86 T.C. 567 (1986), 5950-82, Snyder v. C.I.R.

Docket Nº:5950-82.
Citation:86 T.C. 567
Opinion Judge:COHEN, JUDGE:
Party Name:RICHARD T. SNYDER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Attorney:Ralph S. Boggs, for the petitioner. Fera Wagner, for the respondent.
Case Date:April 02, 1986
Court:United States Tax Court
 
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Page 567

86 T.C. 567 (1986)

RICHARD T. SNYDER, Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 5950-82.

United States Tax Court

April 2, 1986

Petitioner paid $25,000 to Einar Erickson, a geologist, and deducted that payment as ‘ exploration expense‘ under section 617. Erickson caused certain unpatented lode mining claims to be recorded on behalf of petitioner. A year later, petitioner donated one of the claims to a charity, claiming a contribution deduction of $250,000. HELD: (1) The payment made to Erickson was primarily for anticipated tax benefits and is not deductible. (2) Petitioner is not entitled to a charitable contribution deduction. (3) Petitioner is liable for additions to tax under section 6653(a) and additional interest under section 6621(d).

Ralph S. Boggs, for the petitioner.

Fera Wagner, for the respondent.

COHEN, JUDGE:

Respondent determined deficiencies of $12,855 and $28,482.51 in petitioner's Federal income taxes for 1978 and 1979, respectively, and additions to tax under section 6653(a) [1] of $642.75 and $1,424.13, respectively, for those years. By Amendment to Answer, respondent seeks additional interest under section 6621(d) on the ground that the deficiency for the year 1979 is attributable to a valuation overstatement within the meaning of section 6659(c).

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The deficiency for 1978 arose out of respondent's disallowance of a deduction claimed under section 617 for a payment to Einar Erickson, an ‘ exploration geologist.‘ The deficiency for 1979 resulted from disallowance of a claimed charitable contribution deduction for donation of a mining claim to a qualified charity.

FINDINGS OF FACT

Some of the facts have been been stipulated, and the stipulation of facts is incorporated herein by reference. Petitioner was a resident of Toledo, Ohio, at the time he filed his petition herein. He timely filed individual income tax returns with the Internal Revenue Service Center at Cincinnati, Ohio.

At all times material hereto, petitioner was an officer and owner of a company involved in custom molding of steel. Petitioner did not have any experience with silver or other precious metals.

During 1978, petitioner consulted with Roy Higgs (Higgs) about life insurance and estate planning. Higgs mentioned to petitioner investments in mining claims promoted by Einar Erickson (Erickson). Higgs explained the purported tax benefits of investments with Erickson, to wit, that money paid to Erickson could be deducted as ‘ exploration expense‘ and that a mining claim obtained from Erickson could be donated to charity, thus leading to an additional deduction in excess of the amount paid.

Petitioner received from Erickson a two-page document entitled ‘ Client Benefits for Hiring the Professional Services of an Exploration Geologist. ‘ Those purported benefits were described as follows:

1. Such exploration activities and expenditures are 100% tax deductible for all such fees paid for exploration in the calendar year expended:

SEE: Internal Revenue Code Section 617: also note 613 Revenue Rule 70-287.

ADDITIONAL HELPFUL INFORMATION: Commerce Clearing House 1975 Standard Federal Tax Reports Paragraph 3580 A; Commerce Clearing House, 1976 Federal Tax Course page 1419; Prentice-Hall, Inc. Internal Revenue Code 1954 (I.R.C.) page 25,274.

2. Client will have staked in his name one or more twenty acre ‘ Lode Mining Claims‘ as the normal results of exploration activities in a

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mining district or mineralized region. Please note the STANDARD EXPLORATION AGREEMENT. This outlines the terms of the working arrangement. ITEM 7 STATES THE GEOLOGIST WILL RETAIN NO INTEREST IN THE CLAIMS STAKED FOR THE CLIENT. EACH CLIENT HAS TOTAL CONTROL AND AUTONOMY AS IT RELATES TO HIS EXPLORATION ACTIVITITY (sic) AND ANY CLAIMS. Over the years clients have asked what they could do with their claims. Listed below are some alternatives that a client might consider: (Emphasis supplied.)

a. Donate some or all of the mineral claims that the client may have had staked in his name to a qualifying charitable institution. It is suggested that only appreciated capital gains property that qualifies under long term holding rules be so donated. The client can contact the gift officer of most such charitable institutions to obtain information about their requirements. Many have Directors of Mineral Development or offices that accept properties of merit. The Benefits to be derived from such a donation may be seen by examining the material listed as follows:

See: Internal Revenue Code Section 170 Additional helpful information: Commerce Clearing House paragraphs 1860 and 1862:

REGULATION- PARAGRAPH 1.170-1; Commerce Clearing House, 1976 Federal Tax Course page 919. Prentice Hall, Inc. Internal Revenue Code of 1954 (I.R.C.) 25,120.15. CARRY-OVER PROVISIONS - See Internal Revenue Code Section 170 (d). Additional helpful information: Commerce Clearing House 1975 Standard Federal Tax Reports paragraphs 1860 and 1863K,

REGULATION: Paragraph 1.l70A-10; Commerce Clearing House 1976 Federal Tax Course page 921; Prentice-Hall, Inc. Internal Revenue Code of 1954 (I.R.C.) 25,120.21

b. The client may retain some or all of the mineral properties. If a client were to choose this alternative in the second year of retention, $100 worth of assessment work has to be done and filed for each 20 acre claim. For more information on this, the client could contact any geologist and work out the long range program of retention of any claims and on-going work.

If the client retains his properties there are several other possibilities.

1. The client could then expend additional funds for exploration under I.R.C. code Section 617.

2. Hold the properties for the future.

3. Donate in the future - see above, obtain advice of accountant or tax attorney.

4. Sell.

5. Lease.

6. Joint-Venture.

7. Continue to expend funds to prove out additional merit of the property.

8. Hold property and watch developments in the region to ascertain possible disposition of properties.

9. Develop property when merit has been established.

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c. Sell some or all of the mineral properties to a mining and development company, a private individual or others.

d. Lease some or all of the mineral properties to a mining or development company, a private individual, or others. Under this arrangement the Client may elect to take any lease payments in bullion silver. See IRC Section 613.

(ALL OF THE ABOVE DECISIONS TO BE MADE BY THE CLIENT. GEOLOGIST RETAINS NO INTEREST IN ANY CLAIMS LOCATED FOR CLIENTS.) (Emphasis supplied.)

3. Any communications with geologist, field visits, or other, as a professional meeting would be tax deductible.

4. The Client may wish to participate in future exploration projects.

The Client should check with and obtain the expert advice of accounting advisors and or tax attorneys for other alternatives and flexibilities such exploration activities provide and in the evaluation of all of the above.

Erickson and petitioner executed an undated document, entitled Consultant Geologist Standard Exploration Agreement, stating:

The undersigned Consultant Geologist (Erickson) agrees to accomplish the desired exploration activities and geological services and will:

1. During the course of exploration activities locate and stake Lode Mining claim, or claims, for client on any mineralized ground that may be found, or related and associated ground.

2. Record the Certificates of Location for any claims staked, and prepare and record a Claim Map, and have these filed with the County Recorder and the Bureau of Land Management.

3. Provide a progress report or reports of exploration activities performed, recognizing the high degree of risk attendant to exploration activities and non-discovery of commercial ore; and unless notified in writing to the contrary I may provide data for other clients since I may be doing work for others in the same mining region.

4. Provide an accounting of exploration expenditures for client or his accountant as may be desired, and provide receipts for geological services and a STATEMENT for the amount of expenditures made and work done.

5. Prepare a final geological report, or summary, of results of explorations on clients properties, and if not otherwise restricted, data on regional work. And, if desired, arrange for an independent geological report of final results by a recognized geologist.

6. Compile maps of geological work performed, which may include drilling, assaying, geological work, petrographic data, mapping, and any other work that may be completed for client, to the extent of funds provided, on any claims and hold this information confidential unless permitted by client to distribute it otherwise.

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7. I WILL NOT RETAIN ANY INTEREST IN THE LODE CLAIMS, IF ANY, OR ANY CLAIMS LOCATED BY OR FOR CLIENT. (Emphasis supplied.)

8. Upon 30 days notice, client may terminate my services, and if monies were advanced, any unspent funds will be returned to client, and should client replace me by another geologist, which he may do so, I will provide file data and all work completed to that point and help in any transition.

9. Conduct client or his agent over project area as may be arranged during field work and explorationactivities. [Emphasis supplied.]

In late October 1978 petitioner requested that Ross Edwards (Edwards), a sales representative for petitioner's company, meet with Erickson and discuss the investment. Although Edwards had obtained a Bachelor of...

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