This case, Leo v. Commissioner, T.C. Memo. 2025-9, involves a dispute over the valuation of a property donated to charity and the resulting tax implications for the petitioners, Karl W. and Fay L. Leo. The central issue is the fair market value of the Bankhead Property, consisting of buildings and 136.4 acres of land in Union County, Mississippi, as of December 31, 2013. The Leos claimed a charitable contribution deduction based on a valuation of $15,800,000, while the Commissioner of Internal Revenue asserted a value of $4,050,000. The Tax Court sided with the Commissioner, finding the value to be $4,050,000 and upheld the deficiencies and penalties assessed against the Leos.

Factual Background

The Bankhead Property: The property in question is located northeast of state Highway 178 in Union County, Mississippi, and includes 136.4 acres of land. In 1948, a furniture factory was built on the land by Morris Futorian, which expanded from 1955 to 1972 to a total building area of 1,093,345 square feet. The factory included manufacturing, office, and warehouse spaces.
Lease History: From 2000 to 2002, Caye Home Furnishings, LLC (Caye Home) purchased the operations of the factory, but not the buildings or land. In 2002, Vanguard Properties, LLC, in which Karl Leo had a minority interest, purchased the Bankhead Property for $2,750,000. Vanguard Properties leased a portion of the property to Caye Upholstery, LLC, an entity solely owned by Caye Home. Over the years, the leased premises were amended multiple times, and it’s unclear from the record exactly how much of the property was leased at various points. In 2007, Karl Leo became the sole member of Vanguard Properties and the lease was with Caye Home for the entire Bankhead Property.
Newport Furniture and Roberts Trucking: In 2010, Caye Home went bankrupt, and its business assets were acquired by Newport Furniture Co., Inc. Newport Furniture leased 500,000 square feet of building space from Vanguard Properties in an arm’s-length transaction at a rate of 48 cents per square foot per year. In 2012, Vanguard Properties leased a truck-maintenance building (10,624 sq ft) to Roberts Trucking, LLC. The lease required Roberts to perform specific improvements in lieu of paying rent.
Deterioration of Property: By 2013, Newport Furniture stopped paying rent and declared bankruptcy. The property was in disrepair with roof leaks, outdated electrical and non-functioning HVAC systems. The director of industrial development at the local authority testified that the Bankhead Property was unsuitable for leasing due to its size, low ceilings, and poor condition.
Donation to Mercy Foundation: In July 2013, Mercy Foundation expressed interest in purchasing the Bankhead Property. On December 31, 2013, Vanguard Properties sold the property to Mercy Foundation for $10,000 in cash and a $565,000 promissory note. The sale agreement included an appraisal by Campbell valuing the property at $15,800,000.
Subsequent Events: In 2014, Mercy Foundation canceled the promissory note for $40,000 and subsequently tried to sell the property. In 2015, New Albany Acquisitions, LLC, purchased the property for $1,130,000 and demolished parts of the buildings because of their poor condition.
Tax Returns: The Leos claimed a charitable contribution deduction of $15,225,000 on their 2013 tax return based on the $15,800,000 appraisal. They carried over the deduction to tax years 2016 and 2017. The Leos later made adjustments to the carryover deduction based on the cancellation of the promissory note.

Leos’ Arguments for Relief

The Leos contended that the value of the Bankhead Property was $12,425,000, primarily relying on two key pieces of evidence:

The Campbell Appraisal: The Leos argued that the photographic and descriptive contents of the appraisal, valuing the property at $15,800,000, were binding. They contended the Campbell appraisal accurately reflected the condition of the property, asserting that the buildings were in "average condition" and had been well maintained, as well as arguing the improvements and renovations made the Bankhead Property "as functional and useful today as a building that was built in the last 20 years".
Singleton’s Expert Testimony: The Leos offered the expert testimony of Mr. Singleton, who valued the property at $12,425,000 using a combination of comparable sales and income approaches. They argued his methodologies were sound and his conclusion was valid.
Fallback Valuation: In their closing statement, the Leos presented a fallback valuation of $7,941,000, based on separate values for the land, office space "interior finishes," and the buildings, depreciated from their insured value.

Tax Court’s Analysis and Authorities

The Tax Court systematically evaluated the evidence presented and applied the relevant legal standards.

Fair Market Value: The Court cited Treas. Reg. § 1.170A-1(c)(2), which defines fair market value as "the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts". The Court noted that when a taxpayer sells property to a charity for less than fair market value, they can deduct the difference between the fair market value and the sale price, per Stark v. Commissioner, 86 T.C. 243, 255-56 (1986).
Rejection of Campbell Appraisal: The Court determined that while the Campbell appraisal was admitted into evidence, its contents were not binding and were ultimately unpersuasive. The Court found that Campbell’s view of the property’s condition was not credible and suggested that his objectivity was compromised by a pre-existing commitment to a value of at least $15,000,000. The Court noted there was no evidence he reviewed the photographs taken by Mercy Foundation’s environmental consultant. Further, the Court rejected Campbell’s presumption that the electrical and plumbing systems were in good condition.
Rejection of Singleton’s Testimony: The Court found Singleton’s expert opinion unpersuasive. The Court found that Singleton relied too heavily on Campbell’s conclusions about the Bankhead Property’s condition and did not conduct a thorough independent inspection. The Court noted that Singleton’s reliance on comparable properties was flawed because those properties were in better condition than the Bankhead Property. Additionally, the Court disagreed with Singleton’s income approach, noting that his $1.50 per square foot estimate for market rent was too high, especially given the 48 cent per square foot arm’s-length lease with Newport Furniture, as well as the 45 cents per square foot rate in the Newport Home lease. Finally, the Court noted that his assumption of a 20% vacancy rate was incorrect, given the reality that only half the building area was under lease, and his $12,425,000 valuation was inconsistent with the $1,130,000 sale price in 2015.
Acceptance of Ladner’s Testimony: The Tax Court found the expert testimony of Everette E. Ladner III, the Commissioner’s expert witness, persuasive. Ladner determined a value of $4,050,000 using a comparable sales approach, adjusting for the poor condition of the Bankhead Property and deferred maintenance. The Court also gave no weight to the land valuation approach proposed by Ladner, as a typical purchaser would focus on building area for a property of this type. The Court found that Ladner’s conclusion was supported by his inspection, interviews of former tenants, the poor condition photographs from the environmental consultant, the fact that only half the area was leased at below market rate, and the later demolition of a portion of the property. The Court rejected the argument that Ladner should have used an income approach.
Rejection of Fallback Position: The Court dismissed the Leos’ fallback valuation of $7,941,000. The Court rejected their claim that $40 per square foot should be used to value office space, which was contradicted by the fact that this space had to be gutted in later renovations. The Court determined that it was improper to rely on the insured value of the buildings to determine the value of the Bankhead Property.
Application of the Law to the Facts: The Court held that the fair market value of the Bankhead Property was $4,050,000, as determined by Ladner’s sales-comparison approach, concluding that the property was in "inferior condition". The Court reasoned that this was supported by the facts that only half the property was leased at the valuation date, the unleased portions could not be rented out, and it was sold for only $1,130,000 in May 2015. The Court specifically cited Estate of Kaplin v. Commissioner, 748 F.2d 1109, 1111 (6th Cir. 1984) as support, stating that “little evidence could be more probative than the direct sale of the property in question”.
Deficiencies and Penalties: The Court determined that while the Notice of Deficiency originally valued the property at $4,300,000, using the corrected value of $4,050,000 did not change the amount of the tax deficiencies or underpayments. Citing §6662(h)(1) of the Internal Revenue Code, the Court held that the Leos were liable for a 40% gross valuation misstatement penalty since the value claimed on their return was over 200% of the actual value. They pointed out there is no reasonable-cause exception to the penalty for gross valuation misstatements, as found in §6664(c)(3).

Ultimate Findings

The Tax Court ruled in favor of the Commissioner, finding that:

The fair market value of the Bankhead Property on December 31, 2013, was $4,050,000.
The amounts of the tax deficiencies and underpayments determined in the Notice of Deficiency were correct.
The Leos were liable for a 40% gross valuation misstatement penalty under section 6662(h) for both tax years 2016 and 2017.

This case provides a detailed examination of how the Tax Court assesses valuation disputes and highlights the importance of credible evidence, thorough appraisals, and arm’s-length transactions. It underscores that the Court is not bound by appraisals submitted by taxpayers, and that it will give weight to expert testimony and the relevant facts when determining fair market value.

Prepared with the assistance of NotebookLM.