* This order and judgment is not binding precedent, e xcept under the

doctrines of law of the case, res judicata, and col lateral estoppel. The court generally disfavors the citation of orders and judg ments; nevertheless, an order and judgment may be cited under the terms and condi tions 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, th is panel has determined unanimously that oral argument would not materiallyassist the determination of this appeal. See Fed. R. App. P. 34(a)(2); 10th Cir. R. 34.1(G). T he 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 ve ntures similar to Sav-Fuel. Mr. Walford’s case was abated pending the decision in Gianaris and, after various continuances and settlement negotiations, w as 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 1 980 tax year. -2- Taxpayer-appellant Donald L. Walford, proceeding pr o se, petitions this court for review of the decision of the United Stat es Tax Court disallowing, under 26 U.S.C. §183, deductions for losses resulting fro m 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 TaxCourt’s memorandum and opinion, see Walford v. Commissioner , 86 T.C.M. (CCH) 479, 2003 WL 22413166 (2003), we offer only a brief procedural s ummary. On his federal tax returns for 1980 and 1981, Mr. W alford claimed losses resulting from his investment in Sav-Fuel Associate s, a Connecticut limited partnership. After the Commissioner disallowed the se losses and assessed certain additions to tax, Mr. Walford petitioned the Tax Court for redetermination. 1 Following trial, the Tax Court found that Mr. Walfo rd’s deduction for losses in 1981 arising from the Sav-Fuel investment was prope rly 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 foran addition to tax and3 The Tax Court’s decision finally disposing of all c laims with respect to all

parties was entered on January 20, 2004. Section 7 483 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 i s postmarked April 15, 2004, it is considered filed as of that date and is timel y under 26 U.S.C. §7502. -3- 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 en gaged in a profit-making activity. Our jurisdiction to review the Tax Court’s decisionarises 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 de finitely 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 act ual 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-4-

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 accou nt 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 w as 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 partnersh ip “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 manufacturi ng plant of Gould, Inc. The components of the EMS, including heat exchangers, f ans, 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., an4 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 T ax Court noted that: Since 1974 [Mr. Gangel] has been a promoter of nume rous tax shelters involving equipment leasing, real estate, entertainment, and art. The tax shelters promoted by [Mr. Gangel] hav e 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 wa s the Energy Management System (EMS) tax shelter, which e ncompassed 15 corporations, approximately 80 transactions, andapproximately 2,000 investors. In 1985 [Mr. Gangel] entered into a consent agreement with the Government to cease EMS and othe r tax shelter activities. [Mr. Gangel] paid a penalty of $320,00 0 in connection with the consent agreement. 1991 WL 145339 at 1 (footnote omitted).

5 Sav-Fuel was entitled to only eighty-five percent o f half of the net savings realized by Gould as a result of the installation o f the EMS. Taking into account Sav-Fuel’s obligation on the note and other expense s, Sav-Fuel was entitled to only 8.5 percent of any savings generated by the EM S. -5- 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 fromeighty 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 limite d experience in the field of-6-

energy conservation and management. There was no e vidence that the EMS was ever installed at Gould or ever generated any actua l energy savings. The Tax Court’s conclusion that Sav-Fuel was not intended as a profitmaking venture was based primarily on five objectiv e 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-mana gement field of Sav-Fuel’s general partner and promoters; 4) the application o f the factors set out in Treasury Regulation §1.183-2(b); and 5) the calculation of anegative 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 unavail ing, however, because we find the other bases supporting the Tax Court’s decisionregarding Sav-Fuel’s profit motive to be correct. This decision is therefore a ffirmable irrespective of any present value analysis. A key indicator of a venture entered into primarilyto 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 pu rchased the EMS for $10,350,000 only a few months after the same equipm ent 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 ta x 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. -7- 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 be low 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 partn er and the promoters of Sav-Fuel had only limited experience, if any, in en ergy management, and that he himself had none. Further, while Winston Frost, th e general partner of Sav-Fuel, had died by the time of trial, none of the other pr incipals testified, permitting the Tax Court to infer that their testimony would not h ave 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 therei n 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 o r 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 orloss in the activity; (7) the amount of occasional profits, if any; (8) t he 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 beenoperated in a business-like manner, since no books, records, or financial state ments 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-Fu el. 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 pro fit from EMS-related activity. We have reviewed the record in this case and find n one of these conclusions to be clearly erroneous. As a final matter and as an additional basis upon w hich to justify its ultimate conclusion, the Tax Court engaged in a pre sent-value analysis of Sav-Fuel using a useful life for the EMS of twenty-five year s. Mr. Walford takes exception-9-

to the twenty-five-year useful-life assumption and urges this court to reverse on that basis. As noted above, however, there was amp le evidence before the Tax Court to support its conclusion, even without the p resent-value analysis. We will, nonetheless, briefly address Mr. Walford’s contenti ons. Mr. Walford argues that the reference in Sav-Fuel’s private placement memo to a useful life refers to the double-declining dep reciation 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 woul d last at least thirty years. The Tax Court refused to accord any weight to the e xpert’s conclusion, citing its lack of authority, factual support, or d ata and noting that the opinion was based on nothing more than the expert’s personal be lief. Indeed, the expert admitted he had never seen the EMS and was unfamili ar with its design. He further acknowledged that some of the equipment cou ld have become obsolete over the years. We do not find any error in the Ta x Court’s refusal to credit this opinion. Since Mr. Walford had the burden of proof , he is left with no evidence to7 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 ComputerizedEnergy 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 th irty-five year life cited by Mr. Walford refers to the equipment of Harmonic Ass ociates, which included a retrofitted annealing furnace and a new woodchip-bu rning boiler plant, equipment far different from the EMS purchased by Sav-Fuel. -10- 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 relie d upon by the Tax Court to find no profit motive here. The decision of the Tax Court is AFFIRMED. The man date shall issue forthwith.

Entered for the Court

Michael R. Murphy Circuit Judge