## Facts

- Multiple taxpayers invested as partners in Surhill Co., a New Jersey limited partnership formed to acquire and exploit U.S. distribution rights to an Italian film later titled *Submission*.
- In 1976, Surhill acquired the film rights for a stated $1,750,000: $225,000 cash and a $1,525,000 promissory note labeled nonrecourse.
- The general partners (an individual and his wholly owned corporation) contributed $3,333 total and held 1% of profits and losses; limited partners contributed about $330,000 and held 99% of profits and losses.
- Although the note was nonrecourse to the partnership, documents included undertakings that partners were personally liable pro rata, and limited partners executed a written “guarantee” in favor of the seller.
- Partners increased their partnership bases by including their shares of the $1,525,000 note and claimed pass-through losses largely driven by depreciation computed using the income-forecast method.
- The Commissioner issued notices of deficiency disallowing partnership losses and depreciation, asserting lack of profit objective, lack of genuine debt/basis, improper depreciation computations, and failure to satisfy the at-risk rules.

## Issues

1. Whether Surhill’s film activity was engaged in for profit under § 183, allowing loss and depreciation deductions.
2. Whether the $1,525,000 nonrecourse note constituted genuine indebtedness includible in Surhill’s basis and the partners’ bases.
3. Whether Surhill was entitled to depreciation using the income-forecast method for 1977–1978 as claimed.
4. Whether the partners were “at risk” under § 465 for amounts represented by the note and related guarantee arrangements.

## Decision

- The Tax Court sustained the deficiencies and disallowed the partners’ claimed pass-through losses and depreciation.
- The court found Surhill lacked a genuine profit objective under § 183.
- The court held the nonrecourse note was not bona fide debt for tax purposes and did not increase basis.
- The court disallowed the claimed income-forecast depreciation deductions, citing an overstated basis and unreliable income projections.
- The court held the partners were not at risk under § 465 for the noncash portion of the purchase price because the guarantee and transaction structure insulated them from real economic loss.

## Legal Principles

- Deductions from an activity require an actual and honest profit objective; tax-motivated structures and unrealistic economics support disallowance under § 183.
- A nonrecourse obligation is includible in basis only if it reflects genuine indebtedness grounded in economic reality; when the stated debt is disproportionate to the property’s value and repayment is speculative or contingent, the obligation may be disregarded for basis and depreciation.
- Depreciation under the income-forecast method depends on a correct depreciable basis and credible forecasted income; inflated basis and unsupported projections render deductions improper.
- “At risk” amounts under § 465 turn on the taxpayer’s real exposure to loss; formal recourse or guarantee language does not create at-risk basis when arrangements effectively protect investors from personal liability.

## Conclusion

The Tax Court denied film partnership loss and depreciation deductions because the venture lacked a profit motive, the large nonrecourse purchase-money note lacked economic substance for basis purposes, the income-forecast depreciation computations were unsupported, and the partners were not genuinely at risk for the financed portion of the acquisition price.


Abramson v. Commissioner, 86 T.C. 360 (1986)