1 4 9 T.C. No . 1

UNITED STATES TAX COURT
RERI HOLDINGS I, LLC, J EFF BLAU, TAX M ATTERS PARTNER, Pet i t i o n er v . COM MISSIONER OF INTERNAL REVENUE, R es p o n den t

Do ck etNo . 9 3 2 4-0 8. Fi l edJ u l y 3 , 2 0 1 7.
PS, a p art n ers h i p , p ai d$ 2 .9 5 m i ll i on i n M arch 2 00 2 t o acq u i re a rem ai n d er i n teres ti n p ro p ert y . Th e ag reem en tth atcreat edth e rem ai nd er i n t eres tp ro v i dedco v en an t s i n t en d edt o p res erv e th e v al u e o f t h e s ub jectp ro pert y

b u tal s o l i m it edthe rem ed y av ai l ab l e t o the h o l d er o f t he rem ai n d er i n t eres tfo r a b reach o f t h os e co v en an t s t o i m m ed i at e p o s s es s i on o f th e p ro p ert y ; i n n o ev en two u l dth e h o l d er o f th e co rres p on d i n g t erm

i n t eres tb e l i ab l e fo r d am ag es t o th e h o ld er o f th e rem ai n d er i n t eres t. OnAu g . 2 7 , 2 0 0 3 , PS as s i g n edth e rem ai n d er i n t eres tt o U, a u n i v ers i ty . Oni t s 2 0 0 3 Fo rm 1 0 6 5, U.S. Retu rn o f Part n ers h ip In co m e, PS cl ai m ed a d edu ct i o n u n d er I.R.C. s ec. 1 7 0 (a)(1 ) o f $ 33 ,0 19 , 0 0 0 . Th e Fo rm 8 2 8 3 , No ncas h Ch ari tab l e Co n tri bu t i o n s, th at PS at t ach edt o i t s retu rnp ro v i d es th e d at e an d m an n er o f i t s acq u i s i t i o n o f t h e co nt ri b u t ed rem ai n d er i n teres tb u tl eft b l an k t h e s p ace fo r t h e " Do n or's co s t o r o th er ad ju s tedb as i s "
. Hel d : PS' o m i s s i o n fro m i t s Fo rm 8 2 8 3 o f i ts co s to r o th er ad ju st edb as i s i n the co n tri b u t edrem ai n d er i n t eres tv i o l at ed th e- 2
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s ub s t an t i at i o n req u irem en to f s ec. 1 .1 7 0 A -1 3 (c)(4 )(i i )(E), In co m e Tax Reg s . Hel d , fu rt h er, b ecau s e PS' d is cl os u re o f i t s co s t o r o th er b as i s i n th e co nt ri b ut edp ro pert y

wo u ldh av e al ert edR t o a p o t en t ial o v erv al u at i o n o f t h atp ro p ert y , o m i s s i o n o f t hati n fo rm at io n p rev en t ed th e Fo rm 8 2 8 3 fro m

ach i ev i n g i t s i n t en d edp u rp o s e; the o m i s s i o n th u s can n o tb e ex cu s edo n th e g ro u n d s o f s ub s t an t i al co m pl i an ce. Hel d , fu rt h er, PS' fai lu re t o co m p l y , ei th er s tri ct l y o r s ub s t an t i al l y , wi th th e requ i rem en t s o f s ec. 1 .1 7 0 A-1 3 (c)(2 ), In co m e Tax Reg s . , requi res d en i al i n fu l l o f i t s cl ai m edch ari t ab l e co n tri b u t i o n d edu ct i o n . Hel d , fu rt h er, b ecau s e o f t h e l i m i tat i o n o n rem ed ies av ai l ab l e t o th e h o l d er o f t h e rem ai n d er i n t eres tfo r b reach es o f p ro t ect i v e co v en an t s , th e ag reem en tth atcreat edth ati nt eres td i dn ot p ro v i d e ad equ at e p ro t ect i on t o i t s h o l der, fo r p u rp o s es o f s ec. 1 .7 5 20
- 3 (b )(2 )(i i i ), In co m e Tax Reg s . ; th e s tan d ardactu ari al fact o rs p ro v i d ed u n d er I.R.C. s ec. 7 5 2 0 thu s d o n o t ap p l y i n v al u i ng th e rem ai n d er i n t eres t ; i n s t ead , th e v al u e o f t hati n t eres t i s i t s " actu al fai r m ark et v al u e" , d et erm i n edwi th ou treg ardt o I.R.C. s ec. 7 5 2 0 , o n th e b as i s o f al l o f t h e fact s an d ci rcu m s t an ces . Sec. 1 .7 5 2 0 -3 (b )(1 )(i i i ), In co m e Tax Reg s . Hel d , fu rt h er, o n th e b as i s o f al l o f t h e fact s an dci rcu m s t an ces , th e rem ai n d er i n t eres t th atPS as s i g n edt o U o n Au g . 2 7, 2 0 0 3 , h ada fai r m ark etv al u e o n th atd at e o f $ 3 , 4 6 2 ,8 8 6
. Hel d , fu rt h er, b ecau s e t h e $ 3 3,0 1 9 ,0 0 0 v al u e t h at PS as si g n ed t o th e rem ai n d er i n teres ti ttran s ferred t o U i s m o re t h an 4 0 0 % o f t h at i n t eres t 's actu al fai r m ark etv al ue, PS' cl ai m edch ari t ab l e co n tri b u t i on d edu ct i o n res u lt edi n a g ro s s v al u at i o n m i ss t at em en t . I.R.C. s ec. 6 6 6 2 (e)(1 )(A), (h )(2 ). Hel d , fu rt h er, an y

u n d erp aym en t res u lt i n g fro m the d i s al l o w an ce o f PS' cl ai m edch ari t ab l e co n tri b u t i o n d edu ct i o n wo u l d- 3
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b e " at tri bu t ab le t o " a g ro s s v al u at i o n m is st at em en tt o t h e ex t en t th e u n d erp aym en t rel at es t o th e d i s al l o wan ce o f th atp o rt i o n o f t h e d edu ct i o n th at ex ceed s $ 3 ,4 6 2 ,8 8 6 . AHG In v s ., LLC v
. Co m m is s i o n er, 1 4 0 T.C. 7 3 (2 0 1 3 ). 8 8 5 In v . Co . v . Co m m i s s io n er, 9 5 T.C. 1 5 6 (1 9 90 ), o v erru led
. Hel d , fu rt h er, PS d i dn o t m ak e a g oo d -fai th i n v es t i g at i o n o f th e v al u e o f t he p ro p ert y

s ub ject t o th e rem ai n d er i n t eres tan dthu s d id n o th av e reas o n ab l e cau se fo r, o r acti n g o odfai th wi th res p ectt o, i ts cl ai m o f a ch ari t ab l e co n tri b u t i o n d edu ct i on th at res u lt ed i n a g ro s s v al u at i o n m i s s t at em en t . I.R.C. s ec. 6 6 6 2 (c)(2 )(B).

St ep hen D. Gardn er, Kat h l een M . Pak en h am , Cl i n t E. M as s en g il l, Adri an a M . Lo faro , an dM i ch ael J . Berk o vi t s , fo r p et i t i on er. Trav i s Van ce, III, Kri s t en I. Ny g ren , J o h n M . Al t m an , Leo n St
. Lau ren t , W i ll i am D. Wh i t e, an dTat ian a Bel en k ay a, fo r res p o n d en t .
HALPERN, Ju d g e: Th i s cas e i s b efo re u s fo r rev iew o f a n o t i ce o f fi n al p art n ers hi p ad m i n i st rat i v e ad ju s t m en t(FPAA). On i t s Fo rm 1 0 65 , U.S. Retu rn o f Part ners h i p In co m e, fo r t ax y ear 2 0 0 3, RERI Ho l d i n g s I, LLC (RERI) cl ai m eda ch ari t ab le co n tri b u t i on d educt i o n o f $ 3 3 ,0 1 9 ,0 00 1 fo r t h e tran s fer o f a n on cas h
as s et t o t h e Reg en t s o f t h e Un i v ers i ty o f M i ch i g an (Un i v ers i ty ). Th e FPAA, d at ed M arch 2 6 , 2 0 0 8 , redu ced RERI's cl ai m ed ch ari t ab l e co n tri b u t i o n d edu ct io n o n th e

1 W e ro u n dal l d o l l ar am ou n t s t o th e n eares td o ll ar.- 4
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g ro u ndth atth e co n tri b u t edp ro p ert y was wo rth o n l y

$ 3 , 9 0 0 ,0 0 0 . Th e FPAA al s o d et erm i n edth atRERI's cl ai m edd educt i o n res u l t edi n a " s ub s tan t i al v al u at i o n
m i s s t at em en t" wi th in th e m ean i n g o f s ect i o n 6 6 6 2 (e)(1 ). 2 In an am en d m en tt o h i s
an s wer, res p o n d en tas sert ed th atRERI was n o ten t i t l edt o an y d edu ct i o n fo r i t s
co n tri b u t i o n b ecau s e t h e t ran s act i o n o f wh i ch i twas a p art was a s h am fo r t ax p u rp os es o r l ack ed eco n om i c s ub s t an ce o r, al t ern at i v el y , thatRERI's d edu ct i o n
s h o u ldb e l i m i t edt o th e am o un t , $ 1 ,9 40 ,0 0 0 , th at th e Un i v ers i ty real i zedo n i t s
s al e o f t he co n tri b u t edp ro p ert y . Ina s eco ndam en dm en tt o h is an s wer, res p o n d en t
as s ert ed th atRERI's cl ai m ed d edu ct i o n res u l t ed i n a " g ro ss v al u at i o n
m i s s t at em en t" wi th in th e m ean i n g o f s ect i o n 6 6 6 2 (h )(2 ). In a p et i t i o n fi l edAp ri l 2 1 , 2 0 0 8 , p et i t i o n er as s i gn s erro r t o res p o n den t 's ad ju st m en to f RERI's cl ai m ed ch ari t ab le co n tri b u t i on d educt i o n an dt o h i s as s ert i o n o f p en al t i es . FINDINGS OF FACT Th e Hawt h o rn e Pro p erty

an dth e AT&T Leas e In t erg at e.LA II LLC (In t erg at e), t h e o wn er o f l an dan da web h o s ti n g faci li ty i n Hawth o rn e, Cal i fo rn i a (Hawt h orn e p ro pert y ), en t eredi n t o an i n du s tri al l eas e ag reem en t d at edOct o b er 1 2 , 2 0 0 0 , u n d er wh i ch i tl eas edthe Hawt h o rn e

2 Al l s ect i o n referen ces are t o th e In tern al Rev en u e Co d e i n effect fo r 2 0 0 3 , an d al l Ru l e referen ces are t o th e Tax Co u rtRu l es o f Pract i ce an dPro cedure, u n l es s o th erwi se i n d i cat ed
.- 5
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p ro p erty t o AT&T Co rp . (AT&T). Th e AT&T l eas e h adan i n i t i al t erm o f 1 5 .5 y ears b u tp ro v id edAT&T wi th o p t i o ns t o ren ew t h e l eas e fo r s u cces s i v e 5 -y ear p eri o d s . Th e l eas e p ro v i d edfo r fi x edren t s du ri ng th e i n it i al t erm atrat es th at i n creas edfro m

$ 1 3 .5 0 p er s quare fo o tp er y ear t o $ 1 9 .6 0 p er s qu are fo o tp er y ear. Becau s e th e Hawt h o rn e p ro p ert y co n s i s t s o f 2 8 8 ,0 00 s qu are feet , the s ch edu l ed
an n ual ren tu n d er th e AT&T l eas e ran g ed fro m $ 3 ,8 8 8,0 0 0 ($ 1 3.5 0 × 2 8 8 ,0 0 0 ) t o $ 5 ,6 4 4 ,8 0 0 ($ 19 .6 0 × 2 8 8 ,0 0 0 ). If AT&T were t o ren ew t h e l eas e, t h e ren t du ri n g each ren ewal p eri o dwo u l dequ al th e t h en -m ark etrat e fo r s i m i l ar p ro pert y , s ub ject t o a m in i m

u m o f $ 1 4 p er s qu are fo o tp er y ear. Hawt h o rn e's Acqu i s i ti o n o f t h e Hawt h o rn e Pro p ert y In J u l y 2 0 0 1, RedSea Tech I, In c. (Red Sea), en t eredi n t o an ag reem en t wi th In t erg at e t o acq ui re t h e Hawt h o rn e p ro p ert y . OnFeb ru ary 4 , 2 0 0 2, RedSea
as s i g n edt o RS Hawt h o rn e, LLC (Hawt h o rn e), i t s ri g h t , t it l e an di nt eres ti n an dt o i t s co n tract wi th In t erg at e. OnFeb ru ary 7 , 2 0 0 2 , Hawth o rn e acq u ired th e Hawt h o rn e p ro p ert y fro m In t erg at e, s ub

j ect t o th e AT&T l eas e, fo r $ 4 2,3 5 0 ,0 0 0. Hawtho rn e fi n an cedi t s acq u is i t io n wi th a l o an fro m BB&T Ban k(BB&T) o f $ 4 3 , 6 7 1 ,7 3 9
.- 6
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Th e Bo n z/ REA Ap p rai s al In an ap prai s al d at ed Au g u s t3 0 , 2 0 0 1, p rep ared fo r BB&T i n co nn ect i o n wi th i t s l o an t o fi n an ce Hawt h orn e's acq u i si t i o n o f th e Hawt h o rn e p ro pert y , Bo n z/ REA, In c. (Bo n z/ REA), co n cl u d ed th atth e Hawt h o rn e p ro pert y was wo rt h $ 4 7 m i l l i o n as o f Au gu s t1 6 , 2 0 0 1 . Bo n z/ REA b as edi t s co n cl u s i o n i n p arto n a d i s co u n tedcas hfl ow an al y s i s . In m ak i n g i ts cas h fl o w p ro ject i o n s , Bo n z/ REA u s edth e s ch edu l ed ren t p ro v id edi n th e AT&T l eas e th ro u g h th e en do f i ts i n it i al t erm . Bo n z/ REA
es t i m at edth atm ark etm on th l y ren tatth e o ut seto f t h e AT&T l eas e was $ 1 .2 9 p er
s qu are fo o tan dap pl ieda m u l t i p l i er o f 2 .7 5 % t o p ro

jectm ark etren tfo rward
. Th u s, Bo n z/ REA es t i m at edth at , i n th e fi rs ty ear fo l l o w i ng th e en do f t h e i n i t i al t erm o f t h e AT&T l eas e, m ark etren two u l db e $ 1
. 9 4 p er s qu are fo o t . Bo n z/ REA d i s co u n tedi t s p ro

ject edcas h fl ows thro u g h th e en do f t h e i n i t i al l eas e t erm ata rat e
o f 9 .5 % an dd i s co u n t edi t s p ro ject edcas h fl ows fo r t h e fi rs ttwo y ears fo ll o wi n g th e en do f t h at t erm

at 1 2 %. Fo r t h e 1 7 th an d fi nal y ear o f i t s p ro ject i o n s (t h e
s eco n dy ear fo ll o wi n g th e en do f t he i n i t i al l eas e t erm ), Bo n z/ REA i n cl ud edi n
cas h fl o w a rev ers io n v al u e d et erm i n edb y cap i t al i zi n g i t s p ro

ject edy ear 1 7 n et
o p erat i n g i n co m e at1 0 .5 %. Bo n z/ REA's p ro ject edy ear 1 7 n eto p erat i n g i n co m e
o f $ 6 , 4 0 5 ,6 7 7 i s th e d i fferen ce b et ween p ro ject edg ro s s i n co m e o f $ 7 , 2 1 7 ,7 8 7 an d- 7
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p ro ject edo p erat i n g ex pen s es o f $ 81 2 ,1 1 0. Th e p ro ject edg ro s s i n co m e o f $ 7 ,2 1 7 ,7 8 7 i n cl u d es as s u m edex p en s e rei m b u rs em en t s o f $ 6 11 ,9 8 8
. Creat i o n o f t h e SM I Wh en Hawth o rn e acq u i redth e Hawt h o rn e p ro p ert y , RS Hawt h orn e Ho l di n g s , LLC (Ho l d i ng s ), was Hawth orn e's s ol e m em b er an dRedSea was th e
s o l e m em b er o f Ho l d in g s . Aft er Hawt h o rn e acq u i red th e p ro p ert y , u n d er an
as s i g n m en td at edFeb ru ary 7 , 2 0 0 2 (As si g n m en t ), RedSea as s ig n edi ts m em b er i n t eres ti n Ho ld in g s t o RJ S Real ty Co rp . (RJ S), s ubjectt o RedSea's res erv at i o n o f
an es t at e fo r y ears wi th a s ch edu l edex p irat i o n d at e o f Decem b er 3 1 , 2 0 2 0
. 3 (Fo r
co n ven i en ce, fo ll o wi n g th e p art i es ' l ead , we wi l l refer t o the t erm o f y ears i n t eres t i n the s o l e m em

b er i n t eres t i n H o l d i n g s creat edb y th e As s i g n m en tas th e TOYS i n t eres tan dthe co rres p o n d in g rem ai n d er i n t eres tas th e s u cces s o r m em b er i n t eres t , o r SM I.)

3 Onb ri ef, res p on d en t d i s p u t es th atRedSea was th e s o l e m em b er o f Ho l di n g s o n Feb ru ary

7 , 2 0 0 2, an dth atRed Sea as s i g n edt o RJ S a rem ai n d er i n t eres ti n th e s o l e m em

ber i n teres ti n Ho ld in g s. Po i n t i n g t o al l eg edd is crep an ci es i n d o cu m en t at i o n i n cl u d edi n th e reco rd , res p o n d en tcl ai m s th at a d i fferen ten t i t y o wn edth e s o l e m em

ber i n t eres ti n Ho l di n g s o n th atd at e an das s i g neda rem ai n d er i n t eres tt o a d i fferen t as s i gn ee. Res p o n d en t ' s cl ai m s o n b ri ef co n fl i ctwi th h i s s t ip u l at i o n , b as edo n the As s i g n m en t , th at" RedSea as s i g n edi ts m em bers h i p i n t eres ti n Ho ld in g s s ub

jectt o res erv at i o n o f an es t at e fo r y ears t o RJ S o n o r ab o u t Feb ru ary 7 , 2 0 0 2 "
.- 8
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A b reach b y

RedSea o f co n d i t i o ns s p eci fi edi n th e As si g n m en two u l dh av e req u i redi t s earl y

fo rfei tu re o f t h e TOYS i n t eres t . On e o f t h e s p eci fi edco n d i t i o n s req u i redRedSea t o co m

p l y wi th th e AT&T l eas e an dthe BB&T l o an an dt o cau s e Ho l di n g s an dHawth o rn e t o co m p l y wi th tho s e ag reem en t s . Inad d it i on , th e As s ig n m en tg en eral l y

p ro h i b i t edRedSea fro m cau si ng o r p erm i t t i n g Ho l d i n g s o r Hawt h o rn e t o i n cu r m at eri al o b l i g at i o n s . Itp ro h i b i t ed RedSea fro m cau s i n g o r p erm i t t in g an y

tran s fer o f t h e Hawt h o rn e p ro p ert y o r t h e m em

b er i n teres ti n Hawt h o rn e o r t h e i m

p o si t i o n o f an y

l i en o r en cu m

b ran ce o n ei th er. An di t req u i redRedSea t o t ak e al l reas o n ab l e act i o n s n eces s ary t o p rev en tHo l d i ng s o r Hawt h o rn e fro m

co m m i t t i n g was t e i n res p ecto f t h e Hawt ho rn e p ro p ert y . Th e As s i g n m en tp ro vi d es that , i n th e ev en to f b reach b y RedSea o r i t s
s u cces s o rs , th e reco u rs e o f RJ S o r i t s s u cces s o rs " s hal l b e s tri ct l y l i m i t edt o " th e TOYS i nt eres t . Itfu rt h er p ro v id es : " In n o ev en tm ay an y rel i ef b e g ran t edth at i m p o s es o n th e o wn er fro m

t i m e t o t i m e o f t h e * * * [TOYS i n teres t ] an y p ers o n al l i ab i l i ty , i t b ei n g u n d ers t o o d th atan y an d al l rem ed i es fo r an y

b reach o f t he p ro v is i o n s h ereo f s hal l b e l i m i t edt o s u ch o wn er's ri gh t , t i tl e an di n t eres ti n an dt o
* * * [t h e TOYS i n teres t ]
. " 4

4 So o n aft er as s i gn i n g the SM I t o RJ S, RedSea co nt ri b u t edi ts ret ai n ed TOYS i nt eres tt o a p art n ers hi p . Th e reco rdp ro v i des n o i n d i cat i o n o f s ub seq u en t (co n ti n u ed ...)- 9
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By i t s t erm s , th e As s ig n m en t i s g o v ern edb y th e l aw o f New Yo rk . Th e As s ig n m en td o es n o t p u rp o rtt o i m p o s e o n th e TOYS h o l d er a fi du ci ary du ty o wed t o the SM I h o l d er. RERI's Acqu i s i t i o n an dAs s i g n m en t o f t h e SM I RERI en t eredi n t o an ag reem en twi th RJ S d at edas o f M arch 2 2, 2 0 0 2 , th at p ro v id edfo r RJ S' s al e o f t h e SM I t o RERI fo r $ 2 ,9 5 0 ,0 0 0. Reci tal s t o that ag reem en ts t at e t h atHo l d i n g s co n t i n u edt o o wn 1 0 0% o f t h e b en efi ci al i n t eres ti n Hawt h o rn e an dHawth o rn e co n t i n u edt o o wn th e Hawt h orn e p ro p ert y . Inan
as s i g n m en td at edas o f M arch 2 5 , 2 0 0 2 , RJ S as s i g nedth e SM I t o RERI. OnAu gu s t2 7 , 2 0 0 3, RERI as s i g n edth e SM I t o th e Un i v ers i ty . Inco n tras t t o the ag reem en tu n d er wh i ch RERI acq ui redth e SM I, i t s as s i g nm en t o f t h e SM I t o the Un i v ers i ty

d oes n o ti ncl u d e reci t al s t o th e effect th at , o n th e d at e o f t h e
as s i g n m en t , Ho l d in g s co n t i nu edt o o wnth e s o l e m em b er i n t eres ti n Hawth o rn e
an d Hawt h o rn e co n t in uedt o o wnth e Hawt h o rn e p ro p ert y . Ho l di n g s ' tran s fer o f i t s i n t eres ti n Hawth o rn e, h owev er, o r Hawt h o rn e's tran s fer o f t h e Hawth o rn e

4 (...co n t in u ed ) tran s fers o f t h e TOYS i n t eres t . Wh i l e we h av e n o reas o n t o b el i ev e t h atas s i g n ees o f t h e TOYS i n t eres twere n o tb o u n d b y th e co n d i t i o n s p ro v i d edi n th e As s ig n m en t , b ecau s e o f t h e ex cu l p at ory p ro v i s i o n l i m i t i ng rem ed i es fo r b reach o f th o s e co n d i t i o n s , th e ex t en tt o wh i ch th ey were b i n di n g o n th e o wn er o f t h e TOYS i n t eres tas o f t h e d at e o f RERI's g i ft o f t h e SM I t o t h e Un i v ers it y i s i m m at eri al t o o u r d is p o s i t i o n o f t he cas e.- 1 0 -

p ro p erty wo u l dh av e (1 ) b reach edco nd i ti o n s p ro v i d edi n th e As s i gn m en t th at creat ed the SM I, an d(2 ) cau s eda m erg er o f t h e TOYS i nt eres t an d t h e SM I. Becau s e RERI's as s i gn m en tt o th e Un i v ers i ty i d en t i fi es th e t ran s ferred p ro pert y as th e SM I rat h er t han a fee s i m p l e i n t eres t i n th e s ol e m em b er i n t eres ti n Ho l d i n g s , i t fo l l o w s th at , o n t h atd at e o f t h atas s i g n m en t , Ho l d i n g s co n t i n u edt o o wnth e s o l e
m em b er i n t eres ti n Hawt h o rn e an dHawth o rn e co n t i n u edt o o wn th e Hawt h o rn e p ro p erty . Fo r th e s am e reas o n, i tfo l l o ws th atHo l di n g s h adn o m at eri al l i ab i l i t i es
o n Au g u s t2 7 , 2 00 3 , an dHawth o rn e h ad n o m at eri al l i ab i l i t i es o th er t h an i t s
o b l i g at i o n u n d er t h e BB&T l oan . RERI's Sub s t an t i at i o n o f It s Cl ai m edCh ari t ab l e Co n tri b u t i o n Dedu ct io n In an ap prai s al p rep aredfo r RERI d at ed Sep t em ber 2 2 , 2 0 03 , Ho wardC. Gel b tu ch o f Green wi ch Real ty Adv i s o rs , In c., as s i g n eda v al u e o f $ 5 5 m i l l i o n t o th e fee i n t eres t i n th e Hawt h orn e p ro p ert y as o f Au gu s t 2 8 , 2 0 0 3 . M r. Gel b tu ch
m u lt i p l iedh is es t i m at e o f t h e fee i n t eres ti n t h e Hawt h orn e p ro p erty b y an actu ari al fact o r p u rp o rt ed l y p ro v i d edi n s ect i o n 7 5 20 t o arri v e atan " i n ves t m en t
v al u e" o f t h e SM I. Th e d edu ct i o n RERI cl ai m edfo r i t s as s ig n m en t o f t h e SM I t o th e Un i v ers i ty

equ al s t h e i n v es t m en tv al u e d et erm i n ed b y M r. Gel b tu ch i n creas ed b y ap p rai s al an dp ro fes s i o n al fees
.- 1 1 -

Th e Fo rm 8 2 8 3 ap p rai sal s u m

m ary th atRERI at t ach edt o i t s 2 0 0 3 retu rn i n d i cat es th ati tacq u iredth e SM I b y p u rch as e o n M arch 2 2 , 2 0 0 2 . Its h o ws n o
am ou n ti n t h e s p ace p ro vi d edfo r t h e " Do no r's co s to r o th er ad ju s t edb as i s "
. 5 Ex p ertTes t i m o n y

Reg ard i n g th e SM I's Val u e J am es M y ers Pet i t i o ner o ffered t es t i m o n y o f J am es W . M y ers , an ex ecu t i v e m an ag i n g d i rect o r atth e v al uat i o n an dad v i s o ry fi rm o f Cu s h m an & W ak efi el d W es t ern , In c. W e accep t ed M r. M y ers as an ex p erto n real es t at e v al u at i o n. M r. M y ers d et erm i n edth atth e SM I h ada m ark etv al u e as o f Au g u s t2 7 , 2 0 03 , o f $ 1 6 .5 5
m i l l io n . M r. M y ers d eri v edth atv al u e i n tw o s t ep s . Fi rs t , h e d et erm in edth atth e
m em b er i n t eres ti n Ho l d i n g s wo u l db e wo rt h $ 1 0 1 m i l l i o n o n J an u ary 1 , 2 0 2 1 , wh en th e SM I wo u l db eco m e p o s s es s o ry . He th en d i s co u n t edth at fu ture v al u e b ack to Au g u s t2 7 , 2 00 3 , ata rat e o f 1 1 %. M r. M y ers d eri v edh is $ 1 0 1 m i l l io n fu tu re v al u e fo r th e m em b er i n t eres ti n Ho l di n g s b y co m

b in in g th e res u l t s o f t wo s l i g h t ly d i fferen tap p ro ach es . Fi rs t , h e d et erm i n edth e v al u e o f p ro ject edp o s t -2 0 2 0 cas h fl ows , as o f J an u ary 1 , 2 0 2 1 , t o b e $ 1 0 6 .8 m i ll i o n . Nex t, h e cap i t al i zedh i s es t i m at e o f n eto p erat i n g i n co m e fro m

5 In M ay 2 0 0 4 , s ho rt l y

aft er i tfi l edi t s 2 0 0 3 ret urn , RERI fi l ed wi th the Del aware s ecret ary

o f s t at e a cert i fi cat e o f can cel l at i o n .- 1 2 -

th e Hawt h o rn e p ro p ert y

fo r 2 0 21 , $ 8 ,1 5 6 ,6 1 8 , at8 .5 %, ro u n d i n g th e res u l tt o $ 9 6
m i l l io n . Th e $ 1 0 1 m i l l io n p ro ject edfu ture v al u e h e s el ect edfo r t he m em b er i n t eres ti n Ho ld in g s as o f J an u ary 1 , 2 0 2 1 , i s th e ap p ro x i m at e m i dp oi n to f t h e
ran g e es t ab l is h ed b y th e res u l ts h e ach i ev edb y ap pl y i n g th e d i s co u n t edcas h fl o w
an d d i rectcap it al i zat i o n m et ho d s . Th e p ro ject edcas h fl o ws th atM r. M y ers u s edi n ap p l y i n g th e d i s co un t ed
cas h fl o w m et h o dt o d et erm in e t h e v al ue o f t he m em b er i n t eres t i n Ho l d i n g s as o f J an u ary 1 , 2 0 2 1 , refl ecth i s d et erm i n at i o n , b as edo n an an al y s is o f co m p arab l e p ro p ert i es , th atm ark etren t fo r t h e Hawt h o rn e p ro p erty as o f Au g u s t2 7 , 2 0 0 3 , was $ 1 .5 0 p er s quare fo o tp er m o n th
. 6 M r. M y ers ' p ro ject i o n s fo r ren t al i n co m e fro m th e Hawt h o rn e p ro p ert y

b etween 2 0 2 1 an d2 03 2 accret e atan as s u m ed 3 % g ro wth rat e h is es t im at ed Au g u s t2 00 3 m ark etren t . M r. M y ers ' p ro ject edn etcas h fl o w o f $ 8 ,1 0 7 ,5 8 8 fo r 2 0 2 1 i s th e d i fferen ce b et ween h is p ro ject edn eto p erat i ng i n co m e
o f $ 8 , 1 5 6 ,6 1 8 an dan as s u m ed $ 4 9 ,0 3 0 ad di t io n t o cap i t al res erv es . Inco m p u t i n g
n eto p erat i n g i n co m e fo r p eri o ds aft er 2 0 2 0 , M r. M y ers i n cl ud eda d edu ct i o n o f 5 % o f p o t en t i al g ro s s rev enu e (t h ati s , th e s u m o f ren t al i nco m e an dex p en s e

6 Fo r p u rp o ses o f co m

p ari s o n , th e ren t th en p ro vi d ed fo r i n th e AT&T l eas e was $ 32 4 ,0 0 0 p er m o n th , o r $ 1 .1 2 5 p er s qu are fo o t . Res p o n d en tp res en t edn o ev i d en ce t o refu t e M r. M y ers ' d et erm i n at i o n t h atth e ren t p ro v i dedi n th e AT&T l eas e was b el o wm ark etas o f Au g u s t2 7 , 2 0 0 3
.- 1 3 -

rei m b u rs em en t s ) as an es t i m at e o f l o s s es du e t o v acan cy o r un co l l ect ib l e ren t . Th u s, fo r ex am

p l e, M r. M y ers d edu ct ed$ 5 61 ,6 8 8 (5 % o f t h e s u m o f b as e ren t al
rev en u e, $ 8 ,7 1 8 ,3 0 9, an drei m b u rs ab l e ex p en ses , $ 2 ,5 1 5 ,4 54 ) fo r " Vacan cy / Cred i t Lo s s" i n co m

p u t i n g 2 0 2 1 n etcas h fl o w. 7 M r. M y ers d eri v eda t erm i n al v al ue i n 2 0 3 2 , at th e en d o f t he p eri o dco v eredb y h i s p ro j ect i o n s , b y

cap i t al i zi n g th e fi n al p eri o dn eto p erat i n g i n co m e ata rat e o f 9 %. In d i s co un t i n g h i s p ro

ject edp o s t -2 0 2 0 cas h fl o wb ackt o J an u ary 1 , 2 0 2 1 , M r. M y ers ap p l i edth e s am e 9 % d i s co u n trat e t h at h e u s edi n ap p l y i n g th e d i s co u n tedcas hfl ow m et h o d t o d et erm i n e t h e fee v al ue o f t he Hawt h o rn e p ro p erty
as o f Au g u s t2 7 , 2 0 0 3. He d eri v edh i s 9 % d i s co u n t rat e fro m two co m p o n en t s : (1 ) a 7 .5 % rat e ap p ro p ri at e fo r " b o n dab l e l eas es " l i k e t h e AT&T l eas e, wh i ch equ al s th e 1 3 -y ear co rp o rat e b on dy i el d i n Sep t em b er 2 0 0 3 (ro u g h l y

6 %) i n creas edb y

a 1
. 5 % " l iqu i d i ty " p rem i um , an d(2 ) t h e av erag e rat e o f retu rn o n real
es t at e i n v es t m en t s acco rd i n g t o a s u rv ey , wh i ch tren d edb et ween 1 0 % an d1 0 .5 % du ri n g th e rel ev an t p eri o d
.

7 By co n tras t , i n p ro

j ect i n g n etcas hfl o w th ro u g h 2 0 1 4 fo r t he p u rp o s e o f d et erm i n i n g th e fee v al u e o f t h e Hawt h o rn e p ro p ert y as o f Au g u st2 7 , 2 0 03 , M r. M y ers as s u m edv acan cy

/ cred i tl o s s es o f o n l y

1 % o f p ot en t i al g ro s s rev enu e.- 1 4 -

M r. M y ers d et erm i n edth atth e Hawt h o rn e p ro p ert y wo u ldh av e an
es t i m at edu s efu l l ife o f 6 5 y ears an dan effect i v e ag e o f 3 8 y ears i n 2 02 1 , wh en th e SM I b eco m es p os s es so ry . Ri ch ardVo i th Pet i t i o ner al s o o fferedt es t i m o n y o f Ri ch ardVo i th , th e p res i d en tan d fo u n di n g p ri n ci p al o f Eco n su l t So l u t i o n s , In c., an eco n o m i c co n su l t i n g fi rm . Dr. Vo i th h as a Ph .D. i n eco n o m i cs fro m th e Un i v ers i ty

o f Pen n s y lv an i a. W e accep t edDr. Vo i th as an ex p erti n th e s ub j ectm at t er (as d es cri b edb y p et i t i o n er's
co u ns el ) o f " th e eco n o m i c d et erm i n an t s o f v al u e o f a real es t at e as setan dal s o i n h o w the d i sco u n trat es are d et erm in edi n the co u rs e o f m ak i n g i n v es t m en ti n real
es t at e." In h i s rep o rt , Dr. Vo i th d i d n o tp ro vi d e a d efi n i t i v e o p i n i o n reg ard i n g th e SM I's v al u e o n Au g u s t2 7 , 2 00 3 . In s t ead , Dr. Vo i th d es cri b ed g en eral
co n si d erat io n s rel ev an tt o d et erm i n in g th atv al u e t h att en d edt o s up p o rtth e ap p ro ach t ak en by

M r. M y ers an dth e res u l th e reach ed . Inp art i cu l ar, Dr. Vo i th p res en t edan an al y s i s t h at , i n h i s wo rd s , " s ug g es t s thatth e RERI SM I s ho u l db e
v al u edatatl eas t$ 1 6 .5 m i l l i o n i n 2 0 0 3 ." Bu tDr. Vo i th b as edth atco n cl us i o n o n
as s u m pt i o n s ab o u tren tal i n co m e, g ro wth rat es , an dd i s co u n trat es . He d i dn o t
s t at e a co n cl u si o n , o n th e b as i s o f h i s ex p ert ju d g m en t , as t o th e v al i d it y o f t h o s e
as s u m pt i o n s .- 1 5 -

M i ch ael Crag g Res p o n d en to ffered t es t i m o n y o f M i ch ael I. Crag g . Dr. Crag g , wh o h as a Ph .D. i n eco n o m i cs fro m St an fo rd Un i v ers i ty , i s a p ri n ci p al an dd i rect or o f Th e Brat t l e Gro up , al s o an eco n o m i c co n s u l t in g fi rm . W e accep t edDr. Crag g as an
ex p erti n fi n an ce, eco n o m i cs , an dv al u at i o n . Inh i s i n it i al rep o rt , Dr. Crag g o p in ed th atth e SM I was wo rt h n o m o re t h an $ 1 .6 5 m i l l i o n i n Ap ri l 2 0 02
. Dr. Crag g b eg an h i s an al y s i s b y d et erm i n in g th e p res en tv al u e o f p ro ject ed
cas h fl o w fro m

th e Hawt h o rn e p ro p ert y

th ro u gh th e en do f t h e i n i t i al t erm o f t h e AT&T l eas e i n M ay

2 01 6 . Inm ak i n g h i s cas h fl o w p ro j ect i o n s , Dr. Crag g rel i ed
o n th e Bo n z/ REA ap p rai s al fo r h i s es t i m at e o f o perat i n g ex pen s es . He d i s co u n t ed h i s p ro ject edcas h fl o ws thro u g h M ay 2 01 6 ata rat e o f 7 .9 2 %, wh i ch h e es t i m at ed t o b e AT&T's 1 4 -y ear b orro w i n g rat e. Ap p l y i ng th at rat e t o h i s p ro ject ed
cas h fl o ws th ro u g h M ay

2 01 6 p ro duced a p res en tv al ue o f $ 3 9 .0 6 m i l l i o n. Nex t , Dr. Crag g d et erm in edth e p res en tv al u e o f t h e p o s t -M ay 2 01 6 p ro ject edcas h fl o ws fro m

th e Hawt h o rn e p ro p ert y

b y s ub tract i n g th e p res en tv al u e
o f t h e cas h fl o w s th ro u g h M ay 2 0 1 6 , $ 3 9 .0 6 m i l l i o n, fro m th e fee v al u e o f t h e Hawt h o rn e p ro p ert y , wh i ch Dr. Crag g as s u m edt o b e $ 4 2
. 3 5 m i l l i o n --th e p ri ce fo r wh i ch Hawth o rn e acq u i red th e p ro p ert y i n Feb ru ary

2 0 02 . Thu s , Dr. Crag g- 1 6 -

d et erm i n edth atp os t -M ay 2 0 16 p ro ject ed cas h fl ows h ada p res en tv al u e o f $ 3 .2 9
m i l l io n ($ 4 2
. 3 5 m i ll i o n ! $ 3 9 .0 6 m i l l io n ). Dr. Crag g th end et erm in edthe p o rt i o n o f t h at$ 3
. 2 9 m i l l i o n p res en tv al u e at tri b u t ab l e t o p ro

ject edcas h fl o ws b et ween the en do f t h e i ni t i al p eri o do f th e AT&T l eas e an dth e s ch edu l edt erm i n at i on d at e o f t h e TOYS i n teres t(Decem b er 3 1 , 2 0 2 0 ). In m ak in g t h atd et erm i n at i o n , Dr. Crag g fi rs tp ro ject ed cas h fl o ws fro m th e Hawt h o rn e p ro p ert y

aft er t he t erm i n at io n o f t h e AT&T l eas e. To d o s o, h e
as s u m edth atren t al i n co m e i n p eri o d s aft er t h e t erm i n at i o n o f t h e i n i ti al l eas e t erm
wo u l dequ al the s ch edu ledren tas o f t h e en d o f th e i n i t i al t erm i n creas edb y

an
as s u m edg ro wth rat e o f 3 .2 9 % , wh i ch h e d eri v edfro m an i nd ex o f U.S.
co m m erci al real es tat e p ri ces . 8 Dr. Crag g th en s o l v edal g eb rai cal l y fo r t h e rat e th atwo u l dd i s co u n t h i s p ro ject edp o s t -M ay

2 0 1 6 cas h fl o ws (i n cl u d i n g a cap i t al i zedt erm i n al v al ue) t o a p res en tv al u e o f $ 3 .2 9 m i l l i o n . Th atrat e, h i s cal cu l at io n s s h o wed , i s 1 8 .9 9 %. Ap p ly i ng th atrat e t o p ro ject edcas h fl o ws aft er Decem b er 3 1 , 2 0 20 , p ro duced a v al u e fo r t h e SM I o f $ 1
. 6 5 m i l l i o n . Dr. Crag g 's u s e o f s i g ni fi can t l y d ifferen td i s co un trat es t o d et erm in e t h e p res en tv al u e o f p ro

ject edcas h fl o ws b efo re an daft er t h e ex p i rat i o n o f t h e i n i t i al

8 Dr. Crag g's p ro

ject edan n u al cas h fl ows ran g e fro m $ 3 ,3 5 0 ,2 1 5 fo r 2 0 1 6 t o $ 6 ,4 5 1 ,0 8 4 fo r 2 0 2 0
.- 1 7 -

t erm o f t h e AT&T l eas e res u l t edi n a p ro n o un ced" cl i ff effect " . Fo r ex am p l e, Dr. Crag g as su m edcas h fl o w o f $ 4 6 3 ,3 4 4 fo r t h e m o n th o f M ay 2 0 1 6 , wh i ch h e d et erm i n edt o h av e a p res en tv al u e, d i s co u n t edat7 .9 2 %, o f $ 1 5 8 ,3 5 2 . By
co n tras t , a l arg er as s um edm o n th l y cas h fl o w fo r J un e 2 0 1 6, $ 4 78 ,6 0 2 , h ad a p res en tv al u e, d i s co u nt edat1 8 .9 9 %, o f o nl y $ 4 0,7 8 0
. Dr. Crag g 's i n i t i al an al y s i s u s eda v al u at i o n d at e o f Ap ri l 2 0 0 2 b ecau s e h e p rep aredth atan al y s i s p ri m ari l y t o s upp o rtres p o n d en t's arg u m en tth atRERI's acq u is i t io n an das s i g n m en to f t h e SM I l ack edeco n o m i c s ub s t an ce. Dr. Crag g
s o u g htt o s h o w th atth e p ri ces atwh i ch th e SM I ch an g edh an d s d i dn o trefl ecti t s tru e v al u e. He d i dn o ti n i t i al l y fo cu s h i s an al y s i s o n th e d at e RERI co n tri b u t ed t h e SM I t o t h e Un i v ers it y . Wh en res p o n d en t m o v edattri al t o i n tro du ce Dr. Crag g 's rep o rti n t o ev i d en ce, p et i t i o n er o b ject edo n rel ev an ce g ro u n d s , rem i n d in g u s o f o u r
co n cl u s i o n i n an earl i er rep o rto n th is cas e t h at" g ift s t o ch ari ty n eedh av e n o
eco n om i c s ub s t an ce b ey o n d t h e m ere fact o f t h e g i ft " . RERI Ho l d i n g s I, LLC v
. Co m m i s s i o n er, T.C. M em o . 2 0 1 4 -9 9 , at* 2 2 . To ad dres s p et it i o n er's o b ject i o n , th e p art i es ag reedt o red actth o s e p o rt i o n s o f Dr. Crag g 's rep o rtth atad dres s i ss u es o f
eco n om i c s ub s t an ce an db u s in es s p u rp o s e. W e accep t edth e red act edrep o rti n t o
ev i d en ce.- 1 8 -

In a reb u t t al rep o rt , Dr. Crag g i n d i cat edth atth e an al y s i s p res en t edi n h i s
o ri g i nal rep o rtwo u ldi m

p l y a v al u e fo r t h e SM I o f $ 2 .0 9 m il l io n as o f Au gu s t3 1 , 2 0 0 3 . Th atfi g u re ap p ears t o b e t h e p res en tv al u e o f Dr. Crag g 's p ro ject ed p o s t 2 0 2 0 cas h fl o ws d i s co u n t edat1 8 .9 9 % b ack t o Au g u s t3 1 , 2 0 0 3, i ns t eado f h i s i n i t i al v al u at i o n d at e o f Ap ri l 1 , 2 0 0 2
. Dr. Crag g 's reb u t t al rep o rti n cl u d es a p ai r o f t ab l es th atco m p are h is an al y s is t o that o f Dr. Vo i th
. Un der t h e h ead i n g " Crag g Rep o rt " , each t ab l e s t at es a " Val u e
o f t h e Rem ai n d er Es tat e * * * As o f J anu ary 3 1 , 2 0 2 1 " o f $ 4 2 .4 6 m i l l i o n . As
ex p lai n edi n th e m o re d et ai ledo f t h e t wo t ab l es , th atfi g u re eq u al s Dr. Crag g 's p ro ject edcas h fl o w fo r 2 0 21 ($ 6 .4 5 m i ll i on × 1
. 0 32 9 , o r $ 6 .6 6 m i l li o n ) cap i t al i zed ata rat e eq u al t o th e ex ces s o f h i s d is co u n trat e fo r p os t -M ay 2 0 1 6 cas h fl o ws o ver h i s as s u m edg ro wth rat e (.1 8 9 9

! .0 3 2 9 , o r .1 5 7 ). M el Ab rah am Res p o n d en tal s o o ffered t es t i m o n y o f v al u at i o n an d l i t ig at i o n co n s ul t an t M el H. Ab rah am . M r. Ab rah am h as a d eg ree i n acco u n t in g an dh o ld s v ari o u s cert ifi cat i o n s rel at ed t o v al u at io n an d ap p rai s al . W e accep t edM r. Ab rah am as an
ex p erti n b us in es s v al u at i on . M r. Ab rah am

d et erm i n edth atth e SM I was wo rt h $ 3 ,3 82 ,0 0 0 as o f Au g u s t 2 7 , 2 0 0 3 . Th atam ou n ti s the wei g h t edav erag e o f th e p res en tv al u e o f t h e p o s t -- 1 9 -

2 0 2 0 cas h fl o ws M r. Ab rah am p ro ject edi n fi v e al t ern at iv e " s cen ari o s" reduced b y a 1 0 % d i s co u n tfo r l acko f l i qu i d i ty . Ind et erm i ni n g the p res en tv al u e o f h is p ro ject edcas h fl o w i n each s cen ari o , M r. Ab rah am ap p l i eda d i s co un t rat e o f 1 8 %, wh i ch h e d eri v ed b y

s t art i n g wi th an as s u m edri s k -free rat e an d ad di n g p rem i u m s at tri b u t ab l e t o equ i ty

i n v es t m en t s i n rel at i v el y s m al l en t i t i es . M r. Ab rah am 's al t ern at i v e s cen ari o s res to n d i fferi n g as s u m p t i o ns ab o u tAT&T's ex erci se o f i t s
ren ewal o p t i on s i n i t s l eas e o f t h e Hawt h o rn e p ro p ert y . Inh i s s cen ari o 1 , M r. Ab rah am as s u m edth atAT&T wo u l dd ecl in e t o ex erci s e an y o f i t s ren ewal
o p t i o n s , res u l t i n g i n th e ex p i rat i o n o f t h e AT&T l eas e i n M ay 2 0 1 6 . In s cen ari o s 2 , 3 , an d 4 , M r. Ab rah am as s um edthatAT&T wo ul del ect t o ex t en dth e l eas e fo r
ren ewal p eri o d s o f 5 , 1 0 , an d1 5 y ears , res p ect i v el y . Fi n al l y , i n h i s s cen ari o 5 , M r. Ab rah am p ro ject edcas h fl o w s t h ro ug h th e s ch edu l edt erm i nat i o n o f t he TOYS i n t eres ti n M ay

2 0 2 0 . Atth e en do f t h e p eri o d co v eredb y each s eri es o f p ro ject io n s , M r. Ab rah am

cap i t al i zedh is p ro

ject ed fi n al p eri o dcas hfl o w ata rat e
o f 1 0
. 5 %. In ch o os i ng h i s cap i t al izat i o n rat e, M r. Ab rah am rel i edo n the Bo n z/ REA ap p rai s al
. M r. Ab rah am

al s o rel i edo n th e Bo n z/ REA ap p rai s al fo r h i s p ro ject io n s o f
ren t al i n co m e fo r p eri o d s aft er t h e ex p i rat io n o f t h e i n it i al t erm o f t h e AT&T l eas e. In p art i cu l ar, M r. Ab rah am accep t edBo nz/ REA's es t im at e th atm ark etren tfo r t h e- 2 0 -

Hawt h o rn e p ro p ert y

wo ul db e $ 1 .9 4 p er s quare fo o t p er m o n th i n 2 0 17 . Fo r p eri o d s aft er 2 0 1 7 , M r. Ab rah am p u rp o rt edt o fo l lo w the Bo n z/ REA ap p rai s al i n ap p ly i n g a g ro w th rat e o f 3 %, 9 b u th i s fi g ures actu al l y refl ecta g ro wth rat e o f o n l y 2 .5 %
. M r. Ab rah am

al s o p u rp o rt edt o rel y

o n the Bo n z/ REA ap p rai s al fo r h i s p ro ject io n o f ex pen s es aft er t h e i n i t i al t erm o f t h e AT&T l eas e. Fo r 2 0 17 an d
s ub s equ en ty ears , M r. Ab rah am p ro ject edex p en s es equal t o 1 1 % o f h i s p ro ject ed
an n ual ren t al i n co m e. M r. Ab rah am d es cri b edh i s as su m

p t i o n o f ex p en s es equ al t o 1 1 % o f ren t al rev en u e as " bas edup o n t h e am o u n tu s edi n the Bo nz rev ers i o n cal cu l at io n ." 1 0 Onth e b as is o f th e as s u m p t i o n s d es cri b edab o v e, M r. Ab rah am p ro ject ed
n etcas h fl o w fro m

th e Hawt h o rn e p ro p ert y

fo r 2 02 1 , th e y ear t h e SM I wo u l d b eco m e p o s s es s ory , o f $ 6 ,5 8 6,5 9 5 ($ 1
. 9 4 m o n thl y ren t p er s qu are fo o ti n 2 0 1 7 ×

9 Th e 3 % fi g u re t o wh i ch M r. Ab rah am referred i n h i s rep o rtrefl ect s a ro u n di n g o f t he 2
. 7 5 % g ro wth rat e t h atBo n z/ REA actu al l y ap p l iedi n m ak i n g i t s cas h fl o w p ro

ject i o n s . 1 0 Wh i le Bo n z/ REA's p ro

ject edo p erat in g ex p en s es o f $ 8 1 2 ,1 1 0 fo r y ear 1 7 o f t h e p eri o d co v eredb y

i t s p ro ject io n s are ab o u t 1 1 .2 5% o f i t s p ro ject ed g ro s s i n co m e o f $ 7,2 1 7,7 8 7, as n o t eds up ra p p . 6 -7 , Bo n z/ REA's p ro ject edg ro ss i n co m e i n cl u d es as s u m edex p en s e rei m b u rs em en t s o f $ 6 1 1 ,9 8 8 . Bo n z/ REA's p ro ject ed u n rei m b u rs ab l e ex p en s es fo r y ear 1 7 o f $ 2 0 0 ,1 2 2 ($ 8 1 2 ,1 10

! $ 6 11 ,9 8 8 ) are ju s t u n d er 3 % o f i t s p ro

ject edg ro s s ren t al i n co m e o f $ 6 ,6 9 7,1 6 4
.- 2 1 -

2 8 8 ,0 0 0 s qu are feet × 1 2 m o n th s × 1 .0 2 5 4 m u l t i p l i er fo r g ro wth b et ween 2 0 1 7 an d 2 0 2 1 × .8 9 i n v ers e o f as s u m edex p en s e rat i o ). OPINION I. J u ri s d i ct i o n To Det erm i ne Part n ers h i p It em s an dRel at edPen al t i es Becau s e RERI's t ax m at t ers p art n er fi l eda p et i t i o n fo r read ju s t m en to f p art n ers hi p i t em s wi th th i s Co u rtwi th i n 9 0 d ay s o f th e d at e o f res p o nd en t 's FPAA,
s ect i on 6 2 2 6 (f) g ran t s u s ju ri s d i ct i o n t o d et erm i n e al l o f RERI's " p art n ers h i p i t em s " fo r 2 0 0 3 an dth e p ro per al l o cat i on o f t h o s e i t em s am on g i ts p art n ers . Sect i o n 6 2 3 1(a)(3 ) d efi n es p art n ers h i p i t em : " Th e t erm 'p art n ers h i p i tem ' m ean s , wi th res p ect t o a p art n ers h ip , an y i t em req u i redt o b e t ak en i n t o acco un tfo r t h e p art n ers hi p 's t ax ab l e y ear u nd er an y p ro v i s io n o f s ub t i t l e A [s ect i o n s 1 -1 5 6 3 ] t o th e ex t en treg ul at i o n s p res cri b edb y th e Secret ary

p ro v id e t h at , fo r p u rp o s es o f t h i s
s ub t i t le, s u ch i t em

i s m o re ap p ro p ri at el y

d et erm in edatth e p art n ers h i p l ev el th an at th e p art n er l ev el ." Sect i o n 3 0 1 .6 2 3 1 (a)(3 )-1 (a)(1 )(i ), Pro ced . & Ad m i n . Reg s ., p ro v id es th atp art n ers h i p i t em s i n cl u de t he p art ners h i p ag g reg at e an deach p art n er's s h are o f i t em s o f i n co m e, g ai n , l os s , d educt i o n o r cred i to f t h e p art n ers hi p . Thu s , th e ch ari t ab l e co n tri b u t i o n d edu ct i o n RERI cl ai m edo n i t s 2 0 0 3 Fo rm 1 0 6 5 i s a p art n ers hi p i tem th ati s s ub

ject t o d et erm i n at io n i n th i s p art n ers h i p l ev el p ro ceed i n g .- 2 2 -

Sect io n 6 2 2 6 (f) al s o g ran t s u s juri s d i ct i on t o d et erm i n e " th e ap p l i cab i l i ty o f
an y p en al ty * * * wh ich rel at es t o an ad ju s t m en tt o a p artn ers h ip i t em ." Thu s , we h av e juri sd i ct i o n t o d et erm i n e t h e ap p l i cab i l i ty o f t h e s ubs t an ti al o r g ro ss
v al u at i o n m i s s t at em en tp en al ty o f s ect i o n 6 6 6 2 (e)(1 ) o r (h )(2 ) as a res u l t o f t h e d i s al lo wan ce o f al l o r p arto f RERI's cl ai m edch ari t ab l e co n tri b u ti o n d edu ct i o n . II. Th e Dedu ct i b i l i ty

o f RERI's Ch ari t ab le Co n tri b ut i o n A. Ap p li cab l e Subs t an t i at i o n Ru l es Sect io n 1 7 0 (a)(1 ) al lo w s a d educt i o n fo r " an y ch ari t ab le co nt ri b u ti o n * * *
m ad e wi th in th e t ax ab le y ear * * * o n l y i f v eri fi edu n d er reg u l at i o n s p res cri b edb y th e Secret ary ." Th e am o u n t o f a co n tri b u t i o n o f p ro p ert y o th er t h an m o n ey i s g en eral l y m eas u redb y th e p ro p ert y 's fai r m ark etv al u e atthe t i m e o f t h e
co n tri b u t i o n . Sec. 1 .1 7 0 A-1 (c)(1 ), In co m e Tax Reg s . In th e Defi ci tRedu ct i o n Acto f 1 9 8 4 (DEFRA), Pub . L. No . 9 8 -3 69 , s ec. 1 5 5 (a)(1 ) an d (2 ), 9 8 St at . at6 91 , Co n g res s d irect edth e Secret ary t o p res cri b e reg u l at i o n s u n der s ect i o n 1 7 0 (a)(1 ) requ i ri n g d o n o rs t o m eeth ei g h t en ed
s ub s t an t i at i o n req u irem en t s t o s up p o rtd edu ct i on s cl ai m edfo r ch ari t ab l e
co n tri b u t i o n s. Co n g res s i n ten d edth e n ew s ub s t an t i at io n req u irem en ts t o al ertth e Co m m i s s i o n er t o p o t en t i al o v erv al u at i o ns o f co n tri b u t edp ro p ert y an d t h u s d et er t ax p ay ers fro m

cl ai m i n g ex ces si v e d edu ct io n s . Th e Sen at e Fi n an ce Co m m i t t ee,- 2 3 -

wh i ch fi rs tp ro p os eds tren g th en i n g th e s ub s t an t i at i on req u i rem en t s fo r ch ari t ab l e
co n tri b u t i o n s, n o t edth e d i ffi cu l ty o f " d et ect [i ng ] al l o r ev en m o s t i ns t an ces o f
ex ces s co n tri b u t i o n s . " S. Prt . No . 9 8 -1 69 (Vo l
. 1 ), at4 4 4 (S. Co m m . Pri n t 1 9 8 4 ). Th e co m m i t t ee ex p res sed co n cern s ab o u tt ax p ay ers " co n t in u [i n g ] t o p l ay th e 'au d i t l o t t ery '" . Id . Si m i l arl y , th e St aff o f t h e J o i n tCo m m it t ee o n Tax at i o n , i n i ts Gen eral Ex p l an at i o n o f t h e Rev en u e Pro v i si o n s o f t h e Defi ci tRedu ct i o n Acto f 1 9 8 4 (1 9 8 4 Bl u e Bo ok ), at 5 0 4 (J . Co m m . Pri n t 1 9 8 4), o b s erv ed : " [I] ti s n o t p o s s i b l e t o d et ectal l o r ev en m o s ti n s t an ces o f ex ces si ve d educt i on s b y rel y i n g
s o l el y o n th e au d i t pro ces s. Becau s e v al u at i o n o f s o m e t y p es o f p ro p ert y

can n o t b e d et erm i n edb y

referen ce t o read i l y

av ai l ab l e an d accep t edv al u at i o n t ab l es , t ax p ay ers m ay co n t in u e t o p l ay th e 'au d i tl o t t ery ' an dcl ai m ex ces s i v e ch ari t ab l e d educt i o n s ." In res p o n s e t o DEFRA's d i rect i ve, t h e Secret ary am en d ed s ect i o n 1 .1 7 0 A1 3 , In co m e Tax Reg s ., b y , am o n g o th er t h i n gs , ad d i ng p arag rap h (c), wh i ch p ro v id es s ub s t an t i at io n req u i rem en t s th at ap pl y t o ch ari t ab l e co n tri b u t i on s m ad e aft er Decem

b er 3 1 , 1 9 84 , b y

s p eci fi edd on o rs , i n cl u d i ng p art n ers h i p s , o f p ro p ert y
wo rt h m o re t h an $ 5 ,0 0 0 . T.D. 8 1 9 9 , 1 9 8 8 -1 C.B. 9 9 . Fai l u re t o s at i s fy th o s e req u i rem en t s res u l t s i n d en ial o f a d edu ct io n fo r t he co n tri b ut i o n u n d er s ect i o n 1 7 0 . Sec. 1 .1 7 0 A-1 3 (c)(1 )(i ), In co m e Tax Reg s . To m eet th e req u i rem en t s , th e- 2 4 -

d o n o r m u s to b tai n a qu al i fi edap p rai s al o f t he co n tri b u t edp ro p ert y , at t ach a " fu l l y
co m p l et ed " ap prai s al s umm ary t o th e ret u rn o n wh i ch the d educt i o n i s fi rs t cl ai m ed , an dm ai n t ai n reco rd s co n t ai n i n g s p eci fi edi n fo rm at i o n. See s ec. 1 .1 7 0 A1 3 (c)(2 )(i )(A), (B), an d(C), In co m e Tax Reg s . Th e req u i redap p rai s al s u m m ary
m u stp ro vi d e, am o n g o th er t h i n g s , th e ad ju s t ed co s to r o th er b as i s o f t h e d o n at ed p ro p erty . Sec. 1 .1 7 0 A -1 3 (c)(4 )(i i )(E), In co m e Tax Reg s . B. Sub s t an t i al Co m

p l i an ce In Bo n dv . Co m

m i s s i o n er, 1 0 0 T.C. 3 2 , 4 0 -4 1 (1 9 9 3), we d et erm i n edth at th e rep o rt i n g req u i rem en t s o f s ect i on 1 .1 7 0 A -1 3 , In co m e Tax Reg s ., are " d i rect o ry
an d n o tm an d at o ry " , s o th ata fai l u re t o co m p l y s tri ct l y wi th tho s e requ i rem en t s
can b e ex cu s edi f t h e d o n o r d em o n s trat es " s ub s t an ti al co m p l i an ce" . Th e t ax p ay ers i n that cas e at t ach edt o the ret u rn o n wh i ch th ey cl ai m edth e d edu ct i o n i n i s s u e an ap p rai s al s u m

m ary o n Fo rm 8 2 8 3 th ati n cl u d edal l o f t he req u i redi n fo rm at i o n
o th er t han th e ap p rai s er's qu al i fi cat i on s , wh i ch " were p ro m p tl y fu rn i s hedt o
res p o n d en t's ag en tato r n ear t he co m m en cem en t o f h i s au d i t" o f t h ei r retu rn . Id . at 4 2 . W e reas on ed : " T h e d en i al o f a ch ari t ab l e co n tri b u t i o n d edu ct i o n u n d er t h es e ci rcu m s t an ces wo u l dco n s t i tu te a s an ct i o n wh i ch i s n o twarran t ed o r ju s t i fi ed ." Id
. W e t hu s co n cl ud edth atth e t ax p ay ers h ad s ub s t an t i al l y co m p l i edwi th s ect i o n 1 .1 70 -1 3 A, In co m e Tax Reg s ., an dwere en t i t l edt o th e cl ai m ed d edu ct i o n .- 2 5 -

By co n tras t , i n Hewi ttv . Co m m i ss i o ner, 1 09 T.C. 2 5 8 (1 9 9 7 ), aff'dwi th o u t p ub l i s h edo p i n i o n, 1 6 6 F.3 d3 3 2 (4 th Ci r. 1 9 98 ), th e t ax p ay ers n ei th er o b t ai n ed a qu al i fi edap prai s al o f t h e n o np ub l i cl y trad eds t o ckth ey

d o n at edn o r at t ach edan ap p rai s al s u m

m ary t o th ei r retu rn . Th e Co m m i s s i o n er d i s al l o wed the t ax p ay ers ' cl ai m edd edu ct i on ev en tho u g h s h e d i dn o td is p u te t h atth e d edu ct edam ou n t equ al ed th e s t o ck 's v al u e. W e reject ed th e t ax p ay ers ' arg u m en tth atthey h ad
s ub s t an t i al l y

co m p l i edwi th th e s ub s t an t i at i o n req u i rem en t s . " Gi v en th e s t atu t o ry l an g u ag e [req u i ri ng a qu al i fi edap p rai s al ] an dth e th ru s to f t he co n cern s ab o u tth e
n eed of res p o n d en tt o b e p ro v i d ed wi th ap p ro pri at e i n fo rm at i o n i n o rd er t o al ert
res p o n d en t t o p o t en t i al o v erv al u at io n s " , we wro te, " p et i t i o n ers s i m pl y d o n o tfal l wi th i n th e p erm i s si b le b o u n d ari es o f Bo n d" . Id . at2 6 4 ; s ee al s o Al l i v
. Co m m i s s i o n er, T.C. M em o . 2 0 1 4 -1 5 , at* 5 2 (" In d et erm i n in g wh et h er a t ax p ay er h as s ubs t an t i al l y

co m p l iedwi th th e ch ari t ab l e rep o rt i n g reg u l at i o n s, we retu rn t o th e p u rp o s e o f t h e reg u l at i o n s[.] " ). In Sm i th v . Co m

m i s s i o n er, T.C. M em o . 2 0 0 7 -3 6 8 , 2 0 07 W L 4 4 10 7 7 1 , at
* 1 9 , aff'd , 3 6 4 F. Ap p ' x 3 1 7 (9 th Ci r. 2 0 0 9 ), we d eri v ed fro m Bo n d an d Hewi t ta
s t an d ardfo r d et erm i n i n g s ub s t an t i al co m p l i an ce u n d er wh i ch we " co ns i d er wh et h er * * * [t h e d o n o r] p ro v i d eds u ffi ci en ti nfo rm at i o n t o p erm i t * * * [t h e Co m m i s s i o n er] t o ev al u at e t h e[] rep o rt edco n tri b u ti o ns , as i n t en dedb y Co n g res s ."- 2 6 -

C. RERI's Fai l u re To Sub s t an t i at e It s Cl ai m ed Deduct i o n Th e Fo rm 8 2 8 3 ap p rai sal s u m

m ary th atRERI at t ach edt o i t s 2 0 0 3 retu rn i n d i cat es th ati tacq u iredth e SM I b y p u rch as e o n M arch 2 2 , 2 0 0 2 , b u t s ho ws n o
am ou n ti n t h e s p ace p ro vi d edfo r t h e " Do no r's co s to r o th er ad ju s t edb as i s " . Thu s , RERI's Fo rm

8 2 8 3 d i dn o ts at i s fy

th e req u i rem en to f s ect i o n 1 .1 7 0A1 3 (c)(4 )(i i )(E), In co m e Tax Reg s . M o reo v er, b ecau s e RERI's o m i s s i o n o f i t s b as i s i n t h e SM I fro m th e Fo rm 8 2 8 3 i t at t ach edt o i t s 2 00 3 retu rn p rev en tedth e ap p rai s al s u m m ary fro m ach i ev i n g i t s i n t en d ed p u rp o s e, RERI's fai lu re t o m eetth e req u i rem en to f s ect i o n 1 .1 70 A-1 3 (c)(4 )(i i )(E), In co m e Tax Reg s ., can n o t b e ex cu s edb y s ub s t an t i al
co m p l ian ce. As ex p l ai n edab o v e, Co n g res s d i rect edth e Secret ary t o ad o p t s tri ct er
s ub s t an t i at i o n req u irem en t s fo r ch ari t ab l e co n tri b u ti o n s t o al ertthe Co m m i s s i o n er, i n ad v an ce o f au d i t, o f p o ten t i al o v erv al u at i on s o f co n tri b u t edp ro p ert y an d th ereb y d et er t ax p ay ers fro m

cl ai m i n g ex ces s i v e d edu ct i o ns i n th e h op e t h atth ey
wo u l dn o tb e au d i t ed
. S. Prt . No . 9 8-1 6 9 (Vo l . 1 ), s up ra at4 4 4 ; 1 9 8 4 Bl u e Bo o k,
s up ra at5 0 3 -5 0 4; s ee al s o Hewi t tv . Co m m is s i o n er, 1 0 9 T.C. at2 6 4
. RERI acq u iredth e SM I fo r ab ou t$ 3 m i l l i o n i n M arch 2 00 2 an dcl ai m eda ch ari t ab l e
co n tri b u t i o n d edu ct i o n o f ab o u t$ 3 3 m i l l i o n fo r i t s as s i g n m en t o f t h e SM I t o th e Un i vers it y

i n Au g u s t 2 0 0 3 . Th e s i g n i fi can t d i sp ari ty b et ween the cl ai m edfai r- 2 7 -

m ark etv al u e an d th e p ri ce RERI p ai dt o acq u ire t h e SM I ju s t1 7 m o n ths b efo re i t
as s i g n edth e SM I t o th e Un i vers i ty , h adi tb een d i s cl o s ed , wo u l dh av e al ert ed
res p o n d en t t o a p ot en t i al o v erv al uat i o n o f t he SM I. 1 1 Becau s e RERI fai l edt o p ro v id e s u ffi ci en ti nfo rm at i o n o n i t s Fo rm 8 2 8 3 t o p erm i t res p on d en tt o ev al u at e i t s rep ort edco n tri b ut i o n , cf. Sm i t h v . Co m m i s s i o ner, 2 0 0 7 W L 4 4 1 0 7 7 1, at* 1 9 , we can n o tex cu s e o n s ubs t an ti al co m p l ian ce g ro u n d s RERI's o m i s si o n fro m th at fo rm o f i t s b as i s i n t h e SM I. Th erefo re, RERI d i dn o t" [a] tt ach a fu ll y co m p l et ed ap p rai s al s u m

m ary " t o i t s 2 00 3 retu rn as req u i redb y s ect i o n 1 .1 70 A1 3 (c)(2 )(i )(B), In co m e Tax Reg s . Becau s e RERI d i d n o t m eetth e s ubs t an ti at i o n req u i rem en t s p ro v i d edi n s ect i on 1 .1 7 0 A-1 3 (c)(2 ), In co m e Tax Reg s ., i ti s n o t

1 1 In s o m e cas es , th e d o n or's b as i s i n the co n tri b u t edp ro p ert y co u ld" affect [] th e am o un to f t h e d edu ct i o n al l o wed " an d th u s wo ul db e " es s en t i al " i n fo rm at i o n . See Al l i v . Co m

m i s s i o n er, T.C. M em o . 2 0 1 4 -1 5 , at* 4 3 . Sec. 1 7 0(e)(1 )(A) req u i res th atth e am o u nto f a ch ari t ab le co nt ri bu t i on d edu ct i o n o th erwi s e al l o wed b y s ec. 1 7 0 b e redu cedb y

" th e am o u n to f g ai n wh i ch wo ul dn oth av e b een l o n g t erm cap i t al g ai n i f t h e p ro p ert y co n tri b u t ed h adb een s ol d b y th e t ax p ay er ati t s fai r m ark etv al u e (d et erm i n edatth e t i m e o f s u ch co nt ri b u t i o n )" . Ho w ev er, b ecau s e RERI h adh el d t h e SM I fo r m o re t h an o n e y ear wh en i tco n tri b ut edth e SM I t o t h e Un i v ers it y , an y g ai n th e p art n ers h i p wo ul d h av e reco g ni zedh adi ts o l d th e SM I o n th e d at e o f t h e g i ft wo u l d h av e b een l o n g -t erm cap it al g ai n . See s ec. 1 2 2 2 (3 ).- 2 8 -

en t i t l edt o an y

d edu ct io n u n d er s ect i o n 1 70 fo r i t s co n tri b ut i o n o f t h e SM I t o th e Un i vers it y . See s ec. 1 7 0 (a)(1 ); s ec. 1 .1 7 0 A-1 3 (c)(1 ), In co m e Tax Reg s . 1 2 III. Pen al t i es As n o tedatth e o u t s et , th e FPAA d et erm i n edth atth e ch ari t ab l e co n tri b u t i o n d educt i o n th at RERI cl ai m ed fo r i t s as s i g n m en to f th e SM I t o t h e Un i v ers i ty
res u l ted i n a " sub s t an t ial v al u at i o n m i s s t at em en t" wi th i n th e m ean i n g o f s ect i o n 6 6 6 2 (e)(1 ). In ad di t i o n , i n an am en d m en tt o h i s an s wer, res p o n den tas s ert edth at RERI's cl ai m ed d edu ct i o n res u l t edi n a " g ro ss v al u at i o n m i s s t at em en t " wi th i n th e
m ean i n g o f s ect i o n 6 6 6 2 (h )(2 ).

1 2 Becau s e we co n cl u de t h atRERI's fai l u re t o co m p l y wi th th e s ub s t an t i at i on req u i rem en t s o f s ec. 1 .1 7 0A-1 3 (c)(2 ), In co m e Tax Reg s ., ju s ti fi es th e fu l l d i s al lo wan ce o f i t s cl ai m edd edu ct i o n , we n eedn o tco n s i der t h e o th er arg u m en t s res p o n d en t m ad e t o d i s al l o w thatd edu ct i o n i n i t s en t i ret y , i n cl ud i n g h is cl ai m th at RERI's acq u is i t i o n an das s ig nm en to f t h e SM I l ack edeco n o m i c s ub s t an ce an d s h o u ldb e d i s reg ard edan dh i s qu es t i o n s ab o u tth e l eg al v al i d i ty an den fo rceab i l i t y o f t h e SM I an dRedSea's o wn ers h i p o f t h e s o le m em b er i n t eres ti n Ho ld i n g s (an d th u s i t s ab i l i ty

t o tran s fer an y

reco gn i zed ri g ht s t o RERI). In ad d i t i o n, b ecau s e we co n cl u d e th atRERI d i dn otat t ach t o i t s 2 0 0 3 ret u rn a " fu l l y co m p l et ed " ap p rai s al s u m m ary , as req u i redb y

s ec. 1 .1 7 0 A -1 3 (c)(2 )(i )(B), In co m e Tax Reg s ., we n eed n o tad dres s res p on d en t's arg u m en tthatth e Gel b tu ch ap p rai s al was n o t a qu al i fi ed ap p rai s al wi th i n th e m ean i n g o f s ec. 1 .1 7 0 A -1 3 (c)(3 )(i ), In co m e Tax Reg s .- 2 9 -

A. Back g ro u n d 1
. Th e Accu racy -Rel at ed Pen al t ies fo r Val u at i o n M i s s t at em en t s Sect io n 6 6 6 2 (a) an d(b )(3 ) i m p o s es an accu racy -rel at edp en al ty i f an y p art
o f an u nd erp aym en t o f t ax req u i redt o b e s ho wno n a retu rn i s due t o a s ub s t an t i al
v al u at i o n m i s s t at em en t . Th e p en al ty i s 2 0 % o f t h e p o rt i o n o f th e u nd erp aym en to f t ax t o wh i ch th e s ect i o n ap pl i es . Sec. 6 66 2 (a). In th e cas e o f a g ro s s v al u at i o n
m i s s t at em en t, th e p en al ty rat e i s i ncreas ed fro m

2 0 % t o 4 0 %. Sec. 6 6 6 2 (h )(1 ). Th e s ub s t an ti al v al uat i o n m i s s t at em en t p en al ty ap p l i es t o an y p o rt io n o f an
u n d erp aym en t th ati s at tri b u t ab l e t o th e t ax p ay er's cl ai m in g o n a retu rn a v al u e o r b as i s o f p ro p erty

th ati s 2 0 0 % o r m o re o f t h e co rrect v al u e o r b as is . Sec. 6 6 6 2 (e)(1 ). Th e g ro s s v al u at i o n m i s s t at em en tp en al ty ap pl i es i f t h e cl ai m edv al u e
o r b as i s i s 4 00 % o r m o re o f the co rrect am o u n t . Sec. 6 6 6 2 (h )(2 ). Th e p en al ty fo r
a v al u at i o n m i ss t at em en t d o es n o tap p l y , h o wev er, u n les s th e p o rt i o n o f a t ax p ay er's u n d erp aym en tfo r a t ax ab l e y ear at tri b u t ab l e t o ei th er a s ub s t an t i al o r a g ro s s v al u at i o n m i s s t at em en tex ceed s $ 5 ,0 0 0 (o r, i n th e cas e o f m o s tco rp o rat i o ns , $ 1 0 ,0 0 0 ). Sec. 6 6 6 2 (e)(2 ). In th e cas e o f a p art n ers h i p o r o th er " p as s -t h ro u g h en t i ty " , " [t ] he d et erm i n at i o n o f wh et h er t h ere i s a s ub s t an t ial o r g ro s s v al u at i o n m i s s t at em en t- 3 0 -

* * * i s m ad e atth e en ti ty l ev el ." Sec. 1 .6 6 6 2-5 (h )(1 ), In co m e Tax Reg s .; s ee al so
s ec. 1 .6 6 62 -4 (f)(5 ), In co m e Tax Reg s . (d efi n in g " p as s-t h ro u g h en t i ty " ). Th e d o l l ar l i m i tat i on p ro v i d edb y

s ect i o n 6 6 6 2 (e)(2 ), h o wev er, i s ap p li edatth e p art n er l ev el
. Sec. 1 .6 6 6 2 -5 (h )(1 ), In co m e Tax Reg s . Sect io n 6 6 6 4 (c) p ro v i d es an ex cep t i o n t o the accu racy -rel at ed(an dfrau d ) p en al t i es i f t h ere was reas o n ab l e cau s e fo r t h e p o rt i o n o f t h e u n d erp aym en ts ub ject t o the p en al ty

an dth e t ax pay er act edwi th g o odfai th wi th res p ectt o th atp o rt i o n . Un d er s ect i o n 6 66 4 (c)(2 ), h o wev er, t h e reas o nab l e cau s e ex cep t i on d o es n o tap p l y t o a s ub st an t i al o r g ro s s v al u at i o n m i s s t at em en tari s i n g fro m a cl ai m edch ari t ab l e
co n tri b u t i o n d edu ct i o n u n l es s " (A) t h e cl ai m edv al u e o f t h e p ro p ert y was b as edo n a qu al i fi edap prai s al m ad e b y a qu al ifi edap p rai s er, an d (B) i n ad di t i o n t o
o b t ai n i n g s u ch ap p rai s al , th e t ax p ay er m ad e a g o o d fai th i n v es t i g at i o n o f t he v al u e
o f t h e co n tri b u t edp ro p ert y ."

2
. Sco p e o f J u ri s d i ct i o n To Det erm i n e Pen al t i es an dDefen s es As n o tedatth e o u t s et , s ect i o n 6 2 2 6 (f) g ran ts u s juri s d i ct i on i n th i s p art n ers hi p -l ev el p ro ceed i n g t o d et erm i n e t he ap p l i cab i l i ty o f an y p en al ty " rel at ed t o " th e d is al lo w an ce o f RERI's cl ai m edch ari t ab le co nt ri bu t i o n d educt i o n . Ino u r
ex erci s e o f t h atjuri s d ict io n , we m u stm ak e " al l th e l eg al an d fact u al d et erm i n at i o n s t h atu n derl i e t h e d et erm i n at i on o f * * * [t h e] p en al ty * * * o th er- 3 1 -

th an p artn er-l ev el d efen s es "
. Sec. 3 0 1
. 6 2 2 1 -1 (c), Pro ced . & Ad m i n . Reg s . In p art i cu l ar, t h e d et erm i nat i o n o f wh et her t h e d is al lo wan ce o f RERI's d edu ct i o n
res u l ts i n a s ub s t an t i al o r g ro s s v al u at i o n m i ss t at em en tm u s tb e m ad e atth e p art n ers hi p l ev el . E.g
. , St o bi e Creek In v s ., LLC v . Un i t edSt at es , 8 2 Fed . Cl . 6 3 6 , 7 0 4 (2 00 8 ) (" [T] h e d et erm i n at i o n o f wh et h er a s ub s tan t i al o r g ro s s v al u at i on
m i s s t at em en t ex i st s i s m ad e atth e en t i ty l ev el [.] " ), aff'd , 6 0 8 F.3 d1 3 6 6 (Fed . Ci r. 2 0 1 0 ). As n o tedab o v e, h o wev er, o u r ju ri s d i ct i o n d o es n o tex t en dt o t h e ev al u at i o n
o f " p art n er-l ev el d efen s es " , wh i ch are " th o se t hatare p ers o nal t o th e p art n er o r are d ep en d en t up o n t h e p art n er's s ep arat e ret urn an dcan n o t b e d et erm i n edatthe p art n ers hi p l ev el ." Sec. 3 0 1
. 6 2 2 1 -1 (d ), Pro ced . & Ad m i n. Reg s . Al th ou g h t h e reg u l at i o n s l i s tth e reas o n ab l e cau s e ex cep t i o n o f s ect i on 6 6 6 4 (c)(1 ) as an ex am p l e
o f a p art n er-l ev el d efen s e, i d ., th ey d o n o tfo recl o s e t h e p o s s i b i l it y th ata p art n ers hi p m ay

h av e i t s o wnreas o n ab l e cau s e d efen s e. Thu s, th i s Co u rt an d
o th ers h av e co n s i d eredreas o n ab l e cau se d efen s es i n p art n ers h i p-l ev el p ro ceed i n g s wh en th o s e d efen s es are b as edo n fact s an dci rcu m s t an ces co m m on t o al l p art n ers , s u ch as th e rel ian ce o f a p art n ers h ip 's m an ag i n g p artn er o n t h e ad v i ce o f co u n s el
. E.g ., St o b i e Creek , 6 0 8 F.3 d at1 3 8 0 -1 3 8 1 ; Am . Bo atCo . v . Un i t edSt at es , 5 8 3 F.3 d4 7 1 , 4 7 9 -4 80 (7 th Ci r. 2 0 0 9 ); Ti g ers Ey e Trad i n g , LLC v . Co m m i s s i o n er,- 3 2 -

T.C. M em o . 2 00 9 -1 2 1 , 2 0 0 9 W L 1 4 7 5 1 59 , at* 1 8 ; San t a M o n i ca Pi ctu res , LLC v
. Co m m i s s i o n er, T.C. M em o . 2 0 0 5 -1 0 4 , 2 0 05 W L 1 1 1 1 7 92 , at* 1 0 1 -* 11 2
. In th e cas e o f a v al u at io n m i s s t at em en tp en al ty ari s i ng fro m

th e d i s al lo wan ce o f al l o r p arto f a p art n ers hi p 's cl ai m edch ari t ab l e co n tri b ut i o n d educt i o n , h o wev er, t h e av ai l ab i l i ty o f a reas o n ab l e cau s e d efen s e can b e
co n si d eredo n ly

atth e p art n ers h i p l ev el . As n o t edab o v e, i n th atci rcu m s t an ce, t h e
reas on ab l e cau s e ex cep t i o n d o es n o tap p ly u n l es s th e p artn ers h i p 's d educt i on i s
s up p ort edb y

b o th a qu al i fi edap p rai s al an d a g o o d -fai th i n ves t i g at i o n i n t o th e
v al u e o f t h e co n tri b u t ed p ro p ert y . Sec. 6 6 64 (c)(2 ). An ds at i s fact i o n o f t h e
co n di t i o n s s p eci fi edi n s ect i o n 6 6 6 4 (c)(2 ) " are p art n ers h i p -l ev el d et erm i n at i o n s ". Wh i t eh ou s e Ho t el Lt d . P's h i p v . Co m m i s s i on er, 1 3 1 T.C. 1 1 2 , 1 73 (2 0 0 8 ), v acat ed
o n o th er g ro u n d s , 6 15 F.3 d 3 2 1 (5 th Ci r. 2 0 10 ). Th e g o od -fai th i n v es ti g at i o n req u i redb y

s ect i o n 6 6 6 4 (c)(2 )(B) m u s tb e m ad e b y

a p ers on wi th au th o ri ty

t o

" act [] o n b eh al f o f t h e p art n ers hi p " . Wh i t eh o us e Ho t el Lt d . P's h i p v . Co m m i s s i o n er, 1 3 9 T.C. 3 0 4 , 3 5 1 (2 0 1 2), aff'd i n p art , v acat ed i n p art , 7 55 F.3 d 2 3 6 (5 th Ci r. 2 0 14 ).- 3 3 - 3
. Bu rd en o f Pro o f Ru l e 1 4 2(a) p ro vi d es : " Th e b u rd en o f p ro o f s h al l b e up o n th e p et i t i o n er,
ex cep tas o th erwi s e p ro v id edb y s t atu t e o r d et erm in edb y th e Co u rt ; an d ex cep t th at , i n res p ecto f an y

n ew m at ter, i ncreas es i n d efi ci en cy , an daffi rm at i v e d efen s es , p l ead edi n th e an s wer, i ts h al l b e upo n the res p o n den t ." In reg ardt o p en al t i es , th e Co m

m i s si o ner b ears th e b u rd eno f p ro du ct io n . See s ec. 7 4 9 1 (c). To
m eetth atb u rd en , h e m

u s tp ro du ce ev i d en ce reg ard i ng th e ap p ro p ri at en es s o f i m p o s i n g th e p en al ty . Hi g b ee v . Co m m i ss i o ner, 1 16 T.C. 4 3 8, 4 4 6 (2 0 0 1 ). On ce th e Co m m i s s i o n er s at is fi es h i s b u rd en o f p ro du ct io n , th e t ax p ay er g en eral l y h as th e b u rd en o f p ro o f wi th res pect t o ex cu l p at o ry fact o rs s u ch as reas o nab l e cau s e. See i d . at4 4 6 -4 4 7
. W e m u s tfi rs t d et erm i n e wh et h er res p o n d en ts at i sfi edth e b u rd en o f p ro duct i o n i m

p o s edo n h i m

b y s ect i o n 7 4 9 1 (c) b y

p ro du ci n g ev i d en ce reg ard i n g th e ap p ro p ri at en es s o f ei th er t h e s ubs t an t i al o r g ro s s v al u at i o n m i ss t at em en t p en al ty . If s o , we m

u stth enco n s i der wh et h er an y p art n ers h i p -l ev el d efen s es s u ch
as reas o n ab l e cau s e p rev en t th e ap p l i cat io n o f ei th er p en al ty .- 3 4 -

B. Wh et h er An y

Un d erp aym en t Res u l ti n g Fro m th e Di s al l o wan ce o f RERI's Cl ai m ed Dedu ct i o n Co u ldBe " A tt ri b u t ab l e To " a Gro s s o r Sub s t an t i al Val u at i o n M i s st at em en t W e b eg i n b y

co n s i d eri ng wh et h er an y u n d erp aym en tres u l t i n g fro m o u r d i s al lo wan ce o f RERI's cl ai m edch ari t ab l e co n tri b u t i o n wo u l db e " at tri b u t ab l e t o " a g ro s s o r s ub s t an ti al v al u at i o n m i s s t at em en t ev en th ou g h t h atd i s al l o wan ce res u l t s
n o tfro m RERI's cl ai m i n g a v al u e fo r t h e SM I i n ex ces s o f i t s co rrect v al u e b u t i n s t eadfro m

th e p art n ers h i p 's fai l u re t o s ubs t an ti at e i t s cl ai m edd edu ct i o n i n
acco rd an ce wi th s ect io n 1 .1 7 0 A-1 3 (c)(2 ), In co m e Tax Reg s . W e co n cl u de t h at , i f a t ax p ay er cl ai m s a d edu ct i o n t h ato v ers t at es b y 2 0 0 % o r 4 0 0 % the v al u e o r b as i s
o f p ro p ert y , an y

u n d erp aym en tres u l t i n g fro m th e d is al l owan ce o f t h atd educt i o n
o n g ro un d s u nrel at edt o v al u at i o n i s n o n et h el es s " at tri b u tab l e t o " th e v al u at i o n
m i s s t at em en t, wi th in th e m ean i n g o f s ect i o n 6 6 62 (b )(3 ) an d(h )(1 ), t o t h e ex t en t th atth e u n d erp aym en t rel at es t o th e d i s al l o wan ce o f t h at p o rt i o n o f t he d edu ct i o n th atex ceed s the p ro p ert y ' s co rrect v al u e o r b as i s . AHG In v s ., LLC v
. Co m m i s s i o n er, 1 4 0 T.C. 7 3 (2 0 1 3 ). In To d dv . Co m

m i s si o ner, 8 9 T.C. 9 12 (1 9 8 7 ), aff'd , 8 6 2 F.2 d5 4 0 (5 th Ci r. 1 9 8 8 ), we co n cl ud edthatv al u at i o n m i s st at em en tp en al t i es d o n o t ap pl y t o a t ax p ay er wh o o v ers t at es the v al u e o r b as is o f p ro p erty i f t h e t ax p ay er's
u n d erp aym en t res u lt s n o tfro m th atm i s v al u at i o n b u t i n s teadfro m th e co m p l et e- 3 5 -

d i s al lo wan ce o f t h e t ax p ay er's cl ai m edd edu ct i o n s o r cred i ts o n g ro un d s u nrel at ed t o v al u at i o n . To d di nv o l v edt ax p ay ers wh o h adp art i ci p at edi n a m ark et edt ax
s h el t er. Part i ci p at i n g t ax p ay ers h adcl ai m edd ep reci at i o n d educt i o n s an d i n v es t m en tt ax cred i ts i n res p ecto f p ro p ert y i n wh i ch they

cl ai m eda b as i s o f $ 2 6 0 ,0 0 0 p er u n i t . Ina p ri o r t es tcas e, we h add et erm in edth atth e b as i s o f each
u n i td i dn o tex ceed $ 6 0,0 0 0. No o n an v . Co m m i s s i o n er, T.C. M em o . 1 9 8 6 -4 4 9 , 1 9 8 6 Tax Ct . M em o LEXIS 1 5 8 , at* 7 5 -* 7 6 , aff'ds ub n o m . Hi l l en dah l v . Co m m i s s i o n er, 9 7 6 F.2 d7 3 7 (9 th Ci r. 1 9 92 ). Th e b as i s cl ai m edb y p art i ci p at i n g t ax p ay ers th u s res u l t edi n a v al u at i o n o v ers tat em en tfo r p urp o s es o f s ect i o n 6 6 59
o f p ri o r l aw. Th e d edu ct i o n s an dcred it s cl ai m edb y th e To ddt ax p ay ers , h o wev er, were d i s al l o w edb ecau s e t h ei r p ro p ert y h adn o tb een p laced i n s erv i ce u n t i l aft er th e y ear i n i s s u e. Th erefo re, we h el dth atth e u n d erp aym en to f t h o se t ax p ay ers
was n ot" at tri b u t ab l e t o th e v al u at i o n o v ers t at em en t" . To d dv . Co m m i ss i o n er, 8 9 T.C. at9 1 6 . Co ng res s h aden act eds ect i o n 6 6 5 9 t o en ab l e u s t o redu ce o u r
cas el o ad . Th e Co m

m i ss i o n er's i n t erp ret at i o n o f th ats ect i o n, we reas o n ed , wo u l d req u i re u s t o d et erm i n e t h e ex i s t en ce o f a v al uat i o n o v ers t at em en tev en wh en we ch o se t o d et erm i n e t h e t ax p ay er's u n d erl y i n g t ax l iab i l i ty o n o th er g ro un d s . " Su ch a req u i rem en t " , we wro t e, " wo u l dp ro l o ng an d m u l t i p l y l i t i g at i o n, i s co n traryt o- 3 6 -

s o u n d ju d i ci al ad m i n i s trat i o n , an dap p ears co n traryt o co ng res s i on al i n t en tt o redu ce o ur cas e l o ad ." Id . at9 20
. In M cCraryv . Co m

m i s s i o n er, 9 2 T.C. 8 2 7 , 8 5 4 (1 9 8 9 ), we ex t en d edth e To d d rat io n al e t o a cas e i n wh i ch th e t ax pay ers s o u g h tt o av o i dth e v al u at io n
o v ers t at em en tp en al ty res u lt i n g fro m a d i s al l o wan ce o f cl ai m edi n v es t m en tt ax cred i t s b y co n ced in g thatthey

were n o ten t it l edt o t h e cred i t s i n i s s u e fo r reas o n s
u n rel at edt o th e v al u e o f t h e p ro p ert y . In 8 8 5 In v . Co . v . Co m

m i s s i o n er, 9 5 T.C. 1 5 6 (1 9 9 0), we h el dth at t ax p ay ers were n o tl i ab l e fo r t h e v al u at i o n o v ers t at em en tp en al ty p ro vi d edi n
s ect i on 6 6 5 9 b ecau s e we d i s al l o wedth ei r cl ai m edch ari t ab l e co n tri b u t i on d educt i o n en t i rel y

o n t h e g ro un dth atth ei r g i ftwas s ub jectt o a co n d i t io n . Becau s e th e d is al l o w an ce was n o tth e res u l to f a v al uat i o n o v ers t at em en t , we
co n cl u d ed , rel y i n g o n b ot h To ddan dM cCrary , th atth e p en al ty d i dn o tap p l y . If 8 8 5 In v. Co . rem ai n s rel i ab le p reced en t , i ts up p o rt s a d et erm i n at i o n i n t h e p res en t
cas e t hatan y

u n d erp aym en tres u l t i n g fro m o ur d i s al l o wan ce o f RERI's cl ai m ed ch ari t ab le co n tri b u t i on wo u l d n o tb e " at tri bu t ab le t o " a g ro ss o r s ub s t an t i al
v al u at i o n m i s s t at em en t . InAHG In v s ., LLC v . Co m m i s si o n er, 1 4 0 T.C. at8 3 , h o wev er, we o v erru l edb o th To d dan d M cCrary . Becau s e o f o u r o v erru l i n g o f t h e- 3 7 -

two cas es o n wh i ch we rel i edi n 8 8 5 In v . Co ., we wi l l n o l on g er fo l l o w th atcas e. In s t ead , we v i ew 8 8 5 In v . Co . as h av i n g b een o v erru l ed , s ub s i l en ci o , b y AHG. AHG i n v ol v eda p art n er wh o h ad b een al l o cat eda s h are o f p art n ers h i p l o ss th atth e Co m

m i ss io n er d i sal l owedi n an FPAA. Th e t ax pay er i n AHG co n ced ed th ath e was n o ten t i t l edt o th e d i s al l o wedl o s s b ecau s e h e was n o tatri s k u n d er
s ect i on 4 6 5 an d th e p art n ers h i p 's al l o cat io n t o h i m o f a s h are i n th e l o s s d i dn o t h av e s ub s t an t i al eco n o m i c effect wi th i n the m ean i n g o f s ect i o n 7 0 4 (b )(2 ). Th e t ax p ay er m ad e t hi s co n ces s i o n , we fo u n d , " i n an at t em p t t o av o i dap p l i cat i on o f th e 4 0 % g ro s s v al u at io n m is s t at em en tp en al ty " . AHG In vs ., LLC v
. Co m m i s s i o n er, 1 4 0 T.C. at7 3
. Th e t ax p ay er m o v edfo r p art i al s u m m ary ju d g m en t th atth e v al u at i o n m i ss t at em en tp en al ty d i dn otap p l y

as a m at t er o f l aw b ecau s e th e d i s al l o wan ce o f t he l o ss i n i s s u e res t edo n g ro u nd s u n rel at edt o v al u at i o n o r b as i s . W e d en iedthe t ax p ay er's m o t i on an dru l ed " th ata t ax pay er m ay n o tav o i d th e g ro s s v al u at io n m i s s tat em en tp en al ty m erel y b y co n ced i n g a d edu ct io n o r cred i to n a g ro u n du n rel at edt o v al u e o r b as i s o f p ro p ert y ." Id . at7 5 -7 6
. Ou r co n cl u s i o n i n AHG s qu arel y co n fl i ct edwi th o u r p ri o r Op i n i on i n M cCrary . W e res o lv edth atco n fl i ctb y o v erru l i n g M cCrary . Id
. at8 3
. Ov erru l i n g M cCraryd i dn o treq ui re o v erru l i n g To d das wel l . W e co u l d h av e d i s t i n g u i s h edcas es i n wh i ch a t ax p ay er at t em p t s t o av o i da v al u at i on- 3 8 -

m i s s t at em en t p en al ty

b y m ean s o f a s el ect i v e co nces s i o n o n p os s i bl y s p u ri o u s g ro u nd s fro m

th o s e i n wh i ch we o u rs el v es d et erm i n e t h at v al i dal t ern at iv e g ro u n d s req u i re t he d en i al o f a cl ai m edt ax b en efi t . Bu ti n AHG we d ecl i n edt o draw t h at d i s t i n ct i o n , fi n d i n g th atth e Co m m i s s i o n er h ad" m eth i s b u rd en t o p ers u ad e u s t o
o v erru l e o u r p reced en tes t ab l i s h edb y To d d * * * an d M cCrary ." Id . Al th o u g h
o u r p reci s e h o l d in g i n AHG rel at edt o t ax p ay er co n ces s i on s an dth u s d o es n o t
co n fl i ctwi th To d d , we g ro u n d ed o u r h o l d i n g i n AHG o n a b ro ad er p ri n ci p l e t h at

" an u n d erp aym en to f t ax m ay b e at tri b ut ab l e t o a v al u at i o n m i s s t at em en tev en wh en th e Co m

m i s s io n er's d et erm i n at i on o f an u n d erp aym en t o f t ax m ay al s o b e
s u s t ai n edo n a g ro u n d u n rel at edt o b as i s o r v al u at io n ." Id . at8 4 . Our ad o p t i o n o f th atp ri n ci p l e req u i red u s t o o v erru l e To ddan d al s o req u ires th atwe o v erru l e 8 8 5 In v . Co
. Anarg u m en tg ro u n d edi n th e To d drat i o nal e m ay rem ai n v i ab l e i n the Co u rt s o f Ap p eal s fo r t h e Fi ft h an d Ni n th Ci rcu it s . Th e Co u rto f Ap p eal s fo r t he Fi ft h Ci rcu i tn o t o n l y

affi rm ed o u r d eci s i o n i n To d d ; i tal s o ex t en d edthe To d d rat i o nal e t o a cas e i n v o l v i n g l o s s es an dcred it s d i s al l o wedo n eco n o m i c s ub s t an ce g ro u nd s , ev en th o ug h th e eco n o m i c s ub st an ce an al y si s d ep en d edi n p art o n th e
o v erv al u at i o n o f t h e p ro p ert y i n res p ecto f wh i ch th e l o s s es an dcred i t s were cl ai m ed . See Heas ley

v . Co m m i s s i o n er, 9 0 2 F.2 d3 8 0 (5 th Ci r. 1 9 9 0 ), rev ' g T.C.- 3 9 -

M em o. 1 9 8 8 -4 0 8
. M o re recen t l y , i n Bem o n tIn v s ., L.L.C. v . Un i t edSt at es , 6 7 9 F.3 d3 3 9 (5 th Ci r. 2 0 1 2), t he co u rtex p res s edres erv at i o n s ab o u tth e rat io n al e o f To d d an dHeas l ey

b ut n o n et h el es s fo l l o w edth o se cas es u n d er s t are d eci s i s . (In a
s ep arat e co n cu rri n g o p i n i on jo i n edb y th e o th er t wo ju d g es o n t h e p an el , J u d g e Prad o s u g g es t edth atth e " To d d/ Heas l ey ru l e" " m ay b e m i s gu i d ed " . Id . at3 5 1 (Prad o , J ., co ncu rri ng ).) Th e Co u rto f Ap p eal s fo r t h e Ni n th Ci rcu i tfo l l o wed To d d i n i t s d eci s i on i n Gai n er v . Co m m i s s i o n er, 8 9 3 F.2 d 2 2 5 (9 th Ci r. 1 9 9 0 ), aff'g T.C. M em o . 1 98 8 -4 1 6 . M o re recen t l y , i n Kel l er v . Co m m i ss i o n er, 5 5 6 F.3 d 1 0 5 6 , 1 0 6 1 (9 th Ci r. 2 0 0 9 ), aff'g i n p art , rev 'g i n p artT.C. M em o . 2 0 0 6 -1 3 1 , th e
co u rts u g g es t edth at , were i tn o t" co n s trai nedb y Gai n er" , i tm i g h tfo l l o w o th er ci rcu i t s an dap p l y

an o v erv al u at i o n p en al ty i n cas es l i k e Heas ley

i n wh i ch

" o verv al uat i on i s i n t ert wi n edwi t h a t ax av o i d an ce s ch em e t h atl ack s eco n o m i c
s ub s t an ce"
. Becau s e RERI was d i s s o l v edi n 2 00 4 an dh adn o p ri nci p al p l ace o f b u s i n es s wh en p et i t i o n er fi l edh i s p et i ti on i n 2 0 08 , ab sen ta wri t t en s t i pu l at i o n t o th e
co n traryth e p res en tcas e wo u l db e ap p eal ab l e t o the Co u rto f Ap p eal s fo r t h e D.C. Ci rcu i trat h er t h anth e Co urt o f Ap p eal s fo r ei th er t h e Fi ft h o r th e Ni nt h Ci rcu i t . See s ec. 7 4 8 2 (b ); RERI Ho l d i n g s I, LLC v . Co m m i s s i o n er, 1 4 3 T.C. 4 1 , 6 6 (2 0 1 4). Th erefo re, we are n o t b o u n db y th e d oct ri ne o f Go l s en v . Co m m i s s i o n er,- 4 0 -

5 4 T.C. 7 4 2 (1 9 70 ), aff'd , 4 4 5 F.2 d9 8 5 (1 0t h Ci r. 1 9 7 1 ), t o ap p ly i n th e p res en t
cas e t he ru le an no u n ced i n To d dan dup h el db y the Co u rt o f Ap p eal s fo r t h e Fi ft h Ci rcu i ti n i t s affi rm an ce o f o ur d eci s i o n i n th atcas e an dal so ap p l iedb y the Co u rt
o f Ap peal s fo r t h e Ni n th Ci rcu i ti n Gai n er. In s tead , u n d er s t are d eci s i s , the p ri n ci p l e we ad o p t edi n AHG i n o v erru l i n g b o th To d dan dM cCraryg o v ern s th e p res en tcas e. C. Th e SM I's Val u e Becau s e RERI d i d n o t m eetth e s ub s tan t i at i on req u i rem en tp ro v i d edi n
s ect i on 1 .1 7 0 A-1 3 (c)(2 ), In co m e Tax Reg s ., the v al u e o f t h e SM I t h atRERI
co n tri b u t edt o th e Un i v ers i ty i s i rrel ev an tt o th e i s s u e o f t h e am o u n to f t h e d educt i o n t o wh ich the p art n ers h i p i s en t i t l edfo r th atco n tri b u t i o n . No n et h el es s
we m u s td et erm i n e t h e SM I's v al u e t o d eci d e wh ether t h e v al u e RERI cl ai m edo n i t s retu rn res u l t edi n a g ro s s o r s ub s t an t i al v al u at i o n m i s st at em en twi th i n th e
m ean i n g o f s ect i o n 6 6 6 2 (e)(1 ) o r (h )(2 ). As n o tedab o v e, t h e am o u n t o f a co n tri b u t i o n o f p ro p ert y o th er t h an m o n ey i s g en eral l y

m eas u redb y

th e p ro p ert y 's fai r m ark etv al u e atth e t i m e o f t h e
co n tri b u t i o n . Sec. 1 .1 7 0 A-1 (c)(1 ), In co m e Tax Reg s . A p ro p ert y 's fai r m ark et
v al u e " is th e p ri ce atwh i ch th e p ro p ert y wo u l dch an g e h an d s b etw een a wi l l i n g b u y er an da wi l l in g s el l er, n ei ther b ei n g u n d er an y co m p u l si o n t o b u y

o r s el l an d- 4 1 -

b o th h av i n g reas o n ab l e kn o wl ed g e o f rel ev an t fact s ." Sec. 1 .1 7 0 A-1 (c)(2 ), In co m e Tax Reg s . In m o s tcas es , th e wi l l i n g b u y er-wi l li n g s el l er s t an d ardi s n o tap p li ed d i rect l y t o an n ui t i es , l i fe es tat es , t erm s o f y ears , rem ai n ders , rev ers i o n s , an d
s i m i l ar p art i al i n t eres t s i n p ro p ert y . In s t ead , th o s e i n t eres t s are g en eral l y v al u ed
u n d er t ab l es p res cri b edb y th e Secret ary

th atd i v i d e t h e fai r m ark etv al u e o f t h e
u n d erl y i n g p ro p ert y

am o n g the s ev eral i n teres t s i n th e p ro p ert y o n th e b as i s o f th ei r p res en tv al ues , d et erm i n edu s i ng a p res cri b edi n t eres trat e. See s ec. 7 5 2 0 (a).

1
. Ap p li cab i l i ty

o f Sect i o n 7 5 2 0 Sect io n 1 .7 5 2 0 -3 , In co m e Tax Reg s ., l i m i t s th e ap pl i cat i o n o f th e s tan d ard actu ari al fact o rs p ro vi dedi n t h e s ect i o n 7 5 2 0 t ab l es . Un d er t h atreg ul at i o n , th e
s t an d ardfact o rs ap p l y

t o v al u e a rem ai n d er i nt eres t o n l y i f t h e ag reem en t s g o v ern i n g th e p ro p erty

p ro v i d e ad equ at e p ro t ect i o n t o the h o l d er o f t h at i n t eres t . Sec. 1 .7 5 2 0 -3 (b )(2 )(i i i ), In co m e Tax Reg s . Th o s e p ro t ect i o ns m u s t b e " co n s i s t en t wi th th e p res erv at i o n an d p ro t ect i o n th at th e l aw o f tru s t s wo u l dp ro v i d e fo r a p ers o n wh o i s u n qu al i fi ed l y d es i g n at edas the rem ai n d er b en efi ci ary o f a t ru s tfo r a
s i m i l ar durat i o n " . Id . Th e p ro t ect i v e p ro v i si on s m us t" as s u re t h atth e p ro p ert y wi l l b e ad equ at el y

p res erv ed an dp ro t ect ed(e.g ., fro m ero s i on , i n v as i o n , d ep l et i o n , o r d am ag e) u n ti l th e rem ai n d er * * * i n t eres tt ak es effect i n p o s s es s i o n an d- 4 2 -

en jo ym en t ." Id . Th e " p ro v i s i o n s o f t h e arran g em en t an d t h e s u rro u nd i ng ci rcu m s t an ces " m

u stm an i fes t" th e t ran s fero r's i n t en t * * * th atth e en ti re d i s p o s i t i on p ro v i d e t h e rem ai n d er * * * b en efi ci ary wi th an u n d im i n i s h edi n t eres t i n the p ro p ert y

tran sferred atth e t i m e o f t h e t erm i nat i on o f t h e p ri o r i n t eres t ." Id
. In ad d i t i o n , th e s t an d ardactu ari al fact o rs p ro v i dedi n th e s ect i o n 7 5 20 t ab l es g en eral l y

m ay n o t b e u s edt o v al u e a rem ai n d er i n t eres tth ati s a " res tri ct ed b en efi ci al i n t eres t" . Sec. 1 .7 5 2 0 -3 (b )(1 )(i i ), In co m e Tax Reg s. A rem ai n d er i n t eres ti s a res tri ct edb en efi ci al i n t eres t i f i t " i s s ub jectt o a co n t i ng en cy , p o wer, o r
o th er res tri ct i o n, wh et h er t h e res t ri ct i o n i s p ro v id edfo r b y th e t erm s o f t h e t ru s t , wi l l , o r o th er g o v ern i n g i n s tru m en to r i s cau s edb y o th er ci rcu m s t an ces ." Id
. Wh en th e s t an dardt ab le fact ors can no t b e u s edt o v al u e a rem ai n d er i n t eres t , i t s " actu al fai r m ark etv al u e" m u s tb e d et erm i n edo n the b as i s o f al l o f t h e fact s an dci rcu m s t an ces , wi th o utreg ardt o s ect i o n 7 5 2 0 . Sec. 1 .7 5 2 0-3 (b )(1 )(i i i ), In co m e Tax Reg s . Th e t h res h o l dqu es t i o n i n d et erm in i n g wh et h er t h e v al u e o f t h e SM I t h at RERI rep o rt edo n i ts return res u l tedi n a g ro s s o r s ub s t an t i al v al u at i o n
m i s s t at em en t wi th i n th e m ean i n g o f s ect io n 6 66 2 (e)(1 ) o r (h )(2 ) i s wh et h er th e
v al u e o f t h atp ro p erty

m u s tb e d et erm i n ed u nd er s ect i o n 7 5 2 0 . Res p on d en targ u es th atth e SM I i s a res tri ct edb en efi ci al i n t eres tan d t h ati t d o es n o tm eet th e- 4 3 -

ad equat e p ro t ect i on req u i rem en to f s ect i o n 1 .7 5 2 0 -3 (b )(2 )(i i i ), In co m e Tax Reg s . Reg ard in g th atreq u i rem en t , res p o nd en to b serv es th at , u nl i k e th e h o l d er o f a
rem ai n d er i n t eres ti n tru s t, th e SM I h o l der co u l dn o ts u e t h e TOYS h ol d er fo r b reach es o f fi du ci ary du ty . M o reo v er, res p on d en tn o t es : " [T] he o n l y reco u rs e
av ai l ab l e t o the SM I h ol d er i n th e ev en tth e TOYS h o l d er s el l s, ex ch an ges , was t es , o r o v erl y en cu m b ers th e Hawt h o rn e Pro pert y * * * i s t o t ak e i m

m ed i at e p o s s es s i o n
o f t h e n o w-d am ag edTOYS i nt eres to r p ro p ert y ." W e ag ree wi th res p o n d en tth at th e i n ab i l i ty o f t h e SM I h o l d er t o reco v er d am ag es fo r was t e o r o th er act s th at p reju d i ce i t s i nt eres t s ex po s es th e SM I h o l d er t o a s u ffi ci en t ri s ko f i m pai rm en t i n
v al u e t h atth e SM I h ol der d o es n o ten jo y a l ev el o f p ro tect i o n co n s i s t en twi th th at p ro v id edb y

th e l aw o f t ru s t s . 1 3 Becau s e we co n cl u d e t h atth e SM I d o es n o tm eet th e ad equat e p ro t ect i o n req u i rem en t o f s ect i o n 1 .7 5 2 0-3 (b )(2 )(i i i ), In co m e Tax Reg s., we n eedn o t co n s i d er res p o n d en t's arg u m en ts fo r t reat i n g th e SM I as a

1 3 W e d o n o tag ree wi th res p on d en t , h o wev er, t h atth e ab s en ce o f a fi du ci ary du ty o wedb y th e TOYS h o l d er t o the SM I h o l d er i s d i s p o s i ti v e. As p et i ti o n er arg u es , i f t h e m ere ab s en ce o f a fi du ci ary rel at i o n s h i p b et ween t erm an drem ai n d er h o l d ers v i o l at es th e ad equ at e p ro t ect i o n req u i rem en to f s ec. 1 .7 5 2 0 -3 (b )(2 )(i i i ), In co m e Tax Reg s ., th en n o rem ai n d er i n t eres tcreat edo u t s i d e a t ru s t co ul db e v al u edu n d er s ec. 7 5 2 0 . In RERI Ho l d i n g s I, LLC v . Co m m i s s i o n er, 1 43 T.C. 4 1 , 5 8 (2 01 4 ), as p et it i on er o b s erv es , we reject edh i s arg u m en tth atthe ad equ at e p ro t ect i o n req ui rem en tap p l i es o n l y t o i n t eres t s i n tru s t . If th e ad equ at e p ro t ect i o n req u i rem en tap p li es t o i n t eres t s creat edo ut s i d e o f t ru s t s as wel l as t o i n t eres t s i n tru s tp ro p ert y , i t m

u s t b e t h atth e ab s en ce o f a fi du ci ary rel at i o n s h i p d o es n o t v i o l at e t h atreq u irem en t .- 4 4 -

res tri ct edb en efi ci al i n t eres twi th i n th e m ean i n g o f s ect i o n 1 .7 5 2 0 -3 (b )(1 )(i i ), In co m e Tax Reg s . Th e co m m i ss i o n o f was te wo u ldn o to n l y b reach th e As si gn m en t that creat ed the SM I; i t wo u l dal s o v i o l at e t h e TOYS h o l d er's du ty t o th e SM I h o l d er
u n d er New Yo rkl aw. See N.Y. Real Pro p . Act s. Law s ec. 8 0 1 (M cKi n ney 2 0 0 9 ) (p ro v i d i n g fo r act i o n fo r was te ag ai n s t t en an tfo r y ears wh o co m m i t s was t e up o n real p ro p ert y ); Es t at e o f Gaffers , 5 N.Y.S.2 d6 7 1, 6 7 7 (Ap p . Di v . 1 9 3 8 ) (" Iti s a g en eral ru l e t h ata t en an tfo r l ife * * * m u stp ay the t ax es an dm ak e al l o rd i n ary , reas on ab l e an dn eces s ary rep ai rs req u i red t o p res erv e t he p ro p ert y an d p rev en ti t s g o i n g t o d ecayo r was t e[.] " ). Bu tth e ex cu l p at o ry p ro v i s i o n i n the As s i g n m en t
s h o u ldb e i n t erp ret edt o l im i t l i ab i li ty fo r b reach es n o to n l y

o f t h e co v en an t s i n cl u d edi n th atag reem en tb u tal so o f g en eral dut ies u n d er New Yo rk l aw. See Th e Trav el ers In s . Co . v . 6 3 3 Th i rdAs s o cs ., 9 7 3 F.2 d8 2 (2 d Ci r. 1 9 9 2). Trav el ers co n s i d eredwh et h er a cred i t o r h ad s tan d i n g u n d er a frau du l en t
co n vey an ce s t atut e t o s etas i d e d i s tri b u t i o n s b y a p art n ers h i p d eb t o r t o i t s p art n ers . Th e cred it o r arg u edth atthe d i st ri b u t i o n s l eftth e p art n ers hi p wi th i n ad equ at e fu n d s t o p ay

t ax es o n th e p ro p ert y

th ats ecu red th e d eb tan dth atthe p art n ers h i p ' s fai l u re t o p ay

t ax es v i o l at edi t s du t i es t o th e cred i t o r t o p res erv e t h e v al u e o f t h e
m o rt g ag edp ro p erty . Th e p art n ers hi p arg u edth atth e d i s tri b ut i o n s d i dn o t- 4 5 -

p reju d i ce t h e cred i t o r's ri g h t s b ecau s e, u n d er t h e l o an ag reem en t , i t s rem ed i es i n th e ev en t o f b reach were l im i t edt o fo recl os u re o n the p ro p ert y . Thus , ev en i f t h e p art n ers hi p , as m o rt g ag o r, h adb reach edi t s du t ies t o th e cred i t or b y fai l i n g t o p ay t ax es o n th e m o rt g ag edp ro pert y , th e cred i t or wo u l dn o th av e b een en t i t l edt o d am ag es . It s rem ed y

wo u l dh av e b een l i m i t ed t o t ak i ng p o s s es s io n o f t h e p ro p ert y (s ub ject to a l i enfo r t h e u np ai dt ax es ). Th e cred it o r arg u edth at , b u tfo r t h e d i s tri b u t i o n s i n i s s u e, i tco u l dh av e co l lect edd am ag es u n d er a t o rtact i on fo r
was te. Th e Co u rt o f Ap p eal s fo r t h e Seco n d Ci rcu itd i s ag reed , read i ng th e
ex cu lp at o ry

cl au s e i n th e p art i es ' ag reem en tas fo recl os i n g d am ag es u n d er t o rt act i on s as wel l as fo r b reach es o f t h e m ort g ag o r's co n tract u al o b l i g at i o n s .

" Den o m i n at i ng th e act io n as o n e s o u n d i n g i n t ort , as u rg edb y p l ai n t i ff" , th e co u rt
reas on ed , " d o es n ots av e i t ." Id . at8 4 -8 5
. 1 4 Si m i l arl y , we co n cl ud e t h atNew Yo rk
co u rt s wo u l dn o t h av e al l owedth e SM I h o l d er t o av o i dth e ex cu l p at o ry p ro v i s i o n i n cl u d edi n th e As s i g n m en tb y d en o m i n at i n g i t s act io n ag ai n s t the TOYS h o l d er as

1 4 Des p i t e i t s co n cl u s io n i n Th e Trav el ers In s. Co . v . 6 3 3 Th i rdAs s o cs ., 9 7 3 F.2 d8 2 (2 dCi r. 1 9 9 2), t h atth e cred i t o r-p l ai n t i ff wo u l dn o th av e b een en t i t l edt o d am ag es fo r t h e p art n ers h ip -d eb t o r's fai lu re t o p ay p ro p erty t ax es o n th e m o rt g ag edp ro p erty , th e Co u rt o f Ap p eal s fo r t h e Seco n dCi rcu i tv acat edth e l o wer co u rt 's d i s m is s al o f t he cred i to r's act i o n b ecau s e o f t h e p o ss i b i l i ty th at , b u tfo r t h e d i s tri b u t i o n s i n i s s u e, t h e cred i t o r m i g h t h av e b een ab le t o b ri n g an equ i t ab l e act i on t o req u i re t he p artn ers h i p t o p ay th e t ax es .- 4 6 -

o n e fo r b reach o f t h e TOYS h o l d er's du t i es u n d er New Yo rkl aw, rat h er t h an fo r b reach o f the co ven an ts i n cl u d edi n th e As s i g nm en t . As s h o wnab o v e, t h e h o l d er o f a rem ai n d er i n t eres ti n p ro pert y , ev en o u t s i d e
o f a t ru st , wo u ldb e p ro t ect edag ai n s twas t e an do th er act i on s thatwo u ldi m p ai r th e v al u e o f t h e p ro p ert y . Th e h o l d er o f a rem ai nd er i n t eres ti n tru s t , as the b en efi ci ary

o f a fi du ci ary

du ty o wedb y the t ru s t ee, wo u l den

jo y , i f an yth i n g , ev en g reat er p ro t ect i on . See g en eral l y 3 Res t at em en t , Tru st s 3 d , s ecs . 7 7 -7 9 (2 0 0 7 ) (ad dres s i n g du ti es o f p ru d en ce, l o y al ty , an di m p art i al i ty thatco n s ti tu t e th e fu n d am en t al s t an d ard s o f fi du ci ary co n du ct i n tru s t ad m in i s trat i o n ). Th erefo re, a fo rt io ri , th e ex p o s u re o f t h e SM I h o l d er t o th e ri s ko f i m pai rm en ti n th e v al u e o f i t s i n t eres tdu e t o was t e o r o th er ad v ers e act i o n s m ean s th atth e SM I h o ld er d o es
n o ten j o y a l ev el o f p ro t ect i o n co n s i s t en t wi th t h atp ro v i d ed b y th e l aw o f t ru s t s . Cf. s ec. 1 .7 5 2 0 -3 (b )(2 )(i i i), In co m e Tax Reg s . Co n s equen t l y , th e v al u e o f t h e SM I, fo r t h e p urp os e o f d et erm i n i n g th e am o u n to f t he d educt i on t o wh i ch RERI
wo u l dh av e b een al l o wedfo r i t s co n tri b ut i o n o f t h at p ro p erty t o t h e Un i v ers i ty

h ad th e p art n ers h i p co m

p l i edwi th th e s ub s t an t i at i o n req ui rem en t s o f s ect i o n 1 .1 7 0 A1 3 (c)(2 ), In co m e Tax Reg s ., wo u l dn o t h av e b een th e SM I's p res en tv al u e d et erm i n edu nd er s ect i o n 7 5 20 . Id . In s t ead , th e am o u n t RERI wo u l d h av e b een
en t i t l edt o d edu ctwo ul dh av e b een " th e act ual fai r m ark etv al u e o f th e * * * [SM I]- 4 7 -

(d et erm i n edwi th o u treg ardt o s ect i o n 7 5 2 0 ) * * * b as edo n al l o f t h e fact s an d ci rcu m s t an ces ". Sec. 1 .7 5 2 0 -3 (b )(1 )(i i i ), In co m e Tax Reg s .

2
. Th e Val u e o f t he SM I Bas edo n Al l o f t h e Fact s an d Ci rcu m s t an ces
a. Th e Th ree Fu n d am en t al Co m po n en t s o f t h e SM I's Val u e Th e v al u e o f t h e SM I o n Au g us t2 7 , 2 0 0 3 , th e d at e t h at RERI as s i g n edi t t o th e Un i v ers i ty , tu rn s o n th ree am ou n t s : (1 ) t h e p ro ject edcas h fl o w fro m

th e Hawt h o rn e p ro p ert y

fo r 2 02 1 , (2 ) t h e ex p ect edg ro wth rat e i n cas h fl o ws thereaft er,
an d (3 ) th e d i s co u n trat e ap pl i edt o d et erm in e t h e p res en tv al ue o f t he p o s t-2 0 2 0
cas h fl o ws as o f t h e v al u at i o n d at e. In p art i cu l ar, t h e v al ue o f t he SM I as o f Au g u s t2 7 , 2 0 0 3 , can b e ex p res s edb y th e fo l l o w in g fo rm

u l a: (2 0 2 1 CF ÷ (r

! g )) × (1 ÷ (1 + r) 1 7
. 3 3 ) wh ere " 2 0 2 1 CF" is th e p ro j ect edcas h fl o w fro m

th e Hawt h o rn e p ro p erty

fo r 2 0 2 1 ,

" r" i s th e d i s co u ntrat e, an d " g " i s th e p ro ject edg ro wth rat e i n cas h fl o ws aft er 2 0 2 1 . Th e fi rs tp h ras e i n th e fo rm u l a (2 02 1 CF ÷ r

! g )) d et erm i n es the v al u e, as
o f J an u ary

1 , 2 0 2 1, o f al l rem ai n i n g cas h fl o ws fro m th e p ro p erty

b y cap i t al i zi n g p ro ject ed2 0 21 cas h fl o w i n p erp etu i ty 1 5 ata rat e eq u al t o th e ex ces s o f t h e d i s co u n t

1 5 W e reco g ni ze, o f co u rs e, t h atthe Hawt h o rn e p ro p ert y can n o t b e ex p ect ed t o p ro du ce ren t al i n co m e i n d efi n i t el y wi th ou t fu rt h er m at eri al cap i t al i n v es t m en t s . Res po n d en td i dn o trefu t e t h e d et erm i n at i on b y p et i t i o n er's ex p ertM r. M y ers th at (co n ti n u ed ...)- 4 8 -

rat e o ver t h e g ro wth rat e. Th e s eco n dp hras e i n t h e fo rm ul a (1 ÷ (1 + r) 1 7
. 3 3 ) i s
s i m p l y a d i s co un tfact or t h atd i s co u n t s th e J an u ary 1 , 2 0 21 , v al u e b ack1 7 .3 3 y ears t o the d at e o f th e g i ft
.

b
. Th e An al y s es o f th e Th ree Pri n ci p al Ex p ert s Al th ou g h the d et ai l edm ech an i cs em pl oy edb y th e ex p ert s wh o o ffered t es t i m o ny attri al d iffered s o m ewh at , each ex p ert 's co n cl u s i o n can b e ex p res s edi n t erm s o f t h e fo rm

ul a s h o wnab o v e. Fo r ex am p l e, p et it i on er's ex p ert M r. M y ers p ro ject ed2 0 21 cas h fl o w at $ 8 ,1 0 7 ,5 8 8 an d as s u m edth atcas h fl o w wo u l di n creas e 3 % p er y ear. Th e $ 1 6 , 5 5 0 ,0 0 0 v al u e M r. M y ers as s i g nedt o th e SM I effect i v el y d i s co u n ts p o s t -2 0 2 0 cas hfl ows ata rat e o f ab o u t1 1 .0 1 % (t h ati s , ($ 8 ,1 0 7 ,5 8 8 ÷ (.1 1 0 1

! .0 3 )) × (1 ÷ 1 .1 1 0 1 1 7
. 3 3 )  $ 1 6,5 5 0 ,0 0 0). By co n tras t , Dr. Crag g , wh o t es t ifi edo n b eh al f o f res p o nd en t, v al uedth e SM I as o f Au g u s t2 7 , 2 0 0 3 , atab o u t$ 2
. 0 9 m i l l i o n . Dr. Crag g 's an al y s i s i m p l i es a

1 5 (...co n t i nu ed ) th e Hawt h o rn e p ro p ert y

wo u ldh av e an es t i m at edu s efu l l i fe o f 6 5 y ears an dan effect i v e ag e o f 3 8 y ears i n 2 0 2 1 . Th o s e fi gu res s u gg es tth atth e p ro p ert y ' s u s efu l l i fe wo u l den di n 2 0 4 8
. (If t h e p ro p ert y h ada 6 5 -y ear t o tal l i fe an dan effect i v e ag e o f 3 8 y ears i n 2 0 2 1, i t wo u l dh av e 2 7 y ears i n i t s u s efu l l i fe t h enrem ai n i n g .) Th e p art i es ' ex p ert s g en eral ly i g n o redth e l i m i t ed u s efu l l i fe o f t h e Hawt h o rn e p ro p erty an dco m p ut edth e SM I's v al u e b y cap i tal i zi n g p ro ject edcas hfl o ws i n p erp etu i ty . W e h av e co n fi rm edth att ak i n g i n t o acco u n tan as s u m edces s at i o n o f ren t al i n co m e aft er 2 0 48 wo u l d n o tm at eri al l y affect th e SM I's v al u e.- 4 9 -

p ro ject ed2 0 21 cas h fl o w o f $ 6 ,6 6 3 ,3 2 5
. 1 6 He d eri v edth atam o u n tb y accret i n g at 3 .2 9% t h e ren tp ro v i d edfo r t h e fi n al y ear o f t h e i n i t i al p eri o do f t h e AT&T l eas e. Dr. Crag g d i s co un t edh i s p ro ject edfu tu re cas hfl o ws ata rat e o f 1 8 .9 9 % (t h ati s , ($ 6 ,6 63 ,5 2 2 ÷ (.1 8 99

! 0
. 0 3 2 9 )) × (1 ÷ 1
. 1 8 9 9 1 7
. 3 3 )  $ 2 ,0 9 0 , 0 00 ). Dr. Crag g d eri v edh i s 1 8.9 9 % d i sco un trat e fro m th e p ri ce atwh i ch Hawth o rn e b ou g h tth e Hawt h o rn e p ro p ert y

fro m In t erg at e i n Feb ru ary

2 0 02 . Dr. Crag g reas o n edth at In t erg at e an dHawth o rn e i m p l i ci t l y v al u edp o s t -M ay

2 0 1 6 cas h fl o ws atth atrat e, wh i ch refl ect s a ri s kp rem i u m o f 1 3 .3 9 % o v er t h e Feb ru ary 2 00 2 l on g -t erm ap p li cab l e Fed eral rat e (AFR) o f 5 .6 %. Rev . Ru l . 2 0 0 2 -5 , 2 0 0 2 -1 C.B. 4 6 1
. Res p o n d en t 's o ther ex pert , M r. Ab rah am , d et erm i n edth atthe SM I was
wo rt h $ 3 ,3 82 ,0 00 as o f Au gu s t2 7 , 2 0 0 3 . M r. Ab rah am p ro j ect ed2 0 2 1 cas h fl o w
o f $ 6 , 5 8 6 ,5 9 5 , wh i ch h e d eri v edfro m th e fo recas to f ren t al i n co m e m ad e i n t h e Bo n z/ REA ap p rai s al . M r. Ab rah am 's rep o rti ncl u d es a s t at edas s u m p ti o n th atren t
wo u l di n creas e aft er 2 0 1 7 at3 % , al th o u g h h i s p ro ject edren t s actu al l y i n creas e at
o n l y 2 .5 % p er y ear. (Hi s rep o rtfai l s t o ex p l ai n thatd i s crep an cy .) Gi ven th o s e
as s u m pt i o n s , M r. Ab rah am

i m p l i ci t l y d i s co u n t s h i s p ro

ject ed p os t -2 0 2 0 cas h fl o w s

1 6 Dr. Crag g p ro

ject edcas h fl o w o f $ 6 , 4 5 1 ,0 8 4 fo r 2 0 2 0 an das s u m edan an n ual g ro wth rat e o f 3 .2 9%. Th u s , h i s an al y s i s i m pl i es a p ro

ject edcas h fl o w fo r 2 0 2 1 o f $ 6 ,4 5 1,0 8 4 × 1 .0 3 29 , o r $ 6 ,6 6 3 ,3 2 5
.- 5 0 -

fro m th e Hawt h o rn e p ro p erty

ata rat e o f 1 6 .4 4 % (t h at i s , ($ 6 ,5 8 6 , 5 95 ÷ (.1 6 4 4

! .0 2 5)) × (1 ÷ 1 .1 6 4 4 1 7
. 3 3 )  $ 3 ,3 8 2 ,0 0 0 ). M r. Ab rah am

p u rp o rt edt o ap p ly

a d i s co un trat e o f 1 8 %, wh i ch h e d eri v ed b y ad d i n g t o an as s u m edri s k -free rat e p rem i um s at tri bu t ab le t o equ i ty i n v es t m en t s i n rel at i v el y

s m al l en t i t i es . M r. Ab rah am ' s effect i v e d i sco u n trat e, h o w ev er, was l es s th anth e rat e h e p ro fes s ed t o ap p l y b ecau s e, atth e en do f t h e t i m e h o ri zo n i n each o f t h e s cen ari os h e co n s i d ered(u s i ng al t ern at i v e as s u m p t i o ns reg ard i n g AT&T's ex erci s e o f ren ewal o p t i o n s ), h e cap it al i zedth e as s u m edfi nal p eri o dren t ata rat e o f o n l y

1 0
. 5 %. Cap i t al i zi n g at1 0 .5 % cas hfl o ws ex p ect edt o g ro w at2 .5 % p er y ear i s ak i n t o d i s co u nt in g th o s e cas hfl o ws at1 3 % (1 0 .5 % + 2 .5 %). Thu s , M r. Ab rah am ap p l i edan 1 8 % d i sco u n trat e t o cas h fl o ws wi thi n each as s u m edt i m e h o ri zo n an d a 1 3 % d i s co u n trat e t o cas h fl o ws th ereaft er. W e can th i n k o f n o ju s t ifi cat i o n fo r th atap p ro ach : If an yth in g , cas h fl o w s fu rt h er i n th e fu tu re s h o u ld b e d i s co u n t edat a h i g h er rat e, refl ect i n g the g reat er u n cert ai n ty i n h eren ti n p ro ject in g th em . 1 7 Wh at ev er t h e co n cep tu al m eri to f M r. Ab rah am 's ap p ro ach , i ti s

1 7 M r. Ab rah am

rel i edo n t h e Bo n z/ REA ap p rai s al fo r h i s 1 0 .5 % cap i t al i zat io n rat e. Th atap p rai s al , h o wev er, em p l o y eda 9 .5 % rat e t o d i sco u n t p ro ject edcas h fl o ws th ro u g h 2 0 1 6 an da 1 2 % rat e t o d i s co u n tp ro ject edcas h fl o ws i n 2 0 1 7 an d2 0 1 8
. Bo n z/ REA th encap i t al i zedp o s t -2 0 1 8 cas h fl o w s at1 0 .5 %, wh i ch , g i v enan as s u m edg ro w th rat e i n ren to f 2 .7 5 %, was ak i n t o d i s co u n t i n g (co n ti n u ed ...)- 5 1 -

n o ts u rp ri s i n g th at , as an ari th m et i c m at t er, h is effect iv e d i s co u n trat e o f 1 6 .4 4 % i s a b l en do f h i s 1 8 % p ro fes s edd i s co u n trat e an dthe s u m o f h is cap i t al izat i o n an d
as s u m edg ro wth rat es (1 0 .5 % + 2 .5 %, o r 1 3 %). In s u m m ary , th e k ey i np u t s u s edb y the t h ree p ri n ci pal ex p ert s an d thei r
res u l ti n g co n cl u s io ns are as fo l l o ws :
Ex p ert 2 0 2 1 Cas h fl o w Gro wth (p ercen t ) Di s co un t

(p ercen t ) SM I v al u e M r. M y ers $ 8 ,1 0 7 ,5 88 3 1 1 .0 1 $ 1 6,5 5 0 ,0 0 0 Dr. Crag g 6 ,6 6 3 ,5 22 3 .2 9 1 8 .9 9 2 ,0 9 0 ,0 0 0 M r. Ab rah am 6 ,5 8 6 ,5 95 2.5 1 6 .4 4 3 ,3 8 2 ,0 0 0

c. Ev al u at i ng th e Ex p ert s i
. Pro ject edCas h fl ows Becau s e res p o n den tp res en t edn o ev i d en ce t o refu t e M r. M y ers ' d et erm i n at i o n th atth e ren tp ro v i d edi n th e AT&T l eas e was b el o w m ark etas o f Au g u s t2 7 , 2 0 0 3 , we fi n d M r. M y ers ' p ro ject ed2 0 2 1 cas h fl o w m o re rel i ab l e t h an ei th er Dr. Crag g ' s o r M r. Ab rah am 's . Becau s e Dr. Crag g s i m p l y ex trap o l at edfro m th e fi nal p eri odo f the AT&T l eas e t o p ro ject ren t s aft er M ay

2 0 1 6 , i f t he ren t p ro v id edi n th e AT&T l eas e h adfal l en b el o w m ark etas o f t he Au g u s t2 7 , 2 0 0 3 ,

1 7 (...co n t i nu ed ) th o s e cas h fl ows at1 3 .2 5 % (1 0 .5 % + 2 .7 5 %). Thu s , Bo n z/ REA, i n co n tras tt o M r. Ab rah am , ap pl i edi ncreas in g effect i ve d is co u ntrat es fo r l o n ger d i s co u ntp eri o d s .- 5 2 -

v al u at i o n d at e, t h enDr. Crag g 's p o s t -M ay 2 01 6 p ro ject i o n s wo u l dh av e
u n d ers t at edp ro

ject edren t al i n co m e. M r. Ab rah am rel i edo n Bo n z/ REA p ro ject io n s o f ren t al i n co m e, rat h er t h an ex trap o lat i n g fro m the AT&T ren t . He al s o rel i edo n Bo n z/ REA fo r p ro ject edex p en s es , b u t, u nl i k e Bo n z/ REA, h e fai l ed t o co n si d er t h e l es s o r's ri gh t t o rei m bu rs em en t o f m o s tex p en s es fro m th e t en an t . Th u s, M r. Ab rah am 's p ro ject ed2 0 2 1 cas hfl o w i s ev en l o wer t h anDr. Crag g 's an d
ev en les s rel i ab l e. i i
. Ap pl i cab l e Di s co u ntRat e By co n tras t , we g en eral l y

fi n dDr. Crag g's d et erm i n at i on o f t h e rat e atwh i ch t o d i s co u n tp o s t -2 0 2 0 cas hfl ows t o b e m o re cred i b l e th anM r. M y ers ', p ri m ari l y b ecau s e Dr. Crag g 's an al y s is g i v es m o re acco u n tt o the d i fferen ce i n ri skb et ween th e ex p ect edcas h fl ows du ri n g an daft er t h e i ni t i al p eri o d o f t h e AT&T l eas e. Dr. Crag g d i s co un tedthe ren tp ro v i d edfo r i n th e i n i t i al t erm o f t he AT&T l eas e atan i n t eres trat e, 7
. 9 2 %, i n t en d edt o es t i m at e AT&T's 1 4 -y ear b orro wi n g rat e as o f h i s
v al u at i o n d at e o f Ap ri l 2 0 02 . He then d et erm i n edthe rat e atwh i ch In t erg at e an d RS Hawt h orn e i m

p li ci t l y d i s co u n t edwh atwo u ldh av e b een th e ex p ect ed
cas h fl o ws aft er t h e ex pi rat i on o f t h e i ni t ial t erm o f t he AT&T l eas e. Its eem s p l au s i b l e t h atIn t erg at e an d RS Hawt h o rn e wo u l dd i s co u n tp o s t -M ay 2 0 16 p ro ject edcas h fl o ws m o re h eav i l y t o t ak e i n t o acco u n tu n cert ai n t i es ab o u twh et h er- 5 3 -

AT&T wo u l d ren ew i t s l eas e, wh et h er a rep l acem en tt en an tco u l db e fo un di f AT&T d ecl i n edt o ren ew, an d , i n ei th er ev en t , wh atm ark etren t s wo u ldb e atth at t i m e. M r. M y ers ' an al y si s d id n o td i fferen t i at e as s i g n i fi can t l y b et ween p re- an d p o s t -M ay 2 0 1 6 cas h fl o ws . M r. M y ers d i s co u n t edcas hfl o ws up t o 2 0 2 1 u s i n g a 9 % rat e, wh i ch h e d eri vedi n p artfro m th e 1 3 -y ear co rp orat e b o n dy i el d . He u s ed th e s am e 9 % d i s co u n trat e t o d is co u n tp o st -2 02 0 cas h fl o ws b ackt o J an uary1 , 2 0 2 1 . Bu th e u s edan 1 1 % rat e t o d i s co u n t b ackt o Au g u s t2 7 , 2 0 03 , h is p ro ject ed
v al u e o f t h e Hawth orn e p ro p ert y as o f J an u ary

1 , 2 0 2 1 . M r. M y ers d i dn otex p l ai n wh y d i fferen t d i s co u ntrat es s h o u l dap p l y t o d i s co u ntp o s t -J an u ary 1 , 2 0 2 1 , cas h fl o ws fi rs tb ack to J an u ary 1 , 2 0 21 , an d th en fro m

thatd at e b ackt o Au g u s t2 7, 2 0 0 3
. 1 8

1 8 Al th o u g h M r. M y ers ap p l i edrat es o f b o th 9 % an d1 1 % t o d i s co un t p ro ject edp o st -2 0 2 0 cas h fl o ws , h i s o v eral l effect i v e d i s co u n trat e was ju s tab o v e 1 1 % b ecau s e h e d eri v eda t erm i n al v al u e i n 2 0 3 2 , atth e en do f t h e p eri o dco v ered b y h i s p ro ject i on s , b y

cap it al i zi n g th e fi n al p eri odcas h fl o wat 9 %, wi th o ut ad ju s t i n g fo r co n t i n u edg ro w th i n ren ts . Ineffect , M r. M y ers ' p ro ject i o ns as s u m e th atan n u al ren t wo u l dg ro w at3 % p er y ear t h ro u g h 2 0 3 2 an dthen rem ai n fl at th ereaft er. Had M r. M y ers as s um edco n ti n u edg ro wth i n ren t s (d eri v i n g h i s t erm i n al v al u e b y d i vi di n g th e fi n al p eri o dcas h fl o w b y th e ex ces s o f h i s 9 % d i s co u n t rat e o v er h i s as s u m edg ro wth rat e o f 3 %), th e v al u e h e as s i g n edt o th e SM I as o f Au g u s t2 7 , 2 0 0 3 , wo u l dh av e refl ect edan effect i v e o v eral l d is co u n trat e o f 1 1
. 0 1 %.- 5 4 -

Pet i t i o ner ch al len g es Dr. Crag g 's u s e o f an es t i m at e o f t h e i n t eres t rat e o n AT&T b o n d s t o d i s co un ts ch edu l edren tdu ri n g the i n i t i al t erm o f t h e AT&T l eas e. Pet i t io n er arg u es th atDr. Crag g fai l edt o t ak e i n t o acco u n tth e g reat er l i qu id i ty ri ski n vo l v edi n o wn ers h i p o f t h e Hawt h o rn e p ro p erty th an i n o wn ers h i p o f an AT&T b o n d . W e fi n d p et i t i o n er's arg u m en t u np ers u as i v e, fo r t wo reas on s . Fi rs t , al th o u g h th e 7 .9 2 % rat e t h atDr. Crag g u sedt o d is co u n tth e s ch edul edren tdu ri n g th e i n i ti al t erm

o f t h e AT&T l eas e d i dn o t i n cl ud e an ex pl i ci tl i qu i d i ty p rem i u m , th e rat e h e u sed s ti l l ex ceed ed th e 7 .5 % rat e t h atp et i t i o n er's ex p ertM r. M y ers
v i ewed as ap p ro p ri at e fo r a " b on d ab l e l eas e s tru ctu re" . Seco nd , b ecau se t h e v al u e
o f t h e ri gh t t o recei ve ren tfro m AT&T " co ns i s t s s o l el y

i n a p ro m i s eds tream

o f fi xedp aym en t s " , th atri gh ti s ak i n t o an an n u i ty an di s th u s " d i s t in ct i n n atu re fro m th o s e i n t eres t s t o wh ich a m ark et ab i l i ty d i s co u n t i s ty

p i cal l y ap p li ed
. " Cf. Es t at e
o f Gri b au s k as v . Co m

m i s si o ner, 1 1 6 T.C. 1 4 2, 1 6 4 (2 0 0 1), rev 'd , 3 4 2 F.3 d8 5 (2 d Ci r. 2 0 03 ). As we ex p l ai nedi n Es t at e o f Gri b au s kas , i n s up p o rto f o u r h o l d i n g th atan i nal i en ab l e ri gh tt o an n u al i n s t al l m en t s o f a l o tt ery p ri ze co u l db e v al u ed
u s i n g th e s ect i o n 7 5 2 0 t ab l es : [D] i s co u n t s fo r l acko f m ark et ab il i ty are m o stp rev al en ti n v al u at i o n o f cl o sel y h el ds t o ck o r fract i o n al i nt eres t s i n p ro p erty . Su ch i s ap p ro p ri at e i n th atcap i t al ap p reci at io n , wh i ch can u s u al l y b e acces s edo n l y

th ro u g h d i s p o s i t i o n , i s a s i gn i fi can tco m po n en to f v al u e. Th e v al u e o f anan n u i ty , i n co n tras t , ex is ts s o l el y i n t h e- 5 5 -

an t i ci p at edp aym en t s , an di n ab i l i ty t o p rem aturel y l i qu i d at e t h o se i n s t al l m en t s d o es n otl es s en th e v al ue o f an en fo rceab l e ri g h tt o $ X an n u al l y fo r X nu m

b er o f y ears . Id .; s ee al s o Co o kv . Co m m i s s io n er, 3 4 9 F.3 d8 5 0, 8 5 6 (5 th Ci r. 2 0 0 3 ) (" [W ] e th i n ki t un reas o n ab le t o ap p l y a n o n -m ark et ab i l i ty

d i s co u n t wh en th e as s ett o b e
v al u edi s the ri g h t, i n d ep en den to f m ark etfo rces , t o recei v e a cert ai n am o u n to f
m o ney an n u al ly fo r a cert ai n t erm ." ), aff'g T.C. M em o. 2 0 01 -1 7 0
. Pet i t i o ner al s o cal l s at t en t i o n t o al l eg ed l y " s tran g e res u l t s " p ro du cedb y Dr. Crag g 's an al y s i s. Fo r ex am p le, p et i t i o n er cl ai m s th atDr. Crag g p red i ct edth atth e Hawt h o rn e p ro p ert y

wo ul dh av e a v al u e i n J an u ary 2 0 2 1 o f $ 42 .4 6 m i l li o n , ju s t
s l ig h t ly ab o v e t h e $ 4 2.3 5 m i l l i o n p ri ce fo r wh i ch Hawt h o rn e b ou g htth e p ro p ert y fro m In t erg at e i n Feb ru ary

2 0 0 2 . Pet i t i o ner arg u es that , i n t h e l i g h t o f Dr. Crag g 's p ro ject io n o f i n creas i n g ren t s , " th e p ro p ert y co ul dn otp o s s i b l y

b e wo rth ap p ro x i m at el y th e s am e am o un ti n 2 0 2 1 as i n 2 0 0 2 ." Pet i t i on er fai ls t o ap p reci at e th e i m p o rto f Dr. Crag g ' s an al y s i s . Th e $ 4 2 .4 6 m i l l i o n fi g u re p et i t i on er ci t es i s n o t a p red i ct i o n o f t h e v al ue t h e Hawth o rn e p ro p ert y wi l l h av e i n J an u ary

2 0 2 1
. In s t ead , th atfi gu re i s an an ach ro n i s m : Iti s th e v al ue o f t he rem ai n in g p ro j ect ed
cas h fl o ws as o f J an u ary

2 0 21 , cap i t al izedat a rat e t h at refl ect s th e ri s ks een i n an- 5 6 -

i n v es t m en ti n t h e p ro p ert y as o f 2 0 0 2
. By

2 02 1 , m an y o f t h e ri s k s p ercei v edi n 2 0 0 2 wi l l h av e b een real i zed o r n o t . 1 9 Pet i t i o ner al s o p oi n t s t o v ari o u s cl i ff effect s ari s i n g fro m Dr. Crag g 's u s e o f a d i fferen trat e t o d i s co un t p ro ject edcas h fl ows b efo re an daft er t h e ex p i rat i o n o f th e i n i ti al t erm

o f t h e AT&T l eas e i n M ay 2 0 1 6 . Fo r ex am

p l e, p et i t i o ner o b s erv es th at , u n d er Dr. Crag g 's an al y s i s, th e p res en tv al ue o f recei v i ng ren tfro m AT&T i n M ay 2 0 1 6 i s al m o s t fo u r t i m es h i g h er t h an th e p res en t v al u e o f recei v i n g p ro ject ed
ren to f a l arg er am o u n ti n J u n e 2 0 1 6 . Far fro m d em o ns trat in g fu n d am en t al fl aws i n Dr. Crag g 's m et h o d o l og y , as p et i t i o n er cl ai m s, th e co m pari s o n o f t he p res en t
v al u e o f t h e p ro

ject edren t s i n M ay

an dJ u n e 2 0 1 6 s i m

p l y refl ect s th e g reat er
co n fi d en ce o f recei v in g t h e s ch edul edren tfro m AT&T i n acco rd an ce wi th th e

1 9 As s u m e, fo r ex am

p l e, t h ata p ro p ert y

i s cert ai n t o p ro duce $ 1 00 ,0 0 0 o f n et cas h fl o w each y ear fo r 1 5 y ears . Th ereaft er, t h e p ro p ert y h as an equ al ch an ce o f ei th er p ro du ci ng $ 1 0 0 ,0 00 p er y ear fo r an o th er 1 5 y ears o r b ei n g wo rt h l es s . If th e ri sk -free rat e o f retu rn i s 5 %, ani n v es t o r wo u l dp ay $ 1 ,2 8 7 ,6 0 5 fo r t h e p ro p ert y . (Th e p res en tv al u e o f a 1 5 -y ear an n ui ty o f $ 10 0 ,0 0 0 d i s co u n t edat5 % i s $ 1 ,0 3 7 ,9 6 6 . Th e p res en tv al u e o f $ 1,0 3 7 ,9 6 6 d i s co un t ed b ack1 5 y ears at5 % i s $ 4 9 9 ,2 7 9 . Th e as s um edp u rch as e p ri ce o f $ 1 ,2 8 7 ,6 0 5 eq u al s $ 1 ,0 37 ,9 6 6 + (.5 × $ 4 9 9 ,2 7 9 ).) Th atp u rch as e p ri ce refl ect s an i m p l i ci td i s co u n t rat e o f ab ou t 8 .8 85 %--t h ati s , a 3 0 -y ear an n u i t y o f $ 1 0 0 ,0 0 0 h as a p res en tv al u e, d i s co u n t edat 8 .8 85 %, equ al t o th e as s u m edp u rch as e p ri ce. Th e cas h fl o w fro m y ear 1 6 t o y ear 3 0 , d i s co u nt edb ackt o the en do f y ear 1 5 at8 .8 8 5 %, wo u l d h av e a v al u e o f $ 8 1 1 ,5 7 0 . Bu tth atam o u n t can n o tb e v i ewedas a p red i ct i o n o f t h e v al u e t h e p ro p erty wi l l h av e atth e en d o f y ear 1 5 . Atth att i m e, th e p ro p ert y wi l l b e wo rt h ei th er $ 1 ,0 37 ,9 6 6 o r zero .- 5 7 -

t erm s o f t h e l eas e. Th e ren t t o b e recei v edthe fo l l o wi n g m o n th , aft er t h e
ex p irat i o n o f t h e i ni t i al l eas e t erm , was m u ch l es s p red i ct ab l e. Al th ou g h we g en eral l y

fo u n d Dr. Crag g 's ap p ro ach t o d eri v i ng an ap p ro p ri at e d i sco un trat e m o re p ers u as i ve, h i s an al y s i s d ids u ffer fro m b ei n g d i rect ed ata d at e o th er t h an Au g u st2 7 , 2 0 0 3 , th e d at e o f RERI's g i fto f t h e SM I t o th e Un i v ers i ty . W e fi n di n ad equ at e Dr. Crag g 's effo rt s i n h i s reb u t t al rep o rtt o
rev i s e h i s an al y s i s t o d eri v e a v al u e fo r t h e SM I as o f t he d at e o f t he g i ft . It ap p ears th at Dr. Crag g s i m pl y ap p l i edh i s 1 8 .9 9 % rat e t o d i s co u ntp ro ject edp o s t 2 0 2 0 cas h fl o ws b ackt o Au g u s t2 7 , 2 0 0 3 , i n s t eado f b ackt o h i s i n i t i al v al u at i o n d at e o f Ap ri l 1 , 2 0 0 2 . Th atap p ro ach m i g h t h av e b een d efen si bl e i n th e ab s en ce o f
ev i d en ce t h ati n t eres trat es o r p ro ject i o n s o f fu tu re ren t s ch an g edb et ween Ap ri l 1 , 2 0 0 2 , an dAu g u s t 2 7 , 2 0 0 3. In fact , h o wev er, o n the b as i s o f M r. M y ers '
ev al u at i on o f co m

p arab l e p ro p ert i es , i tap p ears th atm ark etren t s i n creas eddu ri n g th atp eri o ds o th atth e ren tp ro v i d edi n t he AT&T l eas e, wh i ch Bo n z/ REA d et erm i n edt o b e b el o w m ark etatth e o u ts et o f th e l eas e, h adfal l en ev en fu rt h er b el o w m ark et by

Au gu s t 2 7 , 2 0 0 3 . Inad d it i on , g en eral i n t eres trat es d ecl in ed b et ween Feb ru ary

2 0 0 2 (t he d at e o f t h e arm 's -l en gt h s al e o f t he Hawt h o rn e p ro p erty fro m wh i ch Dr. Crag g d eri v edh i s 1 8.9 9 % d i s co u n trat e) an dAu g u s t 2 0 0 3 . Th erefo re, ev en i n th e ab s en ce o f reas on t o b el i ev e t h atth e ap p ro p ri at e- 5 8 -

cred i ts p readfo r p o s t -M arch 2 0 1 6 ren t s fro m the Hawt h o rn e p ro p ert y wo u l dh av e ch an gedb et w een Feb ru ary 2 00 2 an dAu g u st2 7 , 2 0 0 3 , Dr. Crag g ' s 1 8 .9 9 % d i s co u n t rat e fai ledt o refl ectch an g es i n g en eral i n t eres trat es du ri n g th atp eri o d
. Onth e b as is o f th e co n s id erat i o n s d es cri b edab o v e, i n d et erm i ni n g the ap p ro p ri at e rat e atwh ich t o d i s co u n tp ro ject edp o s t -2 0 2 0 cas h fl o ws fro m th e Hawt h o rn e p ro p ert y , we h av e ad ju s t edDr. Crag g 's 1 8 .9 9 % rat e t o refl ectch an g es i n the AFR b et ween Feb ru ary 2 0 0 2 an dAu g u s t2 00 3 . Ino th er wo rd s , we
co n cl u d e th atth e p ro

j ect edcas h fl ows s h o u l d b e d is co u n t edata rat e o f 1 7 .7 5 %, equ al t o th e s u m

o f t h e 1 3 .3 9 % ri s kp rem i u m Dr. Crag g d et erm in edan dth e 4 .3 6 % l o n g -t erm AFR fo r Au g u s t2 0 0 3
. 2 0 Rev . Ru l
. 2 0 0 3-9 4 , 2 0 0 3 -2 C.B. 3 5 7
. Ap p ly i n g a d i s co un trat e o f 1 7 .7 5 % t o th e p o s t-2 0 2 0 cas h fl ows fro m th e Hawt h o rn e p ro p ert y , as p ro ject edb y M r. M y ers , wo ul dres u l t i n m u l t i p l e v al u at i o n al l o wan ces fo r t h e ri s kth atth e Hawt h o rn e p ro p ert y wo u l dg o v acan taft er th e i n i t i al t erm

o f t h e AT&T l eas e, s h o u l d AT&T n o t ren ew i t s l eas e, o r t h atan y

2 0 W e are n o tp ers u ad edth atM r. Ab rah am 's an al y s is , wh i ch ap p l i edan effect i v e d i s co u n t rat e o f 1 6 .4 4%, ju s t i fi es u s i n g a d i sco u n trat e b el o w th e 1 7 .7 5 % rat e we h av e ch os en . M r. Ab rah am 's an al y s i s was fl awedb y h i s u s e o f a cap i t al i zat io n rat e l o wer t h anth e d i fferen ce b et ween h i s p ro fes s edd i s co un trat e o f 1 8 % an d h is as s u m ed2 .5 % g ro wth rat e. Th e ro u g h equi v al en ce b etween M r. Ab rah am 's p ro fes s ed1 8 % d i sco u n trat e (i n co n tras t t o th e effect i v e rat e h e act u al l y em pl o y ed ) an dth e 1 7.7 5 % rat e we d et erm i n e t o b e ap p ro p ri at e ap p ears t o b e co i n ci d en t al
.- 5 9 -

rep l acem en tt en an t wo u l db e l es s cred i two rt h y . Th o s e ri s k s were p res u m ab l y
am on g th o s e t ak en i n t o acco u n ti n th e ri s kp rem iu m th atDr. Crag g d eri v edfro m th e p ri ce th atHawtho rn e p ai dfo r t h e Hawt ho rn e p ro p ert y . Bu t M r. M y ers
acco u n t edfo r t h o s e ri s k s s ep arat el y , n o t b y u s i n g a h i gh er rat e t o d i s co u n tp o s t M ay 2 0 1 6 cas hfl o ws b utb y

redu ci n g tho s e cas h fl ows b y i n creas ed es t i m at es o f
v acan cy o r cred i t l o s s es . Th erefo re, i n d et erm i n i n g t h e p ro ject edcas hfl o ws t o wh i ch t o ap p l y

o u r s el ect edd i s co u n trat e, we wi l l ad db ack t o M r. M y ers ' p ro ject ed2 0 21 cas h fl o w o f $ 8 ,1 0 7 ,5 8 8 h i s es t i m at edv acan cy / cred i t l o s s fo r t h at y ear o f $ 5 6 1 ,6 8 8. W e t h u s co n cl ud e t hatthe SM I th atRERI co n tri b u t edt o th e Un i v ers i ty o n Au g u s t2 7 , 2 0 0 3 , h ada fai r m ark etv al u e, as o f th atd at e, o f $ 3 ,4 6 2 , 8 86 , wh i ch equ al s th e p res en tv al u e o f th e p o s t -2 0 2 0 cas h fl ows fro m th e Hawt h o rn e p ro p ert y , as p ro ject edb y M r. M y ers , wi th o u t reg ardt o h i s es t i m at es o f v acan cy / cred i t l o s s es , d i s co u n t edb ack t o th e v al u at i o n d at e ata rat e o f 1 7
. 7 5 %. St at edi n t erm s
o f t h e fo rm

u l a p res en t eds up ra p artIII.C.2 .a, $ 3 ,4 6 2 ,8 86 = (($ 8,1 0 7 ,5 8 8 + $ 5 6 1 ,6 8 8 ) ÷ (.1 7 7 5

! .0 3 )) × (1 ÷ 1 .1 7 7 5 1 7
. 3 3 ).- 6 0 -

D. Ap p li cat i o n o f Ari th m et i c Th res h o l d fo r Gro ss Val uat i o n M i s s t at em en t It fo l l ows fro m

o u r d et erm i n at i o n thatth e SM I was wo rt h $ 3 ,4 62 ,8 8 6 wh en RERI co n tri b u t edi t t o th e Un i vers i ty o n Au gu s t 2 7 , 2 0 0 3 , th atth e p art n ers h i p 's cl ai m o f a ch ari t ab l e co n tri bu t i o n d edu ct i on o f $ 3 3 ,0 19 ,0 0 0 res u lt edi n a g ro s s
v al u at i o n m i s s t at em en t . Un der s ect i o n 6 6 6 2 (h )(2 ), a p ro p ert y v al u e cl ai m edo n a retu rn res u l t s i n a g ro s s v al uat i o n m i s s t at em en ti f t h atv al ue i s 4 0 0 % o r m o re o f th e p ro p ert y 's co rrect v al ue. Th e $ 3 3 ,0 19 ,0 0 0 v al u e t h atRERI as s i g nedt o th e SM I i n cl ai m i n g a d edu ct i o n fo r i t s co n tri b ut io n o f t h e p ro p ert y t o th e Un i v ers i t y i s 9 5 3 .5 % o f t he am ou ntth atwe h av e d et erm i n edt o b e t h e SM I's co rrect v al u e. In fact , RERI's cl ai m

o f a d edu ct i o n o f atl eas t$ 1 3 ,8 5 1 ,5 4 4 ($ 3 ,4 6 2 , 8 8 6 × 4 ) wo u l d h av e res u l t edi n a g ro s s v al u at io n m i s s t at em en t . (Co nv ers el y , RERI's cl ai m ed d educt i o n wo u l dh av e res u lt edi n a g ro ss v al u at io n m i s s t at em en t as l o n g as th e SM I's actu al v al ue was n o g reat er t h an $ 8 ,2 5 4 , 7 50 ($ 3 3 ,0 19 ,0 0 0 ÷ 4 )). Th u s , we
co n cl u d e th atres p o nd en t h as m eth i s b u rd en o f p ro du ct i o n u n der s ect i o n 7 4 9 1 (c) reg ard i n g th e ap p ro p ri at en es s o f t h e g ro s s v al uat i o n m is s t at em en tp en al ty . In p art i cu l ar, an y

u nd erp aym en to f t ax res u l t in g fro m th e d i s al l o w an ce o f RERI's cl ai m edch ari t ab l e co n tri b u t i on d edu ct i o n wo u l db e at tri b u tab l e t o a g ro ss- 6 1 -

v al u at i o n m i s s t at em en tt o th e ex t en tth atth e u nd erp aym en trefl ect s th e ex ces s o f th e $ 3 3,0 1 9 ,0 0 0 v al u e t h at RERI cl ai m edfo r t h e SM I o v er $ 3 ,4 6 2 ,8 8 6
. E. Th e Reas on ab l e Cau s e Ex cep t i o n Pet i t i o ner arg u es th atan y u n d erp aym en tat tri b u t ab l e t o a red et erm i n at i o n o f RERI's cl ai m ed ch ari t ab le co nt ri b u t i o n d educt i o n s h o ul dn o tb e s ub jectt o th e g ro s s o r s ub s tan t i al v al u at i o n m i s s t at em en tp en al ty o f s ect i o n 6 6 6 2 (e)(1 ) an d (h )(2 ), reg ard l es s o f t h e am o u n td et erm i n edt o b e t he SM I's co rrect fai r m ark et
v al u e o n th e d at e o f RERI's g i ft , b ecau s e o f t h e ex i s t en ce o f reas o n ab l e cau s e fo r th e p o rt i o n o f t h e u n d erp aym en tth at wo u l d o th erwi se b e s ub ject t o p en al ty . Pet i t io n er ackn o wl ed g es that , u n d er s ect i o n 6 6 6 4 (c)(2 ), RERI h as n o reas on ab l e
cau s e d efen s e u n l es s i t s cl ai m edd edu ct i o n was s up p o rt edb y a qu al i fi edap p rai sal
an d th e p art n ers hi p 's o wng o o d -fai th i n v es t ig at i o n o f t h e SM I's v al u e. Pet i t i o n er arg u es : " In th e cas e o f a rem ai n d er s ubjectt o s ect io n 7 52 0 , 'a g o o d fai th i n v es t i g at i o n o f t h e v al u e o f t h e co n tri b u t edp ro p ert y ' s h ou l db e i nt erp ret edt o req u i re an i n v es ti g at i o n o f t h e v al u e o f t h e fee es t at e, s i n ce t h e rem ai n d er v al u e i s d et erm i n edu nd er s ect i o n 7 5 20 b y ari th m et i c fo rm

u l a." Pet i ti o n er cl ai m s t hat , b ecau s e Hawth o rn e acq ui redth e Hawt h o rn e p ro p ert y fro m an u nrel at ed s el l er i n Feb ru ary 2 0 0 2 fo r $ 4 2 .3 5 m i l li o n , an d b ecau se Bo n z/ REA v al u edth e p ro p ert y at $ 4 7 m i l l i o n as o f Au gu s t2 0 01 i n co n n ect i o n wi th t h e l o an thatfi n an ced- 6 2 -

Hawt h o rn e's acq u i s i t i o n o f t h e p ro p ert y , " i twas reas o n ab l e fo r RERI t o co n cl u d e th atth e Gel b tuch Ap p rai sal rep res en t ed a reas o n ab l e es t i m at e o f v al u e." Res p o n d en tch al l en g es p et i t i o n er's reas o n ab l e cau se arg um en to n two g ro u nd s . Fi rs t , res p o n d en tcl ai m s th atth e Gel b tu ch ap p rai s al i s n ota qu al i fi ed ap p rai s al . Seco n d , h e cl ai m s t h atRERI acq ui redth e SM I s ol el y t o ach i ev e a t ax d educt i o n fo r i t s p art n ers i n an am o u n tfar g reat er t h an RERI's p u rch as e p ri ce, t h at RERI an di t s p art n ers were i nd i fferen tt o the SM I's actu al v al u e an d fai l edt o p erfo rm an y du e d i l i gen ce i n th atreg ard , an dth at , co n s equ en t l y , RERI d i dn o t
m ak e a " g o o dfai th i n v es t i g at i o n o f th e v al ue o f t he co n tri b ut edp ro pert y " wi th i n th e m ean i n g o f s ect io n 6 6 6 4 (c)(2 ). Res p o n d en t 's as s ert i o n o f t h e g ro s s v al u at io n m i s s t at em en t p en al ty fo r t h e fi rs tt i m e i n an am en d m en tt o h i s an s wer rai s es th e ques t i o n o f wh i ch p arty b ears th e b u rd en o f p ro o f i n reg ardt o th e av ai lab i l i ty o f t he reas o n ab l e cau s e ex cep t i o n t o that p en al ty . As a g en eral ru l e, o n ce t h e Co m m is s i o n er s at i s fi es h i s b u rd en o f p ro duct i o n u n d er s ect i on 7 49 1 (c) es tab l i s h i ng th e ap p ro p ri at en es s o f a d et erm i n ed p en al ty , th e t ax p ay er t h en b ears th e b u rd en o f p ro vi n g t h atex cu l pat o ry fact o rs
s u ch as reas o n ab le cau s e p rev en tth e i m p o si ti o n o f t h e p en al ty . See Hi g b ee v . Co m m i s s i o n er, 1 1 6 T.C. at4 4 6-4 4 7 . No n et h el es s , u n d er Ru l e 1 42 (a), t h e Co m m i s s i o n er b ears th e b u rd en o f p ro o f " i n res p ect o f an y n ew m at t er, i n creas es- 6 3 -

i n d efi ci en cy , an daffi rm at i v e d efen s es , p l ead edi n th e an swer" . Thu s , wh i l e p et i t i o n er b ears th e b urd en o f p ro v i n g reas o n ab le cau se as a d efen s e t o th e
s ub s t an t i al v al uat i o n m i s s t at em en tp en al ty thatres p o n den td et erm i n edi n t h e FPAA, i f t he g ro s s v al u at io n m i s s t at em en t p en al ty thatres po n d en tas s ert edb y
am en d m en tt o h is an s wer i s ei th er a " new m at t er" o r an " i n creas e i n d efi ci en cy " , wi th i n th e m ean i n g o f Ru l e 1 4 2 (a), t h en res p on d en two u l db ear t he b u rd en o f p ro v in g th e ab s en ce o f reas o n ab l e cau s e t o ju s ti fy th e i m p o si t io n o f t h at p en al ty . If s o , each p art y

wo u l db ear t h e b u rd en o f p ro v i ng th e s am e fact s fo r d ifferen t p u rp os es . Onatl eas t two o ccas i o n s , we h av e h el dth at , wh en th e Co m m i s s i o n er i n creas es a p en al ty

i n h i s an s wer, t h e b u rd en o f p ro of i n reg ard t o t h e ap p l icab i li t y
o f a reas o n ab l e cau se d efen s e i s d i vi d ed b et ween th e p art i es : In d efen d i n g ag ai n s t th e p en al ty

i n i t i al l y d et erm i n ed , th e t ax p ay er b ears th e b urd en o f p ro v i n g
reas on ab l e cau s e, wh i le t h e Co m m i s s io n er, t o ju st i fy

th e as s ert edi n creas e i n th e p en al ty , m

u s tp ro v e t h e ab sen ce o f reas o nab l e cau s e. See Rad er v . Co m m i s s i o n er, 1 4 3 T.C. 3 7 6 , 3 8 9 (2 0 1 4 ), aff'di n p art , ap p eal d i s m i s s ed i n p art , 6 16 F. Ap p 'x 3 9 1 (1 0 th Ci r. 2 0 1 5 ); Arn o l dv . Co m m i s s io n er, T.C. M em o . 2 0 0 3 -2 5 9 , 2 0 03 W L 2 2 0 5 3 8 3 8, at * 4
.- 6 4 -

A s ub seq uen ti n creas e i n th e am o u n to f an as s ert edp en al ty , h o wev er, m ay
n o taffect the ev i d en ce t h e t ax p ay er m u s t p ro du ce t o es t ab l i s h reas o n ab l e cau s e. If th e ex i s t en ce o f reas o nab l e cau s e as a d efen s e t o b o th th e p en al ty i n i ti al l y d et erm i n edan dth e i n creas edp en al ty " i s co m p l et el y d ep en d en t up o n th e s am e
ev i d en ce" , th ere m ig htb e " li tt l e p ract i cal reas o n t o s h i ftth e b u rd eno f p ro o f." Sh ea v . Co m

m i s s io n er, 1 1 2 T.C. 1 8 3 , 1 9 7 n .2 2 (1 99 9 ). In s u ch a cas e, " [t ] h e t ax p ay er wo u l dn ots u ffer fro m l acko f n ot i ce co n cern i n g wh atfact s m u s tb e
es t ab l i s h ed ." Id
. M o reo v er, wh il e Ru l e 1 42 (a) l i s t s " new m at ters " an d " i n creas es i n d efi ci en cy " as s ep arat e g ro u n d s fo r s h i ft in g th e b urd en o f p ro o f, o u r cas es h av e g en eral l y treat edth e effect o f a ch an g e i n th e Co m m i s s i o n er's p o si t io n o n th e
am ou n to f t h e as s ert edd efi ci en cy as rel ev an t t o th e qu es t i on o f wh et h er t h e ch an ge res u l t s i n a " n ew m at t er" . Fo r ex am p l e, i n San d erl i n g , In c. v . Co m m i s s i o n er, 6 6 T.C. 7 43 , 7 5 8 (1 9 7 6 ), aff'di n p art , 5 7 1 F.2 d 1 74 (3 d Ci r. 1 9 7 8),
we co n s i dered th e Co m

m i s si o ner's as s ert i on i n an am en d m en tt o h i s an s wer o f an i n creas edad di ti o n t o t ax fo r l at e fi l i n g . W e co n cl u d edthatth e Co m m is si o n er b o re th e b u rd en o f p ro o f i n reg ardt o th e i n creas edad d it i o n t o t ax b ecau s e i twas a " n ew
m at t er" . Ins up p o rto f t h atco n cl u s i o n , we o b s erv edth at " res po n d en t 's n ew p o s i t i on req u i res th e p res en t at i o n o f d i fferen tev i d en ce an dcan n o tb e s ai dt o- 6 5 -

s i m p l y cl ari fy o r d ev el o p h i s o ri g i n al d et erm i nat i o n ." Id . " Fu rt her," we ad d ed ,

" we are s tro n g l y

i n fl u en cedb y

th e fact that* * * [t h e Co m m i s s i o n er] s eek s an i n creas edd efi ci en cy

b y way o f h is am en d edan s wer." Id . Thu s , we treat edth e effect o f t h e Co m

m i s si o ner's ch an g e i n p o s i ti o n o n th e rel ev an tev i d en ce an dth e
am ou n to f t h e d efi ci en cy

as fact o rs s up p o rt in g th e co ncl u s i o n th atth e ch an g e
res u l ted i n a " new m at t er" wi th i n th e m ean i n g o f Ru l e 1 4 2 (a). W e d i dn o t treat th e i n creas e i n th e d efi ci en cy as a s ep arat e g ro u n d , i n i t s o wnri gh t , t o s hi ftth e b u rd en
o f p ro o f t o the Co m

m i ss i o n er. W e m i g hth av e o ccas i o n i n an ap p ro pri at e cas e t o reco n s i der t h e
co n cl u s i o n s we reach edi n Rad er an dArn ol dth at , u nd er Ru le 1 42 (a), an y p o s i t i o n ad v an cedb y

th e Co m m i s s i on er i n h i s an s wer t h ati n creas es th e am o u n to f a d et erm i n edd efi ci en cy n eces sari l y s h i ft s th e b u rd en o f p ro o f, ev eni f t h atn ew p o s i t i on h as n o effect o n th e ev i d en ce t he t ax p ay er i s req u i redt o p res en t . Th e p res en tcas e, h o wev er, d o es n o tp ro v i d e t hato ccas i on . Fo r t h e reas o n s ex p l ai n ed b el o w, we co n cl ud e t h at , ev en i f res p o nd en t m u s tp ro v e t h atRERI d i d n o tm ak e a g o o d -fai th i n v es t ig at i o n o f t h e SM I's v al u e t o ju s t i fy th e as sert edg ro s s v al u at i o n
m i s s t at em en t p en al ty , h e h as m etth atb urd en . Al th ou g h the Co d e an dth e reg u lat i on s d o n ots p eci fy wh atco n s ti tu t es a

" g oo dfai th i n v es ti g at i o n" , th e t ax p ay er m u st d o m o re th an s im

p l y accep t th e res u l t- 6 6 -

o f a qu al i fi edap p rai s al fo r th e req u i rem en to f s ect io n 6 66 4 (c)(2 )(B) t o h av e an y
m ean i n g . Wh i t eh o us e Ho t el Lt d . P's h i p v . Co m m i ss i o ner, 1 3 9 T.C. at3 5 2 -3 5 3
. Pet i t io n er cl ai m s t h atRERI's accep t an ce o f t h e v al u e M r. Gel b tu ch as s i g nedt o th e fee i n teres ti n th e Hawt h o rn e p ro p ert y as o f Au g u s t2 0 0 3 was s up po rt edb y th e p ri ce Hawt h o rn e p ai dt o acq u i re t h e p ro p ert y i n Feb ru ary

2 0 0 2 an dBo n z/ REA's ap p rai s al o f t h e p ro p ert y

as o f Au g u s t2 0 0 1. Bu tth o s e al leg ed l y co n fi rm i n g d at a
can n otju s t i fy

RERI's accep t an ce o f t h e res u l ts o f t h e Gel b tu ch ap p rai sal u n l es s th e p art n ers hi p (t h ro u g h i ts p artn ers o r, p erh ap s , ad v is ers ) was aware o f th o s e d at a an d t o o kth em

i n t o acco u n ti n d et erm i n i ng th e am o u n t t o cl ai m as a d educt i on fo r i t s
co n tri b u t i o n o f t h e SM I t o th e Un iv ers i ty . Th e reco rdp ro vi d es n o ev i d en ce o n th atfact u al qu es t i o n. No n et h el es s , b ecau s e we t reat res p o n d en tas b eari n g th e b u rd eno f p ro vi ng th atRERI d i dn o tm ak e a g o o d-fai th i nv es t i g at io n o f t h e SM I's
v al u e t o ju st i fy

th e as s ert edg ro s s v al u at io n m i s st at em en tp en al ty , we wi ll as s u m e th atRERI's p art ners o r ad v i s ers d i dd i s co v er t h ro u g h i nv es t ig at i o n th e t erm s o n wh i ch Hawth o rn e acq u i red th e Hawt h o rn e p ro pert y i n Feb ru ary 2 00 2 an d th e
v al u e t h atBo n z/ REA as s ig nedt o th e p ro p ert y as o f Au g u s t2 0 0 1 an dt o okth at i n fo rm at i o n i n t o acco u n ti n arri v i n g ata v al u e t o as s i gn t o th e SM I o n RERI's 2 0 0 3 retu rn .- 6 7 -

Hav i n g res o l v edth e rel ev an t fact u al ques t i o n reg ard i n g RERI's effo rt s i n i n v es t i g at i n g th e SM I's v al u e, we n o w face t h e l eg al qu es t io n o f wh ether t h e al l eg ed l y co n fi rm i n g d at a ju s t i fi edRERI's accep t an ce o f t h e v al u e M r. Gel b tu ch
as s i g n edt o th e Hawt h o rn e p ro p ert y . Onth atqu es t i o n , p et it i on er's o wnarg u m en t s ch al l en g i n g Dr. Crag g 's v al u at i o n o f t h e SM I wo rkag ai n s th i m . Ins eek i ng t o
u n d erm i n e Dr. Crag g 's co n cl u s i o n reg ard i n g th e SM I's v al u e o n Au g u s t 2 7 , 2 0 03 , wh i ch i s b as ed , i n p art , o n th e p ri ce Hawt h o rn e p ai dfo r t h e Hawt h o rn e p ro p ert y i n Feb ru ary 2 0 0 2 , p et it i o n er arg u es : " Th e v al ue o f t he p ro p ert y as o f Feb ru ary

2 0 0 2
* * * i s o f m i n i m al p ro b at i v e v al u e an db o rd ers o n i rrel ev an t ." W e ag ree t h at
ev i d en ce o f t h e Hawt h o rn e p ro p ert y 's v al u e i n Feb ru ary 2 00 2 , m uch l es s th e Au g u s t2 0 0 1 d at e o f t h e Bo n z/ REA ap p rai s al , i s o f l im i t edwo rt h i n as s es s in g th e p ro p erty 's v al u e i n Au g u s t2 0 0 3 . M ars h al i n g ev id en ce o f a p ro p ert y 's v al u e 1 8
m o nt h s o r m o re b efo re a g i fti s s i m p l y n o ts u ffi ci en tas a m at t er o f l aw t o qu al i fy
as a g o od -fai th i n v es t i g at i o n i n t o th e v al u e o f t h e p ro p ert y atth e t i m e o f t h e g i ft
. 2 1

2 1 In ap pro pri at e ci rcu m s t an ces , a t ax p ay er's co m m i s s i o n i n g o f a s eco n d , co n tem p o ran eo u s ap p rai s al m ay

s upp o rtfi nd i n g a g o o d -fai th i n v es t i g at i o n wi t h i n th e m ean i n g o f s ec. 6 6 64 (c)(2 )(B). See, e.g ., Wh i teh o u se Ho t el Lt d . P's h i p v . Co m m i s s i o n er, 7 5 5 F.3 d2 3 6 , 2 5 0 (5 th Ci r. 2 0 1 4 ) (" Ob tai n i n g a qu al ifi ed ap p rai s al , an al y zi ng th atap p rai s al , co m m i ss i o ni ng an o th er ap p rai s al , an d s ub m i t t i n g a p ro fes s i o n al ly -p rep aredt ax return i s s u ffi ci en tt o s h o w a g o o d fai t h i n v es t i g at i o n as req u i redb y l aw." ), aff'g i n p art , v acat i n g i n p art1 3 9 T.C. 3 0 4 (2 0 1 2). Wh i t eh ou s e Ho t el i n v o l v eda p artn ers h ip 's co n tri bu t io n o f a ch ari tab l e (co n ti n u ed ...)- 6 8 -

Th erefo re, as s um i n g th atres p o n d en th as th e b u rd en o f p ro vi n g th atRERI d i dn o t
m ak e a g o o d -fai th i nv es t i g at i o n o f the SM I's v al u e t o ju s t i fy th e as s ert edg ro s s
v al u at i o n m i s s t at em en tp en al ty , we co ncl u d e th at res p on d en th as m etth atb u rd en . Co n s equ en t l y , reg ard l es s o f wh et h er t h e Gel b tu ch ap p rai s al i s a qu al i fi edap p rai s al wi th i n th e m ean i n g o f s ect i on 1 .1 7 0 A-1 3 (c)(3 ), In co m e Tax Reg s . , RERI d i dn o t h av e reas o n ab le cau s e fo r, o r acti n g o o d fai th wi th res p ect t o , i t s cl ai m o f a ch ari t ab le co n tri b u t i on d educt i o n th atres u l t edi n a g ro s s v al u at i on m i s s tat em en t. F. Co n cl u si o n Fo r t h e reas o n s d es cri b edab o v e, we co n cl u d e t hatRERI's cl ai m ed d educt i o n fo r i t s co n tri b u ti o n o f t h e SM I t o th e Un i v ers i ty res u l t edi n a g ro s s
v al u at i o n m i s s t at em en twi thi n th e m ean i n g o f s ect i on 6 6 6 2(h )(2 ). Fu rt h er, an y
u n d erp aym en t o f t ax res u lt i n g fro m o ur d i s al l o wan ce o f t h at d edu ct i o n wo u l db e at tri b u t ab l e t o a g ro s s v al u at io n m i s s t at em en tt o th e ex t en tthatth e u n derp aym en t refl ect s th e ex ces s o f t he $ 3 3 ,0 1 9 ,0 00 v al u e t h atRERI cl ai m edfo r t h e SM I o v er

2 1 (...co n t i nu ed ) co n serv at i on eas em en t . Becau s e t he s eco nd , al l eg ed l y co n fi rm i n g ap p rai s al d i d n o td et erm i n e t h e v al u e o f t h e s erv i tu d e, we co n cl u d edth ati t" d [i d ] n o tco n s t i tu t e an i n v es t i g at i o n , i n g o o d fai th o r o th erwi s e, o f t h e v al u e o f t h e s erv i tud e." Wh i t eh ou s e Ho t el Lt d . P's h i p v . Co m m i s s i on er, 1 3 9 T.C. at3 5 6 . Un l i k e t h e Bo n z/ REA ap p rai s al o n wh i ch p et it i o n er i n th i s cas e p urp o rt s t o rel y , h o wev er, t h e s eco n dap p rai s al i n Wh i t eh ou s e Ho t el was co n t em p o ran eo u s wi th t h e p art n ers h i p's g i ft
.- 6 9 -

$ 3 ,4 6 2 ,8 8 6 --t h e am o u n tthatwe h av e d et erm i n edt o b e i t s v al u e as o f t h e d at e o f th e g i ft . Al th o u gh th e l i ab i l i ty o f a p art i cu l ar p art n er fo r t h e g ro s s v al u at i o n
m i s s t at em en t p en al ty

wi l l d ep en do n th e ari thm et i c t h res ho l d p ro v i dedi n s ect i o n 6 6 6 2 (e)(2 ), n o p art n er wi l l b e ab l e t o av o id the p en al ty o n th e b as i s o f t h e
reas on ab l e cau s e ex cep t i o n p ro v i d edi n s ect i o n 6 6 6 4 (c).
Deci s i o n wi ll b e en t eredu n d er Ru l e 1 5 5
.