 United States Court of Appeals
         FOR THE DISTRICT OF COLUMBIA CIRCUIT



Argued November 9, 2018               Decided May 24, 2019

                        No. 17-1266

  JEFF BLAU, TAX MATTERS PARTNER OF RERI HOLDINGS I,
                        LLC,
                     APPELLANT

                             v.

      COMMISSIONER OF INTERNAL REVENUE SERVICE,
                      APPELLEE


               On Appeal from the Decision
               of the United States Tax Court


    Kathleen Pakenham argued the cause for appellant. With
her on the briefs were Stephen D. Gardner, Adriana Lofaro
Wirtz, and Clint Massengill.

     Jacob Earl Christensen, Attorney, U.S. Department of
Justice, argued the cause for appellee. With him on the brief
was Richard Farber, Attorney.

    Before: ROGERS and MILLETT, Circuit Judges, and
GINSBURG, Senior Circuit Judge.

    Opinion for the Court filed by Senior Circuit Judge
GINSBURG.
                               2

     GINSBURG, Senior Circuit Judge: RERI Holdings, LLC
(RERI) claimed a charitable contribution deduction of $33
million on its 2003 federal tax return. The Internal Revenue
Service determined that RERI was not entitled to this deduction
and imposed a 40% penalty for underpayment of tax. RERI
unsuccessfully challenged both rulings before the Tax Court,
and now appeals to this court on a variety of grounds. For the
reasons set forth below, we affirm the judgment of the Tax
Court.

                        I. Background

     At a high level of generality, the facts of this case are
simple: RERI acquired and donated a future interest in a piece
of commercial property to the University of Michigan. RERI
maintains the donation is a bona fide deduction that it valued
reasonably at $33 million. The IRS says RERI artificially
inflated the value of the donated property in order to offset the
tax liability of its owners.

     The corporate arrangements and transactions involved in
this case are fairly complicated. For the sake of clarity, we lay
them out in some detail.

A. Facts

     On February 7, 2002, RS Hawthorne, LLC — a shell
company, whose only member was RS Hawthorne Holdings,
LLC (RSHH), the only member of which was Red Sea Tech I,
Inc. — purchased a 288,000 square-foot web-hosting facility
located in Hawthorne, California for $42,350,000. At the time
of the purchase, the Hawthorne Property was leased to AT&T.
The lease had an initial term of 15.5 years, ending in May 2016;
AT&T then had the option to renew it three times for periods
                                3
of five years each. The rent for each year during the initial term
was spelled out in the lease; if AT&T renewed the lease, then
the rent would be re-set at the then-market rate but not less than
$14 per square foot per year.

    RS Hawthorne financed its purchase with a mortgage loan
from BB&T Bank. In connection with the loan, BB&T had the
Hawthorne Property appraised by Bonz/REA, Inc. The
appraisal “concluded that the Hawthorne property was worth
$47 million as of August 16, 2001.” RERI Holdings I, LLC v.
Comm’r, 149 T.C. 1, 4 (2017).




     Also on February 7, 2002, Red Sea divided its member
interest in RSHH into two temporal interests: (1) a Term of
Years (TOYS) interest lasting until December 31, 2020 and (2)
the remainder, which the Tax Court refers to as the “successor
member interest” (SMI). The SMI in RSHH is the donated
property at issue in this case. Red Sea assigned the TOYS
interest to PVP-RSG Partnership and sold the SMI to a
company called RJS Realty Corporation for $1,610,000. The
                               4
agreement assigning the SMI to RJS imposes several
conditions on Red Sea’s TOYS interest, which the Tax Court
assumed would also bind subsequent assignees. Id. at 6 n.4.
First, the TOYS holder is prohibited from “causing or
permitting any transfer of the Hawthorne property or the
member interest in [RS] Hawthorne or the imposition of any
lien or encumbrance on either” and is obligated to “take all
reasonable actions necessary” to prevent waste of the
Hawthorne property. Id. at 5. Of particular relevance to this
appeal, the assignment also contained a non-recourse
provision:

         In the event of any Breach of the provisions of this
         Assignment on the part of Assignor or any of its
         successors in interest hereunder, the recourse of
         Assignee or any of its successors in interest hereunder
         shall be strictly limited to the [TOYS interest]. In no
         event may any relief be granted that imposes on the
         owner from time to time of the [TOYS interest] any
         personal liability, it being understood that any and all
         remedies for any breach of the provisions hereof shall
         be limited to such owner's right, title and interest in
         and to the [TOYS interest].

    In March 2002 RERI purchased the SMI from RJS for
$2,950,000. RERI was a limited liability company that was
formed on March 4, 2002 and dissolved on May 11, 2004.
RERI Holdings I, LLC v. Comm’r, 107 T.C.M. (CCH) 1488,
1489 (2014).

     In August 2003 Stephen M. Ross, one of RERI’s members,
pledged a gift of $4 million to the University of Michigan; he
later increased the pledge to $5 million. In partial fulfillment
of Ross’s pledge, RERI assigned the SMI to the University
pursuant to a Gift Agreement dated August 27, 2003. The Gift
                               5
Agreement provided, among other things, that the University
“shall hold the Remainder Estate for a minimum of two years,
after which the University shall sell the Remainder Estate in a
manner and to a buyer of its choosing.”

     In December 2005 the University sold the SMI to HRK
Real Estate Holdings, LLC for $1,940,000 although it had had
the property appraised at $6.5 million earlier that year. The
parties have stipulated that the sale price did not represent the
fair market value of the SMI. The buyer, HRK, was indirectly
owned in part by Harold Levine, one of RERI’s members. The
proceeds of the sale were credited toward Ross’s pledge.

B. Procedural History

     Because RERI is treated as a partnership for federal
income tax purposes, it filed a 2003 federal income tax return
for informational purposes only; the actual taxpayers are the
owners of shares in the LLC. RERI claimed a charitable
contribution deduction of $33,019,000 for the transfer of a
noncash asset, $32,935,000 of which represented the purported
value of the donated SMI. (The remaining $84,000 was for
appraisal and professional fees.)         The valuation of
approximately $33 million derives from an appraisal conducted
by Howard Gelbtuch of Greenwich Realty Advisors, dated
September 2003. As required by Treasury regulations, RERI
attached the Gelbtuch appraisal to its return. RERI also
completed a Form 8283 for Noncash Charitable Contributions;
however, RERI left blank the space for “Donor’s cost or
adjusted basis.” It did not provide any explanation for the
omission.

    The IRS thereafter selected RERI for audit and in March
2008 issued a Notice of Final Partnership Administrative
Adjustment (FPAA). It disallowed $29 million of RERI’s
                                   6
deduction, based upon its determination that the SMI was
worth only $3.9 million. Accordingly, it also imposed a
penalty equal to 20% of the tax underpayment for a substantial
valuation misstatement, pursuant to IRC § 6662(e)(1). 1

     In April 2008 RERI filed a petition in the Tax Court
challenging the FPAA. In its answer, the IRS revised its
determinations, asserting RERI was entitled to no deduction for
a charitable contribution on the ground that the transaction
giving rise to the deduction was “a sham for tax purposes or
lacks economic substance.” It argued in the alternative that the
deduction should be limited to $1,940,000, the amount the
University had realized from the sale of the SMI. Finally, the
IRS claimed the valuation misstatement was “gross” rather
than merely “substantial,” triggering a penalty equal to 40% of
the tax underpayment. See IRC § 6662(h)(1).

     After a four-day trial, the Tax Court issued a judgment
sustaining both the IRS’s determination that RERI was not
entitled to any charitable contribution deduction and its
assessment of the 40% penalty. The Tax Court, however, did
not base its decision upon the “lack of economic substance”
theory advanced by the IRS; instead, it concluded that RERI
had failed to substantiate the value of the donated property as
required by Treasury regulations. 2         149 T.C. at 17.


1
   All references to the Internal Revenue Code and Treasury
regulations contained herein refer to the 2003 version in effect during
the tax year at issue.
2
  The IRS acknowledges that it did not raise the substantiation issue
at any point during the proceedings before the Tax Court, and that
RERI consequently did not have notice of the issue or an opportunity
to argue that it substantially complied with the regulations. Yet,
RERI does not argue to this court that it was denied procedural due
process as a result, nor did it file a motion for reconsideration before
                                7
Nonetheless, on its way to affirming the penalty for a gross
valuation misstatement, the Tax Court found the SMI was
worth $3,462,886 on the date of the donation. The court also
held RERI did not qualify for the “reasonable cause” exception
to accuracy-related penalties. See IRC § 6664(c).

        II. The Charitable Contribution Deduction

     RERI first challenges the Tax Court’s ruling that it was not
entitled to a charitable contribution deduction.

A. Statutory Framework

     Section 170 of the Internal Revenue Code permits a
taxpayer to claim a deduction for a contribution to a charitable
organization. This deduction can be abused by a taxpayer who
inflates the valuation of the donated property. For that reason,
IRC § 170(a)(1) provides that “[a] charitable contribution shall
be allowable as a deduction only if verified under regulations
prescribed by the Secretary.”

     In the Deficit Reduction Act of 1984 (DRA), the Congress
directed the Secretary of the Treasury to increase the stringency
of its requirements for verification. Pub. L. No. 983-69,
§ 155(a)(1), 98 Stat. 494, 691. Specifically, the DRA instructs
the Secretary to promulgate regulations that require a taxpayer
claiming a deduction for a noncash charitable contribution

          A. to obtain a qualified appraisal for the property
             contributed,



the Tax Court. See Tax Court Rule 161. We therefore consider any
such argument forfeit. See, e.g., United States v. TDC Mgmt. Corp.,
Inc., 827 F.3d 1127, 1130 (D.C. Cir. 2016).
                              8
         B. to attach an appraisal summary to the return on
            which such deduction is first claimed for such
            contribution, and
         C. to include on such return such additional
            information (including the cost basis and
            acquisition date of the contributed property) as
            the Secretary may prescribe in such regulations.

In fulfillment of this mandate, the Secretary promulgated 26
C.F.R. § 1.170A-13, subsection (c) of which is most relevant
to this case. Paragraph (c)(2) instantiates the three statutory
requirements: The donor must (A) “[o]btain a qualified
appraisal”; (B) “[a]ttach a fully completed appraisal summary
... to the tax return”; and (C) “[m]aintain records” containing
specified information. Paragraph (c)(3) defines a “qualified
appraisal” and paragraph (c)(4) details the necessary elements
of an “appraisal summary,” one of which is “[t]he cost or other
basis of the property.” § 1.170A-13(c)(4)(ii)(E). The taxpayer
must provide the appraisal summary on IRS Form 8283.
§ 1.170A-13(c)(4)(i)(A).

     A deduction is typically disallowed if these requirements
are not met. There is an exception, however, “[i]f a taxpayer
has reasonable cause for being unable to provide the
information ... relating to the manner of acquisition and basis
of the contributed property” in the appraisal summary.
§ 1.170A-13(c)(4)(iv)(C)(1). In that case, the deduction will
still be allowed if the donor attaches “an appropriate
explanation” to the appraisal summary. Id.

B. Application

    The Tax Court disallowed RERI’s charitable donation
deduction on the ground that it failed to comply with the
substantiation requirements. First, the Tax Court held “the
                                 9
reporting requirements of section 1.170A-13, Income Tax
Regs., are directory and not mandatory,” such that a taxpayer
who “substantially complies” with the requirements is entitled
to the claimed deduction. 149 T.C. at 15 (citing Bond v.
Comm’r, 100 T.C. 32, 40-41 (1993)) (cleaned up). The court
went on to conclude that RERI failed substantially to comply
because it did not disclose its basis in the donated property.

     The IRS urges this court to affirm the Tax Court on the
alternative theory that substantial compliance with the
regulation does not suffice, so that RERI’s failure to include
the basis on Form 8283 was automatically fatal. RERI, for its
part, does not dispute that it failed to supply its basis in the SMI
and to provide an explanation for the omission. Instead, RERI
maintains that the substantial compliance doctrine does apply
here, and that providing its basis in the donated property is not
necessary for compliance. It emphasizes that both the Second
Circuit and the Tax Court have concluded the substantiation
requirements can be satisfied by substantial compliance. See
Scheidelman v. Comm’r, 682 F.3d 189, 199 (2d Cir. 2012);
Bond, 100 T.C. at 40-41.

    In general, the Tax Court’s determination as to whether an
appraisal summary and appraisal satisfy the requirements of the
Treasury Regulation is a mixed question of law and fact, which
we review only for clear error. Comm’r v. Simmons, 646 F.3d
6, 9 (D.C. Cir. 2011). We have not, however, previously
decided whether substantial compliance rather than literal
compliance suffices under § 1.170A-13 (or, for that matter,
under any other federal tax regulation). See id. at 12 n*.
Whether a taxpayer may satisfy the substantiation requirements
through substantial compliance is a purely legal question,
which we decide de novo. Byers v. Comm’r, 740 F.3d 668, 675
(D.C. Cir. 2014).
                              10
     The Tax Court formulated the test for substantial
compliance as “whether the donor provided sufficient
information to permit the Commissioner to evaluate the
reported contributions, as intended by Congress.” 149 T.C. at
16 (quoting Smith v. Comm’r, 94 T.C.M. (CCH) 574, 586
(2007), aff’d, 364 F. App’x 317 (9th Cir. 2009)). The IRS
advocates a significantly more stringent test under which
anything short of complete compliance is excused only if “(1)
[the taxpayer] had a good excuse for failing to comply with the
regulation and (2) the regulation’s requirement is unimportant,
unclear, or confusingly stated in the regulations or statute.”
The Fourth, Fifth, and Seventh Circuits have adopted this
formulation of the substantial compliance standard, albeit for
different provisions of the tax code. See Volvo Trucks of N.
Am., Inc. v. United States, 367 F.3d 204, 210 (4th Cir. 2004);
McAlpine v. Comm’r, 968 F.2d 459, 462 (5th Cir. 1992);
Prussner v. United States, 896 F.2d 218, 224 (7th Cir. 1990).

      We conclude that, even if a taxpayer can fulfill the
requirements of § 1.170A-13 through substantial compliance,
RERI failed substantially to comply because it did not disclose
its basis in the donated property; accordingly, we assume but
do not decide that substantial compliance suffices. As we read
the Tax Court’s decision, a taxpayer must supply its basis (or
an explanation for failing to do so) in order to “provide[]
sufficient information to permit the Commissioner to evaluate
the reported contributions, as intended by Congress.” 149 T.C.
at 16. If that is correct, and we think it is despite RERI’s
several arguments to the contrary, then we need not choose
between the Tax Court’s standard for substantial compliance
and the IRS’s more exacting one.

    RERI first argues that the taxpayer’s basis in a donated
property is not necessary to evaluate the taxpayer’s charitable
contribution because the deductible amount is the fair market
                               11
value (FMV) of the property, and the basis is not an input in
calculating the fair market value. But RERI fails to recognize
that the purpose of the substantiation requirements is not
merely to collect the information necessary to compute the
value of donated property. The requirements have the broader
purposes of assisting the IRS in detecting and deterring inflated
valuations. Because the cost or other basis in property typically
corresponds with its FMV at the time the taxpayer acquired it,
an unusually large difference between the claimed deduction
and the basis alerts the IRS to a potential over-valuation,
particularly if the acquisition date, which must also be reported,
is not much earlier than the date of the donation. In addition,
as the Tax Court recognized, there are circumstances under
which the basis affects the amount of the deduction allowed.
149 T.C. at 17 n.11 (citing § 170(e)(1)(A), under which the
amount of a deduction must be reduced by “the amount of gain
which would not have been long-term capital gain,” had the
property “been sold … at its fair market value”). It is therefore
unsurprising that the DRA expressly lists “the cost basis ... of
the contributed property” as information to be provided in
substantiation of a charitable deduction. Though the Congress
left it to the discretion of the Secretary of the Treasury to
impose additional reporting requirements, the Congress
specifically identified the basis and the date of acquisition as
the bare minimum that a taxpayer must provide. We should be
very reluctant to set to naught what the Congress deemed
essential.

     Moreover, in this case, the Tax Court found there was in
fact a “significant disparity between the claimed fair market
value [of $33 million] and the [$3 million] RERI paid to
acquire the SMI just 17 months before it assigned the SMI to
the University.” 149 T.C. at 17. Hence, the Tax Court did not,
as RERI claims, merely “hypothesize” that providing its basis
would have alerted the IRS to a potential over-valuation.
                               12

     RERI contends in the alternative that the omission of a
number in a tax filing is typically construed as a zero, and that
a zero provides the same red flag as does an unusually low
basis. The point would have some force had the Secretary not
provided for the donor to substitute an explanatory statement if
it is “unable” to provide information on the cost basis.
§ 1.170A-13(c)(4)(iv)(C)(1). Because a taxpayer may lack
information about its basis, the IRS reasonably chose not
automatically to treat a blank box as a zero. RERI did not lack
information about its basis or have any other excuse for its
failure to report its basis.

     Finally, RERI argues the Tax Court’s ruling “conflicts
with ... its prior holding in Dunlap v. Commissioner, 103
T.C.M. (CCH) 1689 (2012).” That the Tax Court came to a
conclusion in this case different from that in Dunlap does not
mean it clearly erred. In Dunlap, the court excused the
petitioners’ failure to supply their basis on Form 8283 on the
ground that supplying the basis was not “necessary to
substantially comply with the Instructions.” Id. at 1706.

     A memorandum opinion, such as the one in Dunlap, does
not bind the Tax Court. See, e.g., Dunaway v. Comm’r, 124
T.C. 80, 87 (2005). In any event, Dunlap is quite different from
the present case. There the Tax Court discussed the
completeness of Forms 8283 only in deciding whether the
taxpayers had “made a good-faith attempt to report their
contributions” so as to qualify for the reasonable cause and
good faith exception to accuracy-related penalties. Dunlap,
103 T.C.M. at 1707; see also Belair Woods, LLC v. Comm’r,
T.C. Memo 2018-159, slip op. at 21 n.8 (Sept. 20, 2018). The
court did not consider whether the taxpayers satisfied the
substantiation requirements. Nor did the Dunlap court find
there was in fact a significant disparity between the basis and
                              13
the claimed deduction; there indisputably is such a disparity in
this case.

     In short, we agree with the Tax Court that RERI fell short
of the substantiation requirements by omitting its basis in the
donated property. Therefore, we do not reach the IRS’s further
argument that RERI failed to satisfy the substantiation
requirements because the appraisal it submitted was not a
“qualified appraisal” within the meaning of § 1.170A-13(c)(3).

         III. The Valuation Misstatement Penalty

     Having affirmed the Tax Court’s denial of the charitable
contribution deduction, we proceed to consider whether the
Tax Court properly approved a penalty for misstating the value
of the donated property. IRC § 6662 instructs the IRS to levy
an “accuracy-related penalty” if “any portion of an
underpayment of tax” in excess of $5,000 is “attributable to ...
[a]ny substantial valuation misstatement.” IRC §§ 6662(a),
(b)(3), and (e)(2). If the taxpayer claims the value of the
property for which it seeks a charitable deduction is 200% or
more of the true value of the property, then the misstatement is
“substantial,” § 6662(e)(1)(A), and the penalty is 20% of the
resulting underpayment of tax. § 6662(a). If the taxpayer’s
claimed value is 400% or more of the true value, then the
misstatement is “gross,” § 6662(h)(2)(A), and the penalty is
40% of the resulting underpayment. §§ 6662(a), (h)(1).

     IRC § 6664(c), however, provides a defense to the
accuracy-related penalty: “No penalty shall be imposed ... with
respect to any portion of an underpayment if it is shown that
there was a reasonable cause for such portion and that the
taxpayer acted in good faith with respect to such portion.”
                                 14
     The Tax Court found RERI liable for the 40% penalty
reserved for a gross valuation misstatement because its stated
value of the donated property ($33 million) is more than 400%
of the true value of the property ($3,462,886), as determined
by the court. 149 T.C. at 37. RERI raises four objections to
this ruling, each of which would be an independent ground for
reversal. We reject all of them and affirm the judgment of the
Tax Court. 3

A. Supervisory Approval Requirement

    RERI first contends the IRS failed to meet a procedural
requirement in IRC § 6751(b)(1), which provides:

          No penalty under this title shall be assessed unless the
          initial determination of such assessment is personally
          approved (in writing) by the immediate supervisor of
          the individual making such determination or such
          higher level official as the Secretary may designate.

     The IRS concededly did not present evidence establishing
that it had met this requirement. At the time of the proceedings
below, the IRS took the position that the statute does not
require approval until assessment, which does not occur until a
decision of the Tax Court becomes final. See also Graev v.
Comm’r, 147 T.C. 460, 478 (2016) (Graev I) (adopting the
IRS’s position).




3
  The parties dispute whether the IRS bore the burden of production
in the Tax Court pursuant to § 7491(c) with regard to RERI’s liability
for the penalty. We need not decide the issue, however, because the
IRS clearly met that burden with respect to the three challenges that
were not forfeited.
                              15
     RERI, however, failed to raise its objection before the Tax
Court, which would ordinarily mean it is forfeit. See, e.g.,
Petaluma FX Partners, LLC v. Comm’r, 792 F.3d 72, 78 (D.C.
Cir. 2015). RERI attempts to avoid this result on the ground
that a recent Second Circuit decision, Chai v. Commissioner,
851 F.3d 190 (2017), represents an “intervening change in
law.” In Chai the court held written approval must be obtained
“no later than the date the IRS issues the notice of deficiency
(or files an answer or amended answer) asserting such penalty.”
Id. at 221; see also Graev v. Comm’r, 149 T.C. 485, 493 (2017)
(Graev II) (vacating Graev I in light of Chai).

     RERI asks us to excuse its failure to raise this argument
before the Tax Court on the ground that prior to Chai it did not
clearly have a claim the IRS violated § 6751(b)(1).
Fiddlesticks. The fact is that when RERI was before the Tax
Court, it “was free to raise the same, straightforward statutory
interpretation argument the taxpayer in Chai made” there.
Mellow Partners v. Comm’r, 890 F.3d 1070, 1082 (D.C. Cir.
2018); accord Kaufman v. Comm’r, 784 F.3d 56, 71 (1st Cir.
2015). We therefore see no reason to excuse RERI’s failure to
preserve its claim.

B. “Attributable to” Requirement

     Recall that an accuracy-related penalty applies only to the
“portion of the underpayment ... attributable to one or more
gross valuation misstatements.” § 6662(h)(1). RERI’s second
argument is that, even if it misstated the value of the donated
property, its underpayment is not “attributable to” that
misstatement within the meaning of the penalty statute because
the Tax Court’s stated reason for disallowing the deduction —
which resulted in the underpayment — was RERI’s failure
properly to substantiate the donation per IRC § 170 and the
associated regulations. This ground for the adjustment does
                                16
not relate to a misstatement of the value of the contributed
property.     Subsequently, however, the Tax Court also
determined the taxpayer misstated the value of the donated
property. In these circumstances, is the underpayment fairly
“attributable to” the valuation misstatement? Put another way,
can an underpayment be attributable to two independent
grounds for an adjustment?

     Consistent with its own precedent, the Tax Court answered
this question in the affirmative. 149 T.C. at 21 (citing AHG
Invs., LLC v. Comm’r, 140 T.C. 73 (2013)). Because the proper
interpretation of the phrase “attributable to” is a legal issue, we
resolve the question de novo. See Byers, 740 F.3d at 675. For
the reasons that follow, we agree with the Tax Court that an
underpayment can be “attributable to” more than one cause if
one of the causes is a misstatement of value.

     To begin, nowhere does the statute suggest there can be
only a single cause for an underpayment. The phrase
“attributable to” comfortably comprehends situations in which
the IRS has multiple reasons for adjusting a charitable
deduction. Moreover, as the First Circuit has recognized,
RERI’s reading of § 6662 has the perverse result of “allow[ing]
the taxpayer to avoid a penalty otherwise applicable to his
conduct on the ground that the taxpayer had also engaged in
additional violations that would support disallowance of the
claimed losses.” Fidelity Int’l Currency Advisor A Fund, LLC
v. United States, 661 F.3d 667, 673 (2011). A penalty is meant
to deter and punish abuse of the tax laws; those purposes would
be frustrated if it were interpreted in such a way as to reward a
taxpayer for committing multiple abuses. See id.

    RERI nonetheless advances an argument based principally
upon the Supreme Court’s decision in United States v. Woods,
571 U.S. 31 (2013), which postdates the precedent upon which
                               17
the Tax Court relied. In Woods the district court had concluded
the taxpayers’ partnerships lacked economic substance; it
therefore disallowed deductions for losses generated by those
partnerships. Id. at 37. The taxpayer argued that a penalty
under § 6662 for misstatement of its basis did not apply
because the underpayment was “attributable to” the lack of
economic substance as opposed to the misstatement of its basis.
Id. at 46-47. The Court rejected the argument because “the
economic-substance determination and the basis misstatement
are not ‘independent’ of one another.” Id. at 47. On the
contrary, they were “inextricably intertwined”: “The partners
underpaid their taxes because they overstated their outside
basis, and they overstated their outside basis because the
partnerships were shams.” Id. (cleaned up).

     RERI reads this decision to imply that, had the two
grounds for disallowance been independent rather than
“inextricably intertwined,” the Court would not have upheld
the penalty. That implication is unfounded: Having “reject[ed]
the argument’s premise,” the Court did not reach Woods’s
claim that the underpayment was attributable only to one of the
two “independent legal ground[s].” Id.

     As RERI points out, however, the Fifth and Ninth Circuits
have adopted its position. See Todd v. Comm’r, 862 F.2d 540,
542 (5th Cir. 1988); Gainer v. Comm’r, 893 F.2d 225, 228 (9th
Cir. 1990). Like the First Circuit in Fidelity and the Federal
Circuit in Alpha I, L.P. ex rel. Sands v. United States, 682 F.3d
1009 (2012), we regard the reasoning in those cases as flawed.
Both cases relied upon the General Explanation of the
Economic Recovery Tax Act of 1981, also known as the “Blue
Book.” Todd, 862 F.2d at 542-43; Gainer, 893 F.2d at 227-28.
Prepared by the staff of the Joint Committee on Taxation, the
Blue Book explains how to calculate a valuation misstatement
penalty: “The portion of a tax underpayment that is attributable
                              18
to a valuation overstatement will be determined after taking
into account any other proper adjustments to tax liability.”
Staff of the J. Comm. on Taxation, 97th Cong., General
Explanation of the Economic Recovery Tax Act of 1981, at 333
(Comm. Print 1981). In particular, Todd and Gainer focused
upon the following example:

         Assume ... an individual files a joint return showing
         taxable income of $40,000 and tax liability of $9,195.
         Assume, further, that a $30,000 deduction which was
         claimed by the taxpayer as the result of a valuation
         overstatement is adjusted down to $10,000, and that
         another deduction of $20,000 is disallowed totally for
         reasons apart from the valuation overstatement.
         These adjustments result in correct taxable income of
         $80,000 and correct tax liability of $27,505.
         Accordingly, the underpayment due to the valuation
         overstatement is the difference between the tax on
         $80,000 ($27,505) and the tax on $60,000 ($17,505)
         ... or $9,800.

Id. at 333 n.2, quoted in Todd, 862 F.2d at 543, and in Gainer,
893 F.2d at 228 n.4. From this example, both courts concluded
that, when there is another reason for disallowing a deduction,
the taxpayer’s overvaluation “becomes irrelevant to the
determination of any tax due.” Gainer, 893 F.2d at 228. The
Federal Circuit has aptly explained the flaw in that reasoning:

         The Blue Book ... offers the unremarkable proposition
         that, when the IRS disallows two different deductions,
         but only one disallowance is based on a valuation
         misstatement, the valuation misstatement penalty
         should apply only to the deduction taken on the
         valuation misstatement, not the other deduction,
         which is unrelated to valuation misstatement. The
                              19
         court in Todd mistakenly applied that simple rule to a
         situation in which the same deduction is disallowed
         based on both valuation misstatement- and non-
         valuation-misstatement theories.

Alpha I, L.P., 682 F.3d at 1029.

     We note also that more recent Fifth and Ninth Circuit
decisions retreat from Todd and Gainer. In PBBM-Rose Hill,
Ltd. v. Commissioner, for instance, the Tax Court had denied
PBBM’s charitable contribution deduction for failing to meet
the statutory requirements for “a qualified conservation
easement.” 900 F.3d 193, 209 (5th Cir. 2018). The Fifth
Circuit nonetheless affirmed the Tax Court’s imposition of a
penalty for a gross valuation misstatement for having also
misstated the value of the easement. Id. at 215; see also Keller
v. Comm’r, 556 F.3d 1056, 1060-61 (9th Cir. 2009)
(recognizing the approach we take here as “sensible,” but
explaining that its decision is “constrained by Gainer”).

    In sum, because the Tax Court determined that RERI made
a gross valuation misstatement and that misstatement was an
independent alternative ground for adjusting RERI’s
deduction, the penalty properly applies.

C. Whether RERI Misstated the Value of the Donated
   Property

     Next, RERI contests the Tax Court’s factual finding that it
grossly misstated the value of the donated property. The Tax
Court determined that the correct value of the SMI was
$3,462,886; the $33 million RERI reported was well over
400% of that figure. 149 T.C. at 37. RERI maintains the Tax
Court undervalued the SMI as a result of two independent
errors. First, RERI claims the Tax Court was required to
                                20
determine the value of the SMI using actuarial tables, pursuant
to IRC § 7520. Second, RERI argues that, even if the Tax
Court did not err in setting aside the actuarial tables, it applied
too-high a discount rate in calculating the fair market value of
the donated property.

    1.    Applicability of the actuarial tables

     In general, a deduction for a charitable contribution is
equal to “the fair market value [FMV] of the property at the
time of the contribution.” 26 C.F.R. § 1.170A-1(c)(1).
Treasury regulations define FMV as “the price at which the
property would change hands between a willing buyer and a
willing seller, neither being under any compulsion to buy or
sell and both having reasonable knowledge of relevant facts.”
§ 1.170A-1(c)(2).

     As the Tax Court recognized, however, “the willing buyer-
willing seller standard is not applied directly” to a remainder
interest, 149 T.C. at 25, the value of which depends upon
various economic and demographic facts, such as the
applicable depreciation rate or the life expectancy of the holder
of a life estate. Because making and — for the IRS —
evaluating case-specific estimates would be inefficient, IRC
§ 7520(a) instructs that “the value of any annuity, any interest
for life or a term of years, or any remainder or reversionary
interest shall be determined ... under tables prescribed by the
Secretary.” Published periodically by the IRS, these tables
contain actuarial factors that “divide the fair market value of
the underlying property among the several interests in the
property.” 149 T.C. at 25. The factors incorporate uniform
assumptions in order to make valuations more convenient and
consistent. As a result, they inevitably produce estimates that
differ somewhat from a more particularized calculation of the
FMV of any specific partial interest.
                               21

     Some situations, however, may be so inconsistent with the
assumptions underlying the tables that actuarial valuation will
not produce a reasonably accurate estimate. For that reason,
the implementing regulations contain various exceptions. See
26 C.F.R. § 1.7520-3. As relevant here, § 1.7520-3(b)(2)(iii)
prohibits the use of the tables to calculate the value of a
remainder or reversionary interest unless the relevant legal
instruments “assure that the property will be adequately
preserved and protected (e.g., from erosion, invasion,
depletion, or damage) until the remainder or reversionary
interest takes effect in possession and enjoyment.” Without
that protection, there is a risk that waste or other damage will
impair the value of the future interest, which risk is not
reflected in the actuarial tables. Hence, the exception provides
the appropriate valuation is “the actual [FMV] of the interest
(determined without regard to section 7520) ... based on all of
the facts and circumstances.” § 1.7520-3(b)(1)(iii).

    In this case, the Tax Court ruled that the § 7520 tables were
inapplicable because “the SMI does not meet the adequate
protection requirement” quoted above. 149 T.C. at 27. The
court went on to make an independent valuation of the SMI of
$3.4 million based upon evidence introduced at trial. Id. at 37.

     As an initial matter, RERI contends the applicability of the
tables is a legal determination to be reviewed de novo. See
Anthony v. United States, 520 F.3d 374, 377 (5th Cir. 2008)
(applying de novo review to the question whether the
taxpayer’s annuities were restricted beneficial interests). We
disagree. Whether the agreements governing the SMI
“adequately preserved and protected” it within the meaning of
§ 1.7520-3(b)(2)(iii) is a mixed question of law and fact. We
                                 22
therefore review the Tax Court’s decision for clear error and,
as explained below, see none. 4

      The Treasury regulations indicate protection is adequate if
it is “consistent with the preservation and protection that the
law of trusts would provide for a person who is unqualifiedly
designated as the remainder beneficiary of a trust for a similar
duration.” § 1.7520-3(b)(2)(iii). In this case, the assignment
agreement contained a non-recourse provision under which the
liability of the TOYS holder is “strictly limited to” early
forfeiture of the property. Consequently, in the event of waste
or other harm to the property, the only recourse of the SMI
holder (the University) is to take possession of the damaged
property; the SMI holder does not have the right to sue the
TOYS holder for damages. By contrast, a trustee that failed to
preserve and maintain a trust asset would be liable to the
remainderman for damages. See, e.g., United States v.
Mitchell, 463 U.S. 206, 226 (1983). Indeed, as the Tax Court
recognized, “the holder of a remainder interest in property,
even outside of a trust, would be protected against waste and
other actions that would impair the value of the property.” 149
T.C. at 28. The Tax Court therefore concluded “the inability
of the SMI holder to recover damages for waste or other acts
that prejudice its interests exposes the SMI holder to a
sufficient risk of impairment in value that the SMI holder does
not enjoy a level of protection consistent with that provided by
the law of trusts.” Id. at 26-27.

    RERI does not dispute the Tax Court’s interpretation of
the assignment agreement or its understanding of the law of



4
  As a result, we need not pass upon the IRS’s alternative theory that
the SMI is a “restricted beneficial interest” to which the actuarial
factors do not apply. See § 1.7520-3(b)(1)(ii).
                              23
trusts. Instead, RERI claims the exceptions to § 7520 are to be
construed narrowly and applied in only limited circumstances.
RERI accuses the Tax Court of ignoring the protections the
assignment agreement does contain, in effect requiring the
property to be “perfectly preserved and protected” rather than
“adequately preserved and protected.” At the outset, we do not
agree the exceptions are to be applied, as RERI claims, “only
when the circumstances indicate there is little likelihood that
the interest being valued will have any meaningful worth.” To
the contrary, the regulation expressly states protection is
adequate

         only if it was the transferor’s intent, as manifested by
         the provisions of the arrangement and the surrounding
         circumstances, that the entire disposition provide the
         remainder or reversionary beneficiary with an
         undiminished interest in the property transferred at the
         time of the termination of the prior interest.

§ 1.7520-3(b)(2)(iii). Moreover, the Tax Court did not require
that the SMI be preserved as if it were held in trust. For one,
the court did not specify that the SMI holder must be made
whole in the event of waste or other material breach, see
Restatement (Third) of Trusts § 100 (Am. Law Inst. 2012); it
simply held there must be some remedy beyond early
forfeiture. Although there is no doubt some daylight between
the law of trusts and what is required to satisfy § 1.7520-
3(b)(2)(iii), we cannot say the Tax Court clearly erred in
concluding the level of protection here is “inadequate.” We
therefore affirm its decision not to apply the actuarial tables.

   2.    Actual fair market value

    Because it found the actuarial tables were inapplicable, the
Tax Court calculated “the actual [FMV]” of the SMI as of
                               24
August 2003, the date of the gift, using the “discounted cash
flow method.” See 149 T.C. at 29. The premise of this method
is that the value of an asset is equal to the future income it is
expected to produce, discounted to the valuation date. The
discount rate used should account for both the time value of
money and the risk of the future income stream not
materializing. Thus, a higher discount rate implies the future
cash flow is more uncertain.

     Applying this method, the Tax Court first projected the
cash flow for the SMI in perpetuity starting from January 1,
2021, when the SMI becomes possessory. Id. The court then
discounted that amount to August 2003, using a discount rate
of 17.75% rather than RERI’s proffered rate of 11.01%. 149
T.C. at 30, 32, 36. RERI now challenges the Tax Court’s
calculation of the actual FMV of the SMI solely on the ground
that the court used “a wildly inflated discount rate,” leading it
to understate the value of the property.

    We review the Tax Court’s selection of the appropriate
discount rate for clear error. See Energy Capital Corp. v.
United States, 302 F.3d 1314, 1332 (Fed. Cir. 2002) (“The
appropriate discount rate is a question of fact”). In so doing,
we are mindful that valuation is not an exact science; it requires
making the most of the available data. We therefore defer to
the Tax Court’s choice of discount rate so long as it “is
plausible in light of the record viewed in its entirety.”
Anderson, 470 U.S. at 574 (“Where there are two permissible
views of the evidence, the factfinder’s choice between them
cannot be clearly erroneous”).

     To determine the discount rate, the Tax Court relied upon
the analysis of Dr. Michael Cragg, one of the IRS’s experts;
details of his analysis are laid out in the Appendix. Of
relevance here, Dr. Cragg’s method was based upon the
                                25
premise that the $42.35 million RS Hawthorne paid for the
Hawthorne Property represented the fee value of that property
in February 2002, which in turn was equal to the discounted
value of future cash flow in perpetuity. By calculating cash
flow from 2002 onward, Dr. Cragg solved for the discount rate
implied by that fee value. This produced a discount rate of
18.99%, which implies “a risk premium of 13.39% over the
February 2002 long-term applicable Federal rate (AFR) of
5.6%.” 149 T.C. at 30 (citing Rev. Rul. 2002-5, 2002-1 C.B.
461). The AFR, which is published monthly by the IRS,
approximates the interest rate on Treasury securities, IRC §
1274(d); it represents the risk-free time value of money.
Because Dr. Cragg’s analysis was “directed at a [valuation]
date other than August 27, 2003,” the court adjusted his rate “to
reflect changes in the AFR between February 2002 and August
2003.” 149 T.C. at 35-36. That is, it added Dr. Cragg’s risk
premium of 13.39% to the August 2003 AFR of 4.36%, which
produced a discount rate of 17.75%. Id. at 36.

    RERI challenges that discount rate on the grounds that the
Tax Court erroneously (1) adopted Dr. Cragg’s “novel and
untested” method for deriving the risk premium; (2) accepted
Dr. Cragg’s flawed factual assumptions in applying this
method; and (3) made an insufficient adjustment to correct for
Dr. Cragg’s use of the wrong valuation date.

     As to its first point, we see nothing at all problematic about
rearranging the commonly recognized discounting formula to
solve for the discount rate. RERI’s primary complaint appears
to be that the Tax Court should have adopted the “commonly
recognized method” used by RERI’s expert, Mr. James Myers.
He applied a discount rate of 11%, based upon “investor return
rates for comparable commercial properties,” increased for the
greater uncertainty of a longer-term projection. The Tax Court
explained why it found Dr. Cragg’s method “more credible”
                               26
than that of Mr. Myers: “Dr. Cragg’s analysis gives more
account to the difference in risk between the expected
cashflows during and after the initial period of the AT&T
lease.” 149 T.C. at 32. The Tax Court’s desire to account for
the change in risk after the initial period of the AT&T lease —
for which the rents are not yet determined — is perfectly
reasonable.

     RERI further objects that Dr. Cragg did not check his
results against “market data” to confirm “his conclusion that at
the relevant period investors would have applied a discount rate
of 18.99%.” For instance, RERI would have had Dr. Cragg
incorporate evidence it introduced through its expert
“regarding the data center industry, the market conditions in
the area around the Property, the condition of the Property,
zoning, and market rent for powered shell data centers,
including lease comparables.” Dr. Cragg did not need to rely
upon this evidence because he was using actual data specific to
the Hawthorne Property, to wit, the sale price of the fee interest
and the terms of AT&T’s lease. To be sure, comparing his
results against market data might have bolstered the analysis,
but failing to do so does not amount to clear error.

     RERI next challenges two of the inputs Dr. Cragg used to
calculate the discount rate. The first is another discount rate.
Part of Dr. Cragg’s method involved calculating the value of
the cash flow through May 2016 — the end of the initial term
on the AT&T lease — in February 2002 dollars. In doing so,
Dr. Cragg used a 7.92% discount rate. RERI argues that this
rate — which approximates AT&T’s corporate bond rate for a
14-year bond as of March 2002 — is inappropriate for valuing
an illiquid asset such as the Hawthorne Property. According to
RERI, the Tax Court should have added a 1.5 percentage point
liquidity premium. The higher discount rate would give the
cash flow during the initial lease term a lower present value,
                              27
which results in a higher present value for the post-2016 cash
flow, which then supports a higher valuation for the donated
future interest. As the IRS aptly explains, however, “the only
relevant risk in determining the present value of projected cash
flows during the initial lease term was AT&T’s credit risk” —
which is analogous to the risk of AT&T defaulting on its debt
obligations, as reflected in its corporate bond rate.
Accordingly, we see no clear error in the Tax Court’s relying
upon this analogy.

     Another input the Tax Court needed was the fee value of
the Hawthorne property as of August 2003. The court, like Dr.
Cragg, used the $42.35 million that RS Hawthorne had paid for
the property. RERI objects that the sale took place in February
2002, “18 months before the correct valuation date.” RERI
would have us use its expert’s $52 million estimate of the fee
value as of August 2003. To be sure, the Tax Court could
reasonably have undertaken to adjust the $42.35 million figure
for changes in market conditions during that period; RERI had
introduced evidence relevant to the task. Instead, the Tax
Court, again reasonably, adopted Dr. Cragg’s estimate of the
discount rate for February 2002 and then adjusted that rate to
reflect the change in the AFR over the relevant time period.

     Relatedly, RERI argues the Tax Court’s adjustment did not
suffice to correct Dr. Cragg’s use of the wrong valuation date.
The Tax Court accounted only for the change in the AFR,
whereas RERI contends Dr. Cragg’s risk premium was too high
because there was also a change in market conditions between
April 2002 and August 2003; that is, long-term rental values
rose during the intervening months. As a result, says RERI, the
expected post-May 2016 cash flow should have been higher
than in Dr. Cragg’s analysis, which would have produced a
lower discount rate.
                              28
     Because AT&T’s lease specified the rent only through
2016, Dr. Cragg approximated post-2016 rents by assuming
they would increase by 3.29% each year thereafter; he derived
this growth rate from “an index of U.S. commercial real estate
prices.” 149 T.C. at 10. There are limits to the precision with
which the Tax Court can reasonably be expected to estimate
the inputs to its valuation. Accordingly, we reject RERI’s
suggestion that the Tax Court be required to incorporate every
available piece of data that might have affected the expected
future cash flow from the SMI. Indeed, RERI does not itself
calculate how the Tax Court’s valuation would have been
different had it incorporated every datum that RERI proffered,
except to say that future cash flow would have been “millions
of dollars higher.” Under these circumstances, we cannot say
the Tax Court clearly erred.

D. Reasonable Cause Exception

    We come now to RERI’s final argument, viz., that it
qualifies for the exception to a value-misstatement penalty
because “there was a reasonable cause” for the underpayment
and “the taxpayer acted in good faith.” IRC § 6664(c)(1). In
charitable contribution cases, § 6664(c)(3) provides more
specifically that the exception applies only if:

         A. the claimed value of the property was based on a
            qualified appraisal made by a qualified appraiser,
            and
         B. in addition to obtaining such appraisal, the
            taxpayer made a good faith investigation of the
            value of the contributed property.
                              29
   1.    Burden of proof

      The taxpayer typically bears the burden of showing that it
qualifies for the reasonable cause and good faith exception.
Barnes v. Comm’r, 712 F.3d 581, 584 (D.C. Cir. 2013). That
is, the taxpayer must prove that both elements of § 6664(c)(3)
are satisfied.

     According to RERI, however, this general rule is
superseded here by Tax Court Rule 142(a)(1), which provides
that “[t]he burden of proof” is upon the Commissioner “in
respect of any new matter, increases in deficiency, and
affirmative defenses, pleaded in the answer.” In this case, the
IRS originally applied only a substantial valuation
misstatement penalty; not until it filed its second amendment
to its answer to RERI’s petition before the Tax Court did the
IRS seek to impose a gross valuation misstatement penalty.
The Tax Court has previously stated that an increase in the
amount of a penalty or addition to tax asserted in an answer is
a “new matter” on which the IRS bears the burden of proof.
See Rader v. Comm’r, 143 T.C. 376, 389 (2014); Arnold v.
Comm’r, 86 T.C.M. (CCH) 341, 344 (2003). The Tax Court
has further held that when the IRS bears the burden of proof as
to a penalty, it must negate any defense thereto, such as a
taxpayer’s reasonable cause and good faith. See Cavallaro v.
Comm’r, 108 T.C.M. (CCH) 287, 299 (2014). Hence, RERI
claims the change from a “substantial” to a “gross” penalty was
a “new matter” as to which the IRS bears the burden of proving
RERI lacked reasonable cause for its underpayment.

     In this case, the Tax Court assumed RERI was correct and
that the IRS therefore bore the burden of proving the absence
of reasonable cause; the court then held the IRS had carried its
burden. 149 T.C. at 40. Typically, we review the Tax Court’s
application of the reasonable cause and good faith exception
                              30
for clear error. See Green Gas Del. Statutory Tr. v. Comm’r,
903 F.3d 138, 146 (D.C. Cir. 2018). But the appropriate
construction of the Tax Court’s rule regarding the burden of
proof is a purely legal question, which we decide de novo.

     We agree with the Tax Court’s decision not to excuse
RERI’s gross valuation misstatement under the reasonable
cause and good faith exception, albeit for a slightly different
reason: RERI bore the burden of proving it had met the
requirements and failed to do so. In prior cases involving an
increase in penalty, the Tax Court’s solution has been to apply
a “divided” burden: “In defending against the penalty initially
determined, the taxpayer bears the burden of proving
reasonable cause, while the Commissioner, to justify the
asserted increase in the penalty, must prove the absence of
reasonable cause.” 149 T.C. at 39 (citing Rader, 143 T.C. at
389; Arnold, 86 T.C.M. (CCH) at 344).

     We express no opinion as to whether Rule 142 requires the
IRS to negate affirmative defenses when it pleads a new
penalty in an answer. Even under the Tax Court’s scheme
dividing the burden, however, RERI would properly have to
show (1) “the claimed value of the property was based on a
qualified appraisal made by a qualified appraiser,” and (2) it
“made a good faith investigation of the value of the contributed
property” under § 6664(c)(3) in order to qualify for the
reasonable cause exception to the original “substantial”
penalty. “Placement of the burden of proof affects only the
obligation to prove facts.” Shea v. Comm’r, 112 T.C. 183, 197
n.22 (1999). If a defense to a new matter “is completely
dependent upon the same evidence,” id., as a defense to the
penalty originally asserted, then there is no practical
significance to shifting the burden of proof. Furthermore, “the
taxpayer would not suffer from lack of notice concerning what
facts must be established.” Id. Here, the facts required to
                               31
establish the two elements of the reasonable cause and good
faith exception are the same regardless whether the alleged
misstatement was “substantial” or “gross.” In other words,
although the IRS may theoretically have had the burden of
proof as to the increase in penalty, there was no additional fact
to which that burden applied.

   2.     Good faith investigation

     Having concluded that RERI must prove its entitlement to
the reasonable cause and good faith exception, we can easily
determine it has failed to show that it conducted a good faith
investigation within the meaning of § 6664(c)(3)(B).

     A “good faith investigation” calls for some action beyond
“simply accept[ing] the result of a qualified appraisal for the
requirement ... to have any meaning.” 149 T.C. at 40. RERI
asserts that it met this requirement by comparing the Gelbtuch
appraisal of the Hawthorne Property at $55 million in August
2003 with (1) the Bonz/REA appraisal of $47 million in August
2001 and (2) the $42 million that RS Hawthorne paid to acquire
the property in February 2002. The Tax Court rejected these
two comparisons, stating that “marshaling evidence of a
property’s value 18 months or more before a gift is simply not
sufficient as a matter of law to qualify as a good faith
investigation.” 149 T.C. at 41 (cleaned up). Due to the amount
of time that had passed, the Tax Court explained, that evidence
“is of limited worth in assessing the property’s value in August
2003.” Id.

    On appeal, RERI challenges the Tax Court’s reasoning. It
points out that, in calculating the discount rate, the Tax Court
adopted Dr. Cragg’s use of the February 2002 sale price to
approximate the fee value in August 2003. What is more,
                              32
RERI is correct that the Tax Court provided “no reason why
the same evidence is reliable for one purpose, but not another.”

     We need not consider whether the Tax Court erred in this
respect, however, because the court also found “[t]he record
provides no evidence” on the factual question whether RERI
“was aware of those data and took them into account in
determining the amount to claim as a deduction.” 149 T.C. at
41. In other words, RERI failed to produce evidence that it
conducted any investigation beyond the appraisal, let alone one
that qualifies as a “good faith investigation” within the
meaning of the statute. Consequently, RERI has not carried its
burden and we need not reach the IRS’s additional argument
that RERI did not satisfy the other element of the defense, the
requirement of a qualified appraisal. We therefore affirm the
Tax Court’s conclusion that RERI was not entitled to the
reasonable cause and good faith exception.

                       IV. Conclusion

   For the reasons set forth above, the judgment of the Tax
Court is

                                                Affirmed.
                        33
Appendix: Dr. Cragg’s method of determining the
                 discount rate

  1. The fee value of the Hawthorne property = (the
     present value of cash flow through May 2016) +
     (the present value of cash flow in perpetuity after
     May 2016).
  2. The fee value of the Hawthorne property is the
     $42.35 million that RS Hawthorne paid in February
     2002.
  3. The cash flow through May 2016, the end of the
     initial term of the AT&T lease, is the fixed rent to
     be paid by AT&T.
  4. Discounting the AT&T rents through May 2016 at
     a rate of 7.92% yields a present value of $39.06
     million.
  5. Subtracting $39.06 million from $42.35 million
     produces a present value of $3.29 million for the
     post-May 2016 cash flow. This is the implied
     value, as of February 2002, of the remaining years
     of the TOYS interest (May 2016 to December 2020)
     together with the SMI (from 2021 onwards).
  6. Project the post-May 2016 cash flow by assuming
     that rent will increase each year by 3.29 percent
     from the scheduled rent at the end of the AT&T
     lease.
  7. Solve for the discount rate that would produce a
     present value, as of February 2002, of $3.29 million
     from the projected post-May 2016 cash flow. The
     answer is 18.99%.
