019
BC Ranch II v. Commissioner: A Flexible Approach to Perpetual BC Ranch II v. Commissioner: A Flexible Approach to Perpetual
Conservation Easements Conservation Easements
Victoria Wolfe
Indiana University Maurer School of Law
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BC RANCH II V. COMMISSIONER: A FLEXIBLE APPROACH TO
PERPETUAL CONSERVATION EASEMENTS
VICTORIA WOLFE
*
INTRODUCTION...................................................................................................... 331
I. THE CONFUSION SURROUNDING THE CONSERVATION EASEMENT DEDUCTION
AND ITS PERPETUITY REQUIREMENT .............................................................. 336
II. BC RANCH II V. COMMISSIONER—AN OVERVIEW ........................................... 339
III. THE FIFTH CIRCUIT’S FLEXIBLE APPROACH SHOULD BE ADOPTED ............... 343
A. THE IRS IS NOT THE BEST-SUITED PARTY TO OVERSEE EASEMENT
HOLDERS .............................................................................................. 344
B. VALUATION GAMING IN THE CONTEXT OF PERPETUITY ....................... 348
C. THE FLEXIBLE APPROACH FURTHERS CONGRESSIONAL INTENT .......... 351
IV. ADDRESSING THE ARGUMENTS AGAINST THE FLEXIBLE APPROACH ............. 353
CONCLUSION ......................................................................................................... 354
INTRODUCTION
Shortly before the end of 2017, Republican lawmakers in the U.S. Congress
passed the most significant change to the tax system in over thirty years.
1
Although
rewriting much of the Internal Revenue Code (the “Code”),
2
House and Senate
*. J.D. Candidate, 2019, Indiana University Maurer School of Law. M.A., 2012, George
Washington University. B.A., 2010, Case Western Reserve University. A special thanks to my
partner, Jacob Marks, and my family for their enduring support and to Hannah Miller and the
members of the Indiana Law Journal for their thorough editing.
1
. See Congress Approves Republican Tax Plan Setting Up Delivery to Trump’s Desk,
N.Y. TIMES (Dec. 19, 2017), https://nyti.ms/2oO6asL [https://perma.cc/VCQ6-BHNE];
Damian Paletta & Jeff Stein, Sweeping Tax Overhaul Clears Congress, WASH. POST (Dec. 20,
2017), http://wapo.st/2z5wdLG?tid=ss_mail&utm_term=.c0cb415166cd [https://perma.cc
/J8NX-4BU8]. Prior to this legislation, the most substantial change in tax law was President
Ronald Reagan’s 1986 Tax Reform Act (the “1986 Act”). Tax Reform Act of 1986, H.R. 3838,
99th Cong. (1985). The 1986 Act “was the first across-the-board tax reduction for everyone
since the Kennedy tax cuts.” Stuart E. Eizenstat, Back to the Future: Reagan, Trump and
Bipartisan Tax Reform, BROOKINGS (Sept. 27, 2017), https://www.brookings.edu/blog/fixgov
/2017/09/27/back-to-the-future-reagan-trump-and-bipartisan-tax-reform [https://perma.cc
/MJU5-W4AH]. Some commentators believe that the comparison of the recent tax law to the
1986 Act is misplaced because there are key differences between the two, including that the
main piece of the 2017 law is the cut to the corporate tax rate and it is less egalitarian and
costlier than the 1986 Act. How the Republican Tax Bill Compares with Previous Reforms,
ECONOMIST (Dec. 9, 2017), https://www.economist.com/news/united-states/21732096
-todays-bill-does-not-much-resemble-1986-tax-overhaul-how-republican-tax-bill [https://
perma.cc/7WH8-ZNPS]. Thus, a “better comparison” is to Reagan’s tax overhaul in 1981,
which “contained big across-the-board income-tax cuts, and investment incentives for
businesses.” Id.
2
. To elaborate, some of the most significant changes to the tax code affect taxpayers at
the individual level and include increasing the standard deduction ($12,000 for single
332 I N D I A N A L A W J O U R N A L [Vol. 94:331
Republicans retained a provision authorizing a charitable deduction for the donation
of a conservation easement
3
for federal income tax purposes.
4
This tax incentive,
adopted to encourage private landowners to voluntarily limit the development and
use of their land for conservation purposes, has largely received bipartisan support
since its enactment in 1980.
5
Conservation easements have subsequently experienced
dramatic growth and today encumber an estimated forty million acres in the United
States.
6
However, in recent decades, conservation easements have not been without
controversy, as news outlets have reported on abusive tax breaks claimed through
such easement deductions.
7
In the wake of this coverage, the Senate Finance
taxpayers and $24,000 for married taxpayers), eliminating the personal exemption, capping
the mortgage interest deduction to $750,000, and limiting state and local taxes to a $10,000
deduction, among others. Lorie Konish, 10 Tax Changes You Need to Know for 2018, CNBC
(Feb. 19, 2018, 9:30 AM), https://www.cnbc.com/2018/02/16/10-tax-changes-you-need-to
-know-for-2018.html [https://perma.cc/Q9D9-7JQQ]. Corporate-level taxpayers now face a
significantly lower tax rate of 21% along with the repeal of the corporate alternative minimum
tax, while pass-through entities can take advantage of the new § 199A deduction of 20% of
the entity’s qualified business income. Bill Bischoff, Top 10 Tax Changes for Business
Owners, MARKETWATCH (Dec. 29, 2017, 10:43 AM), https://www.marketwatch.com/story
/top-10-tax-changes-for-business-owners-2017-12-29 [https://perma.cc/25ZR-ATUL]; I.R.C.
§ 199A (Supp. V 2018).
3
. The Nature Conservancy defines a conservation easement as “a restriction placed on
a piece of [real] property” to preserve the property’s ecological values. NATURE
CONSERVANCY, CONSERVATION EASEMENTS: CONSERVING LAND, WATER AND A WAY OF LIFE
1 (2003), https://web.archive.org/web/20160327073929/https://www.nature.org/about-us
/private-lands-conservation/conservation-easements/conservation-easements.pdf [https://
perma.cc/US7V-Q3TV]. This is accomplished through a “voluntary, legally binding
agreement that limits certain types of uses or prevents development from taking place now
and in the future.” Id. To illustrate, the conservation purpose of an easement, for example,
could include preserving watersheds, migration routes, open space, or agricultural lands. Id.
at 2, 4.
4
. See Tax Cuts and Jobs Act of 2017, H.R. 1, 115th Cong. (2017); see also Lori Faeth,
What’s All This About Tax Reform?, LAND TR. ALLIANCE (Sept. 29, 2017),
http://www.landtrustalliance.org/blog/whats-all-about-tax-reform [https://perma.cc/B85L
-E548] (“[S]o far there is no sign that the enhanced deduction for conservation easement
donations is at risk.”).
5
. Nancy A. McLaughlin, Increasing the Tax Incentives for Conservation Easement
Donations––A Responsible Approach, 31 ECOLOGY L.Q. 1, 4–5 (2004) [hereinafter
McLaughlin, Increasing Tax Incentives]; see also BC Ranch II, L.P. v. Comm’r, 867 F.3d 547,
551 (5th Cir. 2017) (“Congress has provided a tax deduction for the charitable contribution of
a conservation easement, which has enjoyed decades of bipartisan support.”).
6
. Nancy A. McLaughlin, Perpetual Conservation Easements in the 21st Century: What
Have We Learned and Where Should We Go from Here?, 33 UTAH L. REV. 687, 691–92 (2013)
[hereinafter McLaughlin, 21st Century]. See generally National Conservation Easement
Database, http://www.conservationeasement.us [https://perma.cc/XU3K-8WCE].
7
. See, e.g., Joe Stephens & David B. Ottaway, Developers Find Payoff in Preservation,
WASH. POST (Dec. 21, 2003), http://www.washingtonpost.com/wp-dyn/content/article
/2007/06/26/AR2007062601176.html [https://perma.cc/3WRZ-9EG3]; Joe Stephens, IRS
Starts Team on Easement Abuses, WASH. POST (June 9, 2005), http://www.washingtonpost
2019] B C R A N C H I I V . C O M M I S S I O N E R 333
Committee and the Joint Committee on Taxation both released reports in 2005
proposing several reforms to easement donations.
8
Additionally, following this
congressional action, the Internal Revenue Service (IRS) began to aggressively audit
and litigate conservation easement deductions where valuation
9
was at issue.
10
Recently, the IRS also successfully challenged claimed deductions for failure to
satisfy the perpetuity requirements.
11
Despite scrutiny by the IRS, conservation
.com/wp-dyn/content/article/2005/06/08/AR2005060802308.html [https://perma.cc/S7ZE
-G698]; Joe Stephens, Panel Advises Ending Tax Breaks for Easements, WASH. POST (Jan. 28,
2005), http://www.washingtonpost.com/wp-dyn/articles/A42697-2005Jan27.html [https://
perma.cc/5JAU-ZFAK]; see also Conservation Easements, IRS, https://www.irs.gov/charities
-non-profits/conservation-easements [https://perma.cc/2NK2-Q7GR] (last updated Apr. 3,
2018) (providing background on abusive tax deductions for conservation easements).
Although beyond the scope of this Note, much of the recent debate has focused on the use of
the easement deduction by owners of golf courses. See, e.g., Dan Wilchins & Prashant Gopal,
One Tax Loophole Untouched So Far: The Trump Golf-Course Break, BLOOMBERG POL.
(Nov. 9, 2017, 10:50 AM), https://www.bloomberg.com/news/articles/2017-11-09/one-tax
-loophole-untouched-so-far-the-trump-golf-course-break [https://perma.cc/DNJ9-KVJZ].
8
. See STAFF OF S. COMM. ON FIN., 109TH CONG., REP. OF STAFF INVESTIGATION OF THE
NATURE CONSERVANCY 10–11 (Comm. Print 2005), https://www.finance.senate.gov
/imo/media/doc/Prt109-27.pdf [https://perma.cc/P38Y-QHGQ]; STAFF OF JOINT COMM. ON
TAXATION, 109TH CONG., OPTIONS TO IMPROVE TAX COMPLIANCE AND REFORM TAX
EXPENDITURES 281–287 (Comm. Print 2005), http://www.jct.gov/s-2-05.pdf [https://
perma.cc/LZ7H-D83S]; see also Nancy A. McLaughlin, Tax-Deductible Conservation
Easements and the Essential Perpetuity Requirements, 37 VA. TAX REV. 1, 3–4 (2017)
[hereinafter McLaughlin, Essential Perpetuity Requirements].
9
. The Treasury regulations provide that the value of the deduction is the fair market
value of the conservation easement at the time of the donation. Treas. Reg. § 1.170A-
14(h)(3)(i) (as amended in 2018). However, fair market value can be difficult to determine
because each easement of land is presumably unique. See Roger Colinvaux, Conservation
Easements: Design Flaws, Enforcement Challenges, and Reform, 33 UTAH L. REV. 755, 765
(2013). Thus, the regulations provide two methods to define this value: first, based on
comparable sales, and second, on value before and after restriction. Treas. Reg. § 1.170A-
14(h)(3)(i)–(ii). One commentator has suggested that valuation is an acute problem for the
IRS, as elucidated through recent litigation, because of: “(1) the complexity, imprecision, and
unreliability of appraisals; (2) the cost and risk of loss from gross valuation misstatements;
and (3) the failure of a market value approach to reflect true conservation value.” Nicholas
Carson, Note, Easier Easements: A New Path for Conservation Easement Deduction
Valuation, 109 NW. U. L. REV. 739, 753 (2015).
10
. Federico Cheever & Nancy A. McLaughlin, An Introduction to Conservation
Easements in the United States: A Simple Concept and a Complicated Mosaic of Law, 1 J.L.
PROP. & SOC’Y 107, 127 (2015); see also Scott D. McClure, Steven E. Hollingworth & Nicole
D. Brown, Courts to IRS: Ease Up on Conservation Easement Valuations, TAX NOTES, Aug.
10, 2009, at 551 (“Increasingly, the IRS has taken the position that conservation easements
have little or no value.”).
11
. See David van den Berg, IRS Scrutinizing Conservation Easements, TAX NOTES, Oct.
1, 2012, at 19, 20; see also Daniel Halperin, Incentives for Conservation Easements: The
Charitable Deduction or a Better Way, 74 LAW & CONTEMP. PROBS. 29, 45 n.89 (2011)
(“Historically, the IRS has been much more likely to audit donors based on their estimate of
the easement valuation than on any other measure of substantive compliance with § 170(h). It
should be noted, however, that audits based on other requirements have appeared to increase
334 I N D I A N A L A W J O U R N A L [Vol. 94:331
easements remain popular with charitable organizations (e.g., land trusts)
12
seeking
protection of land and with congressional lawmakers who repeatedly renewed a
provision providing enhanced incentives to conservation easement donors.
13
The diverging viewpoints of the IRS on one side and land trusts and congressional
leaders on the other highlight the tension between conservation easement
enforcement, policymaking, and lobbying. Some critics of the IRS’s viewpoint argue
that the IRS’s enforcement of the perpetuity requirements amounts to a technical
“foot fault” (analogizing to the game of tennis),
14
where a single error can result in
the disallowance of the full easement deduction, thereby discouraging such
in recent years.”); Ann Taylor Schwing, Perpetuity Is Forever, Almost Always: Why It Is
Wrong to Promote Amendment and Termination of Perpetual Conservation Easements, 37
HARV. ENVTL. L. REV. 217, 234 (2013) (“[T]he IRS has been increasingly vigilant in enforcing
these [perpetuity] requirements.”). The current perpetuity requirements, in the Code and in the
Treasury regulations, require perpetual (i.e., forever) encumbrance. See infra notes 38–40 and
accompanying text.
12
. According to the Land Trust Alliance (LTA), “[a] land trust is a nonprofit organization
that, as all or part of its mission, actively works to conserve land by: [a]cquiring land or
conservation easements (or assisting with their acquisition), and/or [s]tewarding/managing
land or conservation easements.” What You Can Do: Questions?, LAND TR. ALLIANCE, http://
www.landtrustalliance.org/what-you-can-do/conserve-your-land/questions [https://perma.cc
/9F9G-NC8P]. The LTA is a national conservation organization representing over 1000 land
trusts in the United States. About Us, LAND TR. ALLIANCE, https://www.landtrustalliance
.org/about-us [https://perma.cc/GE5M-UT2V].
13
. Anson H. Asbury, Understanding the Conservation Easement Tax Deduction, FED.
LAW., Mar. 2016, at 26, 27–28, http://asburylawfirm.com/new/wp-content/uploads/2013/04
/Easement-Asbury.pdf [https://perma.cc/WA3F-CNSU]. The Pension Protection Act of 2006
(the “Pension Protection Act”) was enacted to curb abuses but also increased tax benefits
offered to conservation easement donors by making percentage limitations on charitable
deductions more favorable. These temporary incentives, which were repeatedly extended by
Congress, were made permanent in 2015. Nancy A. McLaughlin, Trying Times: Important
Lessons to Be Learned from Federal Tax Cases Involving Conservation Easement Donations
4 (2017), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2808234 [https://perma.cc
/RE4U-KN26]. Now part of the Code under § 170(b)(1)(E), the Pension Protection Act
generally limited conservation easement deductions to fifty percent of the donor’s contribution
base but increased the limitation to one-hundred percent for certain farmers and ranchers.
Pension Protection Act, Pub. L. No. 109–280, § 1206(a), 120 Stat. 780, 1068 (codified as
amended at I.R.C. § 170 (2012)). The Act also allowed a carryover period of up to fifteen
years for excess contributions. Id.
14
. In tennis, a foot fault (the equivalent of a penalty) occurs, for example, when the server
while serving “[c]hange[s] position by walking or running” or “[t]ouch[es] the baseline or the
court with either foot.” 2018 ITF RULES OF TENNIS, INTERNATIONAL TENNIS FEDERATION 8
(2017), http://www.itftennis.com/media/277603/277603.pdf [https://perma.cc/U5P9-NUV7]
(providing four instances in Rule 18 where a server can be found to have committed a foot
fault); see also Greg Bishop, A Fine Line on Foot Faults, N.Y. TIMES (Aug. 28, 2011), https://
www.nytimes.com/2011/08/29/sports/tennis/foot-faults-and-the-rage-they-can-cause.html
[https://perma.cc/XL84-3MH2] (“The issue, though, is not with the rule, or the wording of the
rule, but rather with the enforcement of it, with how often foot faults are called and when or
whether they should be.”).
2019] B C R A N C H I I V . C O M M I S S I O N E R 335
donations.
15
Others argue that strict compliance with the requirement is necessary to
“ensur[e] that tax-deductible easements will actually protect the properties they
encumber in perpetuity as Congress intended — that easement protections will be
durable.”
16
Moreover, IRS enforcement of the perpetuity requirements can potentially be
used to prevent taxpayer gaming of property valuation in conservation easements.
17
Although it would be inappropriate to enforce perpetuity in a formulistic manner to
disallow easements, the IRS is increasingly faced with an expanding number of cases
involving overvaluation, among other issues.
18
However, the question remains as to
whether the IRS may be using a hypertechnical reading of the perpetuity
requirements in lieu of more stringent challenges to easement valuation.
19
Such a
policy would be at odds with congressional intent evinced in the multiple passages
of conservation easement provisions that maintain the status quo ante and even
provide enhanced tax benefits to easement donors.
20
Several court cases have addressed the perpetuity requirements for conservation
easements (and façade easements) and have grappled with the definition of
perpetuity.
21
While many courts have employed a technical reading of the
requirements,
22
consistent with the IRS’s interpretation, the Fifth Circuit Court of
Appeals in BC Ranch II, L.P. v. Commissioner (“BC Ranch II”) determined that the
15
. See, e.g., Anson H. Asbury, Anyone for Tennis? Technical Foot Faults and the
Conservation Easement Deduction, 32 TAX MGMT. REAL EST. J. 195, 195–96 (2016).
16
. McLaughlin, Essential Perpetuity Requirements, supra note 8, at 8.
17
. See infra notes 129–130 and accompanying text.
18
. Nancy A. McLaughlin, Conservation Easements and the Valuation Conundrum, 19
FLA. TAX REV. 225, 228 (2016) [hereinafter McLaughlin, Valuation Conundrum] (“Over the
past ten years, the courts have issued more than seventy-five opinions in this context, which
is an astonishing amount of case law for such a specific charitable deduction provision. This
case law reveals a variety of abuses, including persistent overvaluation of easements.”).
19
. Cf. Ronald Levitt & David Wooldridge, An Unwelcome Gift from the IRS on
Conservation Easements, LAW360 (Jan. 9, 2017, 5:46 PM), https://www.law360.com
/articles/879088/an-unwelcome-gift-from-the-irs-on-conservation-easements [https://perma
.cc/D22E-YXLM]. In this article, the authors suggest that “[t]he real threat of abuse in
conservation easement deductions lies in overvaluation of the easement,” arguing, in the
context of “listed transactions,” (i.e., tax avoidance transactions) that the IRS should
“address[] overvaluation by changing its own internal audit procedures to obtain more accurate
results in a more efficient manner.” Id. For further discussion on this point, see infra Section
III.B.
20
. See supra note 13. In 1997, Congress enacted I.R.C. § 2031(c), which added an estate
tax incentive for donating conservation easements. See Taxpayer Relief Act of 1997, Pub. L.
No. 105-34, § 508, 111 Stat. 787, 857 (1997); McLaughlin, 21st Century, supra note 6, at 703.
Pursuant to this incentive scheme, taxpayers contributing conservation easements are given
the option to reduce the value of their estate for estate tax purposes by the value of the easement
or exclude up to forty percent of the value of the land under the easement from estate taxes, if
§ 2031(c) is applicable. See Taxpayer Relief Act of 1997 § 508.
21
. See, e.g., Belk v. Comm’r, 774 F.3d 221, 227 (4th Cir. 2014) (conservation
easement); Kaufman v. Shulman, 687 F.3d 21, 28 (1st Cir. 2012) (façade easement); Comm’r
v. Simmons, 646 F.3d 6, 10–11 (D.C. Cir. 2011) (façade easement).
22
. See, e.g., Atkinson v. Comm’r, 110 T.C.M. (CCH) 550 (T.C. 2015); Balsam Mountain
Invs., LLC v. Comm’r, 109 T.C.M. (CCH) 1214 (T.C. 2015).
336 I N D I A N A L A W J O U R N A L [Vol. 94:331
perpetuity of an easement does not require such inflexibility, particularly in the case
of a modification provision.
23
In this case, the Fifth Circuit vacated the Tax Court’s
holding that provisions in the conservation easements allowing for boundary changes
violated the perpetuity requirements, and thus, the Fifth Circuit held that the
charitable contribution deductions were allowable.
24
Depending on the approach used in enforcement, there is the potential to
encourage or discourage charitable donations of conservation easements. In Part I,
this Note explores the federal charitable income tax deduction for conservation
easements and the legislative purpose in enacting the perpetuity requirements. Part
II examines the Fifth Circuit’s decision in BC Ranch II and the flexible approach to
perpetuity adopted by the court. Finally, Part III considers the implications of the BC
Ranch II decision, specifically authority to monitor conservation easements,
valuation gaming of easements in the context of perpetuity, and congressional intent
in allowing the conservation easement deduction. Part IV addresses the main
arguments against adopting a flexible approach to the easement deduction. Overall,
this Note argues that a flexible interpretation of perpetuity by the IRS and the courts
strikes the proper balance between respecting congressional intent and encouraging
conservation efforts.
I. THE CONFUSION SURROUNDING THE CONSERVATION EASEMENT
DEDUCTION AND ITS PERPETUITY REQUIREMENT
Congress first enacted express statutory authority, albeit temporary authority, for
a charitable deduction for conservation easement donations in the Tax Reform Act
of 1976
25
(the “1976 Act”).
26
In the 1976 Act, conservation easements were not
required to be perpetual, but they had to last for at least thirty years and be donated
exclusively for conservation purposes.
27
The Tax Reduction and Simplification Act
of 1977
28
later extended the easement deduction provision from the 1976 Act but
limited the deduction to perpetual easements.
29
Then, as part of the Tax Treatment
Extension Act of 1980,
30
Congress made the deduction a permanent provision of the
Code with the enactment of section 170(h).
31
23
. See BC Ranch II, L.P. v. Comm’r, 867 F.3d 547, 553–54 (5th Cir. 2017).
24
. Id. at 553–54, 556.
25
. Pub. L. No. 94-455, 90 Stat. 1520.
26
. McLaughlin, Increasing Tax Incentives, supra note 5, at 12. Although this was the
first statutory recognition of conservation easements, Congress had addressed the deductibility
of certain easements in the Conference Report for the Tax Reform Act of 1969. H.R. REP. NO.
91-782, at 294 (1969) (Conf. Rep.) (“The conferees on the part of both Houses intend that a
gift of an open space easement in gross is to be considered a gift of an undivided interest in
property where the easement is in perpetuity.”).
27
. McLaughlin, Increasing Tax Incentives, supra note 5, at 11.
28
. Pub. L. No. 95-30, 91 Stat. 126 (codified as amended in scattered sections of 26
U.S.C.).
29
. McLaughlin, Increasing Tax Incentives, supra note 5, at 11.
30
. Pub. L. No. 96-541, 94 Stat. 3204 (codified as amended in scattered sections of 26
U.S.C.).
31
. Nancy A. McLaughlin, Internal Revenue Code Section 170(h): National Perpetuity
Standards for Federally Subsidized Conservation Easements, Part I: The Standards, 45 REAL
2019] B C R A N C H I I V . C O M M I S S I O N E R 337
However, there were concerns that, without a restriction on perpetuity, taxpayers
would take a current tax deduction on an easement and then terminate the easement
when it became “inconvenient or the deduction invaluable.”
32
Therefore, in an effort
to minimize potential abuse, Congress imposed significant restrictions on the
deduction.
33
Pursuant to section 170(h), a federal charitable tax deduction by a
landowner for a conservation easement is allowed provided that the easement is (1)
“granted in perpetuity” on the use of real property,
34
(2) to a “qualified organization”
as the easement holder
35
(e.g., a government entity or charity),
36
and (3) “exclusively
for conservation purposes.”
37
As a point of clarity, there are two perpetuity
requirements: first, on the use of real property,
38
and second, on the conservation
purpose.
39
In 1986, the Department of Treasury (the “Treasury”) promulgated final
regulations (the “regulations”) interpreting the perpetuity requirements and other
provisions of section 170(h).
40
The fact that Congress permanently extended the charitable deduction provisions
for conservation easements indicates the importance of easements in the eyes of the
legislature. In doing so, the legislature emphasized that “the preservation of our
country’s natural resources and cultural heritage is important” and that “conservation
PROP. TR. & EST. L.J. 473, 478 (2010).
32
. Asbury, supra note 13, at 28. To illustrate, an easement could become “inconvenient”
if, for example, an energy company began exploring for natural gas near the easement
property, making the land unsuitable for agriculture. See David Baron, In Land Conservation,
‘Forever’ May Not Last, NPR (Mar. 11, 2008, 4:15 PM), https://www.npr.org/templates
/story/story.php?storyId=88038482 [https://perma.cc/F267-FA9F].
33
. See supra text accompanying note 31. These restrictions are also likely derived from
the notion that deductions for conservation easements (i.e., partial interests in land) are an
exception to the general rule that a taxpayer may not claim a deduction for a charitable
contribution of property consisting of less than the taxpayer’s entire interest in the property.
See I.R.C. § 170(f)(3) (2012); Colinvaux, supra note 9, at 758 (describing that Congress
“adopted a number of special rules intended to address potential (and anticipated) problems”
stemming from the fact that conservation easements are an exception to the rule).
34
. I.R.C. § 170(h)(1)(A), (2)(C) (2012); see also Treas. Reg. § 1.170A–14(b)(2) (as
amended in 2018) (defining a perpetual conservation restriction).
35
. I.R.C. § 170(h)(1)(B).
36
. See I.R.C. § 170(h)(3). An example of an organization that holds conservation
easements is The Nature Conservancy, a nonprofit with a mission “to conserve the lands and
waters on which all life depends.” Our Mission, Vision, and Values, NATURE CONSERVANCY,
https://www.nature.org/en-us/about-us/who-we-are/our-mission-vision-and-values [https://
perma.cc/X5NY-NPRZ].
37
. I.R.C. § 170(h)(1)(C). There are four conservation purposes for which deductible
conservation easements can be donated: the preservation of land areas for the public, the
protection of a natural habitat, the preservation of open space (subject to some restrictions),
and the preservation of a historically important land area or historic structure. See I.R.C. §
170(h)(4)(A)(i)–(iv).
38
. I.R.C. § 170(h)(2)(C) (“[A] restriction (granted in perpetuity) on the use which may
be made of the real property.”).
39
. I.R.C. § 170(h)(5)(A) (“[A] contribution shall not be treated as exclusively for
conservation purposes unless the conservation purpose is protected in perpetuity.”).
40
. See Treas. Reg. § 1.170A-14 (as amended in 2018).
338 I N D I A N A L A W J O U R N A L [Vol. 94:331
easements now play an important role in preservation efforts.”
41
Karin Gross of the
IRS Office of Chief Counsel has also stated that Congress created the provision to
incentivize taxpayers to make a substantive investment in land conservation.
42
Congress, for example, stressed that the deduction should be limited to conservation
easements that permanently protect “unique or otherwise significant land areas or
structures.”
43
The perpetuity requirements support this overall purpose by ensuring
that conservation easements will “protect the conservation values of the properties
they encumber in perpetuity or forever”
44
and “the public investment in conservation
will not be lost.”
45
However, there are still some concerns with the deduction. The Treasury, for
instance, has acknowledged some issues with the provision. More specifically, the
Treasury recognized that changed circumstances could potentially “frustrate the
purpose of a perpetual conservation easement.”
46
For example, in situations of force
majeure, such as a catastrophic earthquake, the regulations specify that: “[i]f a
subsequent unexpected change in the conditions surrounding the property” that is
subject to the easement “make[s] impossible or impractical the continued use of the
property for conservation purposes, the conservation purpose can nonetheless be
treated as protected in perpetuity.”
47
However, this conservation purpose will only be considered perpetual “if the
restrictions are extinguished by judicial proceeding” and the proceeds from the sale
of the property are used by the easement holder “in a manner consistent with the
conservation purposes.”
48
In general, there is still much confusion about the deduction provision and the
perpetuity requirements. Professor Nancy McLaughlin of the University of Utah S.J.
41
. S. REP. NO. 96-1007, at 9 (1980), https://www.finance.senate.gov/imo/media/doc
/Rpt96-1007.pdf [https://perma.cc/3MVG-NM6C]; see also Zachary Bray, Reconciling
Development and Natural Beauty: The Promise and Dilemma of Conservation Easements, 34
HARV. ENVTL. L. REV. 120 (2010) (describing the history and development of conservation
easements as part of the Code). In fact, the adoption of this provision is consistent with long-
time congressional commitment to cultural and historic preservation. See, e.g., 16 U.S.C. §§
431–33 (enacting the Antiquities Act of 1906); 16 U.S.C. § 1 (establishing the National Park
Service in 1916); 16 U.S.C. § 470 (enacting the National Historic Preservation Act in 1966).
42
. Anne Galloway, IRS Attorney Clarifies ‘In Perpetuity’ Rules for Conservation
Easements, VTDIGGER (Nov. 30, 2014), https://vtdigger.org/2014/11/30/irs-attorney
-clarifies-perpetuity-rules-conservation-easements [https://perma.cc/A5YZ-UZFJ].
43
. S. REP. NO. 96-1007, at 9. Therefore, the deduction is intended to apply narrowly to
these lands and structures, rather than to “ordinary lands or structures.” McLaughlin, 21st
Century, supra note 6, at 693.
44
. McLaughlin, Essential Perpetuity Requirements, supra note 8, at 28.
45
. Id. at 7, 43.
46
. Cheever & McLaughlin, supra note 10, at 124.
47
. Treas. Reg. § 1.170A-14(g)(6)(i) (as amended in 2018).
48
. Id.; see also Jessica Owley, Conservation Easements at the Climate Change
Crossroads, 74 LAW & CONTEMP. PROBS. 199, 220 (2011) (describing that the regulations
recognize “that changed circumstances could trigger a court proceeding to dissolve a
conservation easement”). Interestingly, this “extinguishment” provision resembles the
charitable-trust law doctrine of cy pres. See Nancy A. McLaughlin, Rethinking the Perpetual
Nature of Conservation Easements, 29 HARV. ENVTL. L. REV. 421, 444 n.74 (2005).
2019] B C R A N C H I I V . C O M M I S S I O N E R 339
Quinney College of Law, whose research focuses on conservation easements,
addressed this current state of confusion, stating “[w]ith more than three decades of
experience, continued investment of billions of dollars of public funds, and an
estimated 40 million acres encumbered, it is somewhat surprising that we still do not
know (and are quite vigorously debating in some circles) what it actually means to
protect land ‘in perpetuity’ or ‘forever’ with a conservation easement.”
49
The Fifth
Circuit Court of Appeals in its recent decision in BC Ranch II also weighed in on the
semantic debate over perpetuity.
50
The court seemingly interpreted an exception to
the perpetuity requirements for changes to the border of a conservation easement
(which this Note will refer to as a “modification” or “substitution” provision in the
following Part)––an exception that on the face of the Code and the regulations does
not explicitly exist.
51
Part II will address the details of the case.
II. BC RANCH II V. COMMISSIONER—AN OVERVIEW
This Part describes the relevant facts of the BC Ranch II decision and its
procedural history. It also focuses on the key points of the majority’s opinion and
concludes with the reasons for the dissent’s disagreement with the majority.
In BC Ranch II, two limited partnerships, Bosque Canyon Ranch I (“BCR I”) and
Bosque Canyon Ranch II (“BCR II”), owned a 3729-acre tract of land called Bosque
Canyon Ranch (the “ranch”) in Bosque County, Texas.
52
In 2003, the ranch
developers began working with the North American Land Trust (NALT)
53
to
establish tax-deductible conservation easements that would cover the majority of the
land within the ranch and protect the nesting areas and habitat of the golden-cheeked
warbler, an endangered species of bird that only nests in the hill country of central
Texas.
54
Between 2005 and 2008, BCR I and BCR II began offering limited partners
five-acre homestead parcels,
55
but in 2005 and 2007, both partnerships (i.e., BCR I
49
. McLaughlin, 21st Century, supra note 6, at 717 (“The most fundamental of questions
remain controversial and unresolved. Under what circumstances can perpetual conservation
easements be modified or terminated? Who should have the authority to make such decisions
and what standards should apply?”).
50
. BC Ranch II, L.P. v. Comm’r, 867 F.3d 547 (5th Cir. 2017).
51
. See id. at 554.
52
. Id. at 549; Bosque Canyon Ranch, L.P. v. Comm’r, 110 T.C.M. (CCH) 48 (T.C.
2015), vacated and remanded sub nom. BC Ranch II, L.P. v. Comm’r, 867 F.3d 547 (5th Cir.
2017).
53
. NALT is a 501(c)(3), nonprofit organization. North American Land Trust,
GUIDESTAR, https://www.guidestar.org/profile/23-2698266 [https://perma.cc/MB3U-FZTU].
It was formed with the “primary purpose of preserving and managing open space with
ecological, agricultural or historical significance” and to “balance[] conservation and land
development.” About, NORTH AM. LAND TR., http://northamericanlandtrust.org/about
[https://perma.cc/6CY9-2WRM]. The organization has protected more than 120,000 acres
through conservation easements in the United States. NORTH AM. LAND TR.,
https://northamericanlandtrust.org [https://perma.cc/32M2-BK6C].
54
. BC Ranch II, 867 F.3d at 549.
55
. From the remaining land on the ranch, there were forty-seven homestead parcels
marketed to the limited partners, totaling 235 acres (or five acres each). Id. at 554.
340 I N D I A N A L A W J O U R N A L [Vol. 94:331
and BCR II) donated conservation easements of the remaining land to NALT
56
with
the purpose of protecting and preserving the warblers’ habitat.
57
However, the
easements reserved certain rights to the ranch developers, including a “modification”
that allowed the developers, only with NALT’s consent, to adjust the boundaries of
the easements to allow for the five-acre homesteads.
58
In 2005 and 2007, BCR I and BCR II, respectively, filed federal tax returns,
claiming charitable contribution deductions for the amount of $15.9 million total for
the conservation easements donated to NALT.
59
The IRS disallowed the deductions,
and the partnerships filed petitions for readjustment before the Tax Court.
60
The Tax
Court, agreeing with the IRS Commissioner, held that the boundary modification
provision violated the perpetuity requirement of § 170(h)(2)(C).
61
Because the
“modification” provision meant that boundaries could potentially be changed to
include property not within the original easement, the court found that the easement
was not granted in perpetuity.
62
In its decision, the Tax Court cited the court’s
holding in Belk v. Commissioner
63
“for the proposition that an easement is not
qualified real property if the boundaries of the property subject to the easement may
be modified.”
64
Therefore, the partnerships were not entitled to charitable tax
deductions.
65
The partnerships then appealed the Tax Court’s decision to the Fifth
Circuit.
66
56
. According to the Conservation Easement Plan of the ranch, the conservation area
covered under the easement in 2005 totaled 1750.1 acres and in 2007 totaled 1731.63 acres.
Id.
57
. Id. at 550. In addition to preserving the habitat of the golden-cheeked warblers (and
other birds and game), the easements sought to protect watershed, scenic vistas, and mature
forest. Id.
58
. Id. Additional rights provided included to “raise livestock; hunt; fish; trap; cut down
trees; and construct buildings, recreational facilities, skeet shooting stations, deer hunting
stands, wildlife viewing towers, fences, ponds, roads, trails, and wells.” Bosque Canyon
Ranch, L.P. v. Comm’r, 110 T.C.M. (CCH) 48, at 5 (T.C. 2015).
59
. BC Ranch II, 867 F.3d at 550.
60
. Id. at 550–51.
61
. Id. at 552. The Code provision on which the Tax Court stated that the easement at
issue failed is the perpetual restriction on the use of real property. I.R.C. § 170(h)(2)(C).
62
. BC Ranch II, 867 F.3d at 552.
63
. 140 T.C. 1 (2013), aff’d, 774 F.3d 221 (4th Cir. 2014). In Belk, the taxpayers donated
a conservation easement over a 184-acre golf course and claimed a $10.5 million deduction.
Id. at 3. The conservation easement agreement executed by the parties included a provision
which allowed the taxpayers to substitute the property subject to the easement with “an area
of land owned by Owner which is contiguous to the Conservation Area for an equal or lesser
area of land comprising a portion of the Conservation Area.” Id. The Fourth Circuit held that,
while the conservation purpose of the easement was perpetual, the use restriction on the real
property was not because the taxpayers could remove land from the defined parcel and replace
it with other land. Belk v. Comm’r, 774 F.3d 221, 227 (4th Cir. 2014).
64
. BC Ranch II, 867 F.3d at 552; see also Belk, 774 F.3d at 227 (articulating that the
Treasury regulations “confirm that a conservation easement must govern a defined and static
parcel” and “that holding otherwise would deprive donees of the ability to ensure protection
of conservation interests”).
65
. Bosque Canyon Ranch v. Comm’r, 110 T.C.M. (CCH) 48 (T.C. 2015).
66
. BC Ranch II, 867 F.3d at 551. For the appeal, NALT submitted an amicus brief in
2019] B C R A N C H I I V . C O M M I S S I O N E R 341
The Fifth Circuit overturned the Tax Court’s ruling that the provisions in the
conservation easements allowing boundary changes violated the perpetuity
requirement, thereby permitting the easement grantors to take the claimed charitable
deductions.
67
In justifying its position, the majority highlighted that for any boundary
modification to occur, NALT would have to agree to the modification established by
the partnerships and the homestead parcel owner.
68
Additionally, the majority
observed that any such modification would be permitted only if three criteria were
met: (1) NALT determines that the modification does not “result in any material
adverse effect on any of the Conservation Purposes,” (2) the homestead parcels do
not increase in size, and (3) the modification is correctly documented and recorded.
69
The Commissioner argued that the case at hand was indistinguishable from the
Fourth Circuit’s decision in Belk,
70
relied upon by the Tax Court, because “property
initially subject to restrictions can be released from those restrictions,” even though
the easement in BC Ranch II permitted only interior boundaries to be modified, as
opposed to exterior boundaries in Belk.
71
However, the majority found “the Tax
Court’s reliance on Belk [to be] misplaced,” observing that in BC Ranch II “neither
the exterior boundaries nor the total acreage of the instant easements will ever
change: Only the lot lines of one or more [sic] the five-acre homesite parcels are
potentially subject to change and then only (1) within the easements and (2) with
NALT’s consent.”
72
Whereas, the easement in Belk “could be moved, lock, stock,
and barrel” to an entirely different area of land.
73
Therefore, the majority concluded
that “the homesite adjustment provision does not prevent the grants of the
support of BC Ranch II stating that “[d]isallowing deductions for gifts of conservation
easements that incorporate the sort of purposeful, limited and controlled guidelines as
contained in the provisions of the Bosque Canyon conservation easements - that allow for
movement of homestead parcel boundaries - would deprive landowners and conservation
organizations of a valuable tool in managing perpetuity wisely.” Brief for North American
Land Trust as Amici Curiae Supporting Petitioners-Appellants at 17, BC Ranch II, L.P. v.
Comm’r, 867 F.3d 547 (5th Cir. 2017) (No. 16-60068).
67
. BC Ranch II, 867 F.3d at 554. The Fifth Circuit’s decision also involved whether the
limited partnerships’ documentation for conservation easements satisfied the baseline
documentation requirement for the claimed charitable contribution (the court found that it did)
and whether the limited partners’ contributions to limited partnerships were receipts from
“disguised sales” (the court found that they were not). Id. at 556, 558. However, for the
purposes of this Note, the focus will be on the portion of the decision related to the “in
perpetuity” requirement. See id. at 551–54.
68
. Id. at 552.
69
. Id.
70
. Belk v. Comm’r, 774 F.3d 221, 227 (4th Cir. 2014).
71
. Answering Brief for Appellee at 29, BC Ranch II, L.P. v. Comm’r, 867 F.3d 547 (5th
Cir. 2017) (No. 16-60068).
72
. BC Ranch II, 867 F.3d at 552.
73
. Id. at 553. The majority noted that the easements in BC Ranch II were more analogous
to the façade easements in Commissioner v. Simmons, 646 F.3d 6 (D.C. Cir. 2011), and
Kaufman v. Shulman, 687 F.3d 21 (1st Cir. 2012), where the Fifth Circuit’s sister circuits
found that permitting repairs and changes to the building façades did not violate the perpetuity
restrictions on the easements but, rather, promoted the underlying conservation purposes. BC
Ranch II, 867 F.3d at 552.
342 I N D I A N A L A W J O U R N A L [Vol. 94:331
conservation easements . . . from satisfying the perpetuity requirement of §
170(h)(2)(C).”
74
Notably, in its discussion, the majority included language advocating for a
flexible approach to perpetual conservation easements: “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.”
75
The majority also appeared to be persuaded that
“the perpetuity of the easements is further ensured by NALT’s virtually unrestricted
discretion to withhold consent to any modifications.”
76
In line with this flexible
interpretation, the majority further observed that “the usual strict construction of
intentionally adopted tax loopholes is not applicable to grants of conservation
easements made pursuant to § 170(h),” but rather are analyzed under the “ordinary
standard of statutory construction.”
77
The dissent took issue with two points in the majority opinion: first, that the
conservation easements donated by the partnerships were not granted in perpetuity,
thus the charitable deductions should be disallowed; and second, that the
majority employed a “lax standard” in its use of an ordinary standard of statutory
construction, which is at odds with Supreme Court precedent requiring that tax
deductions be strictly construed.
78
The dissent stated that the easements fail because
the property contributed to NALT was not subject to perpetuity because any future
modification cannot be considered de minimis. These modifications could have a
substantial effect given that nonprotected land can be substituted for land originally
protected in the easement.
79
Therefore, the dissent argued that the majority, in
distinguishing Belk and refusing to apply the rule from that case, created a circuit
split.
80
It is worth noting that the response period for the Commissioner to petition for a
rehearing en banc by the Fifth Circuit expired in October 2017.
81
However, as the
case was remanded to the Tax Court for that court to consider the other grounds
asserted by the Commissioner, including overvaluation of the easements (which was
not originally addressed by the Tax Court),
82
further developments may await.
74
. Id. at 554.
75
. Id. at 553.
76
. Id.
77
. Id. at 554. As support for the majority’s application of the ordinary standard of
statutory construction to the conservation easement deduction, the majority relied on the fact
that, among others, the easement deduction provision (i.e., § 170(h)) was adopted “by an
overwhelming majority of Congress.” Id. at 553.
78
. Id. at 560 (Dennis, J., dissenting in part and concurring in part). The dissent cited to
INDOPCO, Inc. v. Commissioner for “the well-established rule that tax deductions are a matter
of legislative grace,” and therefore are strictly construed. Id. (citing INDOPCO, Inc. v.
Comm’r, 503 U.S. 79, 84 (1992) (“[D]eductions are strictly construed and allowed only ‘as
there is a clear provision therefor.’”)).
79
. Id. at 562.
80
. Id. at 560.
81
. See BC Ranch II, L.P. v. Comm’r, 867 F.3d 547 (5th Cir. 2017) (No. 16-60068)
(indicating that the petition for rehearing en banc was not filed before the October 25, 2017,
deadline).
82
. BC Ranch II, 867 F.3d at 556, 556 n.30.
2019] B C R A N C H I I V . C O M M I S S I O N E R 343
III. THE FIFTH CIRCUIT’S FLEXIBLE APPROACH SHOULD BE ADOPTED
In a way, the distinctions drawn by the majority and the dissent in BC Ranch II
mirror the typical tax deduction framework between balancing the interests of the
government and the taxpayer.
83
However, this balancing act fails to take into account
the interests of another stakeholder: the conservationists (e.g., the land trust holding
the conservation easement). The majority alluded to the viewpoints of conservation
proponents in its policy argument, recommending flexibility in the conservation
easement analysis to benefit all parties, including “the flora and fauna.”
84
There are differing opinions regarding whether the decision in BC Ranch II
created a circuit split, and if there is a circuit split, there are also different views
regarding how this split affects the various stakeholders.
85
Assuming, for argument’s
sake, that the majority did create a circuit split with the Fourth Circuit,
86
the issue for
the stakeholders then is to what extent will modifications of land under a
conservation easement still fulfill the requirements of perpetuity. Depending on
whether a technical or flexible approach is implemented, there is the potential for
differing consequences. Under the Fourth Circuit’s technical reading in Belk, a
modification provision in a conservation easement would likely put the taxpayer’s
charitable deduction at risk of disallowance (a potential win for the IRS).
87
Conversely, under the Fifth Circuit’s more flexible approach in BC Ranch II, a
factual determination would be necessary to determine whether the modification is
sufficiently restricted so as to allow the deduction (a potential loss for the IRS).
88
Note that, in BC Ranch II, the majority was persuaded by the fact that any
modifications to the easements could not occur without the consent of the easement
holder (i.e., NALT).
89
In both instances described, the interests of the easement
holder are affected. The adoption of the technical approach will likely lead to less
taxpayer enthusiasm for participating in the easement process for fear of
unforeseeable consequences (or ultimate disallowance of the deduction).
90
On the
contrary, the adoption of the flexible approach will likely lead to greater enthusiasm
on the part of the taxpayer to engage in conservation easement donations.
91
83
. See Carson, supra note 9, at 742; see also Interstate Transit Lines v. Comm’r, 319
U.S. 590, 593 (1943) (noting “the now familiar rule that an income tax deduction is a matter
of legislative grace and that the burden of clearly showing the right to the claimed deduction
is on the taxpayer”).
84
. BC Ranch II, 867 F.3d at 553.
85
. See infra note 87 and accompanying text.
86
. See BC Ranch II, 867 F.3d at 560 (Dennis, J., dissenting in part and concurring in
part) (“The majority opinion . . . creates a split with the Fourth Circuit by refusing the [sic]
apply the rule established in Belk v. Commissioner.” (citation omitted)).
87
. Ed Zollars, Split Fifth Circuit Panel Finds a Limited Ability to Substitute Land Was
Not Fatal to Conservation Easement Deduction, CURRENT FED. TAX DEV. (Aug. 19, 2017),
https://www.currentfederaltaxdevelopments.com/blog/2017/8/19/split-fifth-circuit-panel
-finds-a-limited-ability-to-substitute-land-was-not-fatal-to-conservation-easement-deduction
[https://perma.cc/9GQE-N3J5].
88
. Id.
89
. See BC Ranch II, 867 F.3d at 553.
90
. See infra Section III.C.
91
. Id.
344 I N D I A N A L A W J O U R N A L [Vol. 94:331
Even if there is a “split” over the degree of modification allowed in an easement,
this Note maintains that any distinctions drawn between Belk and BC Ranch II (i.e.,
between exterior versus interior boundary modifications) are minute.
92
Because any
potential differences between the two circuits are negligible, as a matter of complete
clarity and consistency, this Note recommends that other courts (as well as the IRS)
adopt the Fifth Circuit’s flexible approach; this approach offers a more sound and
pragmatic interpretation of the Code that allows conservation easement donors and
easement holders to adapt to changing circumstances. This Note further contends that
hairsplitting over minor modification details in the context of perpetuity detracts
from more serious issues in conservation easements, particularly that of
overvaluation (which was likely present in BC Ranch II).
93
The Fifth Circuit’s
flexible approach is also desirable for reasons discussed by the majority in its
opinion, including longstanding bipartisan, congressional support for conservation
easements
94
and issues with hypertechnicality on the part of the Tax Court and the
IRS.
95
As noted by Professor McLaughlin, “the circuit courts have indicated impatience
with the IRS’s attempts to use litigation to confirm the agency’s interpretation of
Internal Revenue Code and regulatory requirements without having provided
taxpayers with fair warning regarding that interpretation.”
96
As demonstrated, there
remains much confusion concerning the conservation easement deduction (and this
confusion was arguably augmented after the potential circuit split due to the BC
Ranch II decision). To eliminate any confusion or uncertainty, this Note urges the
IRS and the courts to adopt a single approach: the Fifth Circuit’s flexible approach.
The remainder of this Part explains the reasons for adopting this recommendation,
in addition to those described above, such as issues with easement holder autonomy,
hypertechnicality and valuation gaming, as well as congressional intent.
A. The IRS Is Not the Best-Suited Party to Oversee Easement Holders
In BC Ranch II, the majority found the boundary modifications to accommodate
certain homestead parcels to be allowable and not in contravention of the perpetuity
92
. See infra Section III.B.
93
. See infra Section III.B.
94
. See BC Ranch II, 867 F.3d at 551 (“Congress has provided a tax deduction for the
charitable contribution of a conservation easement, which has enjoyed decades of bipartisan
support.”).
95
. See id. at 556 (“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.”).
96
. McLaughlin, 21st Century, supra note 6, at 714; see also Kaufman v. Shulman, 687
F.3d 21, 27 (1st Cir. 2012) (“[T]he IRS’s reading of its regulation would appear to doom
practically all donations of easements, which is surely contrary to the purpose of Congress.
We normally defer to an agency’s reasonable reading of its own regulations . . . but cannot
find reasonable an impromptu reading that is not compelled and would defeat the purpose of
the statute . . . .” (citation omitted)).
2019] B C R A N C H I I V . C O M M I S S I O N E R 345
requirement.
97
However, neither voluntary modification nor substitution are
expressly provided for in the Code or the Treasury regulations, and the IRS’s policies
and practices are consistent with the view of the Code and the regulations.
98
According to the regulations, only in instances of extinguishment, where sustaining
the easement is now impracticable or impossible, may an easement be modified.
99
Although the IRS is following the express provisions in the statute (as well as in
the regulations) in litigating the perpetuity of conservation easements, this Note asks
how far the IRS’s authority goes (or perhaps it is better to ask how reasonable is such
presumptive authority) to disallow a charitable deduction for failure to satisfy the
perpetuity requirements. Particularly, this Note questions IRS authority in instances
such as those present in BC Ranch II, where potential modifications have been agreed
upon (through mutual assent) by the easement donor and the holder in the original
deed of easement.
100
The Fifth Circuit appears to find reasonable (and this Note
agrees) that when modifications are agreed upon in the deed of easement and do not
appear to substantially affect the perpetuity of the land and the conservation
purpose,
101
then there is little reason for the IRS to disallow them on perpetuity
grounds.
102
However, some believe the Fifth Circuit, in its holding, may be giving too much
weight to private agreements between parties (e.g., between the landowner and the
97
. BC Ranch II, 867 F.3d at 554.
98
. See IRS, CONSERVATION EASEMENT AUDIT TECHNIQUES GUIDE 12 (Jan. 24, 2018),
https://www.irs.gov/pub/irs-utl/conservation_easement.pdf [https://perma.cc/BK9Y-RQYK]
(“[Protected in perpetuity] means that the deed of conservation easement must indicate that
the restriction remains on the property forever and is binding on current and future owners of
the property. If a deed of conservation easement does not meet the perpetuity requirements,
the easement is not deductible.”); I.R.S. Info. Ltr. 2012-0017, at 2 (Mar. 5, 2012),
https://www.irs.gov/pub/irs-wd/12-0017.pdf [https://perma.cc/A6NT-Z99N] (“[E]xcept in the
very limited situations of a swap that meets the extinguishment requirements of section
1.170A-14(g)(6) of the Regulations, the contribution of an easement made subject to a swap
is not deductible under section 170(h) of the Code.”); see also IRS, 2017 INSTRUCTIONS FOR
SCHEDULE D (FORM 990) 2 (2017), https://www.irs.gov/pub/irs-pdf/i990sd.pdf [https://
perma.cc/8RBA-LE95] (“[A]n easement is modified when its terms are amended or altered in
any manner. For example, if the deed of easement is amended to increase the amount of land
subject to the easement or to add, alter, or remove restrictions regarding the use of the property
subject to the easement, the easement is modified.” (emphasis omitted)).
99
. See supra notes 47–48 and accompanying text.
100
. See BC Ranch II, 867 F.3d at 552 (“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.’”).
101
. See id. at 554 (“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.”).
102
. See Nancy A. McLaughlin & W. William Weeks, In Defense of Conservation
Easements: A Response to The End of Perpetuity, 9 WYO. L. REV. 1, 96 (2009) (commenting
that easement “holders that desire th[e] extraordinary level of discretion [to modify or
terminate conservation easements] should negotiate for it up-front and in good faith at the time
they acquire conservation easements and memorialize that grant of discretion in the easement
deeds,” while acknowledging that this may affect deductibility of the easement for the donor).
346 I N D I A N A L A W J O U R N A L [Vol. 94:331
land trust) at the expense of the Code, the Treasury regulations, and IRS policy.
103
For instance, Professor McLaughlin argues that conservation easements are not
“private arrangements,” but “are created for” and “subsidized by the public through
. . . tax incentive and easement purchase programs.”
104
In response to this viewpoint,
others argue that such “private arrangements” are just the mechanism needed to
ensure the longevity of conservation efforts through easements to benefit the public
as well as to provide flexibility to the donor and the easement holder to manage
changed circumstances.
105
This Note claims that where the conservation purpose is
not jeopardized, even though minor modification in the easement has occurred,
perpetuity (both on the use of real property and on the conservation purpose) should
be considered satisfied.
106
Related to the foregoing discussion on the appropriate degree of discretion
allowed to the parties as to the terms of the easement (including modification), what
level of deference should be accorded to the easement holder in modifying and
monitoring the easement in the future? In a deferential maneuver, the majority in BC
Ranch II found that perpetuity of the easement was further protected because the
easements at issue could only be amended with the consent of the easement holder.
107
Is the Fifth Circuit giving preference to the easement holder vis-à-vis the IRS? It is
reasonable to assume that the easement holder is in the best position to oversee and
enforce the easement in perpetuity as an organization that is required to “have a
103
. See McLaughlin, 21st Century, supra note 6, at 719 (arguing that giving “nonprofit
holders the freedom to sell, trade, swap, release, or otherwise dispose of perpetual conservation
easements as they might see fit from time to time . . . would be contrary to . . . federal tax law
perpetuity requirements”).
104
. Id.
105
. See Jane Ellen Hamilton, Understanding the Debate About Conservation Easement
Amendments, SAVING LAND, Winter 2014, at 14, 19, https://www.landtrustalliance.org
/news/understanding-debate-about-conservation-easement-amendments [https://perma.cc
/B6BU-A6NF] (“Proponents of treating conservation easements as private agreements that
may be amended at the parties’ discretion believe that this approach better fulfills the needs of
the public benefitted by the conservation easement over time, gives land trusts appropriate and
needed flexibility to address change, and reduces cost, time and the risk of politicizing
amendment decisions.”).
106
. The Staff of the Senate Committee on Finance, in a 2005 report in regard to the
committee’s investigation of The Nature Conservancy, explained that “[m]odifications to an
easement held by a conservation organization may diminish or negate the intended
conservation benefits, and violate the present law requirements that a conservation restriction
remain in perpetuity.” STAFF. OF S. COMM. ON FINANCE, 109TH CONG., REP. ON THE NATURE
CONSERVANCY: EXECUTIVE SUMMARY 9 (2005), https://www.finance.senate.gov
/imo/media/doc/tnccontents.pdf [https://perma.cc/N373-YCCV]. While important to note, the
committee staff’s concerns are not relevant in the case of BC Ranch II as the majority
concluded that any boundary modification would not detract from the conservation purposes
of the easement. See BC Ranch II, L.P. v. Comm’r, 867 F.3d 547, 554 (5th Cir. 2017).
107
. See BC Ranch II, 867 F.3d at 553 (“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.”).
2019] B C R A N C H I I V . C O M M I S S I O N E R 347
commitment to protect the conservation purposes of the donation, and have the
resources to enforce the restrictions.”
108
However, this brings up the issue of which agency or organization is best-suited
to ensure that the easement holder is properly carrying out its duties, including
protecting the easement in perpetuity. Common sense might indicate that this job is
best left to the IRS. However, “the authority of the IRS to require that holders enforce
conservation easements consistent with their terms and stated purposes over the long
term is uncertain.”
109
In fact, the attorney general of the state in which the easement
holder organization is formed is supposed to be the primary enforcer of the easement
holder’s duties, not the IRS.
110
However, in reality, the issue of how to police
easement holders is further magnified by the fact that charitable organizations that
work in conservation easements are largely self-regulated (i.e., they are expected to
police themselves).
111
As a result, in the event that an easement holder fails to enforce
the easement, the IRS and the states’ attorneys general are nonetheless essentially
left powerless, without basic “enforcement tools.”
112
Nonetheless, as the Land Trust Alliance (LTA) has acknowledged, the IRS has a
“direct interest in the operation of all nonprofits and in amendments to easements for
108
. Treas. Reg. § 1.170A-14(c)(1) (as amended in 2018). An “eligible donee” (i.e.,
qualified easement holder) per the regulations is an organization that is “organized or operated
primarily or substantially for one of the conservation purposes” in the Code (e.g., the
protection of wildlife habitat) but also includes government entities and 501(c)(3) charitable
organizations. Id. For example, the majority in BC Ranch II noted that NALT surveys the
conservation area and “has repeatedly found it to be in good condition and in compliance with
the terms of the easements.” 867 F.3d at 550.
109
. McLaughlin & Weeks, supra note 102, at 80. For instance, the Senate Finance
Committee Report discussing § 170(h) of the Tax Treatment Extension Act of 1980 describes
the role of easement holders in enforcement:
By requiring that the conservation purpose be protected in perpetuity, the
committee intends that the perpetual restrictions must be enforceable by the
donee organization (and successors in interest) against all other parties in interest
(including successors in interest). . . . The requirement that the conservation
purpose be protected in perpetuity also is intended to limit deductible
contributions to those transfers which require that the donee (or successor in
interest) hold the conservation easement . . . exclusively for conservation
purposes (i.e., that [the easement] not be transferable by the donee except to other
qualified organizations that also will hold the perpetual restriction . . . exclusively
for conservation purposes).
S. REP. NO. 96-1007, at 14 (1980) (emphasis added), https://www.finance.senate.gov
/imo/media/doc/Rpt96-1007.pdf [https://perma.cc/A5DX-5VAT]; see also id. at 80 n.308.
110
. Colinvaux, supra note 9, at 764.
111
. See, e.g., McLaughlin, 21st Century, supra note 6, at 705–06 (noting that the Land
Trust Accreditation Commission, a supporting organization of the LTA, is a self-regulatory
body); see also STAFF. OF S. COMM. ON FINANCE, 109TH CONG., REP. ON THE NATURE
CONSERVANCY: EXECUTIVE SUMMARY 9 (2005), https://www.finance.senate.gov/imo/media
/doc/tnccontents.pdf [https://perma.cc/TB46-SPMQ] (investigating the organization’s
management and real estate sales, including valuation of land donations).
112
. Colinvaux, supra note 9, at 764, 766 (noting that the IRS lacks the ability to regulate
qualified easement holders, and reforms involve providing the IRS with greater enforcement
tools in this regard).
348 I N D I A N A L A W J O U R N A L [Vol. 94:331
which landowners took tax deductions.”
113
For instance, the IRS examines charitable
organizations’ “efforts to monitor and enforce conservation easements,” as tax
“[e]xempt organizations are required to file a Form 990
114
annually with the
[agency].”
115
It is understandable and certainly prudent for the IRS to have the
primary role in determining deductibility of the conservation easement. However,
this Note agrees with the Fifth Circuit’s suggestion that it is less desirable and
understandable for the IRS to police land trusts for potential modifications to the
easement—modifications that may never happen. This Note argues that the IRS is
not in the best position to monitor and enforce the easement duties when the donor
and the easement holder have come to a mutually beneficial agreement––as long as
parts of the easement are not replaced “lock, stock, and barrel,” as was the case in
the easement in Belk.
116
B. Valuation Gaming in the Context of Perpetuity
In BC Ranch II, in addition to the Commissioner’s arguments regarding the
perpetuity requirement,
117
the Commissioner also asserted that the conservation
easements at issue were grossly overvalued for the purposes of the charitable
deduction (the combined deductions were $15.9 million for the value of the
easements).
118
The Commissioner’s expert reported that one easement was 1600%
higher than its real value, and the other easement was 1300% higher than its real
value.
119
However, the Fifth Circuit declined to address the question of valuation
since it had not been examined by the Tax Court and then remanded the case (while
vacating other portions, including those involving perpetuity) to the Tax Court to
determine, among other grounds, whether the easements were overvalued.
120
The
lack of discussion over potential overvaluation of the easements by the Tax Court
and the fact that the IRS did not press this issue further is curious.
In December 2016, at the end of the Obama administration, the IRS issued a
notice
121
alerting taxpayers that the IRS will now consider syndicated conservation
113
. LAND TR. ALLIANCE, AMENDING CONSERVATION EASEMENTS: EVOLVING PRACTICES
AND LEGAL PRINCIPLES LAND TRUST ALLIANCE 4 (Sylvia Bates & Mary Burke eds., 2d ed.
2017) (ebook), http://s3.amazonaws.com/landtrustalliance.org/AmendingConservation
Easements-2nd-Edition.pdf [https://perma.cc/RP9Y-BC52]; see also supra note 98.
114
. I.R.S. Form 990, Return of Organization Exempt from Income Tax (2017),
https://www.irs.gov/pub/irs-pdf/f990.pdf [https://perma.cc/A8KM-88XZ].
115
. Robert W. Wood, Conservation Easements, the IRS & Charity, MONT. LAW., April
2008, at 9, 11, http://www.woodllp.com/Publications/Articles/pdf/conservation_easements
_the_IRS.pdf [https://perma.cc/6PCH-TYC4].
116
. BC Ranch II, L.P. v. Comm’r, 867 F.3d 547, 553 (5th Cir. 2017).
117
. Answering Brief for Appellee, supra note 71, at 72.
118
. See BC Ranch II, 867 F.3d at 550.
119
. Answering Brief for Appellee, supra note 71, at 72. (“The Commissioner’s expert
determined that the actual value of the 2005 easement was $525,057, yet BCR I reported a
value of $8.4 million — 1,600% higher than the actual value . . . . The Commissioner’s expert
determined a value of $571,221 for the 2007 easement, yet BCR II’s reported value was $7.5
million — 1,300% higher than the actual value.”).
120
. BC Ranch II, 867 F.3d at 560.
121
. I.R.S. Notice 2017-10, 2017-4 I.R.B. 544, https://www.irs.gov/pub/irs-drop/n-17
2019] B C R A N C H I I V . C O M M I S S I O N E R 349
easements to be tax avoidance transactions (i.e., listed transactions) and that the
agency will now require disclosure of such transactions.
122
The notice describes that
in “a syndicated conservation easement transaction, a promoter offers prospective
investors in a partnership or other pass-through entity . . . the possibility of a
charitable contribution deduction for donation of a conservation easement.”
123
By its
own account in the notice, the IRS is primarily concerned with overvaluation in the
context of syndicated easements.
124
A preliminary investigation by the IRS of
syndicated partnerships has shown that for each dollar invested in such schemes, an
average of nine dollars was taken as a tax deduction.
125
Adam Looney, an economist
at the Brookings Institution, has estimated that the revenue loss from syndications in
2016 was between $1.3 billion and $2.4 billion, up from $1 billion to $1.9 billion in
2015, and that the surging was due to abusive tax gaming through syndicated
transactions.
126
It is likely that the IRS targeted the conservation easements in BC Ranch II, at
least in part, because the underlying transaction appears to have involved a
syndicated partnership similar to that described in the IRS notice. In fact, Stephen
Small, who initially helped to draft the 1986 Treasury regulations, commented that
the structure of the transaction in BC Ranch II was a version of a syndicated
transaction that he had observed, where “developers were devising complicated
-10.pdf [https://perma.cc/ULS9-6LTQ]; see also Peter J. Reilly, New IRS Scandal –
Syndication of Conservation Easement Deductions, FORBES (Jul. 24, 2017, 11:25 AM), https://
www.forbes.com/sites/peterjreilly/2017/07/24/new-irs-scandal-syndication-of-conservation
-easement-deductions/#43f0f3df6b33 [https://perma.cc/XQ7V-EYDJ] (commenting that past
conservation easement abuses do not “hold[] a candle to syndicated easements”). The
Partnership for Conservation has come out against the notice providing five primary concerns
with it. Our Position on IRS Notice 2017-10, PARTNERSHIP FOR CONSERVATION, https://
partnershipforconservation.org/position-paper-irs-notice-2017-10-recommended-solutions
[https://perma.cc/3YYU-S8XR]. Whereas, the LTA has shown support for the notice. Lori
Faeth, It’s Time to Stand Up for IRS Notice 2017-10, LAND TR. ALLIANCE, http://www
.landtrustalliance.org/blog/it%E2%80%99s-time-stand-irs-notice-2017-10 [https://perma.cc
/EPV4-A9A7].
122
. I.R.S. Notice 2017-10, 2017-4 I.R.B. 544, at 4–5, https://www.irs.gov/pub/irs-drop/n
-17-10.pdf [https://perma.cc/AR7N-FNVL Edit].
123
. Id. at 2.
124
. Id. at 3 (“The IRS intends to challenge the purported tax benefits from this transaction
based on the overvaluation of the conservation easement.”).
125
. Peter Elkind, The Billion-Dollar Loophole, FORTUNE (Dec. 20, 2017),
http://fortune.com/2017/12/20/conservation-easement-tax-deduction-loophole [https://perma
.cc/7PFN-GGEL]; Adam Looney, Estimating the Rising Cost of a Surprising Tax Shelter: The
Syndicated Conservation Easement, BROOKINGS (Dec. 20, 2017), https://www.brookings
.edu/blog/up-front/2017/12/20/estimating-the-rising-cost-of-a-surprising-tax-shelter-the
-syndicated-conservation-easement [https://perma.cc/M2BP-26ZJ]; see also Letter from John
A. Koskinen, Comm’r, IRS, to Senator Ron Wyden 1 (July 13, 2017), http://s3.amazonaws
.com/landtrustalliance.org/7.13%20Wyden%20Response.pdf [https://perma.cc/93FJ-ZGZY]
(“The average contribution deduction from this preliminary analysis was 9 times the amount
of the investment in the transaction (computed by excluding a few outlier disclosures that
would otherwise have skewed the result higher).”).
126
. Looney, supra note 125.
350 I N D I A N A L A W J O U R N A L [Vol. 94:331
transactions in which an investor bought into the project and received a deduction
for a conservation easement plus the ownership of a house lot.”
127
As briefly mentioned in the Introduction of this Note, an important question raised
here is whether the IRS is litigating the perpetuity requirements in a minor,
formulistic manner (e.g., litigating potential minor modifications to an easement) to
evade the murky waters of valuation games
128
played by the taxpayer. It certainly
appears this way, at least in the case of BC Ranch II. Disallowance of a charitable
deduction on the basis of failing to meet the perpetuity requirements is a “silver
bullet”
129
for the IRS. For that reason, it seems likely that, in some instances, the IRS
attempts to solve complicated overvaluation issues under the guise of attacking
noncompliance with the perpetuity requirements. If this is, in fact, what the IRS is
attempting, then it is unacceptable, as the agency is failing to attack true instances of
abuse in conservation easements.
130
If overvaluation is a chief concern of the IRS (as
recognized in the notice), then it should litigate such abuse, rather than expend
valuable time and resources litigating perpetuity, which for all intents and purposes
is a mere technical hurdle to overcome.
131
In other words, perpetuity should not
supplant the requirement that taxpayers provide a proper valuation of the land they
donate for conservation purposes.
132
127
. Stephen J. Small, A Modest Legislative Proposal to Shut Down Specific Tax Shelters,
TAX NOTES, May 23, 2016, at 1085, 1089 (emphasis omitted), http://www.stevesmall.com
/wordpress/wp-content/uploads/Small-05-23-2016.pdf [https://perma.cc/6F66-Q7V2].
128
. See Exempt Organizations: Enforcement Problems, Accomplishments, and Future
Direction: Hearing Before the S. Comm. on Finance, 109th Cong. 10 (2005) (written statement
of Mark W. Everson, Comm’r of IRS), https://www.finance.senate.gov/imo/media/doc
/metest040505.pdf [https://perma.cc/YP9W-X4JN] (“Overvaluations are difficult to identify,
substantiate and litigate. Further, donors and the recipient charities do not have adverse
interests that would help establish a correct valuation.”).
129
. The term “silver bullet” was aptly used by Professor McLaughlin to describe the IRS’s
attempt to disallow conservation easement deductions on failure to properly substantiate the
easement. McLaughlin, 21st Century, supra note 6, at 711–12. However, the term applies
equally to perpetuity because if perpetuity is not satisfied, then the entire deduction is
disallowed.
130
. In 2014, taxpayers deducted $3.2 billion in charitable contributions for conservation
easements, resulting in a reduction of $1.3 billion in tax liability. Looney, supra note 125.
Such deductions tripled between 2013 and 2014. Id.
131
. Many tax practitioners also agree that overvaluation is the primary area of abuse in
the conservation easement program. See, e.g., Levitt & Wooldridge, supra note 19 (“The real
threat of abuse in conservation easement deductions lies in overvaluation of the easement.”);
Letter from Randy Bampfield, Legal Comm. Co-Chair, P’ship for Conservation, to Scott K.
Dinwiddie et al., IRS Office of Chief Counsel, at 3 (Nov. 8, 2016), http://src.bna.com/kfu
[https://perma.cc/SB6H-295H] (commenting that the IRS should explore options that “will
increase transparency and get to the root of abusive transactions” and that “[s]uch options
should focus on over-valuation, which . . . is the greatest possible area of abuse under Section
170(h)”).
132
. The IRS has further noted that the agency “ha[s] seen taxpayers, often encouraged
by promoters and armed with questionable appraisals, take inappropriately large deductions
for easements.” Conservation Easements, IRS, https://www.irs.gov/charities-non
-profits/conservation-easements [https://perma.cc/P6F5-KTV4] (last updated Apr. 3, 2018);
see also McLaughlin, Valuation Conundrum, supra note 18, at 267 (“The case law . . . suggests
2019] B C R A N C H I I V . C O M M I S S I O N E R 351
By focusing on perpetuity, the IRS is explicitly acting against congressional
intent
133
to allow charitable deductions for easements (and curb abuse), while
potentially discouraging donors from contributing bona fide easements for
conservation.
134
Perhaps the BC Ranch II decision demonstrates that the Tax Court
decided to disallow the deductions on weaker grounds and should have been more
concerned with valuation, in addition to the fact that the IRS should have focused on
litigating the valuation issue rather than the perpetuity requirement, if that was the
area of true concern with the partnerships’ deductions.
This Note advocates for a flexible approach, as applied by the Fifth Circuit in BC
Ranch II, enabling the IRS and the courts to use their limited time and resources in a
more efficient manner by preventing litigation over minor technicalities in perpetuity
and focusing more on abusive valuation practices.
C. The Flexible Approach Furthers Congressional Intent
Although seemingly at odds with the express language of the Code (and the
Treasury regulations), the IRS and the courts should utilize a flexible approach to
perpetuity because such an approach is consistent with Congress’s wishes to allow
charitable tax deductions for easements that further conservation efforts––a matter
to which the legislature has had a longstanding commitment.
135
To illustrate, tax
attorney Anson Asbury, for example, has advocated that a less rigid standard should
be employed by the IRS and the courts because it closely aligns with congressional
intent to incentivize taxpayers to donate land for conservation purposes.
136
Asbury
has posited that perpetuity restrictions on the donor’s property were offered “as an
objectively measured proxy for the donor’s intent,” arguing that this is supported by
the brief legislative history of the provisions.
137
Therefore, the congressional intent
of the requirements “has been lost in courtroom battles on technical readings of
regulations that established that theoretical objective standard.”
138
Similarly, Joseph
Ecuyer, an editor for Bloomberg Tax, when discussing the BC Ranch II decision
specifically, questioned whether the Fourth Circuit was correct in reading the
that overvaluation has been a persistent problem in the conservation easement donation
context. In addition, the prevalence of overstatements in the recent cases, and the fact that the
taxpayers asserted values for their easements that were, on average, ten times the court-
determined correct values, suggest that the problem of overstatements has worsened over
time.”).
133
. See infra Section III.C.
134
. See Letter from Senator Christopher S. Murray and Senator Richard Blumenthal to
John Koskinen, Comm’r, IRS 1 (Feb. 23, 2016), https://www.sirote.com/media/28949/22316
-irs-conservation-easement.pdf [https://perma.cc/74K9-TGBD] (“[W]e are deeply troubled by
a trend recounted by a number of constituents who have chosen to conserve their properties,
especially given Congress’s strong and unambiguous support of the charitable deduction.
These constituents describe audits focused on their donation of a conservation easement as
antagonistic, aggressively adversarial, lengthy, and expensive––even when the final result is
a ‘no change’ letter from the Service.”).
135
. See supra note 41 and accompanying text.
136
. Asbury, supra note 13, at 28.
137
. Id.
138
. Id.
352 I N D I A N A L A W J O U R N A L [Vol. 94:331
perpetuity requirement for the purposes of § 170(h)(2)(C) as narrowly as the Belk
court did.
139
Ecuyer suggested that it appears the IRS is relying on technicalities to
disallow these deductions, which is contrary to Congress’s intent to encourage
conservation easement contributions.
140
Encouraging taxpayer donations through flexible interpretation is also an
important consideration for land trusts.
141
For instance, Leslie Ratley-Beach,
Conservation Defense Director for the Land Trust Alliance, has articulated that the
IRS is thwarting Congress’s intent to encourage conservation easements when it
denies otherwise legitimate deductions on procedural compliance grounds.
142
Drew
Troyer, Chairman of the Compatible Lands Foundation, further argues that private
landowners have an important role in advancing conservation efforts through
easements because these landowners effectively subsidize the cost of the land that
the government would otherwise have to purchase and manage with federal (or state)
funds.
143
In contrast to the above perspectives, Professor McLaughlin suggests that the
perpetuity requirements should be enforced strictly to curb abuse and facilitate
compliance.
144
McLaughlin argues that, when enhancing incentives for taxpayers to
donate conservation easements, Congress largely ignored the abuses present in the
case law.
145
Thus, given the increasingly public investment in tax-deductible
easements, one suggestion for reform is for the Treasury Department to provide
guidance that would reduce transaction costs for parties involved in the conservation
easement process, as well as reduce audits and litigation overall.
146
However, this
viewpoint fails to recognize that the perpetuity requirements should not be used to
limit abuse as an end run around attacking overvaluation.
147
Congress has remained
steadfast in its support of the deduction for over three decades by not amending the
law
148
and by adding tax incentives to foster easement donations.
149
Therefore, strict
enforcement of perpetuity, rather than flexibility, would contradict congressional
movement towards increasing the scope of the conservation easement program.
139
. Joseph J. Ecuyer, To Be Contiguous, or Not to Be Contiguous – The Fifth Circuit’s
Folly, BLOOMBERG: ESTATE TAX BLOG (Oct. 11, 2017), https://www.bna.com/contiguous-not
-contiguous-b73014470728 [https://perma.cc/9K55-EMFB].
140
. Id.
141
. See, e.g., Van den Berg, supra note 11, at 21.
142
. Id.
143
. Drew Troyer, New IRS Guidelines Deter Private Land Conservation, Thwart
Congressional Intent, POLITICO (Oct. 3, 2017, 10:03 AM), http://www.politico.com/sponsor
-content/2017/10/03/new-irs-guidelines-deter-private-land-conservation-thwart-congressional
-intent [https://perma.cc/QC9C-DGD9] (“Whether the land being conserved is owned by an
individual, a family partnership or an investment partnership, all private landowners play an
important role advancing needed conservation projects.”).
144
. McLaughlin, Essential Perpetuity Requirements, supra note 8, at 8.
145
. Id. at 6.
146
. Id. at 6, 9.
147
. See supra Section III.A.2.
148
. See Tax Cuts and Jobs Act of 2017, H.R. 1, 115th Cong. (2017).
149
. See supra notes 13 and 19 (describing tax incentives for conservation easements
approved in the Pension Protection Act of 1996 and Taxpayer Relief Act of 1997).
2019] B C R A N C H I I V . C O M M I S S I O N E R 353
IV. ADDRESSING THE ARGUMENTS AGAINST THE FLEXIBLE APPROACH
There are downsides to the flexible approach (as opposed to a technical reading),
particularly for the government. First, private conservation easements decrease
federal revenues because of the considerable tax deductions allowed.
150
Professor
Roger Colinvaux estimates that $3.6 billion in total revenue was lost over the six-
year period between 2003 and 2008, without including corporate donations of
conservation easements.
151
Furthermore, Adam Looney has found that, according to
preliminary IRS reports, total deductions by taxpayers for conservation easements
tripled in 2014, rising from $971 million in 2012 to $1.1 billion in 2013 to $3.2 billion
in 2014.
152
If courts were to follow the Fifth Circuit’s approach in BC Ranch II, it
could be expected that more deductions (often six-figure deductions)
153
would pass
muster because they would not be disallowed for the purposes of the perpetuity
requirements, thereby further decreasing government revenue.
However, an argument based on revenue loss can only go so far. Congress is
presumably aware of the revenue gains that could be provided from reforming (or
dropping) the charitable deduction for conservation easements. Further support for
Congress’s commitment to allowing such deductions is found in the latest tax
overhaul that maintains the deduction provisions as the legislature created them
decades ago (including the tax benefits for such donations added in the timespan
from when the law was enacted).
154
Furthermore, while some might argue that a flexible approach leaves the door
open for abusive practices by the taxpayer, the potential for abuse in the context of
perpetuity is likely overblown because the root issue in taxpayer abuse is
overvaluation of easements.
155
Valuation gaming by the taxpayer should be the IRS’s
focus, not insignificant modifications, for instance, that do not encroach on the
perpetuity of the easement. This is not to say that all modifications to the
conservation easement should be allowed wholesale. But some flexibility is
150
. McLaughlin, 21st Century, supra note 6, at 716.
151
. Roger Colinvaux, The Conservation Easement Tax Expenditure: In Search of
Conservation Value, 37 COLUM. J. ENVTL. L. 1, 9 n.26, 9–10 (2012).
152
. ADAM LOONEY, BROOKINGS INST., CHARITABLE CONTRIBUTIONS OF CONSERVATION
EASEMENTS 3 (2017), https://www.brookings.edu/wp-content/uploads/2017
/05/looney_conservationeasements.pdf [https://perma.cc/YPV9-UEPG].
153
. McLaughlin, 21st Century, supra note 6, at 715–16.
154
. See Tax Cuts and Jobs Act of 2017, H.R. 1, 115th Cong. (2017); see also Letter from
Senator Christopher S. Murray and Senator Richard Blumenthal to John Koskinen, Comm’r,
IRS 1 (Feb. 23, 2016), https://www.sirote.com/media/28949/22316-irs-conservation
-easement.pdf [https://perma.cc/396W-EQ3U] (recognizing the high value of conservation
easement donations to the IRS, but stating that “[t]he record is clear: Congress values the
conservation of land protection by private landowners through the charitable contribution of
conservation easements”).
155
. See Adam Looney, Abuse of Tax Deductions for Charitable Donations of
Conservation Lands Are on the Rise, BROOKINGS (June 1, 2017), https://www.brookings
.edu/research/abuse-of-tax-deductions-for-charitable-donations-of-conservation-lands-are
-on-the-rise [https://perma.cc/JNU9-M433] (“[S]ome donors are abusing the provision by
applying grossly inflated appraisals to the value of the easement to increase their charitable
deduction.”); supra notes 131–132.
354 I N D I A N A L A W J O U R N A L [Vol. 94:331
necessarily justified when two parties have agreed to allow the possibility for
modification in the original deed of easement, as in BC Ranch II.
CONCLUSION
In response to uncertainty regarding the “in perpetuity” requirement for
conservation easements, two approaches have emerged that courts have employed to
resolve this uncertainty: one flexible, the other technical. Both of these options
present different benefits and challenges in practice. However, as the conservation
easement program’s primary goal is to preserve land and habitats from development,
flexible, perpetual conservation easements, such as the one in BC Ranch II, provide
the most appropriate mechanism for achieving this goal.
This Note urges the IRS and the courts to adopt a flexible approach when
evaluating the perpetuity requirements for conservation easements because this
approach respects Congress’s intent in enacting the Code provisions to allow such
easement deductions, thereby promoting conservation values. Furthermore, less
stringent focus on minor details related to perpetuity (such as potential modifications
agreed upon by the easement donor and holder) will allow the IRS and the courts to
address overvaluation of conservation easements, a chief issue in charitable
deductions for such easements.
