* This order and judgment is not binding precedent, except under the

doctrines of law of the case, res judicata, and collateral estoppel. The court

generally disfavors the citation of orders and judgments; nevertheless, an order

and judgment may be cited under the terms and conditions of 10th Cir. R. 36.3.

F I L E D

United States Court of Appeals

Tenth Circuit

FEB 24 2005

PATRICK FISHER

Clerk

UNITED STATES COURT OF APPEALS

FOR THE TENTH CIRCUIT

DONALD L. WALFORD,

Petitioner-Appellant,

v.

COMMISSIONER OF INTERNAL

REVENUE,

Respondent-Appellee.

No. 04-9004

(T. C. No. 6506-86)

(Petition for Review)

ORDER AND JUDGMENT *

Before BRISCOE , ANDERSON , and MURPHY , Circuit Judges.

After examining the briefs and appellate record, this panel has determined

unanimously that oral argument would not materially assist the determination of

this appeal. See Fed. R. App. P. 34(a)(2); 10th Cir. R. 34.1(G). The case is

therefore ordered submitted without oral argument.
1 Mr. Walford’s case was initially assigned to Judge Charles Halpern who

was presiding over Gianaris v. Comm’r , 64 T.C.M. (CCH) 1229, 1992 WL

315448 (1992), a test case involving partnership ventures similar to Sav-Fuel. 

Mr. Walford’s case was abated pending the decision in Gianaris and, after

various continuances and settlement negotiations, was returned to the general

docket and set for trial in 2003. 

2 Before trial, the Commissioner conceded that he was barred by the statute

of limitation from asserting a deficiency for the 1980 tax year.

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Taxpayer-appellant Donald L. Walford, proceeding pro se, petitions this

court for review of the decision of the United States Tax Court disallowing, under

26 U.S.C. §183, deductions for losses resulting from an investment in a limited

partnership and assessing associated penalties and interest. Because the parties

are familiar with the facts as set forth in the Tax Court’s memorandum and

opinion, see Walford v. Commissioner , 86 T.C.M. (CCH) 479, 2003 WL

22413166 (2003), we offer only a brief procedural summary.

On his federal tax returns for 1980 and 1981, Mr. Walford claimed losses

resulting from his investment in Sav-Fuel Associates, a Connecticut limited

partnership. After the Commissioner disallowed these losses and assessed certain

additions to tax, Mr. Walford petitioned the Tax Court for redetermination. 1

Following trial, the Tax Court found that Mr. Walford’s deduction for losses in

1981 arising from the Sav-Fuel investment was properly disallowed because the

partnership did not have the requisite profit motive under 26 U.S.C. § 183. 2 The

court further found that Mr. Walford was liable for an addition to tax and
3 The Tax Court’s decision finally disposing of all claims with respect to all

parties was entered on January 20, 2004. Section 7483 of title 26 requires that a

notice of appeal be filed within ninety days after the entry of the Tax Court’s

decision. Because Mr. Walford’s notice of appeal is postmarked April 15, 2004,

it is considered filed as of that date and is timely under 26 U.S.C. §7502. 

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increased interest. In his brief to this court, Mr. Walford does not argue that

these penalties were erroneously assessed. He has therefore waived these

arguments, Gaines-Tabb v. ICI Explosives, USA, Inc. , 160 F.3d 613, 624 (10th

Cir. 1998), and we will consider only his arguments challenging the Tax Court’s

conclusion that the Sav-Fuel partnership was not engaged in a profit-making

activity.

Our jurisdiction to review the Tax Court’s decision arises under 26 U.S.C.

§ 7482(a), Hildebrand v. Comm’r , 28 F.3d 1024, 1026 (10th Cir. 1994), and we

affirm. 3

 Whether Sav-Fuel was intended as a profit-making venture is a question

of fact that this court will not disturb unless clearly erroneous. Cannon v.

Comm’r , 949 F.2d 345, 349 (10th Cir. 1991). A finding of fact is clearly

erroneous only when, on all the evidence, we are definitely and firmly convinced

that a mistake has been made. Id. After reviewing the record, we conclude that

the Tax Court’s finding that Sav-Fuel lacked an actual profit objective is not

clearly erroneous.

As we explained in Hildebrand , 28 F.3d at 1026-27, not all costs associated

with a business venture are necessarily deductible. “For a deduction to be
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allowed it must be shown that the activity engaged in was operated with an actual

and honest profit objective.” Id. at 1027 (citing 26 U.S.C. §183). “The

determination of whether an activity is engaged in for profit is to be made by

reference to objective standards, taking into account all of the facts and

circumstances of each case. . . . The taxpayer’s objective must be to achieve an

economic profit independent of tax considerations.” Gianaris v. Comm’r , 64

T.C.M. (CCH) 1229, 1992 WL 315448 at 5 (1992) (citations omitted). The

taxpayer has the burden to establish that “profit was the dominant or primary

objective of the venture,” Hildebrand , 28 F.3d at 1027 (quotation omitted), and,

in the case of a partnership, the relevant economic motives are those of the

partnership, not the individual investor, id. Courts particularly examine the

identity of the individuals operating the partnership “whose expertise is relied

upon in making partnership decisions.” Gianaris , 1992 WL 315448 at 5.

Sav-Fuel was ostensibly formed to acquire an energy-management system

(EMS) to be installed in the California manufacturing plant of Gould, Inc. The

components of the EMS, including heat exchangers, fans, valves, and various

control devices, would supposedly provide a simple, yet technologically

sophisticated, method of energy management. Three other entities were involved

in the structuring of this venture, the most relevant of which was Consumer

Energy Funding (CEF). In 1980, CEF sold the EMS to Dard Systems, Inc., an
4 Mr. Gangel had a long history as a promoter of tax shelters. In Gangel v.

Comm’r , 62 T.C.M. (CCH) 319, 1991 WL 145339 (1991), the Tax Court noted

that:

Since 1974 [Mr. Gangel] has been a promoter of numerous tax

shelters involving equipment leasing, real estate, entertainment, and

art. The tax shelters promoted by [Mr. Gangel] have been the subject

of previous Tax Court proceedings. [Mr. Gangel’s] previous shelters

have raised in excess of $400,000,000.

A major tax shelter [Mr. Gangel] was involved in was the

Energy Management System (EMS) tax shelter, which encompassed

15 corporations, approximately 80 transactions, and approximately

2,000 investors. In 1985 [Mr. Gangel] entered into a consent

agreement with the Government to cease EMS and other tax shelter

activities. [Mr. Gangel] paid a penalty of $320,000 in connection

with the consent agreement.

1991 WL 145339 at 1 (footnote omitted).

5 Sav-Fuel was entitled to only eighty-five percent of half of the net savings

realized by Gould as a result of the installation of the EMS. Taking into account

Sav-Fuel’s obligation on the note and other expenses, Sav-Fuel was entitled to

only 8.5 percent of any savings generated by the EMS.

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entity controlled by Sav-Fuel promoter Richard Gangel, for $337,500. 4 By the

time the equipment was purchased by Sav-Fuel later in 1980, the purchase price

had escalated to $10,350,000. The bulk of that sum was to be paid by a

nonrecourse note of $9,004,500, payable solely from eighty percent of the gross

income actually received by Sav-Fuel from the use of the EMS. 5 All of the

entities involved in this scheme were organized in 1980, and none of the general

partners or promoters had anything more than limited experience in the field of
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energy conservation and management. There was no evidence that the EMS was

ever installed at Gould or ever generated any actual energy savings.

The Tax Court’s conclusion that Sav-Fuel was not intended as a profitmaking venture was based primarily on five objective factors: 1) the grossly

inflated sales price paid by Sav-Fuel for the EMS; 2) the large amount of the

nonrecourse note with payment of that note limited to a very speculative income

source; 3) the lack of expertise in the energy-management field of Sav-Fuel’s

general partner and promoters; 4) the application of the factors set out in Treasury

Regulation §1.183-2(b); and 5) the calculation of a negative net present value for

Sav-Fuel.

Mr. Walford takes exception only to the Tax Court’s calculation of SavFuel’s net present value. This argument is unavailing, however, because we find

the other bases supporting the Tax Court’s decision regarding Sav-Fuel’s profit

motive to be correct. This decision is therefore affirmable irrespective of any

present value analysis. 

A key indicator of a venture entered into primarily to shelter taxes is the

presence of a grossly inflated purchase price for the asset involved. Soriano v.

Comm’r , 90 T.C. 44, 54 (1988). The fact that Sav-Fuel purchased the EMS for

$10,350,000 only a few months after the same equipment sold for $337,500

indicates that Sav-Fuel’s objective was to achieve grossly inflated tax benefits,
6 We note that before his death, Mr. Frost was the tax matters partner of

Harmonic Associates, a Florida limited partnership, similarly found to lack a

profit motive for purposes of 26 U.S.C. §183. See Gianaris , 1992 WL 315448 at

8.

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not to make an economic profit. See Gianaris , 1992 WL 315448 at 8. Further,

we agree with the Tax Court that the nature of the financing used here, a twentyfive-year nonrecourse note with interest at well below that paid by government

bonds at the time and whose payment was limited to funds received from

speculative savings to be generated by the EMS, meant “that Sav-Fuel would

generate artificially inflated tax benefits while at the same time virtually assuring

that it would never repay the note in full.” Walford, 2003 WL 22413166 at 15. 

Mr. Walford does not dispute that the general partner and the promoters of

Sav-Fuel had only limited experience, if any, in energy management, and that he

himself had none. Further, while Winston Frost, the general partner of Sav-Fuel,

had died by the time of trial, none of the other principals testified, permitting the

Tax Court to infer that their testimony would not have been favorable to Mr.

Walford. See Wichita Terminal Elevator Co. v. Comm’r , 6 T.C. 1158, 1165

(1946), aff’d , 162 F.2d 513, 516 (10th Cir. 1947). 6

 

Turning to the Treasury Regulations, the Tax Court applied the facts of this

case to the nine nonexclusive factors listed therein to further support its
-8-

conclusion that Sav-Fuel was not intended to earn an economic profit. Those

factors are: 

(1) the extent to which the taxpayer carries on the activity in a

businesslike manner; (2) the taxpayer’s expertise or his reliance on

the advice of experts; (3) the time and effort the taxpayer expends in

carrying on the activity; (4) the expectation that the assets used in the

activity may appreciate in value; (5) the taxpayer’s success in similar

activities; (6) the taxpayer’s history of income or loss in the activity;

(7) the amount of occasional profits, if any; (8) the taxpayer’s

financial status; and (9) the elements of personal pleasure or

recreation.

Hildebrand, 28 F.3d at 1027 (citing Treas. Reg. §1.183-2(b)).

In addition to the findings discussed above, the Tax Court found, after

applying the regulation, that Sav-Fuel had not been operated in a business-like

manner, since no books, records, or financial statements had been offered as

evidence. Likewise, there was no evidence that Mr. Walford expended any time

and/or effort in carrying on the business of Sav-Fuel. No evidence showed that the

EMS was expected to appreciate in value or that Sav-Fuel had any success in

similar energy-saving ventures or ever earned a profit from EMS-related activity. 

We have reviewed the record in this case and find none of these conclusions to be

clearly erroneous.

As a final matter and as an additional basis upon which to justify its

ultimate conclusion, the Tax Court engaged in a present-value analysis of Sav-Fuel

using a useful life for the EMS of twenty-five years. Mr. Walford takes exception
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to the twenty-five-year useful-life assumption and urges this court to reverse on

that basis. As noted above, however, there was ample evidence before the Tax

Court to support its conclusion, even without the present-value analysis. We will,

nonetheless, briefly address Mr. Walford’s contentions.

Mr. Walford argues that the reference in Sav-Fuel’s private placement memo

to a useful life refers to the double-declining depreciation schedule of seven years

and not to the actual, expected useful life of the equipment. He further argues that

the chart in the private placement memo reflecting a twenty-five year useful life

refers to the life of the nonrecourse note, not to the equipment. Finally, he points

to his expert’s opinion that the EMS equipment would last at least thirty years.

The Tax Court refused to accord any weight to the expert’s conclusion,

citing its lack of authority, factual support, or data and noting that the opinion was

based on nothing more than the expert’s personal belief. Indeed, the expert

admitted he had never seen the EMS and was unfamiliar with its design. He

further acknowledged that some of the equipment could have become obsolete

over the years. We do not find any error in the Tax Court’s refusal to credit this

opinion. Since Mr. Walford had the burden of proof, he is left with no evidence to
7 Mr. Walford cites Gianaris to support his contention that the EMS had a

useful life longer than twenty-five years. In Gianaris , however, the relevant

comparison is to the equipment used by Computerized Energy Associates (CEA),

the useful life of which the Tax Court found to be twenty-five years based on

assumptions in the CEA offering memorandum. The thirty-five year life cited by

Mr. Walford refers to the equipment of Harmonic Associates, which included a

retrofitted annealing furnace and a new woodchip-burning boiler plant, equipment

far different from the EMS purchased by Sav-Fuel.

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sustain his contention that the useful life of the EMS was greater than twenty-five

years. 7

 

The different hypotheses conjured by Mr. Walford to generate a theoretical

profit for Sav-Fuel, assuming a useful life of more than twenty-five years, are too

speculative to overcome the abundant evidence relied upon by the Tax Court to

find no profit motive here.

The decision of the Tax Court is AFFIRMED. The mandate shall issue

forthwith.

Entered for the Court

Michael R. Murphy 

Circuit Judge