The partnerships just watched $39.4 million in easement deductions go up in smoke. Add a 40% penalty for getting too creative with their valuations. The only consolation prize? They still get to deduct some cash donations and a handful of related expenses.
Holding
The Tax Court tossed out both partnerships’ historic preservation easement deductions. For penalty math, it pegged Del Monte’s easement at $200,000 and Continental’s at $550,000. That triggered a 40% penalty for the inflated valuations and a 20% penalty on the remaining disallowed deductions. On the bright side, each partnership’s $60,000 cash donation survived, along with some transaction expenses. The Court also told the IRS to take a seat on its disputed income theory.
Why it matters
The $750,000 combined valuation does not produce an allowable easement deduction. The deeds failed to meet the requirements to permanently protect conservation interests. Valuation determined the applicable penalties, rather than an amount the partnerships could deduct.
The decision applies established valuation principles and controlling Sixth Circuit precedent. General demand for housing did not establish demand for residential towers above these particular historic buildings. Actual transactions, comparable properties, and existing rental income supported substantially lower values.
The deeds’ treatment of development rights caused the decisive legal defect. The partnerships included those rights in their claimed deductions but excluded their asserted value from the formula protecting the charity’s share of proceeds after a Court terminates an easement.
Appraisal qualification and valuation credibility remain separate questions. The appraisals survived the IRS’s technical qualification challenges, but the Court rejected their values. Qualification also did not establish reasonable cause or prevent the gross valuation misstatement penalties.
Key facts
Del Monte owned the Del Monte Building, and Continental owned the Empire Building. Both properties operated as office buildings in downtown Columbus, Ohio. Both partnerships used the former TEFRA partnership audit procedures.
GBX Associates structured the easement transactions and arranged investor participation. Its investment model anticipated substantial tax benefits from charitable contribution deductions attributable to restrictions on future development.
Del Monte purchased its property for $1.3 million in December 2015. After renovations and increased occupancy, an August 2016 appraisal obtained for a bank loan valued the property at $1.85 million and identified its existing use as its highest and best use.
In December 2016, GBX-affiliated investment entities acquired substantial ownership interests in the partnerships. Del Monte Holdings acquired a 98% interest in Del Monte for $1.4 million. Historic Preservation Fund 2016 acquired a 95% interest in Continental through a $2.05 million capital contribution.
On December 27, 2016, both partnerships granted historic preservation easements to Heritage Ohio, a qualified charitable organization. The agreements restricted changes to the buildings’ exteriors and development of airspace above or adjacent to them.
The partnerships claimed these easement deductions on their 2016 returns:
Del Monte: $18,742,000.
Continental: $20,658,000.
Each partnership also claimed a separate $60,000 cash contribution to Heritage and deductions for transaction-related expenses.
The easement appraisals relied on hypothetical residential developments. Del Monte’s plans contemplated a 19-story condominium complex. Continental’s plans contemplated a residential development with 16-story and 23-story portions above the Empire Building and its adjoining garage.
Statutory and regulatory framework
Section 170 generally permits a deduction for a charitable contribution but ordinarily excludes donations of less than the donor’s entire property interest. Section 170(h) provides an exception for qualified conservation contributions. A qualifying easement must restrict property use permanently and protect its conservation purpose in perpetuity.
Treasury Regulation § 1.170A-14(g)(6) addresses judicial extinguishment, meaning a court-ordered termination of an easement. The regulation protects the charitable recipient’s proportionate interest in proceeds from a subsequent disposition of the property.
A property contribution generally takes its value from fair market value: the price informed, willing parties would agree upon without compulsion. The before-and-after method measures an easement’s value by subtracting the property’s value after the restriction from its value before the restriction.
The valuation must reflect a supportable highest and best use, meaning a reasonably probable, legally permissible, physically possible, and financially feasible use that produces the highest value. A theoretically profitable development does not qualify without evidence supporting its likelihood.
Arguments
The partnerships argued:
They transferred development rights separate from the restrictions that preserved the buildings’ façades.
Their deeds adequately protected Heritage’s interests.
The Tax Court’s decision invalidating the extinguishment regulation in Valley Park Ranch supported their position.
Residential development represented the properties’ highest and best use.
Their appraisals, related expense deductions, and treatment of investor funding satisfied the applicable requirements.
Reliance on GBX and tax professionals established reasonable cause for purposes of the available penalty defenses.
The IRS argued:
The development restrictions formed part of the easements rather than separate donated interests.
The deeds failed the perpetuity requirements through their mortgage, extinguishment, or reserved-rights provisions.
The appraisal work failed qualification requirements.
The claimed values depended on unsupported development assumptions.
The partnerships failed to establish entitlement to disputed expenses and treatment of certain transfers as capital contributions.
Accuracy-related penalties applied to the resulting tax underpayments.
The IRS also challenged Continental’s intent to donate.
Court’s reasoning
The development restrictions formed part of the easements. The agreements restricted both alterations to the historic exteriors and construction above or adjacent to the buildings. Their operative language expressly included the development rights within the easement grants. The partnerships failed to establish an independent donation of development rights. Consequently, those restrictions had to satisfy the easement requirements.
The proceeds formula failed to protect the complete donated interest. The deeds excluded development-rights values when calculating Heritage’s percentage interest. Using the appraisal figures, the Court calculated that including the complete easement values would give Heritage approximately 95% of the Del Monte property’s value and 74% of the Empire property’s value. Instead, the deeds assigned Heritage approximately 5% of each building’s value through their percentage formula. They referred separately to proceeds allocated to development rights but failed to explain an effective allocation mechanism. The formula already allocated 100% of the relevant interests between the charity and the owners. A provision requiring the owners to cover a shortfall did not solve the problem because it protected the same percentage interest that excluded development rights.
Binding appellate precedent defeated the regulatory challenge, and the statute supplied an additional basis for denial. The Sixth Circuit had upheld the extinguishment regulation in Oakbrook Land Holdings. Under Golsen, that precedent controlled these Ohio cases despite the Tax Court’s subsequent contrary conclusion in Valley Park Ranch. The Court also rejected the argument that Loper Bright displaced the earlier appellate decision merely because it had relied partly on Chevron. Independently, the partnerships failed to establish that the development restrictions satisfied the Code’s perpetuity requirements. The deeds left unresolved how and when Heritage would receive compensation for extinguishment of those rights.
The IRS’s other deed challenges did not establish grounds for denial. Continental’s mortgage agreement preserved the bank’s priority over rents and certain foreclosure proceeds, but it did not permit foreclosure to extinguish Heritage’s easement or override Heritage’s extinguishment rights. The Court distinguished a lender’s claim to income or proceeds from a sale subject to an easement from a priority claim that defeats the charity’s property interest. The Court also accepted the reserved rehabilitation rights. Those rights required compliance with federal preservation standards and approval through the National Park Service or the Ohio State Historic Preservation Office. The restrictions adequately protected the buildings’ historic features.
Technical appraisal qualification did not establish credible value. The Court rejected the IRS’s contention that weaknesses in the appraisals made them inconsistent with generally accepted appraisal standards. It treated the unreasonable assumptions as credibility- and weight-affecting defects rather than automatic disqualifications. The Court also concluded that Claud Clark qualified as an appraiser when he prepared the reports. The evidence did not establish the donor knowledge required to falsely overstate the easement values. Separately, Continental defeated the donative-intent challenge. A desire for tax benefits alone did not defeat a charitable contribution.
The proposed towers did not establish a supportable alternative use. The engineering work left material questions about foundations and structural capacity unresolved. The cost estimates omitted important expenses and relied on assumptions that understated the projects’ complexity. Evidence of general demand for apartments and condominiums did not establish demand for large residential additions above these historic office buildings. Alternative development sites offered less complicated options. The owners’ actual conduct and the bank appraisal also supported continued office use. The Court concluded that the proposed additions were not physically or financially feasible and that the properties’ existing uses represented their highest and best uses.
Actual market evidence supported the IRS expert’s valuations. Charles Brigden analyzed comparable sales and capitalized the buildings’ existing rental income. The Court accepted his before-easement values of $1.3 million for Del Monte and $4.75 million for Empire. It treated his after-easement values of $1.1 million and $4.2 million as IRS concessions. Subtraction produced easement values of $200,000 and $550,000. The Court rejected the partnerships’ trial expert’s discounted cash flow analyses because they depended on unsupported residential developments, speculative costs, and sensitive timing assumptions.
Other deductions and capital contributions
The failure of the easement deductions did not resolve every other adjustment in the IRS’s favor.
Cash donations. The Court allowed each partnership’s separate $60,000 contribution to Heritage. Heritage’s acknowledgment letters and the partnerships’ accounting records established the donations. Payment through the GBX-affiliated escrow account did not prevent the Court from attributing the payments to the partnerships.
GBX fees. The Court denied current deductions for Del Monte’s $670,000 payment and Continental’s $784,000 payment to GBX. GBX structured the transactions and raised investor funds. Section 709(a) barred the claimed deductions for organizational or syndication costs, and the partnerships failed to establish that any portion warranted a different characterization.
Other transaction expenses. The Court allowed the identified payments to Clark, Sandvick, Lewin, and JERA, together with Heritage’s application fees. It treated those payments as ordinary and necessary expenses to obtain the appraisal and complete the transaction. Del Monte failed to explain its payments to Amerititle and Integra Realty, so the Court sustained those disallowances.
Investor funding. The Court rejected the IRS’s disputed income adjustments of $549,204 for Del Monte and $1,195,000 for Continental. Testimony and supporting accounting records sufficiently established that the transfers represented capital contributions from their respective investment entities.
Penalties
The partnerships’ claimed easement values greatly exceeded the Court’s findings. Del Monte claimed $18,742,000 for an easement worth $200,000. Continental claimed $20,658,000 for an easement worth $550,000.
The Court applied the 40% gross valuation misstatement penalty to the portions of the tax underpayments (tax shortfalls) attributable to claiming values above those amounts. Section 6664(c)(3) foreclosed a reasonable-cause defense for these gross valuation misstatements involving charitable contribution property.
The 20% accuracy-related penalty applied to different portions of the underpayments:
The amounts attributable to denying deductions corresponding to the easements’ actual $200,000 and $550,000 values because the deeds failed the perpetuity requirements.
The amounts attributable to the disallowed GBX fees and Del Monte’s unexplained expenses.
The Court sustained the 20% penalty for substantial understatement where the statutory threshold applied and alternatively for negligence where it did not.
The partnerships failed to establish reasonable cause for those remaining adjustments. GBX promoted and implemented the transactions, so its involvement did not provide independent professional advice. The partnerships also failed to identify substantive advice from their return preparers concerning the disallowed expense deductions. General assertions of professional reliance did not establish the defense.
The Court determined penalty applicability at the partnership level. The resulting underpayments require partner-level determinations. The opinion does not state final dollar amounts for the penalties.
Result
Bottom line: both easement deductions denied. The Court allowed the cash contributions and some expenses, tossed the IRS’s income adjustments, and upheld the 40% and 20% penalties. The final math will be worked out under Rule 155.
List of citations
I.R.C. § 170(a), (f)(3), and (h): Charitable contribution deductions, partial-interest restrictions, and the requirements for qualified conservation contributions.
Treas. Reg. § 1.170A-14(g)(2): Mortgage subordination sufficient to preserve the charity’s enforcement rights.
Treas. Reg. § 1.170A-14(g)(6): Protection of the charity’s proportionate interest following judicial extinguishment.
Treas. Reg. §§ 1.170A-1(c) and 1.170A-14(h)(3): Fair market value and before-and-after easement valuation.
I.R.C. § 170(f)(11); Treas. Reg. § 1.170A-13(c)(5)(ii); IRS Notice 2006-96: Appraisal and appraiser qualification requirements.
Oakbrook Land Holdings, LLC v. Commissioner, 28 F.4th 700 (6th Cir. 2022): Controlling Sixth Circuit authority upholding the extinguishment regulation.
Valley Park Ranch, LLC v. Commissioner, 162 T.C. 110 (2024): The Tax Court’s contrary procedural-validity decision, which did not override controlling appellate precedent.
Golsen v. Commissioner, 54 T.C. 742 (1970), aff’d, 445 F.2d 985 (10th Cir. 1971): Requires the Tax Court to follow directly applicable precedent of the appellate Court that would hear the appeal.
Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244 (2024): Ending Chevron deference did not itself unsettle earlier decisions that used that framework.
Corning Place Ohio, LLC v. Commissioner, T.C. Memo. 2024-72, aff’d, 158 F.4th 715 (6th Cir. 2025): Closely analogous authority rejecting speculative vertical development as a basis for easement valuation.
I.R.C. §§ 162 and 709(a): Treatment of ordinary business expenses and partnership organizational or syndication costs.
I.R.C. §§ 6662 and 6664(c): Accuracy-related penalties and limits on reasonable-cause defenses.
Neonatology Associates, P.A. v. Commissioner, 115 T.C. 43 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002): Requirements for establishing reliance on professional tax advice.