Sixth Circuit Affirms Tax Court; Rejects LLC's $22.6 Easement Donation Deduction

(Parker Tax Publishing December 2025)

The Sixth Circuit affirmed the Tax Court and held that a limited liability company (LLC) was not entitled to a $22.6 million charitable donation deduction with respect to an easement on a building it had recently purchased and upheld the penalty assessed on the taxpayer for grossly overstating the easement deduction, noting that the claimed deduction for the easement donation was 2500 percent of the Tax Court's valuation. Corning Place Ohio, LLC, et al. v. Comm'r, 2025 PTC 365 (6th Cir. 2025).

Background

In November 2014, Corning Place Ohio, LLC (Corning Place), a limited liability corporation (LLC) taxed as a partnership, was formed to purchase and develop the Garfield, an eleven-floor, nineteenth-century property in downtown Cleveland. Its primary partner, and the tax matters partner, is Corning Place Investment (CP Investment). Sixteen months later, Corning Place created an "Historic Preservation and Conservation Easement," and donated the easement to a local charity, thus allowing the donee the right to modify the facade and to increase the Garfield's height (by 34 floors). Corning Place claimed a $22 million tax deduction for that donation, nearly four times the $6 million it had paid for the building.

Corning Place donated the Garfield easement on May 25, 2016. However, its tax year did not begin until July 7, 2016. CP Investment became its sole partner on May 15, 2016, and remained its sole partner until July 7. For that roughly seven-week period, Corning Place did not exist as a taxable partnership.

On its 2016 tax return, Corning Place claimed a $22.6 million tax deduction for the easement donation, which was nearly four times what it had paid for the building. The amount of the deduction corresponded to an appraisal prepared by Claud Clark III, an appraiser who was well known for performing "lost development rights" appraisals. This type of appraisal uses a discounted cashflow methodology to calculate the supposed development potential of real estate, often with an assumed highest and best use as a residential subdivision. By placing an easement on the property, the developer assertedly becomes entitled to a charitable contribution deduction equal to the property's alleged "before" value - hypothetically built out into a multimillion-dollar subdivision - minus the value of the property (often de minimis) after being encumbered by the easement. However, since Corning Place did not exist at the time of the deduction, CP Investment cured the error in September 2020 by submitting an amended return for 2016 that claimed the deduction for itself.

The IRS disallowed the deduction and imposed penalties. It found that Corning Place claimed the deduction for the wrong year, substantially overvalued the building's worth, and failed to document key expenses. The IRS imposed a 20 percent negligence penalty for claiming the easement in the wrong year, a 40 percent penalty for grossly overstating the easement's value, and a 20 percent negligence penalty for a total penalty of almost $9 million. Corning Place and CP Investment challenged the IRS's assessment in Tax Court.

In T.C. Memo. 2024-72, the Tax Court held that Corning Place claimed the easement donation deduction for the wrong year and upheld the disallowance of the charitable contribution deduction, reasoning that CP Investment was the only relevant partner at the time of the deductions. Thus, the correct taxpayer with respect to the deduction was CP Investment, not Corning Place. The court rejected Corning Place's valuation of the easement, finding an overstatement of 2400 percent, and also rejected its belated documentation of key easement expenses relating to the appraisal and architectural services, and rejected its challenge to the penalties.

Corning Place appealed to the Sixth Circuit, offering two reasons as to why the court should permit the easement donation deduction. First, as to whether Corning Place may claim the deduction for a period of time that its tax year did not cover, it argued that the Tax Court should have ignored the mistake as a harmless administrative error. Second, Corning Place argued, CP Investment cured the error in September 2020 by submitting an amended return for 2016 that claimed the deduction for itself.

Thus, the issues in the appeal were (1) whether Corning Place is entitled to a partnership-level deduction for the Garfield easement donation; (2) whether Corning Place overstated the easement's value; (3) whether Corning Place properly documented easement-related expenses of $665,000; and (4) whether the IRS properly imposed underpayment penalties.

Analysis

The Sixth Circuit affirmed the Tax Court and held that (1) while Corning Place donated the Garfield easement on May 25, 2016, its tax year did not begin until July 7, 2016, and thus the correct taxpayer with respect to the deduction was CP Investment; (2) the Tax Court did not err in rejecting Corning Place's $22 million valuation for a charitable easement with respect to a property that it had recently purchased for $6 million; (3) Corning Place was not entitled to deduct $665,000 in easement-related expenses on its 2016 tax return; and (4) the Tax Court did not clearly err in finding that Corning Place (i) negligently claimed a deduction for the Garfield donation; (ii) grossly overstated its deduction for the Garfield easement; and (iii) negligently failed to substantiate its easement-related business deduction.

With respect to the question as to who is the correct taxpayer to take the easement donation deduction, the Sixth Circuit found that the Code does not permit a taxpayer to take a deduction in the wrong year as the wrong entity unless it files a timely correction. The court determined that, while it is true that a partnership may cure a mistaken filing by submitting a request for an administrative adjustment under Code Sec. 6227(a) and Reg. Sec. 301.6227(c)-1, Code Sec. 6227(c) requires the partnership to correct a filing before the IRS notifies its partners of a proposed adjustment and that did not happen in this case.

In determining the penalty for overstating an easement donation deduction, the Sixth Circuit said the Tax Court did not err in rejecting a valuation premised on a 34-story addition to the Garfield. The court found that the Tax Court appropriately asked whether transforming the 11-story, century-old Garfield into a 45-story apartment tower was "physically possible, appropriately supported, and financially feasible" and rejected the easement proposal for several straightforward reasons. Corning Place, the court noted, offered exceedingly weak underlying analyses to support the physical possibility of this proposed construction and, the court said, the likelihood of regulatory approval for the proposed construction was remote.

The Sixth Circuit also agreed with the Tax Court's rejection of the Corning Place's argument that the 45-story tower for the Garfield was the best use of the pre-easement Garfield, noting that Corning Place did not establish an unmet market demand to support a 34-story addition to a century-old building, and (2) never justified its construction costs estimate.

Finally, the Sixth Circuit affirmed the penalties assessed by the IRS. Citing the Supreme Court's decision in U.S. v. Boyle, 469 U.S. 241 (1985), the court rejected Corning Place's reliance on its tax advisors' preparation of the contribution deduction to escape the penalty. The court also agreed with the penalty assessed for grossly overstating the easement deduction noting that Corning Place's deduction of $22.6 million was 2500 percent of the Tax Court's $900,000 valuation. The Sixth Circuit also agreed that Corning Place had inadequately documented its easement-related expenses as it never provided any evidence of the payments it had deducted.

For a discussion of historic preservation easement deductions, see Parker Tax ¶84,155. For a discussion of valuation misstatement penalties, see Parker Tax ¶262,120.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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