Fifth Circuit Issues Important Conservation Easement Decision
Last week the United States Court of Appeals for the Fifth Circuit entered an important conservation easement decision reversing the decision of the Tax Court and remanding the case to decide certain issues. The conservation easement protected a Texas ranch of several thousand acres. Among the Court’s holdings was that Belk, a Tax Court case decided in 2013 and affirmed by the U.S. Court of Appeals for the Fourth Circuit in 2014, did not apply to the conservation easements donated by two Bosque Canyon entities.
In Bosque, the conservation easement reserved specific five-acre house sites within the conservation area. These sites were unrestricted by the conservation easement and were identified by exhibits to the conservation easements. The boundaries of these house sites could be relocated within the conservation area under certain specified circumstances, including Land Trust discretion, but they could not be enlarged and any agreement by the Land Trust to move them could not adversely affect the Conservation Purposes. In Belk, the Fourth Circuit held that the right of the owner to modify outside boundaries of a conservation easement would effectively allow the owner to exchange land within the conserved golf course — the perpetual use protected by the Conservation Easement — for adjacent non-golf course land and that this reserved right undermined the perpetual use requirement of the Internal Revenue Code, resulting in no tax deduction.
Why is Bosque not Belk?
In an amicus curiae brief filed by Saul Ewing attorneys on behalf of the North American Land Trust, we made several arguments with regard to Belk.
First, we pointed out that even if the house sites’ boundaries were moved within the conservation area, the property would still perpetually remain protected for its conservation use, as a ranch. The easement required that the number and size of the house sites not change. The house sites constituted less than 6 percent of the property. In Belk, the easement allowed for the external boundaries of the conservation area to be relocated; effectively a “swap” of the conservation area. Tax Court Judge Vasquez in Belk II pointed out that one of the problems with the Belk easement was that the protected conservation “use” could be changed from that of a golf course to some other use by changing the external boundaries of the conservation area. Importantly, the section of the regulations on which the Tax Court relied in Belk refers to the perpetual protection of “use” and so we argued that the protected “use” in Bosque was that of a ranch and that the relocation of house sites would never alter that protected use. The property would always remain a ranch with limited house sites. Though the Fifth Circuit did not rely specifically on this argument, the opinion did note that a view of the map of the property clearly indicated that relocation of the house sites would not materially change the condition of the property.
Second, we argued that relocation of house sites within the conservation area in Bosque would not undermine the appraised value or the baseline documentation that was prepared for the original conservation easement donation. On appeal, the Fourth Circuit in Belk noted that the relocation of the boundaries of the conservation area could delegitimize the original conservation easement appraisal and render the baseline documentation incomplete. While this argument may apply to other conservation easements that permit boundary modifications, there are certainly ways to avoid it, and this was something, we argued, that was not applicable in Bosque. The Fifth Circuit agreed.
Third, we argued that some flexibility in the location of non-conservation uses permitted within a conservation area can be beneficial not only to the owner but also to the holder of the easement as well as to the achievement of conservation purposes. Though it is beneficial to identify the location of substantial reserved rights within a conservation area, it is sometimes impossible to have complete information regarding ecosystems within a conservation area at the time the easement is granted. And conditions may change over time, such as the movement of species or impacts of weather. For that reason some flexibility, managed by the land trust in its statutory responsibility as holder, can be very important to the perpetual protection of conservation purposes.
Fourth, unlike Belk, the North American Land Trust easement in Bosque gave ultimate discretion to the holder of the conservation easement as to whether or not to permit any relocation of the building sites. In Belk, it was arguable that the owner had a “right” to relocate the boundaries of the conservation area because the holder was bound to give approval based upon a reasonable circumstances standard. This was an important distinction as noted by the Court.
Fifth, no conservation easement should be completely divorced from the facts and circumstances in which it exists. There are infinite variations among conservation properties and appropriate reserved rights. In this instance, the Court of Appeals was willing to look at the facts and circumstances and see that the design of the building site locations, when combined with their number and size and the use and extent of the ranch in its entirety, achieved a legitimate conservation purpose. The property would forever be a ranch with expansive conserved habitat and scenic Texas landscape.
Various commentators had been quick to prejudge the outcome of Bosque — particularly those who argue for absolute inflexibility in conservation easements. We view the Fifth Circuit decision in Bosque as a victory for conservation for two reasons. First, the Court of Appeals was willing to consider carefully the purpose and accomplishment of the overall conservation design put in place by experienced conservation professionals and negotiated with the owner in its application of the law. Second, the Court of Appeals accepted the essential role of the qualified land trust organizations which were recognized in Section 170(h) of the Internal Revenue Code as keepers of the conservation purposes and uses of easements and as arbiters of the baseline documentation.
Bosque can be viewed as a roadmap for limited and carefully designed flexibility in future conservation easement transactions.
For more information on this important decision, please contact the author or the attorney at the firm with whom you are regularly in contact.