Del Monte: Historic Façade Easements Failed Perpetuity Because the Deeds Carved Out Development Rights

A historic façade easement deduction fails if the deed does not protect the donee’s share of the property in perpetuity, and a carve-out in the extinguishment-proceeds clause sank two of them here. In Del Monte, LLC v. Commissioner, T.C. Memo. 2026-107 (Oct. 19, 2026), Chief Judge Urda denied about $39 million in easement deductions for two Columbus, Ohio office buildings, valued the easements at $200,000 and $550,000, and sustained 40% gross valuation misstatement penalties.

The consolidated TEFRA partnership cases, Docket Nos. 3411-21 (Del Monte) and 6084-21 (Continental Downtown Properties), concern 2016 returns.

Two office buildings and $39 million in claimed deductions

Del Monte owned the four-story Del Monte Building, built in 1902, which it bought in December 2015 for $1.3 million. Continental had owned the eight-story Empire Building since 1988. In December 2016 the sponsor, GBX Associates, restructured both for its 2016 investment fund: Del Monte Holdings, a GBX-formed entity in which the fund held 54.26%, bought 98% of Del Monte, and the fund itself acquired 95% of Continental.

On December 27, 2016, both owners recorded easements in favor of Heritage Ohio covering each building’s façade and the air space above and beside it, called the development rights. After the gifts, an architecture firm drew residential towers of 16 to 23 stories atop the buildings. Relying on those plans, appraiser Claud Clark valued the easements at $18,742,000 and $20,658,000, and the partnerships claimed those amounts. Nearly all of each figure, $18,690,000 and $20,279,000, was attributed to the development rights.

Why the easements were not protected in perpetuity

Section 170(h) requires both a restriction “granted in perpetuity” and a conservation purpose “protected in perpetuity.” Under Treasury Regulation § 1.170A-14(g)(6)(ii), if a court extinguishes the easement, the donee must be entitled, on a later sale, exchange or involuntary conversion, to proceeds at least equal to the easement’s proportionate value at the time of the gift.

Section 9.1 of each deed set Heritage’s percentage interest by dividing the easement’s value by the building’s value, both measured “excluding the value of the Development Rights.” Using the appraisal figures, Heritage’s share would have been 95% of the Del Monte property and 74% of the Empire property if the development rights counted. With them excluded, it fell to 5% of each. The owners would keep 95% of any extinguishment proceeds while deducting roughly $20 million each for giving those rights away.

The deeds did say Heritage would receive any proceeds “specifically allocated to the Development Rights,” but they gave no method for that allocation. Because the owners’ share was defined as 100% minus Heritage’s façade share, nothing was left to allocate. As the court put it, “you cannot end up with a number greater than 100% of the property’s value.” The owners’ promise to cover any shortfall reached only the façade percentage.

The partnerships mainly argued that the Tax Court had held the proceeds regulation procedurally invalid in Valley Park Ranch, LLC v. Commissioner, 162 T.C. 110 (2024). But the Sixth Circuit, where an appeal would ordinarily go, upheld the regulation in Oakbrook Land Holdings, LLC v. Commissioner, 28 F.4th 700 (6th Cir. 2022), and under Golsen v. Commissioner, 54 T.C. 742 (1970), the Tax Court follows an appeals court decision squarely in point. It also held that, regulation aside, the statute requires the development-rights restriction to be protected in perpetuity. The partnerships had not shown that it was, and that restriction was “the lion’s share of the claimed tax deductions.”

The challenges the IRS lost

Huntington Bank’s mortgage subordination was valid although the bank kept a prior claim to rents and foreclosure-sale proceeds; unlike the lender’s priority over insurance and condemnation proceeds in Palmolive Building Investors, LLC v. Commissioner, 149 T.C. 380 (2017), those terms did not interfere with Heritage’s easement. A reserved right to rehabilitate under federal standards, with National Park Service or state approval, did not impair the preservation purpose. And Mr. Clark’s appraisals, though lacking all credibility, were qualified appraisals because their flaws went to weight, not consistency with appraisal standards, and he was a qualified appraiser because the court saw no evidence that either manager colluded to inflate them.

Valuation in brief: $200,000 and $550,000

A failed easement can still carry a penalty, so the court valued both. The court found the towers neither physically possible nor financially feasible: no soil was sampled under either building, the cost estimates were one page each, and there was no market demand for towers on historic buildings. Each building’s highest and best use was its current use.

It adopted the IRS expert’s reconciled before values, weighted to comparable sales and income: $1.3 million, which the Del Monte Building’s purchase price a year earlier supported, and $4.75 million. His after values, $1.1 million and $4.2 million, were lower than the partnerships’ expert’s, so the court treated them as concessions, leaving easements worth $200,000 and $550,000.

Penalties and the other deductions

The claimed values were overstated by more than 9,000% and 3,600%, so the 40% gross valuation misstatement penalty under section 6662(h) applied to the underpayment from value claimed above $200,000 and $550,000. Section 6664(c)(3) makes reasonable cause unavailable for a gross valuation overstatement of charitable deduction property.

The partnerships kept their $60,000 cash gifts to Heritage and their appraisal, study and application fee deductions, but GBX’s fees, $670,000 and $784,000, were nondeductible syndication costs under section 709. A 20% penalty applied to the rest of the underpayments, including the portion tied to the $200,000 and $550,000 lost to the perpetuity failure. Reliance on advice failed: the partnerships showed no ordinary business care on the proceeds terms, and GBX “was the driving force behind both transactions.”

Result, status and what the case means

The court decided on the preponderance of the evidence, so the burden of proof did not matter. Decisions will be entered under Rule 155; an October 23 docket order sets January 19, 2027, for the parties’ computations.

Our reading: In a façade-easement deed, the extinguishment-proceeds formula has to cover every right the deduction is based on. Related: our Watson Lake analysis of a land-easement valuation case decided the same day, and our façade easement deed guide on what perpetuity requires.