Tax Court Rejects Bullshit Grossly Overvalued Conservation Easement Claim (7/19/24)

In Corning Place Ohio, LLC v. Commissioner, T.C. Memo. 2024-72, JAT Google Docs here and GS here, the Court (Judge Lauber) denied a charitable deduction for an alleged conservation easement and imposed accuracy-related penalties. The Court’s opening paragraph tells the story of a bullshit tax shelter, as so often these days, in the guise of a conservation easement (footnote omitted):

          This case presents what might be called the urban version of the conservation easement tidal wave that has deluged this Court. A partnership acquired a historic office building in downtown Cleveland, Ohio, and proceeded to renovate it into luxury [*3] apartments. The renovation was undertaken pursuant to a “rehabilitation plan” approved by the National Park Service (NPS) and the State of Ohio, both of which awarded historic preservation tax credits. The partnership used the tax credits to finance the renovation.

          Gilding the lily, the partnership then granted a conservation easement over the very same property, claiming a $22.6 million charitable contribution deduction on the theory that it had relinquished valuable development rights. The “lost development rights” allegedly consisted of the notional opportunity to add a 34-story vertical addition on top of the historic building. Apart from being structurally implausible and economically unsound, adding 34 floors of steel and concrete atop the building would have required the partnership to forfeit the Federal and Ohio tax credits upon which it relied to finance the renovation. As a condition of receiving those credits, it had pledged that the rehabilitation plan would entail no rooftop improvements “visible from the street.”

          Needless to say, a 34-story addition on top of the building would have been visible from the street. Finding that the 34-story tower was a chimerical concept ginned up solely to support a wildly inflated appraisal, we will sustain the Commissioner’s disallowance of the charitable contribution deduction and his imposition of a 40% penalty under section 6662(h) for a “gross valuation misstatement.”

I include at the end of this blog entry several quotes from the opinion that I thought particularly good to show the perfidy of the actors involved in the drama. First, I will address two tax procedure issues:

1. For proving mailing to the IRS, often a USPS receipt will suffice. This often comes up in the context of § 7502’s timely mailing timely-filing rules; here the petitioner tried to prove that an amended return was sent (pp. 25-26, bold-face supplied by JAT):

          CP Investment, as the sole member of Corning Place on May 25, 2016, was admittedly the correct party to report that contribution. But the IRS has no record of having received a second amended return from CP Investment for 2016. The return petitioner offered into evidence is unsigned. Petitioner supplied no proof of mailing, such as a certified or registered mail receipt, to show that a signed version of the document was in fact mailed. And there is no evidence—such as a “stamped received” notation on the return or on a U.S. Postal Service (USPS) return receipt—showing that the IRS received an amended return for CP Investment. See Son Gee Wine & Liquors, Inc. v. Commissioner, T.C. Memo. 2013-62, 105 T.C.M. (CCH) 1407, 1411.

           In support of its allegation that a second amended return for CP Investment was filed with the IRS, petitioner submitted a USPS tracking report and attached receipt for $63.30. The tracking report shows that an unidentified item with tracking number ending in 202958 was delivered to the IRS in Ogden, Utah, on September 8, 2020. For several reasons, we find that this document does not satisfy petitioner’s burden of proof.

           First, we find it surprising that an amended return dated July 9, 2020, involving a matter of some importance, would not have been mailed until September 8, 2020, two months later. Second, there is no evidence that the item delivered on September 8, 2020, was a second amended return for CP Investment. Curiously, the $63.30 receipt indicates that two “wild orchids” with a unit price of $11.00 were also purchased at the time of mailing. Petitioner did not call the person to whom  USPS gave this receipt as a witness to testify as to what document was actually mailed. Third, the cover sheet attached to the amended return, prepared by RSM, explains that “this return has been prepared for electronic filing.” As a “special instruction” RSM told its client: “Do not mail the paper copy of the return to the IRS.” If the return had been electronically filed, RSM or petitioner would have received confirmation of that fact. But petitioner produced no such evidence at trial.

          In any event, even if CP Investment did file a second amended return for 2016, that filing would not save the day for petitioner. This case does not concern return items reported by CP Investment for its calendar taxable year ending December 31, 2016. Rather, the case [*26] concerns return items reported by Corning Place for its short taxable year beginning July 7, 2016, and ending December 31, 2016.

The point this should make is that the taxpayer bears the proof that what was in the envelope allegedly sent to and acknowledged received by the IRS is the tax return allegedly sent. Most of the time, that is the most obvious conclusion, but as Judge Lauber states the facts, that was not this case.

2. The Court determined (Slip op. 45-47) in the TEFRA proceeding that the penalties applied at the partnership level (meaning that any partner-level defenses had to be asserted later). The penalties were the 40% substantial valuation misstatement penalty § 6662(b)(3) and (h) on the portion of the underpayment related to the overvaluation and the 20% negligence and substantial understatement penalties § 6662(b)(1) & (2) related to the rest of the underpayment from disallowing the charitable contribution that was not overvalued.

Now, I offer excerpts from the opinion showing egregious action on the parts of the actors (bold face supplied by JAT).

[*8]

          Mr. Clark was well known for performing “lost development rights” appraisals. This type of appraisal uses a discounted cashflow (DCF) methodology to calculate the supposed development potential of real estate, often with an assumed HBU 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.

[*19]

   n8 On December 18, 2018, the United States filed a complaint against Mr. Clark and other defendants seeking an order enjoining them from organizing, promoting, or selling abusive syndicated conservation easement transactions. The complaint alleged that Mr. Clark, in preparing appraisals from 2009 onwards, relied on inappropriate assumptions and methodologies to inflate the value of the conservation easements he appraised, resulting in his customers’ claiming improper and outsized charitable contribution tax deductions. See Complaint at 37, United States v. EcoVest Cap. Inc., No. 1:18-cv-05774 (N.D. Ga. Dec. 18, 2018), ECF No. 1. On March 20, 2023, the United States and Mr. Clark filed a joint motion of entry of final judgment wherein Mr. Clark consented to the entry of an injunction barring him from preparing or assisting in the preparation of any appraisal intended to be a “qualified appraisal” within the meaning of section 170(f)(11)(E). See Final Judgment of Permanent Injunction Against Defendant Claud Clark III at 2–3, EcoVest Cap. Inc., No. 1:18-cv-05774 (N.D. Ga. Mar. 20, 2023), ECF No. 419.

 [*10]

           The outside investors were trusts and individuals who appear to have invested with Mr. Sinito previously. Technically speaking, there was no “syndication” because there was no formal offering of securities to investors. However, the transaction does resemble a syndicated conservation easement transaction in that 100% of the charitable contribution deductions were intended to flow up from Corning Place through CP Investment to the ultimate investors. A communication from the representative of one investor indicated that he was expecting a $6 million charitable contribution deduction in exchange for a $2 million investment.

 [*12]

           To support the feasibility of this vertical expansion scheme, Sandvick secured a structural engineering report from Hach Engineering (Hach) and a geotechnical report from the David V. Lewin Corp. (Lewin). The latter was charged with testing the soil underneath the Garfield Building to ascertain whether it could support the weight of the proposed 34-story tower. Together with Sandvick, Hach and Lewin were part of a cottage industry in Cleveland that specialized in supplying data for “lost development rights” appraisals of historic buildings. As of the date of trial, Hach and Lewin had worked with Sandvick on 50–60 “vertical expansion” projects, all of which were connected to conservation easements, and none of which was ever built.

 [*15]

           This evidence shows that Millenia and Mr. DeGrandis were working together to supply Mr. Clark with whatever he needed to generate at least a $20 million valuation for the easement. That was apparently because this was the estimate of value Mr. Sinito had previously given his investors. In a February 22, 2016, email Mr. DeGrandis stated that Corning Place “will be using [Mr. Clark’s] original assessment [i.e., a $22,128,045 easement value] to gauge the investor contribution.” According to Mr. DeGrandis, this would create a problem if Mr. Clark’s “preliminary assessment is way off in relation to his actual appraisal.” Mr. Mignogna testified at trial that Mr. DeGrandis told him that “the easement needed to reach $20 million.”

           Mr. Clark ultimately used an estimate of construction costs furnished, not by Mr. Kucera, but by JERA Contractors, Inc. (JERA). JERA was another participant in the Cleveland cottage industry that helped generate appraisals for hypothetical vertical expansions of existing buildings. Sandvick regularly used JERA to estimate construction costs for these fanciful projects, and it recommended JERA to Mr. Sinito. JERA’s fee for making this estimate, as shown by its invoices to Mr. Sinito, was $7,500.

 [*23]

           Respondent contends that the charitable contribution deduction at issue should be denied in its entirety on ten distinct and independently sufficient grounds. We agree with respondent’s bottom line, but we find it sufficient to address just one of his arguments, namely, his contention that Corning Place did not make any charitable contribution during the 2016 tax year for which its return was filed. n10 
    n10 Respondent also contends that the IRS properly disallowed the charitable contribution deduction in its entirety because (1) Corning Place failed to include with its 2016 return the $500 filing fee mandated by section 170(f)(13)(A); (2) the Deed failed to protect the conservation purpose in perpetuity, as required by section 170(h)(5), because it did not protect the entire exterior of the Garfield Building as it existed on the contribution date; (3) Corning Place failed to comply with the “contemporaneous written acknowledgment” requirement of section 170(f)(8); (4) the Form 8283, Appraisal Summary, submitted by Corning Place failed to include all of the information required by the regulations; (5) Corning Place failed to include with its return photographs of the entire exterior of the Garfield Building, as required by section 170(h)(4)(B)(iii)(II); (6) the baseline documentation submitted by Corning Place did not comply with Treasury Regulation § 1.170A-14(g)(5)(i); (7) the appraisal attached to Corning Place’s return, prepared by Mr. Clark, was not a “qualified appraisal” prepared by a “qualified appraiser,” as required by section 170(f)(11)(D) and (E)(ii) and the corresponding regulations; (8) the donation of the easement was not made ”exclusively for conservation purposes” as required by section 170(h)(1)(C); and (9) Corning Place lacked the donative intent required for a charitable contribution under section 170(a)(1). We find it unnecessary to address these arguments because we sustain the disallowance of the deduction in toto for the reason discussed in the text.