Del Monte LLC and Continental Downtown Properties, LLC v. Commissioner of Internal Revenue

The stakes could not have been higher when Del Monte LLC and Continental Downtown Properties LLC claimed nearly $40 million in charitable contribution deductions for conservation easements donated to the Historic Preservation Fund. In a sweeping rebuke of aggressive tax planning, the U.S. Tax Court delivered a decisive blow to the taxpayers, disallowing the entire claimed deduction in a pair of consolidated cases. T.C. Memo. 2026-107, filed October 19, 2026, marks another major victory for the IRS in its sustained crackdown on syndicated conservation easement transactions—one that reaffirms the court’s willingness to wield its authority over valuation methodologies and perpetuity requirements with uncompromising rigor.

While the court sided with the IRS on the core issues of perpetuity and valuation, it notably rejected the agency’s arguments regarding mortgage subordination in one case, demonstrating the Tax Court’s independent role in parsing technical compliance from substantive compliance. Chief Judge Urda’s opinion underscores the court’s exercise of judicial power not merely as a reviewer of IRS determinations, but as a gatekeeper of statutory integrity—particularly under Section 170(h), which demands that conservation easements be protected in perpetuity to justify a deduction. The ruling arrives on the heels of the Sixth Circuit’s affirmation in Corning Place Ohio, LLC v. Commissioner, further solidifying judicial skepticism toward inflated valuation claims tied to “lost development rights.” For promoters and taxpayers alike, the message is clear: the Tax Court will not defer to creative accounting when the plain text of the Code and its regulations are unmet.

Transaction Overview: The Syndicated Easement Scheme

The Del Monte and Empire Buildings became the focus of a syndicated conservation easement scheme orchestrated by GBX Associates, LLC (GBX), a firm specializing in structuring transactions to generate outsized tax deductions. The scheme relied on two key components:

1. Acquisition and Renovation: Developers Brad DeHays and Frank Kass acquired the Del Monte Building (1902) and Empire Building (1924) in Columbus, Ohio, for $1.3 million and $1.35 million, respectively. DeHays invested in renovations, increasing the Del Monte Building’s occupancy to 90% by 2016, with an appraised value of $1.85 million.

2. Easement Donation and Valuation: GBX restructured ownership to facilitate the donation of conservation easements to Heritage Ohio. Appraiser Claud Clark III used a "before-and-after" methodology to value the easements at $18.7 million (Del Monte) and $20.7 million (Empire), relying on speculative "lost development rights" studies by Sandvick Architects. These studies proposed hypothetical 19-story residential towers and bilevel apartment complexes, despite no market demand or feasibility.

The transactions were structured through HPF2016, a syndicated fund raising $75 million to finance renovations in exchange for tax deductions. Payments for fees, including those to Heritage Ohio and GBX, were managed through Western Reserve Escrow, LLC.

Legal and Valuation Disputes

The IRS challenged the claimed $39.4 million in deductions on three grounds:

1. Perpetuity Violations: The easements failed to meet Treas. Reg. § 1.170A-14(g) due to defective mortgage subordination and extinguishment clauses. The IRS argued that the agreements did not ensure Heritage Ohio would receive a proportionate share of proceeds if the easements were extinguished, violating the regulation’s requirement for permanent conservation restrictions.

2. Valuation Methodology: The IRS contended that the appraisals relied on speculative "lost development rights" studies, which proposed hypothetical 19-story residential towers and bilevel apartment complexes with no market demand or feasibility. The appraisals were prepared by Claud Clark III, an appraiser with ties to GBX, and relied on feasibility studies by Sandvick Architects, a firm whose president acknowledged its mission was preservation, not speculative development.

3. Lack of Donative Intent: The IRS argued that the transactions were part of a syndicated scheme where investors were promised tax deductions far exceeding their contributions, suggesting the primary purpose was tax avoidance rather than conservation.

Perpetuity and the Illusion of Development Rights: Court Rejects Easement Validity

The Tax Court’s ruling in Del Monte Properties, LLC v. Commissioner and Continental Building Investors, LLC v. Commissioner (T.C. Memo. 2026-5, Oct. 15, 2026) delivers a decisive blow to the taxpayers’ claims that their conservation easements met the statutory perpetuity requirements under § 170(h). The court’s analysis hinges on two core issues: whether the mortgage subordination provisions satisfied Treas. Reg. § 1.170A-14(g)(2), and whether the extinguishment clauses complied with Treas. Reg. § 1.170A-14(g)(6). The court’s resolution—particularly its rejection of the taxpayers’ argument that development rights were somehow segregated from the easement—exercises the Tax Court’s interpretive authority over IRS regulations, even in the face of procedural challenges to those regulations’ validity.

The stakes were nothing short of the deductibility of $40 million in claimed charitable contributions. The taxpayers, Del Monte and Continental, had donated historic preservation easements to Heritage Ohio, Inc., asserting that the easements permanently restricted development rights while preserving the historic façades of two Columbus buildings. The IRS, however, argued that the easements failed the perpetuity requirement because they did not ensure Heritage would receive its proportionate share of proceeds if the easements were ever extinguished. The court’s holding—that the easements were fatally flawed because they carved out development rights in a way that left Heritage with an illusory, non-perpetual interest—disallows the deductions entirely, leaving the taxpayers exposed to $40 million in tax deficiencies plus penalties.

The Statutory and Regulatory Framework: Perpetuity as the Cornerstone of § 170(h)

The perpetuity requirement is the linchpin of § 170(h), which governs deductions for qualified conservation contributions. To qualify for a deduction, a taxpayer must donate a qualified real property interest—defined as a restriction granted in perpetuity on the use of real property for conservation purposes. § 170(h)(2)(C); Belk v. Commissioner, 774 F.3d 221, 228 (4th Cir. 2014). The statute further demands that the conservation purpose be protected in perpetuity, meaning the restriction must be permanent and enforceable against all future owners. § 170(h)(5)(A).

The Treasury Regulations flesh out these requirements in Treas. Reg. § 1.170A-14(g), which imposes two critical conditions for perpetuity:

1. Mortgage Subordination (§ 1.170A-14(g)(2)): If a property encumbered by a mortgage is donated, the mortgagee must subordinate its interest to the easement holder’s right to enforce the conservation purpose in perpetuity. The regulation explicitly states that the mortgagee’s rights must be subordinated to the donee’s enforcement rights, not merely to the easement itself. Palmolive Bldg. Invs., LLC v. Commissioner, 149 T.C. 380, 394–96 (2017).

2. Extinguishment (§ 1.170A-14(g)(6)): If a change in circumstances makes it impossible to continue the conservation purpose, the easement may be extinguished by judicial proceeding, but the donee must receive proceeds equal to the proportionate value of the easement at the time of donation. Treas. Reg. § 1.170A-14(g)(6)(ii). The regulation requires that the donee’s interest be protected in perpetuity, meaning the formula for allocating proceeds must reflect the easement’s value relative to the entire property at the time of donation.

The Sixth Circuit, whose precedent binds the Tax Court in these cases under Golsen v. Commissioner, 54 T.C. 742 (1970), has repeatedly upheld the validity of these regulations. Oakbrook Land Holdings, LLC v. Commissioner, 28 F.4th 700, 705 (6th Cir. 2022), aff’g 154 T.C. 180 (2020). Though the Tax Court later held in Valley Park Ranch, LLC v. Commissioner, 162 T.C. 110 (2024), that Treas. Reg. § 1.170A-14(g)(6) was procedurally invalid under the Administrative Procedure Act, the court adhered to the Sixth Circuit’s precedent under Golsen, finding that the regulation’s substantive validity remained intact for purposes of these cases.

The Mortgage Subordination Provision: A Narrow Victory for the Taxpayers

The IRS challenged Continental’s easement agreement on the ground that its mortgage subordination provision under section 12 of the agreement failed to satisfy Treas. Reg. § 1.170A-14(g)(2). The agreement required Huntington Bank, the mortgagee, to subordinate its rights to Heritage’s enforcement of the conservation purpose. However, the IRS argued that three reservations in the subordination clause undermined the perpetuity requirement:

1. Prior Claim to Leases, Rents, and Profits: The agreement allowed Huntington Bank to retain a prior claim to the property’s income stream until its debt was satisfied.
2. No Liability for Unperformed Obligations: The bank would have no liability for Heritage’s reimbursement claims if it foreclosed.
3. Entitlement to Foreclosure Proceeds: The agreement stated that Huntington Bank would be entitled to all proceeds from a foreclosure sale, despite the mortgage being subordinate to the easement.

The court rejected the IRS’s argument, finding that none of these reservations violated the perpetuity requirement. The court distinguished the case from Palmolive, where the mortgagee’s prior claim to insurance and condemnation proceeds deprived the easement holder of its proportionate share. Here, the court held, Heritage’s easement did not grant it an interest in the property’s income stream, so the bank’s prior claim to rents and profits did not diminish Heritage’s property interest. Similarly, the court reasoned that the bank’s entitlement to foreclosure proceeds did not interfere with Heritage’s enforcement rights, as the new owner would take the property subject to the easement.

The court’s analysis underscores its willingness to interpret the regulation narrowly to uphold the taxpayers’ position on mortgage subordination, even as it later rejects their claims on extinguishment. The decision reflects the court’s exercise of judicial power to parse the nuances of the regulation, distinguishing prior precedent where necessary to reach a result favorable to the taxpayers on this discrete issue.

The Extinguishment Clause: A Fatal Flaw in the Taxpayers’ Easement Agreements

The court’s rejection of the taxpayers’ extinguishment clauses, however, was unqualified. The easement agreements used a formula to determine Heritage’s percentage interest in the properties if the easements were ever extinguished. The formula excluded the value of the development rights—defined as the air rights above and adjacent to the buildings—from the calculation of Heritage’s share. The agreements stated that Heritage would receive its proportionate share of proceeds, but the court found that the carve-out of development rights rendered the allocation illogical and non-perpetual.

The agreements defined Heritage’s percentage interest as follows:

"[Heritage’s] percentage interest in the [respective buildings] shall be determined by dividing the difference between: (a) the fair market value of the Building before the grant of the Easement, excluding the value of the Development Rights; and (b) the fair market value of the Building after the grant of the Easement; by (c) the fair market value of the Building before the grant of the Easement, excluding the value of the Development Rights."

The effect of this formula was stark. Without the development rights carve-out, Heritage’s percentage interest in the Del Monte Building would have been 95% (based on an easement value of $18,742,000 and a building value of $19,727,000). With the carve-out, Heritage’s interest plummeted to 5% (based on an easement value of $52,000 and a building value of $1,037,000). Similarly, Heritage’s interest in the Empire Building dropped from 74% to 5%.

The court held that this allocation violated the perpetuity requirement because it left Del Monte and Continental with 95% of the proceeds if the easements were extinguished, effectively nullifying Heritage’s interest in the development rights. The agreements purported to grant Heritage "all of the Development Rights," but the court found that the allocation formula made this impossible. As the court explained:

"The agreements do not explain how such allocation would be determined, and the agreements use an allocation-of-interests formula that cannot possibly include the development rights. Section 9.1 of the agreements states that the ‘Grantor’s percentage interest in the Building shall be the difference between 100% and [Heritage’s] percentage interest.’ Recall that Heritage’s ‘percentage interest’ specifically excludes the development rights and therefore only reflects Heritage’s interest in the building façades. Thus, the agreements allocate to Del Monte and Continental all of the interest in the buildings left over after allocating the façade interests to Heritage."

The court further rejected the taxpayers’ argument that Ohio law would somehow protect Heritage’s interest, noting that the taxpayers failed to cite any applicable law or explain how such protection would operate. Instead, the court held that the extinguishment clauses were fatally flawed because they did not ensure Heritage would receive its proportionate share of proceeds, as required by Treas. Reg. § 1.170A-14(g)(6).

The Court’s Exercise of Judicial Power: Interpreting the Regulation Despite Procedural Challenges

The court’s analysis of the extinguishment clauses is particularly noteworthy for its assertion of interpretive authority over the IRS regulation. The taxpayers argued that the court should disregard the Sixth Circuit’s precedent in Oakbrook Land Holdings because the Tax Court had later held in Valley Park Ranch that Treas. Reg. § 1.170A-14(g)(6) was procedurally invalid under the Administrative Procedure Act. The court, however, adhered to Golsen, finding that the Sixth Circuit’s decision bound it to uphold the regulation’s substantive validity.

The court’s reliance on Oakbrook Land Holdings demonstrates its willingness to exercise judicial power to interpret the regulation independently, even as it acknowledges the regulation’s procedural infirmity. The court’s reasoning reflects a deliberate choice to prioritize the Sixth Circuit’s precedent over its own later holding, underscoring the Tax Court’s role as an independent arbiter of tax law, capable of interpreting regulations in a manner that aligns with appellate precedent.

The Broader Implications: A Warning to Syndicated Easement Promoters

The court’s holding sends a clear message to promoters of syndicated conservation easements: perpetuity is not a technicality. The IRS and the courts will scrutinize easement agreements with surgical precision, particularly where development rights are involved. The court’s rejection of the taxpayers’ extinguishment clauses—despite their meticulous drafting—demonstrates that form over substance will not suffice. Taxpayers and their advisors must ensure that easement agreements fully and unambiguously convey the donee’s proportionate interest in all aspects of the property, including development rights, or risk disallowance of their deductions.

For future taxpayers, the lesson is stark: if the easement does not truly restrict development in perpetuity, the deduction is illusory. The court’s holding in this case is a powerful tool for the IRS in its ongoing crackdown on abusive conservation easement transactions, and it signals that the Tax Court will not hesitate to exercise its authority to disallow deductions where the perpetuity requirement is not met.

Court Ruling: Valuations Rejected as Speculative

The Tax Court rejected the $20 million easement valuations, finding them based on speculative "lost development rights" studies with no market support.

Key Findings:

1. Speculative Methodology: The petitioners’ expert, Kevin Kernen, relied on a discounted cash flow (DCF) analysis projecting income from hypothetical 19- and 23-story residential towers. The court found this "highly speculative" and "prone to error," noting it was premised on "imaginary income and costs of buildings that do not and would not ever exist."

2. Market-Based Valuation: The Commissioner’s expert, Charles Brigden, used comparable sales and income approaches grounded in actual market data. Brigden identified five comparable transactions for each property, ranging from $1.297 million to $3.625 million, and determined before-easement values of $1.28 million (Del Monte) and $4.54 million (Empire).

3. Principle of Substitution: The court held that the petitioners’ valuations ignored market realities, including the availability of alternatives such as ground-up development or adaptive reuse at a fraction of the claimed values.

4. Actual Sales Data: The court noted that the Del Monte Building was purchased for $1.3 million in December 2015 and appraised at $1.85 million in August 2016, values far below the petitioners’ claimed easement values.

Implications:

The ruling underscores that valuation methodologies must be grounded in market realities, not speculative projections. Taxpayers cannot inflate deductions by relying on unrealistic assumptions.

Penalties Imposed for Gross Valuation Misstatements

The Tax Court imposed a 40% gross valuation misstatement penalty under § 6662(h) and a 20% accuracy-related penalty under § 6662(a) on the partnerships, finding their easement valuations grossly overstated and their deductions invalid.

Key Findings:

1. 40% Penalty Upheld: The partnerships claimed easement values of $18.7 million (Del Monte) and $20.7 million (Continental), but the court determined the actual values were $200,000 and $550,000, respectively. The overstatements exceeded 200% of the correct values by 9,370x (Del Monte) and 3,756x (Continental), qualifying as "gross" under § 6662(h).

2. Reasonable Cause Defense Rejected: The partnerships argued they relied on professional advice from GBX and tax preparers, but the court found GBX was not an independent advisor and the partnerships failed to disclose all relevant facts. The court held that the reasonable cause defense is not available for gross valuation misstatements.

3. 20% Penalty for Other Disallowed Deductions: The court upheld a 20% penalty for the portions of the underpayment not attributable to the valuation misstatement, including disallowed deductions for syndication fees (GBX) and perpetuity violations.

Implications:

The ruling demonstrates the Tax Court’s willingness to impose severe penalties for abusive tax planning. Taxpayers cannot rely on promoter-driven valuations or disregard regulatory requirements without facing financial consequences.

Conclusion: Compliance is Non-Negotiable

The Tax Court’s decision in Del Monte and Continental serves as a definitive warning to taxpayers and promoters involved in syndicated conservation easement transactions. The court’s ruling disallowed the $39.4 million in claimed deductions, upheld severe penalties, and rejected speculative valuation methodologies and perpetuity violations.

Key Takeaways:

1. Perpetuity Compliance: Easement agreements must ensure the donee receives a proportionate share of proceeds in all scenarios, including extinguishment. Form over substance will not suffice.

2. Market-Based Valuations: Valuations must be grounded in actual market data, not speculative "lost development rights" studies. The court rejected appraisals based on hypothetical towers with no market demand or feasibility.

3. Severe Penalties: The court upheld a 40% gross valuation misstatement penalty and a 20% accuracy-related penalty, signaling that the Tax Court will not tolerate abusive tax planning.

4. IRS Crackdown: The decision aligns with the IRS’s aggressive enforcement posture, including IRS Notice 2017-10, which designated syndicated conservation easements as "listed transactions."

Final Warning:

Taxpayers and promoters must comply with the plain text of the Internal Revenue Code and Treasury Regulations. The era of speculative, promoter-driven easement transactions is over. Compliance with the tax laws is non-negotiable.