Parker
v.
Comm'r of Internal Revenue

Tax Court of the United States.Mar 2, 1943
1 T.C. 709 (U.S.T.C. 1943)
1 T.C. 709T.C.

Docket No. 109735.

1943-03-2

CHARLES T. PARKER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

George Black, Jr., Esq., for the petitioner. Alva C. Baird, Esq., for the respondent.


Under the facts it is held that petitioner sustained a loss in a transaction entered into for profit which is deductible under section 23(e)(2) of the Internal Revenue Code. Robert Lyons Hague, 24 B.T.A. 288, distinguished. George Black, Jr., Esq., for the petitioner. Alva C. Baird, Esq., for the respondent.

Respondent determined a deficiency in income tax for the year 1940 in the amount of $649.77. The deficiency is contested only in part. The question is whether or not petitioner is entitled to a deduction for an expenditure which was made for the investigation of a mining project.

The return was filed with the collector for the district of Oregon.

FINDINGS OF FACT.

Petitioner resides in Portland, Oregon. He keeps his books and makes his returns on the cash basis. Petitioner is a copartner in a partnership which does business under the name of Parker & Schram, with offices in Portland. The partnership does a general contracting business of a diverse nature.

Petitioner had engaged in the mining business in 1919, after the first world war, in Terrebon, near Redmond, Oregon. In 1920 he had $50,000 invested in the Dialmatius Mine on the Deschutes River in Oregon. At the time of the hearing in this proceeding, petitioner had investments in a mining operation in Hume, California, and in Murray, Idaho.

Early in 1940 Dean Butler went to petitioner and told him that he thought some plan could be worked out as an investment or under a contract, with persons who had been carrying on placer mining operations on Burnt River, in Oregon, or with the owner of the property. Those people were short of money and they were having trouble with a dredge which had sunk. The people referred to included one Bernert and a Mrs. Bertuleit. Petitioner asked C. W. Anderson, a contractor who formerly worked for him, to look at the property. Anderson looked at the property and reported that it looked like a favorable proposition. As a result of that investigation by Anderson, petitioner, Anderson, Bernert, and Mrs. Bertuleit joined together and each contributed $1,000, a total of $4,000 to make test runs before attempting to make a deal with the owner of the property, or with other interested persons.

The property had been operated by Bernert, Mrs. Bertuleit, and others, and certain equipment was located on the property, including a dredge. Profitable operations had been conducted. In one instance $9,000 had been made during a twelve-day run.

Anderson made the test runs. The dredge and equipment on the property was used. He spent the entire $4,000 for the following uses: He pulled out the dredge and dried and cleaned it. The motor was repaired. Other machinery was cleaned and repaired. Quite a few men were employed and they were paid wages. They worked on three shifts a day for about 15 days. About 15 days were spent in getting the equipment in order. Altogether 30 days were devoted to making preparations and test runs. The runs showed a much lower recovery of gold than had been expected. After making the test runs for 15 days, petitioner and the others abandoned the venture. Petitioner has never acquired any interest or made any other investment in the property.

Petitioner joined others and entered into a transaction for profit. Although the transaction was to test the advisability of a more extensive operation, it was nevertheless a transaction entered into for profit. The transaction was abandoned in the taxable year, and, upon abandonment, petitioner sustained a loss of $1,000.

OPINION.

HARRON, Judge:

Petitioner claims a deduction under section 23(e)(2) of the Internal Revenue Code for a loss sustained in a transaction entered into for profit. Respondent contends that there was a failure to enter into any transaction and cites Robert Lyons Hague, 24 B.T.A. 288, as authority for denying the claimed deduction.

In our opinion, the facts here are distinguishable from those in the Hague case, and it is not controlling.

In the Hague case, the taxpayer did no more than employ an attorney to advise him upon the matter of whether or not he should purchase certain property and enter into a project to develop a patent. The advice received was negative and the taxpayer did nothing. The taxpayer paid the attorney for his advice. We held that the fee was not deductible as a loss sustained from a transaction entered into for profit.

On the other hand, in this case the taxpayer went a step further. He asked a competent person to investigate the placer property. This was done without charge. The report was favorable. In fact, Anderson advised petitioner and others to advance money; he also advanced money; and placer mining operations were carried on. Petitioner and the others entered into a joint venture. The venture was a business undertaking and the object was to make profits. The parties expected that the runs would yield a sufficiently high rate of recovery of gold to warrant further investment and continued operations. If the results had been more favorable, the operations would have been continued. The carrying on of operations for thirty days constituted more than a mere preliminary investigation. The operations, in fact, were usual operations and they were carried on after Anderson had made the preliminary investigation. All that was done involve the elements of entering into a transaction for profit within the meaning of the statute. The operations were preliminary to making arrangements for permanent operations, it is true. But they were actual operations and the fact that they did not result in a permanent undertaking does not take the transaction outside the statutory provision. There is no question that a loss was sustained. When the venture was abandoned, the petitioner's money was lost.

Petitioner's claim is sustained.

Decision will be entered under Rule 50.