83 T.C. 542">*542 Respondent determined the following deficiencies in petitioners' Federal income tax for 1977 and 1978:

After concessions, we must determine whether petitioners are entitled to various deductions and credits claimed in connection with Sydney Baron's purchase of the U.S. and Canadian rights in the master recording of the soundtrack of the motion picture "The Deep" (sometimes hereafter referred to as purchase of the master recording).

FINDINGS OF FACT

Some of the facts have been stipulated and are found accordingly.

Petitioners' legal address at the time the petition herein1984 U.S. Tax Ct. LEXIS 26">*29 was filed was in Scarsdale, NY. Sydney S. Baron (sometimes Baron), petitioner Sylvia S. Baron's husband, died in 1981, prior to the filing of the petition.

83 T.C. 542">*543 In the spring of 1977, Richard Baron, Sydney Baron's son (and a tax lawyer), called Richard Talmadge (Talmadge), an entertainment lawyer, and asked Talmadge whether he knew of any good entertainment properties in which Richard Baron's family could invest. ¹1984 U.S. Tax Ct. LEXIS 26">*30 Talmadge then contacted Richard Trugman (Trugman), an old friend, who was vice chairman, secretary, and treasurer of Casablanca Record & Filmworks, Inc. (Casablanca). At first, Trugman told Talmadge that Casablanca had nothing to sell. In a subsequent conversation, Trugman told Talmadge that Casablanca would be willing to sell the U.S. and Canadian rights in the master recording of the soundtrack of "The Deep," a movie they were working on at the time. ² Trugman briefly described the film and the record (who was involved, etc.) to Talmadge. Talmadge, in turn, relayed this information to Richard Baron. The master recording was of fine technical quality.

The original draft agreement between Baron and Casablanca, mailed by Talmadge to Richard Baron on May 12, 1977, called for a purchase price for the U.S. and Canadian rights in the master recording of $ 600,000, including a $ 500,000 nonrecourse note. The Barons insisted on the note's being nonrecourse. Because Richard Baron was not well versed in commercial transactions, he asked Martin Engels (Engels), a good friend and a commercial lawyer with whom he shared office space, to help out on the deal. Richard Baron told Engels that instead of a cash fee, his father was prepared to give Engels a $ 100,000 nonrecourse note (at 6-percent interest), to be paid out of 10 percent of gross proceeds which Baron would be entitled to receive in respect of his rights in the master recording.

On May 18, 1977, Casablanca sold the U.S. and Canadian rights in the master recording ³ to Whittier Development Corp., a shell corporation owned by Engels, for $ 550,000, payable $ 90,000 in cash and $ 460,000 by a nonrecourse note (at1984 U.S. Tax Ct. LEXIS 26">*31 7-percent-per-annum interest), payable solely out of royalties 83 T.C. 542">*544 from Casablanca's sale of records in respect of the master recording in the United States and Canada. ⁴1984 U.S. Tax Ct. LEXIS 26">*32 The note was due on May 27, 1984 (7 years later). The $ 90,000 cash which Whittier used to purchase the rights in the master recording was received from Sydney Baron. At all times pertinent herein, it was understood by Casablanca, Whittier, and the Barons that Sydney Baron would be the ultimate purchaser of the rights in the master recording. ⁵ Whittier was merely used as a middleman to provide Engels with a fee for his services. ⁶

On May 27, 1977, Whittier sold all of its rights and interest in the master recording to Sydney Baron for $ 650,000, ⁷ payable $ 90,000 in cash (already advanced to Whittier for Casablanca), $ 460,000 by taking subject to Whittier's note to Casablanca, and $ 100,000 by Sydney Baron's nonrecourse note to Whittier. The $ 100,000 note was canceled by Whittier on March 1, 1978, at the request of Richard Baron, who represented to Engels that there was no further possibility of any distribution proceeds being generated. Up to that time, Engels had never attempted to collect on the note even though Sydney Baron was receiving royalties and even though Engels was entitled to 10 percent of Baron's gross royalties, i.e., without deduction for the share of the royalties which Casablanca was 1984 U.S. Tax Ct. LEXIS 26">*33 entitled to retain as payment on the $ 460,000 note.

Pursuant to a distribution agreement entered into between Casablanca and Sydney Baron, also on May 27, 1977, ⁸ Sydney Baron gave Casablanca the sole right to distribute "The Deep" 83 T.C. 542">*545 soundtrack ⁹ recordings in return for a royalty of 80 cents per LP album, including tapes, and 4 cents per 45 RPM single for records sold in the United States and a royalty of 40 cents and 2 cents, respectively, 1984 U.S. Tax Ct. LEXIS 26">*34 for albums and singles sold in Canada. Half of the royalties to be received by Sydney Baron were to be kept by Casablanca as partial payment of interest and principal on the $ 460,000 nonrecourse note.

The motion picture "The Deep" was based on a novel by Peter Benchley, the author of "Jaws." The movie "Jaws" had been extremely successful and "The Deep" was perceived as the equally successful "Jaws" sequel. The "Jaws" soundtrack album was not nearly as successful as the movie; the1984 U.S. Tax Ct. LEXIS 26">*35 album did not go "gold." ¹⁰ Two independent organizations, Columbia Pictures Industries, Inc. (Columbia), and Casablanca, ¹¹ joined forces to produce the movie. Casablanca, at that time, was considered a young, successful, and aggressive record company; ¹² "The Deep" was the first motion picture production in which Casablanca participated. Making "The Deep" movie a success was of "major importance" to Casablanca.

1984 U.S. Tax Ct. LEXIS 26">*36 Due to Casablanca's position in the record industry and its relationship to "The Deep" film, Casablanca wanted to produce the soundtrack album. Columbia finally decided to grant Casablanca rather than Arista Records, Columbia's subsidiary, that right. Several months before Casablanca officially received the right from Columbia to produce the soundtrack records, Casablanca was focusing on the expected album and its uses to promote the film. John Barry, the well-known arranger and composer of soundtracks for motion pictures and television specials, including "Born Free," "Midnight Cowboy," "The Lion in Winter," and several James Bond movies, had already been selected by Columbia to arrange and compose 83 T.C. 542">*546 the music for "The Deep" movie. ¹³ In January 1977, Neil Bogart, Casablanca's president, estimated, in a memorandum to Trugman, that, with John Barry composing the album's music, "I don't believe we will sell less than 100,000 Lps, with a potential of 300,000." Bogart also stated that "I'd feel comfortable if we can break even, and on 100,000 Lps, we'll come close * * * and help the movie." Thus, the major purpose of the album was to promote the movie.

1984 U.S. Tax Ct. LEXIS 26">*37 Casablanca soon began considering the possibility of having Donna Summer, one of their "stars" (see note 12 supra) sing the title song in the film and on the soundtrack album. Casablanca's European licensees were very interested in such a soundtrack album, since Donna Summer had spent several years singing in Europe and was quite a sensation there. Casablanca projected that the album would sell better with Donna Summer on it. Columbia and John Barry agreed in April to have Donna Summer on the album recording. After the album was put together and the promotional activities planned, Casablanca hoped to sell, at a minimum, approximately half a million albums (i.e., go "gold").

Side 1 of the album recording contains an instrumental "ballet" by John Barry based on the score from the movie. On side 2, Donna Summer sings one song, "Theme From The Deep (Down, Deep Inside)" ¹⁴ twice, at different speeds. Side 2 also contains an instrumental version of "Theme From The Deep" by John Barry and a song "Disco Calypso" by an "obscure" group named "Beckett."

1984 U.S. Tax Ct. LEXIS 26">*38 Casablanca vigorously sought to promote the movie and the album. Radio station contests with numerous prizes, including bikes, radios, cameras, Casablanca cassette libraries, and trips to Bermuda were held in over 50 cities. ¹⁵ One hundred and fifty thousand copies of the album were pressed with blue, rather than black, vinyl (at an additional cost of 25 percent, or 15 cents per album) to make the album look like the ocean. A "The Deep" poster was included with each album (at a cost of 83 T.C. 542">*547 approximately 10 cents per poster). Casablanca spent $ 250,000 to advertise the album, and thereby the movie as well, in the United States. ¹⁶ Window streamers, posters, and dump boxes (which are used for placing a large number of records in one area of a store) were placed in record stores. Having missed out on the opportunity to get "Record of the Month" status for "The Deep" album (which would have resulted in distribution of the album through K-Mart department stores nationwide), ¹⁷ Casablanca set up a deal whereby, for the first time, a contemporary album was sold nationwide through supermarkets. This promotion by Casablanca also had the effect of promoting the film whose success1984 U.S. Tax Ct. LEXIS 26">*39 was of major importance to Casablanca. "The Deep" movie's net film rental for 1977 was $ 31 million.

"The Deep" album was, notwithstanding Casablanca's vigorous efforts, a flop. ¹⁸ Sydney Baron received royalties (before 50 percent was deducted to pay off the nonrecourse note) of $ 17,842 in 1977 and $ 10,410 in 1978. In 1979, Sydney Baron received royalties of $ 4,420. Thus, Sydney Baron's total royalty receipts were $ 32,672. On their joint returns, Sydney and Sylvia Baron elected to compute depreciation on the U.S. and Canadian rights in the master recording, pursuant to Rev. Rul. 60-358, 1960-2 C.B. 68, Rev. Rul. 64-273, 1964-2 C.B. 62,1984 U.S. Tax Ct. LEXIS 26">*40 and Rev. Rul. 79-285, 1979-2 C.B. 91, using the income forecast method of depreciation. They deducted depreciation on the master recording of $ 401,390 (72.98 percent of $ 550,000) ¹⁹ in 1977 and $ 148,610 (27.02 percent of $ 550,000) in 1978. ²⁰1984 U.S. Tax Ct. LEXIS 26">*41 Thus, the rights in the master recording were fully depreciated over 83 T.C. 542">*548 2 years. ²¹ The Barons also deducted recording costs of $ 1,500 ²² and travel expenses of $ 500 ²³ in connection with the album.

OPINION

The two 1984 U.S. Tax Ct. LEXIS 26">*42 principal issues which we must resolve ²⁴1984 U.S. Tax Ct. LEXIS 26">*43 are whether: (1) The $ 460,000 nonrecourse note should be taken into account in determining Sydney Baron's basis for the master recording rights he acquired, and (2) in entering into the transaction for the acquisition of those rights, Sydney Baron's bona fide objective was to make a profit from the royalties aside from the tax benefits by way of large deductions. ²⁵

We turn our attention first to whether the $ 460,000 nonrecourse note from Sydney Baron should be included in the basis of his rights in the master recording. Respondent contends that the note should not be so included because: (1) The purchase price or the amount of the note unreasonably exceeds the fair market value of the rights ²⁶ which secured the 83 T.C. 542">*549 payment of the nonrecourse note, and (2) the obligation on the note is in any event too contingent. Petitioner, of course, contends that the fair market 1984 U.S. Tax Ct. LEXIS 26">*44 value of the rights was at least as great as, if not greater than, the purchase price (and, a fortiori, the amount of the note) and that the obligation on the note is not too contingent because there was a reasonable certainty at the time Sydney Baron acquired the rights that the note would be paid in full. We find it unnecessary to engage in an evaluation of the opinions of the experts herein as to the fair market value of Sydney Baron's rights in the master recording, because we conclude that, irrespective of the existence of some value which might be considered the fair market value, the obligation represented by the nonrecourse note was too contingent at the time Sydney Baron entered into the transaction to permit its inclusion in basis.

1984 U.S. Tax Ct. LEXIS 26">*45 We start from the recognized principle that, in appropriate circumstances, obligations have been found to be too contingent to permit their inclusion in basis and that this principle has been utilized in recent cases dealing with tax shelters. See, e.g., CRC Corp. v. Commissioner, 693 F.2d 281">693 F.2d 281 (3d Cir. 1982), affg. in relevant part, revg. and remanding on other grounds Brountas v. Commissioner, 73 T.C. 491">73 T.C. 491 (1979) (payment of note contingent upon discovery of recoverable amounts of oil or gas); Brountas v. Commissioner, 692 F.2d 152">692 F.2d 152 (1st Cir. 1982), vacating and remanding on other grounds 73 T.C. 491">73 T.C. 491 (1979) (same); Gibson Products Co. v. United States, 637 F.2d 1041">637 F.2d 1041 (5th Cir. 1981) (same); Fox v. Commissioner, 80 T.C. 972">80 T.C. 972 (1983), affd. by order (2d Cir., Jan. 23, 1984), affd. sub nom. Barnard v. Commissioner, 731 F.2d 230">731 F.2d 230 (4th Cir. 1984), affd. in unpublished orders sub nom. Hook v. Commissioner, Kratsa v. Commissioner, Leffel v. Commissioner, Rosenblatt v. Commissioner, Zemel v. Commissioner, 734 F.2d 9">734 F.2d 9 (3d Cir. 1984)1984 U.S. Tax Ct. LEXIS 26">*46 (note payable solely out of book sale proceeds); Saviano v. Commissioner, 80 T.C. 955">80 T.C. 955 (1983), on appeal (7th Cir., Oct. 7, 1983) (note payable solely out of sales proceeds of mined gold); Graf v. Commissioner, 80 T.C. 944">80 T.C. 944 (1983) (note payable solely out of profits from foreign dredging operation). See also Denver & Rio Grande Western R.R. Co. v. United States, 205 Ct. Cl. 597">205 Ct. Cl. 597, 505 F.2d 1266">505 F.2d 1266 (1974) (obligation payable at rate of 32 percent of 83 T.C. 542">*550 carload freight traffic revenue after movement of 100,000 net tons per year); Lemery v. Commissioner, 52 T.C. 367">52 T.C. 367 (1969), affd. on another issue 451 F.2d 173">451 F.2d 173 (9th Cir. 1971) (obligation contingent upon business sold showing net profit); Columbus & Greenville Railway Co. v. Commissioner, 42 T.C. 834">42 T.C. 834 (1964), affd. per curiam 358 F.2d 294">358 F.2d 294 (5th cir. 1966), cert. denied 385 U.S. 827">385 U.S. 827 (1966) (obligation to pay based on mileage of railroad lines); Albany Car Wheel Co. v. Commissioner, 40 T.C. 831">40 T.C. 831 (1963),1984 U.S. Tax Ct. LEXIS 26">*47 affd. per curiam 333 F.2d 653">333 F.2d 653 (2d Cir. 1966) (obligation for severance pay -- incurred as part of acquisition of assets of predecessor corporation -- contingent upon failure to give employees notice prior to closing plant).

Applying the contingency principle, we think it clear that the $ 460,000 nonrecourse note was too contingent to be includable in Sydney Baron's basis. The nonrecourse note specifically provided that payments were to be made "solely out of the gross receipts" from the use of the rights in respect to the master recording. See note 32 infra. Thus, it seems clear that the parties contemplated that the rights had no value apart from the income stream which might be generated. More importantly, in the instant case, the income stream was totally dependent upon public acceptance of, not only the movie "The Deep," but the album and other recordings as well. While the failure of the movie might well hinder the album and other recordings, the success of the movie would not create any viable degree of assurance that the album and other recordings would be accepted by the public. Every witness at the trial herein testified that the1984 U.S. Tax Ct. LEXIS 26">*48 record industry is a highly speculative business and that it is extremely difficult to predict the success of a particular record in advance of its release and the resulting indication of public acceptance. Here, at the time Sydney Baron entered into the transaction and acquired the rights subject to the $ 460,000 nonrecourse note, neither the movie, the album, nor any other recording had been released for sale to the public. To be sure, there were high hopes for both because of the involvement of Donna Summer (a rising star vocalist at that point), John Barry (a well-known arranger and composer), Peter Guber (a recognized movie producer who had recently produced "Jaws"), Peter Benchley (who had written the book "The Deep," his first after the record-breaking book and movie "Jaws"), and Casablanca (a well-known 83 T.C. 542">*551 record producer and distributor) and because of the extensive advance promotion efforts, most of which, however, were of the film rather than of the recordings. But these pluses are not, in our opinion, sufficient to provide a basis for a meaningful measurement of the possibility of a successful release of the music contained in the master recording.

The situation1984 U.S. Tax Ct. LEXIS 26">*49 herein is to be sharply distinguished from those cases where the courts have valued movie rights and the potential income to be derived therefrom after the movie had been released. See, e.g., Grill v. United States, 157 Ct. Cl. 804">157 Ct. Cl. 804, 303 F.2d 922">303 F.2d 922 (1962); O'Brien v. Commissioner, 25 T.C. 376">25 T.C. 376 (1955); Herbert v. Riddell, 103 F. Supp. 369">103 F. Supp. 369 (S.D. Cal. 1952). In those cases, because public acceptance had been established, the courts were in a position to determine the value of the rights based upon the actual experience of the movie involved. ²⁷ No such factual situation exists herein. As we have previously pointed out, neither the album nor other recordings nor the movie had been released for sale to the public at the time Sydney Baron acquired his rights. ²⁸1984 U.S. Tax Ct. LEXIS 26">*51 We are satisfied that the personalties involved in the master recording of "The Deep" had not achieved such status as would permit us to view them in the same way as we might view an author whose stature practically guaranteed that his or her book, regardless of its quality, could make the Best Sellers list, or perhaps a1984 U.S. Tax Ct. LEXIS 26">*50 recording artist of similar renown. Moreover, a soundtrack album on which a star makes a limited appearance, such as is involved herein, simply does not have the high degree of appeal that a record featuring such an artist could be expected to have. ²⁹

83 T.C. 542">*552 The transaction involved herein is also distinguishable from a situation where the acquisition of rental real estate or equipment is involved. In such situations, not only are the payments on a nonrecourse note usually fixed in amount, but the obligation to make the payments is not, by its terms, confined to the income produced, and the underlying property has a potential value apart from the income stream which it is expected to generate. Moreover, the value of the underlying property is not so directly and totally dependent upon public acceptance as is the case with a master recording or similar property1984 U.S. Tax Ct. LEXIS 26">*52 -- a factor which may also distinguish situations involving the acquisition of oil and gas or perhaps patent rights. ³⁰ See 637 F.2d 1041">Gibson Products Co. v. United States, supra at 1048-1049; Siegel v. Commissioner, 78 T.C. 659">78 T.C. 659, 78 T.C. 659">690 (1982). Cf. 692 F.2d 152">Brountas v. Commissioner, supra at 157. ³¹ See also Mayerson v. Commissioner, 47 T.C. 340">47 T.C. 340 (1966).

1984 U.S. Tax Ct. LEXIS 26">*53 The long and short of the matter is that, in the case before us, the value of the rights in the master recording lay solely in the anticipated income stream derived from direct and total public acceptance and that Sydney Baron was liable on the nonrecourse note only out of his receipts from that income stream. If there were no receipts, there was no obligation to pay. ³²1984 U.S. Tax Ct. LEXIS 26">*54 Under these circumstances, there was no incentive for Sydney Baron to pay the note out of his other funds in order to preserve valuable property -- an element which the courts have found compelling in other cases involving nonrecourse obligations. See Brannen v. Commissioner, 78 T.C. 471">78 T.C. 471, 78 T.C. 471">493 (1982), affd. 722 F.2d 695">722 F.2d 695 (11th Cir. 1984); 78 T.C. 659">Siegel v. Commissioner, supra at 689. Under these circumstances, the amount of $ 460,000 represented by the nonrecourse note may not be 83 T.C. 542">*553 included in Sydney Baron's basis. ³³

It is important to note that we are dealing herein with a nonrecourse note where the obligation to make the payments thereon is, by its terms, confined to the income which the asset involved produces, where direct and total public acceptance is a key element, and where the likelihood of such acceptance has not been demonstrated. Thus, we recognize that no bright line can be drawn which will dispose of every case where a contingent nonrecourse note is involved.

We now turn to the question of whether Baron's acquisition of the U.S. and Canadian rights in the master recording and the holding thereof during 1977 and 1978 constituted, under section 183, ³⁴1984 U.S. Tax Ct. LEXIS 26">*56 an "activity not engaged in for profit." ³⁵Whether an activity is engaged in for profit turns on whether the taxpayer has a bona fide objective of making a profit. Dreicer v. Commissioner, 78 T.C. 642">78 T.C. 642, 78 T.C. 642">643-645 (1982),1984 U.S. Tax Ct. LEXIS 26">*55 affd. without opinion 702 F.2d 1205">702 F.2d 1205 (D.C. Cir. 1983); Engdahl v. Commissioner, 72 T.C. 659">72 T.C. 659, 72 T.C. 659">666 (1979); Golanty v. Commissioner, 72 T.C. 411">72 T.C. 411, 72 T.C. 411">425-426 (1979), affd. without opinion 647 F.2d 170">647 F.2d 170 (9th Cir. 1981). Baron's objective is a question of fact to be determined from all the facts and circumstances. Allen v. Commissioner, 72 T.C. 28">72 T.C. 28, 72 T.C. 28">34 (1979). The burden of proof is on the petitioners. Surloff v. Commissioner, 81 T.C. 210">81 T.C. 210, 81 T.C. 210">233 (1983); Rule 142(a). In respect of petitioners' burden of proof, we observe that we have no direct evidence as to Baron's expectations either as to anticipated profit or tax benefits or the comparative importance of these two elements; for example, there was no prospectus. Presumably Baron's son Richard, who was a tax lawyer, orally explained the various facets of the transaction to his father. Consequently, our analysis is 83 T.C. 542">*554 based upon reasonable inferences drawn from the record before us.

The regulations under section 183 list the following nine relevant factors which should normally be taken into account in determining whether an activity is engaged in for profit: (1) The manner in which the taxpayer carries on the activity; (2) the expertise of the taxpayer1984 U.S. Tax Ct. LEXIS 26">*57 or his advisers; (3) the time and effort expended by the taxpayer in carrying on the activity; (4) the expectation that assets used in the activity may appreciate in value; (5) the success of the taxpayer in carrying on other similar or dissimilar activities; (6) the taxpayer's history of income or losses with respect to the activity; (7) the amount of occasional profits, if any, which are earned; (8) the financing status of the taxpayer; (9) the elements of personal pleasure or recreation. Sec. 1.183-2, Income Tax Regs. We see no need to dissect the record herein separately with respect to each of the foregoing factors, particularly since many of these factors are hard to fit to shelter activity of the type involved herein. Rather, we will deal with the totality of the circumstances revealed by that record in the context of the elements which the parties assert in favor of their positions.

Petitioners contend that Baron consulted with industry experts before purchasing the master recording, that there was every indication, when Baron purchased the master recording, that "The Deep" album would be a success, that Casablanca made every effort to make "The Deep" album a success, and1984 U.S. Tax Ct. LEXIS 26">*58 that Baron reasonably relied on Casablanca, whose interests were similar to his own, to distribute the album in such a manner as to achieve maximum sales.

Respondent argues that tax profit, rather than economic profit, motivated Baron in his acquisition of the master recording. Numerous examples of Baron's alleged "unbusinesslike manner" in this transaction have been provided by respondent to illustrate what respondent believes was Baron's lack of concern with making a profit on his investment.

The bulk of petitioners' argument on profit motive revolves around Casablanca's promotion of the record and Baron's allegedly justifiable reliance thereon. We agree with petitioner that, from Casablanca's perspective, "The Deep" record was a legitimate business venture and that Casablanca went all out to promote "The Deep" project, although we note that Casablanca's 83 T.C. 542">*555 main interest was in the success of the movie, with the promotion of the records an instrument to achieving that main objective. However, that does not end our inquiry, for we still must determine Baron's objective.

Petitioners rely heavily on Baron's "consultation" with industry experts before purchasing his rights1984 U.S. Tax Ct. LEXIS 26">*59 in the master recording. However, it is clear from the record that Baron's "consultation" was mere window dressing to conceal tax motives. It was Richard Baron who initiated the entire chain of events by calling Talmadge, an entertainment lawyer he had never met, and asking Talmadge whether any good entertainment properties were available for investment. The record contains no evidence that either Sydney or Richard Baron knew the first thing about entertainment properties. Prior to his interest in "The Deep," Baron had never invested in, purchased, or sold master recordings or audiotapes for production or sale. Similarly, although Richard Baron apparently knew so little about commercial law that he asked Engels, another lawyer, to review the purchase documents, as a tax lawyer, Richard Baron did know a great deal about the tax consequences of his parents' half-million-dollar annual income. See note 38 infra. On May 12, 1977, when Talmadge mailed Richard Baron the original draft agreement for the purchase, Richard Baron was aware of who was involved in "The Deep" project and had been given certain sales projections (in the half-million-unit range) by Casablanca. See note1984 U.S. Tax Ct. LEXIS 26">*60 42 infra. All of the details were settled by May 18, 1977, the date of the agreement between Whittier and Casablanca. Each party to the transaction knew that Engels via Whittier was merely acting on behalf of the ultimate purchaser, Baron. Of the two appraisals Baron received of his rights in the master recording, one was dated May 24, 1977 (6 days after the transaction was, in effect, consummated), and one was undated. See note 7 supra. The record contains no evidence that either of those appraisals was available, either orally or in writing, prior to May 18, 1977. ³⁶1984 U.S. Tax Ct. LEXIS 26">*61 Thus, as far as the record herein shows, the only information that Baron had regarding his purchase prior to his entering the deal was given him by 83 T.C. 542">*556 the seller via his son, Richard. ³⁷ We think that Baron's investigative efforts leave a great deal to be desired. See Surloff v. Commissioner, 81 T.C. 210">81 T.C. 237; Fox v. Commissioner, 80 T.C. 972">80 T.C. 1015.

1984 U.S. Tax Ct. LEXIS 26">*62 Respondent places great emphasis on Baron's use of nonrecourse financing, both in acquiring his master recording rights and in compensating Engels for reviewing the sales arrangement, as illustrating Baron's tax, rather than economic, profit objective. We agree. While the use of large nonrecourse financing vis-a-vis cash invested is not necessarily fatal to establishing a profit objective (see Wildman v. Commissioner, 78 T.C. 943">78 T.C. 943 (1982)), in this case, it is a significant factor working against petitioner. See Barnard v. Commissioner, 731 F.2d 230">731 F.2d 230, 731 F.2d 230">231 (4th Cir. 1984), affg. Fox v. Commissioner, 80 T.C. 972">80 T.C. 972 (1982); Fuchs v. Commissioner, 83 T.C. 79">83 T.C. 79, 83 T.C. 79">98 (1984); Dean v. Commissioner, 83 T.C. 56">83 T.C. 56, 83 T.C. 56">74 (1984).

Baron's $ 650,000 purchase price for the master recording rights would have produced (assuming a 70-percent tax bracket) ³⁸1984 U.S. Tax Ct. LEXIS 26">*65 a tax benefit of $ 455,000 from the depreciation he expected to be able to claim (or $ 365,000 above his $ 90,000 cash investment). Cf. 731 F.2d 230">Barnard v. Commissioner, supra at 231.1984 U.S. Tax Ct. LEXIS 26">*63 Even if Baron were eventually required to recapture his excess depreciation deductions under section 1245, ³⁹ he would still be 83 T.C. 542">*557 in pocket after taxes and after deducting his $ 90,000 cash investment, over $ 109,000. ⁴⁰1984 U.S. Tax Ct. LEXIS 26">*66 In contrast, Baron would not have even recovered his $ 90,000 in before-tax dollars until 281,250 albums were sold, ⁴¹ a figure far in excess of the number Casablanca guaranteed to distribute under the distribution agreement. See note 9 supra. If the album went "gold," i.e., sold 500,000 copies, which was the projection given Baron by Casablanca, ⁴²1984 U.S. Tax Ct. LEXIS 26">*67 Baron would have received in before-tax dollars $ 70,000 above his $ 90,000 investment. ⁴³ Obviously, a $ 70,000 profit on a $ 90,000 investment represents a substantial return on that investment, but we think that, while this standard may be valid for determining the potential for economic profit, it should not be determinative of the existence of the necessary profit objective in determining the applicability of section 183. If such a standard were the sole criterion, we would have the ridiculous situation that the lower the amount 83 T.C. 542">*558 of the cash investment and the higher the amount of1984 U.S. Tax Ct. LEXIS 26">*64 nonrecourse financing, the more likely would be the existence of a profit objective. ⁴⁴ We recognize that, in some instances it has been suggested that profit should be measured in terms of the amount received over the cash investment. See Wildman v. Commissioner, 78 T.C. 943">78 T.C. 943, 78 T.C. 943">954 (1982); Bizub v. Commissioner, T.C. Memo. 1983-280. But neither of these cases made the existence of such a profit determinative; rather both cases, as we do herein, used this profit only as one factor to be considered in determining the taxpayer's objective.

In our view, the comparison should be made between the $ 70,000 and the $ 365,000 net benefits from the deduction for depreciation. In adopting this comparison, we are not suggesting that there must always be a dollar-for-dollar matching which would, in this case, necessitate a prediction of well over 2,300,000 albums, ⁴⁵1984 U.S. Tax Ct. LEXIS 26">*70 a figure clearly beyond anyone's wildest imagination (see note 42 supra). Instead, we conclude that an intermediate position will usually be in order, namely, that the disparity between before-tax profit and tax benefits be weighed in the context of all the factors involved in determining the existence of the requisite profit objective, ⁴⁶ rather than applying a "primary or dominant" test for nontax factors (which would seem to be required by a dollar-for-dollar matching) or a "sole" 1984 U.S. Tax Ct. LEXIS 26">*68 objective test for the tax benefits. Cf. 81 T.C. 210">Surloff v. Commissioner, supra.See also Lemmen v. Commissioner, 77 T.C. 1326">77 T.C. 1326, 77 T.C. 1326">1339-1347 (1981), where this Court, particularly at 1340-1341, discusses the various descriptive adjectives which have been used in weighing the various factors involved. We recognize that such a standard lacks the precisional quality which would be useful in the shelter area (see Warren, "The Requirement of Economic Profit in Tax 83 T.C. 542">*559 Motivated Transactions," 59 Taxes 985 (1981)) and may appear to leave the ultimate weight to be accorded the comparison to intuitive judicial judgment. ⁴⁷ See 1 B. Bittker, Federal Taxation of Income, Estates & Gifts, sec. 4.3.2 (1981). But this will not be the first time a less-than-precise standard has been applied -- witness the myriad of decisions in the debt-versus-equity arena where efforts to establish a precise ratio of debt to equity have not succeeded. See B. Bittker & J. Eustice, Federal Income Taxation of Corporations and Shareholders, sec. 4.04 (4th ed. 1979). Moreover, our intermediate position will permit accomodation, as a mechanical comparison1984 U.S. Tax Ct. LEXIS 26">*69 would not, in those areas where Congress has singled out particular transactions for favorable treatment via tax-benefit subsidies. See Fox v. Commissioner, 82 T.C. 1001">82 T.C. 1001 (1984); Warren, supra. Applying the foregoing analysis and the other elements revealed by the record herein, we conclude that the presence of a potential $ 70,000 profit on Baron's cash investment is not sufficient to cause us to conclude that Baron had a profit objective aside from the net tax benefits of $ 365,000 which he anticipated being able to obtain.

Respondent argues that no business person concerned with making an economic profit would impose upon himself or herself a $ 100,000 nonrecourse note for legal fees which would presumably have been, at most, a few thousand dollars and that Baron's $ 100,000 note to Whittier further exhibits his concern with tax, rather than economic, profit. Petitioners argue, however, that the $ 100,000 Whittier note is irrelevant, since Baron did not include it in his basis in his rights on the 1977 tax return. Whatever Baron's thinking 1984 U.S. Tax Ct. LEXIS 26">*71 may have been in 1978, it is clear that in 1977, when he entered this transaction, he contemplated a purchase price of $ 650,000 ($ 90,000 cash plus the Casablanca and Whittier notes) and this higher purchase price was expected to enable him to realize greater tax benefit. Consequently, in determining Baron's objective in entering the transaction, the Whittier note must be considered and, in the context of this case, respondent's argument is persuasive.

83 T.C. 542">*560 Similarly, there is no evidence in the record that Baron ever checked with Casablanca regarding the progress of the album. ⁴⁸ Respondent contends that Baron, as a prudent businessman, would have been in constant contact with Casablanca. While we agree with petitioners that Casablanca was far more qualified than Baron to direct the promotion and sale of the album and that Baron would therefore have had very little to add to the sales campaign, we still believe that Baron's complete absence of contact with Casablanca can only be attributed to Baron's lack of concern with an economic profit.

1984 U.S. Tax Ct. LEXIS 26">*72 The long and the short of the matter is that, based on the record herein, we simply cannot find that Sydney Baron was even the least bit concerned with making an economic profit. Baron lacked the knowledge to value the rights he was purchasing and yet did not consult with any outside expert until after he had already committed himself to the venture. We think it more than reasonable to infer, from the record herein, that Baron was quite aware of the anticipated tax benefits to be derived from the transaction and, as a result, increased his purchase price by an additional $ 100,000 nonrecourse note in an attempt further to increase those benefits. The most that can be said is that Baron "was completely indifferent to the success or failure" of the sale of records from "The Deep" soundtrack. See Grodt & McKay Realty, Inc. v. Commissioner, 77 T.C. 1221">77 T.C. 1221, 77 T.C. 1221">1245 (1981). In sum, petitioners have not carried their burden of proving that Baron took into account the economic consequences of the transaction aside from its tax benefits, much less that such consequences were anything more than incidental to such benefits.

We hold that Sydney Baron's acquisition1984 U.S. Tax Ct. LEXIS 26">*73 constituted an activity "not engaged in for profit," as defined in section 183(c). However, petitioners are entitled to deductions to the extent of the gross income derived from that activity. See Brannen v. Commissioner, 722 F.2d 695">722 F.2d at 702-703. Since, in the deficiency notice, respondent has allowed the claimed deductions up to the amount of income received in respect of the rights in the master recording and has made no further claim 83 T.C. 542">*561 in respect of such deductions, we have no need to resolve the subsidiary issues of how the income forecast method should be applied under the circumstances herein and whether petitioners are entitled to miscellaneous deductions for recording and travel expenses ⁴⁹ and interest. ⁵⁰

1984 U.S. Tax Ct. LEXIS 26">*74 To reflect the conclusions reached herein and the resolution of undisputed issues by the parties,

Decision will be entered under Rule 155.