As tax professionals advising clients on charitable contributions and partnership taxation, the recent decision by the Sixth Circuit in Corning Place Ohio, LLC v. CIR, No. 25-1093, decided and filed November 5, 2025, serves as a critical reminder regarding the strict observance of timing rules, valuation standards, and documentation requirements. The court affirmed the Tax Court’s decision to disallow a significant conservation easement deduction and uphold severe penalties.

Factual Background of the Dispute

Corning Place Ohio, LLC (Corning Place), a partnership whose primary partner was Corning Place Investment, LLC (Investment), purchased the 11-story Garfield Building in Cleveland in January 2015 for $6 million. This sale was described by the taxpayer as "at market," "arm’s length," and "reasonable". Subsequently, Corning Place redeveloped the building into residential apartments, utilizing $9 million in state and federal historical preservation credits. To secure these credits, Corning Place had promised that "[n]one of the proposed rooftop construction . . . will be visible at ground level".

In May 2016, Corning Place donated an "Historic Preservation and Conservation Easement" to a local charity. For this donation, which represented the right to modify the façade and increase the Garfield’s height, Corning Place claimed a charitable donation deduction of $22,601,000 on its 2016 tax return. This claimed value was nearly four times the purchase price of the entire property.

The valuation was predicated on a hypothetical development—a 45-story tower containing 547 apartment units—which would require adding 34 stories to the century-old structure, inserting over 40 steel support pillars, and excavating 130 feet below ground level. However, the architectural firm involved noted that assisting with the construction of the hypothetical 45-story tower would violate the terms of the existing five-year historical preservation credits.

Crucially, due to changes in its partnership structure, Corning Place had only one partner, Investment, from May 15, 2016, through July 6, 2016. The easement donation occurred on May 25, 2016. Consequently, Corning Place did not exist as a taxable partnership during this seven-week window. Despite this, Corning Place claimed the deduction on its 2016 tax return, which officially began on July 7, 2016.

The Commissioner disallowed the deduction and imposed penalties, including a 20% negligence penalty for claiming the easement in the wrong year, a 40% penalty for grossly overstating the value, and a 20% negligence penalty for inadequate documentation of expenses, totaling $8,993,400.

Taxpayer’s Challenge and Request for Relief

Corning Place challenged the Commissioner’s decision in the Tax Court, and subsequently appealed the adverse ruling to the Sixth Circuit. On appeal, the partnership asserted four main challenges: the denial of the partnership-level deduction, the finding of overstatement of the easement’s value, the rejection of easement-related expense deductions, and the propriety of the underpayment penalties.

Regarding the deduction timing error, Corning Place argued that the Tax Court should have disregarded the mistake as a harmless administrative error because Investment, as the sole partner at the time of the donation, also claimed a 100% share of the deduction on its own 2016 tax return. Alternatively, Corning Place argued that Investment cured the error in September 2020 by submitting an amended return for 2016 claiming the deduction for itself.

For valuation, Corning Place argued that the relevant regulations required an "as complete valuation," meaning the pre-easement value of the property should have been valued "as if" it had already been established that the highest and best use was the 45-story apartment building.

Judicial Analysis and Application of Tax Law

The Sixth Circuit addressed each issue, applying clear-error review to factual findings and fresh review to legal conclusions. Corning Place bore the burden of proving entitlement to the deduction.

Timing of the Charitable Deduction

The court confirmed that a partnership’s taxable year includes only the portion of the year in which it has multiple partners (26 C.F.R. §§ 301.7701-3(b)(1)(ii), -3(f)(2)). When a partnership has only one partner, the partner must claim all partnership items, including deductions, on its own tax return.

Application: Since the donation occurred on May 25, 2016, and Corning Place did not exist as a taxable partnership until July 7, 2016, the court determined that Investment was the correct taxpayer for the deduction, not Corning Place.

The court rejected the argument that the mistake was harmless error, emphasizing that the issue was whether Corning Place could claim the deduction for a period its tax year did not cover. Citing Summa Holdings v. Comm’r, 848 F.3d 779, 782 (6th Cir. 2017), the court stated that in law, "form" is "substance".

Furthermore, the court dismissed the attempted cure via an amended return. Although a partnership may submit a "request for an administrative adjustment" (26 U.S.C. § 6227(a); 26 CFR § 301.6227(c)-1), the filing must occur before the Commissioner notifies the partners of a proposed adjustment (26 U.S.C. § 6227(c)). Since Investment submitted its corrected return in September 2020, two months after the Commissioner notified the partners in July 2020 of the proposed adjustment (and two years after the audit notice in August 2018), the submission was untimely. Thus, the deduction was denied because it was claimed by the wrong entity in the wrong year, and the mistake was not timely corrected.

Valuation of the Easement

The relevant regulations specify that the easement value equals the difference between the fair market value of the property before and after the restriction (26 C.F.R. § 1.170A-14(h)(3)(i)). The pre-contribution value must account for the current use, but also include an objective assessment of how likely the property would have been developed absent the restriction, taking into consideration zoning and historic preservation laws (26 C.F.R. § 1.170A-14(h)(3)(ii)). Valuation of a hypothetical use must rely on a "reasonable probability," excluding "mere speculation and conjecture" (citing Olson v. United States, 292 U.S. 246, 255, 257 (1934)).

Application: The Tax Court appropriately assessed whether transforming the Garfield into a 45-story tower was "physically possible, appropriately supported, and financially feasible". The Sixth Circuit affirmed the rejection of the valuation based on several factors:

Physical Impossibility/Lack of Support: The structural analysis was labeled as "not [to] be used for actual construction", and the feasibility analysis used a general soil survey rather than one specific to the Garfield. The likelihood of such development was deemed "remote".
Regulatory Hurdles: The proposed 34-story expansion was incompatible with existing historical preservation credits secured by the partnership (citing 26 U.S.C. §§ 47(b), 50(a)).
Financial Speculation: The estimated construction costs of $102 million for the expansion were deemed "patently speculative," reaffirming that speculative and remote possibilities requiring substantial investment cannot guide value (citing 1.72 Acres of Land, 821 F.3d at 749–50).

The court rejected the partnership’s attempt to force an "as if" best use valuation, noting that the fundamental preliminary inquiry is whether the hypothetical use represents a "reasonable probability". Since the valuation failed at this initial step, the Tax Court did not err in rejecting the $22 million valuation. The Tax Court’s alternative valuation of $900,000 for the easement was upheld, as Corning Place did not otherwise challenge it.

Easement-Related Expenses

Corning Place sought to deduct $665,000 in expenses for appraisal and architectural services. As an accrual-basis taxpayer, Corning Place "incur[s]" an expense only when "economic performance has occurred" (i.e., the service is provided) and the liability can be determined with reasonable accuracy (citing Chrysler Corp. v. Comm’r, 436 F.3d 644, 647 (6th Cir. 2006); 26 C.F.R. § 1.461-1(a)(2)).

Application: The engagement letters provided failed to demonstrate that the services were performed during Corning Place’s taxable year (after July 7, 2016). Furthermore, the documentation did not show what Corning Place actually paid the consultants, nor did one letter specify the liability with "reasonable accuracy". The court concluded that Corning Place failed its burden of proof.

Imposition of Penalties

The Tax Code imposes penalties for underpayment resulting from negligence or overvaluation (26 U.S.C. § 6662). A taxpayer can avoid a penalty by showing "reasonable cause" and acting in "good faith" (26 U.S.C. § 6664(c)(1)), including reasonable reliance on professional tax advice (citing United States v. Boyle, 469 U.S. 241, 251 (1985)). However, this defense is explicitly unavailable when the understatement results from a gross valuation overstatement (more than 200% of the correct amount) (26 U.S.C. §§ 6662(h)(2)(A)(i), 6664(c)(3)).

Application:

Wrong Year/Negligence: The failure to timely file or claim a deduction in the correct year is not excused by reliance on an agent (citing Boyle, 469 U.S. at 252). The finding of negligence for the timing error was upheld.
Gross Valuation Overstatement: The claimed $22.6 million valuation was 2500% of the correct $900,000 value, meeting the definition of a gross valuation overstatement. The court consequently affirmed the 40% penalty and denied the partnership the defense of reliance on professional advice.
Expense Documentation/Negligence: The partnership provided no proof of service or payment for the $665,000 in expenses. The court ruled that reliance on others cannot substitute for compliance with an unambiguous statute, upholding the negligence penalty for inadequate substantiation (citing Boyle, 469 U.S. at 251).

Conclusion

The Sixth Circuit affirmed the Tax Court’s decision, finding that Corning Place improperly claimed the deduction because the charitable contribution was made during a period when the entity did not exist as a taxable partnership. Furthermore, the court found the $22.6 million valuation was based on speculative and financially infeasible development plans, justifying the disallowance of the claimed value and the application of a gross valuation overstatement penalty. Finally, the partnership failed to adequately document its easement-related expenses as required for an accrual-basis taxpayer.

The case underscores the necessity for CPAs and EAs to meticulously vet the timing of partnership tax events, particularly when single-member periods occur, and to ensure that conservation easement valuations adhere rigorously to the “reasonable probability” standard, demonstrating economic and regulatory feasibility far exceeding mere aspiration. Like constructing a skyscraper, every component of a charitable deduction must be supported by a sound foundation—if the underlying structure of the valuation fails the objective feasibility test, the entire deduction collapses.

Prepared with assistance from NotebookLM.