Conservation Easements - How Flexible Is Too Flexible?

To ensure the continued conservation of natural resources and habitats, it is important to ensure that easements are not simply undone by successors to the original parties after the tax benefits have been realized.  For conservation easements there is an inherent struggle between the IRS requirement of perpetuity and the need for flexibility.  This decision by the Fifth Circuit Court has tremendous relevance for future conservation easements


For conservation easements[1] there is an inherent struggle between the IRS requirement of perpetuity[2] and the need for flexibility. To ensure the continued conservation of natural resources and habitats, it is important to ensure that easements are not simply undone by successors to the original parties after the tax benefits have been realized. On the other hand, landowner grantors and managing land trusts need to preserve a certain level of flexibility to both entice landowners to establish conservation easements and to ensure the sustainability of the easement for the future. This need for flexibility is especially pronounced in coastal locales where a changing climate is forcing communities, landowners and habitats to constantly adapt.

Several court cases[3] have addressed what it means for a conservation easement to be perpetual, but a recent decision from the United States Fifth Circuit Court of Appeals has found that the perpetuity of an easement does not require stagnancy. In BC Ranch II, L.P. v. C.I.R.,[4] which was issued on August 11, 2017, the Fifth Circuit overturned a Tax Court decision that provisions in conservation easements allowing for boundary modifications violated the perpetuity requirement and disallowed the charitable contribution deductions.

In BC Ranch, ranch developers worked with the North American Land Trust (NALT) to establish two conservation easements with the goal of permanently protecting the nesting area of the golden-cheeked warbler, a listed endangered species that only nests in the hill country of central Texas. In 2005 and 2007, the ranch owners "voluntarily, unconditionally, and absolutely" granted NALT "perpetual easement[s] in gross"; however, of critical importance to this case, the grantors of the easements reserved certain narrow rights that "could be conducted . . . without having an adverse effect on the protected Conservation Purpose." These included constructing recreational facilities[5] and a provision that allowed the grantors, with NALT's consent, to modify the boundaries of the easement to allow for certain five-acre homestead parcels.

In general, I.R.C. § 170(f)(3) prohibits a charitable contribution deduction for a contribution of an interest in property that is less than the taxpayer's entire interest in the property; however, there is an exception for "qualified conservation" contributions (i.e., the contribution of a qualified real property interest exclusively for conservation purposes). The real property interest conveyed by an easement must be protected in "perpetuity" for the contribution to be a qualified conservation contribution.[6] In particular, Treasury Regulation § 1.170A-14(b)(2) provides that a perpetual conservation restriction is a restriction granted in perpetuity on the use which may be made of real property, including an easement or other similar interest under applicable state law.
In the situation at issue, the Tax Court held that the easements violated the perpetuity requirement in I.R.C. § 170(h)(2)(C) and, therefore, BC Ranch was not entitled to a charitable contribution deduction because the property protected by the earlier easements could subsequently lose protection due to the homesite boundary modification provisions. This decision was based on Belk, a Fourth Circuit ruling that rejected a conservation easement allowing the parties to substitute the real property interest that was originally protected by the easement.
The Fifth Circuit disagreed with the Tax Court and noted, instead, that unlike an easement that "could be moved, lock, stock, and barrel, to a tract or tracts of land entirely different" from the original easement, the easement in BC Ranch only allowed for modifications that expanded neither the exterior boundaries nor the total acreage of the easements. Specifically, only the discrete five-acre homestead parcels could be moved, within the overall boundaries of the conservation easement, to account for future nesting sites.

Addressing the balancing act of perpetuity and flexibility head-on, the Fifth Circuit stated:



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.

The Fifth Circuit was especially persuaded by the fact that the land trustee (i.e., NALT) had "virtually unrestricted discretion" to overrule a proposed modification and was satisfied that any potential future modifications of the boundaries of one or a few homesite locations could not conceivably detract from the conservation purposes for which these easements were granted, particularly in light of the fact that NALT's prior approval of any such change was required.

This decision has tremendous relevance for future conservation easements, especially in coastal Louisiana. If drafted appropriately, flexible conservation easements will both encourage landowners to commit their land to conservation purposes and allow for those easements to bend as is necessary to handle the challenges of perpetual land management.
See the Fifth Circuit's entire opinion here.
If you have questions regarding this matter or other issues regarding coastal or environmental law, please contact Beaux Jones.
 [1] Under Louisiana Law, conservation easements are known as conservation servitudes and are governed by La. R.S. 9:1271
et seq.
 [2] I.R.C. § 170(h).
 [3] Belk v. C.I.R., 140 T.C. 1 (2013), aff'd, 774 F.3d 221 (4th Cir. 2014); C.I.R. v. Simmons, 646 F.3d 6, 7 (D.C. Cir. 2011); Kaufman v. Shulman, 687 F.3d 21, 23 (1st Cir. 2012).
 [4] No. 16-60068, 2017 WL 3446583, at *1 (5th Cir. Aug. 11, 2017).
 [5] "These reserved rights included constructing staff buildings, barns, recreational or meeting areas, swimming pools, ponds, shelters, pavilions, skeet-shooting stations, facilities for utilities, deer-hunting stands, roads, trails, and driveways." BC Ranch, at 3.
 [6] See I.R.C. § 170(h)(2)(C); Treas. Reg. § 1.170A-14(b)(2).