Appeals court upholds $9 million in penalties for overstated historic easement deduction
Corning Place Ohio, LLC v. Commissioner, No. 25-1093, 2025 BL 396463 (6th Cir. Nov. 05, 2025), Court Opinion
The Sixth Circuit affirmed the Tax Court’s disallowance of Corning Place’s conservation easement deduction and sustained penalties, holding the deduction belonged to a different taxpayer year, the $22.6 million valuation was speculative, the claimed expenses were unsubstantiated, and the penalty defenses failed.
Holding
The court affirmed that Corning Place could not claim the easement deduction on its 2016 partnership return because the donation occurred during a period when the entity had a single owner and was not a taxable partnership.
The Tax Court did not clearly err in valuing the easement at $900,000, rejecting a 45-story hypothetical redevelopment as physically, legally, and economically remote.
The court also upheld denial of $665,000 in expense deductions for lack of proof of accrual or payment and sustained negligence and gross valuation misstatement penalties.
Why It Matters
Confirms that partnership deductions cannot be taken for periods when the entity has only one partner and is disregarded.
Reinforces that conservation easement valuations must reflect feasible development, not remote hypotheticals.
Emphasizes timely use of partnership-level correction procedures and the limits of late “fixes.”
Clarifies that reliance defenses do not defeat penalties where there is a gross valuation misstatement or failure to meet clear substantiation rules.
Timeline
Nov. 2014–Jan. 2015: Partnership formed; Garfield Building purchased for $6 million; appraisal near purchase set same value.
Oct. 2015: Redevelopment to apartments; historic credits obtained with rooftop visibility limits.
May 15–July 7, 2016: Single-member period; entity not a taxable partnership.
May 25, 2016: Easement donated on façade and height; taxpayer later claimed $22.6 million deduction.
Aug. 2018: IRS opened examination of the 2016 return.
July 2020: IRS disallowed deduction and imposed penalties.
Sept. 2020: Investor filed amended return attempting to claim the deduction; held untimely.
Tax Court: Disallowed deduction, valued easement at $900,000, denied expense deductions, sustained penalties.
Nov. 5, 2025: Sixth Circuit affirmed.
Key Facts
Property: 11-story 1893 building in downtown Cleveland converted to 123 apartments.
Easement: “Historic Preservation and Conservation” on façade and height.
Claimed value: $22.6 million based on a 45-story, 547-unit hypothetical vertical expansion.
Purchase price: $6 million about 16 months before the easement.
Development constraints: Existing historic credits required no visible rooftop construction for five years.
Expenses claimed: $665,000 for appraisal and architectural services; no adequate documentation of accrual or payment.
Penalties: 20% negligence for wrong-year claim, 40% gross valuation misstatement, and 20% negligence for unsubstantiated expenses; total penalties assessed were $8,993,400.
Statutory or Regulatory Framework
Charitable deductions for conservation easements require a qualified conservation contribution and valuation at fair market value at the time of contribution, using comparable sales or a before-and-after analysis, accounting for legal and practical development constraints. See §170 and Reg. §1.170A-14(h)(3).
Partnership items are determined at the partnership level, and corrections must be timely under former TEFRA procedures. See §§701–706, 6221–6231 (as then in effect), and §6227 for administrative adjustments.
Business expense deductions for accrual-method taxpayers require economic performance and reasonably determinable liability. See §162; Reg. §§1.461-1 and 1.461-4.
Accuracy-related penalties apply for negligence and valuation misstatements; reasonable cause and good-faith defenses are limited and unavailable for gross valuation misstatements. See §§6662 and 6664.
Arguments
Taxpayer argued:
The wrong-year claim was harmless because the same investor effectively took the same deduction for the same period.
A 2020 amended return by the investor cured the error.
The “as complete” valuation framework required assuming feasibility of the 45-story tower.
Market demand and comparable vertical expansions supported highest and best use.
Engagement letters supported accrual of appraisal and architectural fees.
Reliance on professionals defeated penalties.
Government argued:
The deduction belonged to the investor during the single-member period, not the partnership’s later tax year.
The 2020 filing was untimely under §6227 given the 2018 exam and 2020 proposed adjustment.
The 45-story scenario was physically, legally, and economically remote and thus speculative.
Claimed expenses lacked proof of economic performance or payment.
Gross valuation misstatement and negligence penalties applied, and reliance defenses were barred or unreasonable.
Court’s Reasoning
Wrong year: A partnership’s tax year excludes single-member periods. The donation occurred when the entity had only one partner; the deduction, if any, belonged to that partner, not the later-year partnership return.
No timely cure: The investor’s amended filing came after notice of exam and proposed adjustments, missing §6227’s timing rules.
Valuation standard: Before-and-after fair market value must reflect feasible uses grounded in objective evidence, considering zoning, preservation rules, and market realities.
Feasibility gaps: Structural analysis was labeled not for construction, soil work relied on another building, and no live expert testimony supported feasibility.
Regulatory limits: Existing historic credit restrictions and applicable laws made immediate vertical expansion unlikely.
Market evidence: Examples of vertical additions involved modern foundations designed for expansion; no demonstrated demand supported a 34-story addition to this century-old frame.
Cost proof: A one-page $102 million cost figure lacked support and was speculative.
Expenses: Engagement letters did not show services performed or liabilities fixed within the partnership’s 2016 tax year; no evidence of actual payment.
Penalties: Wrong-year filing was negligent; the valuation was grossly overstated relative to the $900,000 finding, barring reasonable-cause reliance; unsubstantiated expenses supported negligence penalties.
Forward-Looking Implications
Partnerships must track ownership changes and understand that deductions arising in single-member periods belong to the owner, not to later reinstated partnership years.
Timely administrative adjustment requests are critical once an exam notice issues; late attempts to reallocate deductions are ineffective.
Conservation easement valuations should document physical possibility, legal permissibility, market demand, and supported costs; speculative towers will not carry the before-and-after analysis.
Historic credit covenants and preservation obligations are part of the valuation baseline and can limit highest and best use.
Reliance defenses have limited reach where valuation overstatements exceed statutory thresholds or where basic timing and substantiation rules are not met.
Result
Judgment affirmed. The deduction was disallowed, the easement was valued at $900,000, expense deductions were denied, and negligence and gross valuation misstatement penalties were sustained.
The Takeaway
Partnership form and timing rules control who takes a deduction and when. For conservation easements, courts require feasible, well-supported development scenarios, strict substantiation, and timely procedural compliance to avoid penalties.
List of Citations
26 U.S.C. §170; Reg. §1.170A-14(h)(3): Conservation easement valuation and before-and-after method.
§§701–706; former §§6221–6231; §6227: Partnership procedures and administrative adjustments.
§162; Reg. §§1.461-1 and 1.461-4: Accrual timing and economic performance for expense deductions.
§§6662, 6664; United States v. Boyle, 469 U.S. 241: Accuracy-related penalties and limits on reliance defenses.
Olson v. United States, 292 U.S. 246; TVA v. 1.72 Acres, 821 F.3d 742: Highest and best use and exclusion of speculative uses in valuation.