The Garfield on Euclid Avenue in Downtown Cleveland was built in 1895 as an 11-story office building. In 2016, while it was getting renovated as apartments, its owner claimed a $22.6 million tax deduction on the property for not building a 34-story addition above it. That apparently improper deduction may prove costly to the owner (Google). CLICK IMAGES TO ENLARGE THEM.
Penalty on The Garfield’s owner TBD in October
A U.S. Tax Court judge in Washington D.C. has agreed with the Internal Revenue Service (IRS) in disallowing a $22.6 million tax deduction claimed by Corning Place Ohio, LLC for not building a 34-story vertical addition on top of its 19th-century Garfield Building, 1965 E. 6th St., in Downtown Cleveland. Senior Judge Albert George Lauber also sustained the IRS commissioner’s imposition of a 40 percent penalty for a “gross valuation misstatement” in seeking the deduction.
Both the IRS and Corning Place have until Oct. 15 to submit their own computations of the amount of tax underpayment and penalty due and either side can request more time if needed, said Sarah Finken, public information officer for the tax court. She said determining the dollar amount due is not an easy task in this complex tax case.
“Neither party fully won and there’s no dollar amount due yet,” Finken said in a phone interview with NEOtrans. “Cases can always be settled out of court and we don’t force people to settle.”
In 2020, the IRS issued to Cleveland-based Corning Place a notice of Final Partnership Administrative Adjustment (FPAA) in disallowing a charitable conservation easement deduction in its entirety. The deduction was sought in 2016 for the 11-story Garfield Building, located at East 6th and Euclid Avenue. Corning Place petitioned the tax court to rebut the IRS.
A conservation easement is a voluntary, legal agreement that limits the permanent uses of the land in order to protect its conservation values. So an owner donates to a recipient nonprofit organization, in this case it was the Historic Gateway Neighborhood Corp., the right to prevent all present and future owners from making changes to an historic property, which would destroy its historic character.
East 6th Street entrance to The Garfield, formerly the home of National City Bank until 2009. The former office building was vacant until it was renovated with apartments in 2017 (apartments.com).
The FPAA said Corning Place had failed to establish that it had made a contribution or gift during its 2016 tax year, that any gift satisfied all legal requirements or that the value of the contributed property was greater than $0. The FPAA also disallowed a $665,500 deduction for a net real estate rental loss.
Corning Place said in filings with the court that it relied on advice from Chicago-based tax consultant RSM US LLP in seeking a charitable tax deduction. “As a matter of policy, we do not comment on litigation,” said Kimberly Bartok, enterprise public relations leader at RSM US LLP.
An e-mail seeking more information, sent by NEOtrans to Corning Place manager Frank Sinito, was opened but otherwise not responded to prior to publication of this article.
Sinito is founder and CEO of Millennia Companies whose affiliates own millions of square feet of downtown buildings including Key Tower and 925 Euclid as well as numerous multifamily properties nationwide. He and his wife also own and operate notable Cleveland-area restaurants like The Marble Room, LockKeepers and Il Venetian.
The tax court issued its opinion last month, summarized in colorful language in a July 17 article headlined as “Attempted double dip on tax credits leads to valuation penalty” by Tax Notes, a tax news reporting service. It wrote “This case presents what might be called the urban version of the conservation easement tidal wave that has deluged this (tax) court.”
Lobby of The Garfield apartments, looking out to the building’s East 6th Street entrance (apartments.com).
The matter began when Corning Place, an Ohio partnership, acquired an historic, vacant office building in 2015 in Downtown Cleveland and proceeded to renovate it into 123 luxury apartments. The Garfield apartments opened in 2017 and leased out relatively quickly. It was originally built in 1895 by two of U.S. President James A. Garfield’s sons.
Among the financing tapped to afford the renovations, the Garfield Building was awarded $5 million of Ohio historic preservation tax credits and $4,171,600 of federal historic preservation tax credits. These were reportedly awarded because the building’s rehabilitation plan, as approved by the National Park Service (NPS) and the State of Ohio, said any exterior changes from its historic appearance would not be “visible from the street.”
“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,” Tax Notes added. “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,” the article continued. “Needless to say, a 34-story addition on top of the building would have been visible from the street.”
A recent picture of The Garfield as seen from the corner of Euclid Avenue and East 6th Street (apartments.com).
The article described “The 34-story tower was a chimerical concept ginned up solely to support a wildly inflated appraisal.” The court said the property did have a conservation easement value in 2016, but estimated it at only $900,000, not $22.6 million as Corning Place had.
NEOtrans reached out to two Ohio tax attorneys to see if a dollar amount due for underpayment and penalties could be determined for this case at this time. Both said it would take a significant amount of time and effort and declined to try.
“Corning Place contends that it reasonably relied on RSM, its tax return preparer, to claim the charitable contribution deduction on the correct tax return,” Tax Notes said in citing the court.
“We disagree,” it continued. “There is no evidence that RSM supplied an opinion, or other form of tax advice, that Corning Place’s return for the taxable year beginning July 7, 2016, was the correct return on which to report the charitable contribution deduction. And whether or not the taxpayer has engaged a return preparer, it is obligated to review the return itself to ensure that the return has been prepared properly.”
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