                                                                          F I L E D
                                                                   United States Court of Appeals
                                                                           Tenth Circuit
                     UNITED STATES COURT OF APPEALS
                                                                          OCT 31 2001
                            FOR THE TENTH CIRCUIT
                                                                      PATRICK FISHER
                                                                               Clerk

    LAURO G. GUADERRAMA;
    GAYLE W. GUADERRAMA,

                Petitioners-Appellants,
                                                         No. 00-9035
    v.                                             (Tax Court No. 16255-97)

    COMMISSIONER OF INTERNAL
    REVENUE,

                Respondent-Appellee.


                            ORDER AND JUDGMENT            *




Before TACHA , Chief Judge, BALDOCK , Circuit Judge, and BRORBY , Senior
Circuit Judge.




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

unanimously to grant the parties’ request for a decision on the briefs without oral

argument. See Fed. R. App. P. 34(f); 10th Cir. R. 34.1(G). The case is therefore

ordered submitted without oral argument.



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      This order and judgment is not binding precedent, except under the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

      We have jurisdiction pursuant to 26 U.S.C. § 7482. The facts found by the

Tax Court can be summarized as follows.

      Steven Benavidez’s bar burned down in 1989. Mr. Benavidez decided to

build a new restaurant/bar at a different location, and purchased a $35,000 tract of

land for this purpose, placing $10,000 down. He was unable to obtain a loan to

finance this project, however, because the banks he approached refused to accept

his only asset, a New Mexico liquor license, as collateral. Because of his

inability to secure a bank loan, Mr. Benavidez entered into negotiations with

Lauro and Gayle Guaderrama, and the parties reached a number of agreements.

      Mr. Benavidez deeded the property to the Guaderramas    1
                                                                  and the

Guaderramas paid off the $25,000 balance owed on the property. The

Guaderramas contracted and paid for the construction of the building that was to

house the restaurant/bar and also purchased furniture for the establishment. In

exchange, Mr. Benavidez sold his liquor license, which had an estimated value of

$100,000 to $200,000, to the Guaderramas for only $10. Mr. Benavidez also



1
      Some aspects of these agreements were conducted through L&G
Investments, a corporation formed by Mr. Guaderrama. The Tax Court
determined that this corporation had no independent economic existence. This
finding is not contested; therefore, for the sake of clarity, references to the
Guaderramas will implicitly include transactions conducted through L&G
Investments.

                                        -2-
agreed to make monthly lease payments to the Guaderramas for the next fifteen

years. The amount of the payments equaled the sum of the Guaderramas’

expenditures (the $25,000 payment on the property, the cost of constructing the

building, and the cost of the furniture) amortized at an interest rate of 15%. The

lease also provided that, after ten years, Mr. Benavidez had the option to purchase

the property for 125% of the balance of his lease payments.

      Under the lease agreement, Mr. Benavidez bore all the costs, expenses and

obligations of operating the restaurant/bar, and any benefits of operation (i.e.,

profits or appreciation of the property) accrued to him. By contrast, the

Guaderramas were indemnified against any expense by Mr. Benavidez, and were

immune to liability for any damage occurring in connection with the property.

Even if the restaurant/bar were partially or fully destroyed, the Guaderramas

would still receive lease payments from Mr. Benavidez.

      Mr. Benavidez and the Guaderramas reported the transaction inconsistently

on their respective tax returns, and the Commissioner issued deficiency notices to

both parties, spurring the instant action. On their face, the agreements entered

into by Mr. Benavidez and the Guaderramas referred to their arrangement as a

lease, and at trial the Guaderramas contended that this accurately reflected the

nature of the transaction. Mr. Benavidez and the Commissioner, by contrast,

asserted that, regardless of the form of the transaction, in substance it was a


                                          -3-
financing arrangement. In its memorandum opinion,        2
                                                             the Tax Court carefully

examined the characteristics of the transaction, including the following: Mr.

Benavidez provided collateral to the Guaderramas; the lease payments correlated

to a fixed interest rate on a certain sum of money, not to the value of the property;

and the risks, responsibilities, and benefits of ownership fell to Mr. Benavidez,

not the Guaderramas. Based on these considerations, the Tax Court determined

that the transaction was a financing arrangement rather than a lease, and imposed

an adjusted tax liability on the Guaderramas as a result.

       On appeal, the Guaderramas do not take issue with the Tax Court’s factual

findings regarding the features of the transaction, but contend that (1) the court

erred by looking beyond the form of the transaction to its substance in

determining the tax consequences of the agreements and (2) even if the court was

permitted to examine the substance of the transaction, the court erred in

concluding that the parties intended a financing arrangement rather than a lease.      3



       We affirm the decision of the Tax Court.




2
       Neither party attached to their brief a copy of the Tax Court’s memorandum
opinion as required by 10th Circuit Rule 28.2(A)(1). While the decision appealed
here is a brief order entered November 21, 2000, the Tax Court’s analysis and
reasoning is laid out in its memorandum opinion of March 28, 2000, and it is this
document that the appellate panel requires for effective review.
3
      The Guaderramas present only the first of these arguments as an issue on
appeal; however, both arguments are set forth in the body of their brief.

                                            -4-
                                   II. Standard of Proof

      In their petition for review, the Guaderramas first contend that the Tax

Court erred in allowing the Commissioner to look beyond the form of the

agreement elected by the parties and instead assess tax liability based on the

substance of that agreement.   4
                                   Specifically, the Guaderramas argue that the Tax

Court should have applied either the     Danielson rule or the “strong proof” rule to

prevent the Commissioner from construing the transaction independently of the

form given to it by the parties. Whether the Tax Court applied the correct legal

standard is a question of law that we review de novo.      See LDL Research & Dev.

II, Ltd. v. Comm’r , 124 F.3d 1338, 1342 (10th Cir. 1997).

      The Danielson rule prevents a taxpayer from challenging the form of an

agreement unless the taxpayer can adduce evidence that would be admissible to

alter or invalidate the agreement in an action between the parties to the agreement

See Comm’r v. Danielson , 378 F.2d 771, 775 (3d Cir. 1967). The “strong proof”

rule similarly prevents a taxpayer from disavowing the form of an agreement in

the absence of “strong proof” that the parties intended a different arrangement.


4
       The Guaderramas also argue that the Commissioner bore a heavier burden
of proof because he raised a new issue at trial. The Commissioner asserts that the
Guaderramas make this argument for the first time on appeal, and because the
Guaderramas have neither provided a record citation indicating where this issue
was preserved nor filed a Reply Brief contesting the Commissioner’s assertion,
the argument is deemed waived.   See 10th Cir. R. 28.2(C)(2) (requiring parties to
identify where issues on appeal were raised and ruled upon).

                                            -5-
See Kreider v. Comm’r , 762 F.2d 580, 586 (7th Cir. 1985) (taxpayer seeking to

attack form of agreement must present “strong proof” showing that intent of

parties was other than that expressed in agreement);   Hamlin’s Trust v. Comm’r ,

209 F.2d 761, 765 (10th Cir. 1954) (parties transacting at arm’s length cannot

later attempt to avoid tax consequences by claiming that substance of transaction

differed from form). The Tenth Circuit has declined to adopt the more restrictive

Danielson rule; therefore, when an appeal would lie in this circuit, the Tax Court

applies the less stringent “strong proof” rule.    5



       Though formulated differently, each of these rules limits a taxpayer’s

ability to alter the tax consequences of a transaction by arguing that the parties to

an agreement intended something different than what they expressed in the

agreement. Neither rule constrains the Commissioner’s position on a taxpayer

transaction. In fact, the   Danielson decision that the Guaderramas urge us to




5
        See, e.g., Hoffman v. Comm’r , T.C.M. (RIA) 2001-109 (2001) (“strong
proof” rule applies where circuit has not adopted      Danielson rule). Danielson has
been cited by the Tenth Circuit only in passing in a single unpublished order and
judgment and in two published decisions,        Barton Theatre Co. v. Comm’r , 701
F.2d 126, 127 (10th Cir. 1983), and     Atchison, Topeka & Santa Fe R.R. v. United
States , 443 F.2d 147, 152 (10th Cir. 1971). In light of this fact, the Tax Court
correctly concluded that it could not apply the      Danielson rule. See Golsen v.
Comm’r , 54 T.C. 742, 756-57 (1970) (Tax Court bound by law of circuit in which
appeal would lie), aff’d , 445 F.2d 985 (10th Cir.), cert. denied , 404 U.S. 940
(1971).

                                             -6-
follow clearly articulates the distinction between a challenge to the form of an

agreement mounted by a taxpayer and one mounted by the Commissioner.

       [T]o permit a party to an agreement . . . to attack that provision for
       tax purposes, absent proof of the type which would negate it in an
       action between the parties, would be in effect to grant, at the
       insistence of a party, a unilateral reformation of the contract . . . . If
       allowed, such an attack would encourage parties unjustifiably to risk
       litigation after consummation of a transaction in order to avoid the
       tax consequences of their agreements.

Danielson , 378 F.2d at 775. By contrast,

       Where the Commissioner attacks the formal agreement the Court
       involved is required to examine the ‘substance’ and not merely the
       ‘form’ of the transaction. This is so for the very good reason that the
       legitimate operation of the tax laws is not to be frustrated by forced
       adherence to the mere form in which the parties may choose to
       reflect their transaction. . . . [T]o allow the Commissioner alone to
       pierce formal arrangements does not involve any disparity of
       treatment because taxpayers have it within their own control to
       choose in the first place whatever arrangements they care to make.

Id. at 774. It is in fact well established that “the government may look at the

realities of a transaction and determine its tax consequences despite the form or

fiction with which it was clothed.”   Hamlin’s Trust , 209 F.2d at 764. Thus,

whether a court follows the   Danielson rule or the “strong proof” rule, the

reasoning quoted above bars application of the restriction to the Commissioner.

The Guaderramas’ argument that the Commissioner is bound by the parties’

construction of their transaction is without merit.




                                           -7-
                      III. Characterization of the Transaction

       Next, the Guaderramas contend that, even if the Tax Court is permitted to

examine the substance of the transaction, it erred in concluding that the

transaction was not a bona fide lease. While the Tax Court’s factual findings on

this issue will stand unless the Guaderramas can demonstrate clear error,    6
                                                                                 “[t]he

general characterization of a transaction for tax purposes is a question of law.”

Frank Lyon Co. v. United States    , 435 U.S. 561, 581 n.16 (1978).

       The Guaderramas’ arguments on this point are assertions unsupported by

authority. The Guaderramas cite cases in which a court concluded that a lease

was genuine, but they fail to point to any factual parallels that would mandate

reaching the same conclusion in the instant case. Conversely, the Guaderramas

assert that this case is distinguishable from decisions concluding that a purported

lease is in fact a financing agreement, but do not elaborate on or support this

assertion. In fact, the cases the Guaderramas claim are similar have marked

distinctions from this case,   see, e.g., Frank Lyon Co. , 435 U.S. at 577 (lease was

genuine where lessor who was liable to bank for mortgage bore real, substantial

risk), while the proper analogues are found in those cases they claim are

distinguishable.   See, e.g., Sun Oil Co. v. Comm’r   , 562 F.2d 258, 269 (3d Cir.



6
     The Guaderramas have not taken issue with any particular findings of the
Tax Court, and we conclude that the court’s findings are supported by the record.

                                           -8-
1977) (purported lease was in fact financing arrangement where lessor was

insulated from all risks and was guaranteed a particular rate of return, while

lessee bore all risks and accrued equity interest in property through lease

payments).

       The arrangement entered into by Mr. Benavidez and the Guaderramas bears

many similarities to the transaction analyzed in the   Sun Oil decision, and the Tax

Court was correct to apply a similar analysis to reach a similar conclusion: that

the transaction at issue failed to effect an actual transfer of ownership interests to

the lessor; rather, the purported lessor in essence served the role of lender. In

determining the nature of the transaction, the Tax Court carefully examined a

number of factors, including whether the purchase option would convey the

property at its fair market value; which party bore the risks and responsibilities of

ownership; and the terms of the lease payments. The Tax Court properly

concluded that the salient features of the transaction marked it as a financing

arrangement rather than a lease.




                                            -9-
                        IV. Conclusion

The decision of the Tax Court is AFFIRMED.


                                         Entered for the Court



                                         Wade Brorby
                                         Senior Circuit Judge




                              -10-
