BC Ranch II, L.P. v. Commissioner, 867 F.3d 547

Background

BCR I and BCR II (partnerships) owned Bosque Canyon Ranch and granted near-identical conservation easements to North American Land Trust (NALT) in 2005 and 2007, reserving forty-seven 5‑acre homesites inside the easement area.
The easements prohibited most development in perpetuity but included a provision allowing NALT‑approved boundary adjustments of the five‑acre homesite parcels (not increasing parcel size or expanding exterior easement boundaries).
BCR I and BCR II sold limited partnership interests to buyers who paid $350,000–$550,000 and were later deeded individual 5‑acre homesites and promised membership in an owners’ association.
Each partnership claimed large charitable deductions for the donated easements on their partnership returns; the IRS disallowed the deductions and asserted gross valuation misstatement penalties and that the homesite transfers were disguised sales.
The Tax Court (below) disallowed the deductions (finding easements not granted in perpetuity and baseline documentation insufficient), treated the entire limited partners’ contributions as proceeds of disguised sales, and imposed valuation‑misstatement penalties.
The Fifth Circuit vacated and remanded: it held the perpetuity and baseline‑documentation holdings were erroneous and remanded for further proceedings on other Commissioner theories, the correct disguised‑sale amount, and whether valuation‑misstatement penalties apply.

Issues

Issue	Plaintiff's Argument (BCR Partnerships)	Defendant's Argument (Commissioner)	Held
Whether the easements satisfy §170(h)’s perpetuity requirement	Homesite‑boundary adjustments are limited, occur only within easement exterior bounds, need NALT consent, and do not change total easement acreage, so easements are perpetual	Modification provision permits changing which acreage is encumbered and thus prevents a single defined parcel from being restricted in perpetuity	Reversed Tax Court: the homesite adjustment provision (with NALT’s discretion and limits) did not defeat perpetuity; easements can qualify for deduction (vacated and remanded)
Whether baseline documentation satisfied Treas. Reg. §1.170A‑14(g)(5)(i)	Donors provided aerial photos, maps, biologist reports, site surveys and other documentation to NALT prior to donation; the record establishes condition of property at donation	Tax Court: key documents were untimely, incomplete, or inaccurate	Reversed Tax Court: record contained sufficient baseline documentation; the Tax Court erred in its strict timing/technical approach (vacated and remanded)
Whether limited partners’ capital contributions were entirely proceeds of disguised sales under disguised‑sale doctrine	Only the homesite parcels (and limited appurtenant rights) were transferred in substance; their fair market value is far less than the full contributions, so only part (not the entire contribution) can be treated as a disguised sale	Commissioner contends additional value (unencumbered acreage and tax‑benefit expectations) should be allocated to the disguised sale, making contributions largely proceeds	Reversed Tax Court as to treating whole contribution as disguised sale; remanded to determine correct taxable amount from disguised sales
Whether gross valuation‑misstatement penalty under §6662(h) applies	Penalty cannot be sustained based solely on the Tax Court’s technical disallowance; Tax Court made no finding of easement value	Commissioner argues penalties apply because easements were grossly overvalued and statutory penalty standards support application	Vacated and remanded: Tax Court must determine whether a gross valuation misstatement occurred and compute any penalty (no finding below on values)

Key Cases Cited

Belk v. Commissioner, 774 F.3d 221 (4th Cir. 2014) (modification/substitution provision can defeat perpetuity where easement can be moved to different land)
Commissioner v. Simmons, 646 F.3d 6 (D.C. Cir. 2011) (allowing limited consented alterations to building facades did not defeat perpetuity)
Kaufman v. Shulman, 687 F.3d 21 (1st Cir. 2012) (similar to Simmons; facade/limited modifications upheld as consistent with perpetuity)
INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992) (tax deductions are matters of legislative grace and are strictly construed)
United States v. Woods, 134 S. Ct. 557 (2013) (addressing valuation‑based penalties in the context of disregarded transactions)