Section of Taxation Publications
  VOL. 58
NO. 2
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 Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
Tax Shelter Methodologies: The (Dis)Appearance of Relevant Facts in Walford v. Commissioner
Mark Brennan



In Walford v. Commissioner, the Tax Court disallowed deductions from the taxpayer’s investment in the Sav-Fuel limited partnership because the venture was not created with profit as the “dominant or primary objective.” Applying the test from the Tenth Circuit, the Tax Court relied on such factors as the price paid by the partnership for its sole asset, the actions and expertise of the promoters and general partner of Sav-Fuel, the factors listed in Treasury regulation section 1.183-2(b), and the results of a present-value analysis provided to investors. Instead of looking at “all of the surrounding facts and circumstances,” the court analyzed selective facts presented by the parties and put aside evidence suggesting that the taxpayer, and the Sav-Fuel partnership itself, may have engaged in the energy management system (EMS) business for profit. Consequently, taxpayers and those who advise them are faced with a gray area blurring the distinction between abusive tax shelters and for-profit enterprises.

This note focuses on the court’s valuation of the Sav-Fuel partnership and the underlying EMS asset. Part I introduces the facts in Walford. Part II details the Tax Court’s decision to disallow the taxpayer’s deductions within the frame-work of section 183. Part III highlights (1) the court’s questionable reliance on a previous purchase price to determine the fair market value of an asset, along with its dismissive characterization of the type of financing used to pay for the asset, and (2) how the Tax Court’s use of present value analysis undermines the method’s flexibility.


Published by
Section of Taxation, American Bar Association
With the Assistance of
Georgetown University Law Center


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