Decision will be entered under Rule 50.
Petitioner incurred litigation expenses in connection with his unsuccessful prosecution of an action for the "recovery of certain mining properties, for an accounting, and for damages." Such litigation involved as its principal issue the adjudication of title to the mining claims. Held: Expenditures in connection with petitioner's unsuccessful attempt to establish an interest in property are nondeductible personal expenses. Petitioner's request for an accounting and damages was wholly dependent upon and incident to the determination of title and does not therefore affect the character of such litigation.
*1642 Respondent determined the following deficiencies and additions to tax in the Federal income tax of petitioners for the taxable years 1963, 1964, and 1965:
| Addition to tax | ||
| Year | Deficiency | sec. 6653(a) |
| 1963 | $ 947.41 | $ 47.37 |
| 1964 | 1,534.66 | 76.73 |
| 1965 | 1,746.32 | 87.32 |
The issues for decision are:
(1) Whether petitioner may deduct certain litigation-related expenses -- including travel expenses, rental, and utilities expenses allocable to the use of his home as *77 an office, and post office box rentals -- incurred in connection with certain mining claims; and if so the amount of such deduction.
(2) Whether petitioner is entitled to deductions for magazine subscriptions, moving expenses, and mailing expenses.
(3) The amount of petitioner's deductible prospecting expenses attributable to the use of his automobile.
(4) Whether petitioner is entitled to claimed net operating loss carryover deductions for the years 1964 and 1965.
(5) Whether petitioner is liable for additions to tax under section 6653(a). 1
FINDINGS OF FACT
Petitioners J. Bryant and Maryann Kasey, husband and wife, resided in Las Vegas, Nev., at the time of the filing of their petition in this case. Petitioners filed joint Federal income tax returns for the *1643 calendar taxable years 1963 and 1964 with the district director of internal revenue, Los Angeles, Calif., and for the year 1965 with the district director of internal revenue, Reno, Nev. J. Bryant Kasey will be referred to as petitioner.
Petitioner is a chemist and registered metallurgical engineer. He was employed as an analytical chemist *78 by the Bagdad Copper Corp. from July 1963 to January 1967. Petitioner has also engaged in prospecting activity on a regular basis prior to and during the taxable years in question. Such prospecting efforts resulted in petitioner's discovery and ownership of numerous mining claims, some of which were productive of income.
On June 11, 1951, petitioner and one Julius A. Paskan, 2 as "owners," entered into an agreement 3*79 with Molybdenum Corp. of America (hereinafter referred to as Molybdenum), which recited that petitioner and Paskan, who were the sole owners of certain mining claims located in the Clark Mountain Mining District of San Bernardino County, Calif., desired to grant Molybdenum an option to purchase such claims subject to the terms of the agreement. The agreement further recited that Molybdenum had theretofore acquired certain other mining claims in the same mining district, referred to as the Sulphide Queen claims.
Molybdenum was granted, under the terms of the agreement, an exclusive option to purchase the specified mining claims on or before October 8, 1951, for a maximum purchase price of $ 2 million payable as follows: $ 15,000 upon execution of the agreement, $ 135,000 upon the exercise of the option, and the balance, $ 1,850,000, payable, if at all, to the extent that petitioner is entitled to "royalties" under section Fifth of the agreement. Such royalties were payable with respect to concentrates produced from minerals mined from a valid claim of petitioner based upon a stated percentage of the value of such minerals. The Sulphide Queen claims which were the property of Molybdenum prior to the agreement were specifically excluded from the royalty provision. However, the agreement provided that if Molybdenum exercised its option to purchase petitioner's claims and commenced commercial operations for mining of minerals from the Sulphide Queen claims, it must also commence similar operations within the claims with respect to which royalties were payable to petitioner. In the event the option was exercised, petitioner further *80 agreed to admit the validity of the Sulphide Queen claims and consent to a judgment *1644 quieting title to such claims in favor of one Fred B. Piehl in a legal proceeding then pending in the Superior Court of the State of California, respecting the validity of the Sulphide Queen claims. Section Ninth of the agreement provided that neither the execution of the agreement nor the exercise of the option to purchase shall prejudice or impair the right of Molybdenum to assert in good faith the invalidity of any of the claims.
On September 21, 1951, pursuant to the terms of the above agreement, petitioner executed a deed conveying the claims and appurtenant rights and properties to Molybdenum. Prior to October 8, 1951, in accordance with the agreement, Molybdenum exercised its option to purchase, and in 1951 paid the agreed sum of $ 135,000 to petitioner and Paskan. During 1952 petitioner received $ 37,128.34 as his share of the royalties provided for under the agreement. However, after 1952 Molybdenum ceased the payment of royalties to petitioner despite his demand that royalties be paid.
The dispute between petitioner and Molybdenum with regard to royalties was generated by a disagreement *81 between the parties with respect to the interpretation of the agreement and resulted in a series of lawsuits between Molybdenum and petitioner continuing to the date of trial, the first of which was instituted by Molybdenum on April 29, 1953. The results of most of the litigation stemming from the above dispute are found in the following reported opinions: (1) Kasey v. Molybdenum Corporation of America, 176 Cal. App. 2d 346">176 Cal. App. 2d 346, 1 Cal. Rptr. 393">1 Cal. Rptr. 393 (Dist. Ct. App., 4th Dist., Dec. 17, 1959); (2) Molybdenum Corporation of America v. Kasey, 176 Cal. App. 2d 357">176 Cal. App. 2d 357, 1 Cal. Rptr. 400">1 Cal. Rptr. 400 (Dist. Ct. App., 4th Dist., Dec. 17, 1959); (3) Kasey v. Molybdenum Corporation of America, 336 F. 2d 560 (C.A. 9, 1964); (4) Kasey v. Molybdenum Corporation of America, 408 F. 2d 16 (C.A. 9, 1969). The 1951 agreement was also the subject of prior litigation before this Court in J. Bryant Kasey, 33 T.C. 656">33 T.C. 656 (1960). 4
Prior to 1960 *82 petitioner was represented in his litigation with Molybdenum by legal counsel. Dissatisfied with the results of litigation, petitioner discharged his attorneys in 1960 and thereafter pursued the litigation on his own. In so doing petitioner maintained files, engaged in legal research, drafted legal document such as motions and complaints, and represented himself in court proceedings. Petitioner's wife, who was often a party to the suits instituted by or against petitioner, was often required to appear with petitioner in these proceedings. *1645 In carrying on such litigation, which was generally venued in Los Angeles, Calif., petitioner incurred substantial travel expenses.
Petitioner's rented apartment in Las Vegas, Nev., constituted his principal residence during the taxable years in question. It consisted of a kitchen, combination living room and dining room, and two bedrooms. The smaller bedroom, approximately 10 by 12 feet in size was used by petitioner as an office. Such office was used exclusively in connection with the conduct of petitioner's business affairs, primarily litigation respecting his mining claims. The monthly rental of petitioner's apartment was $ 155. In addition *83 to the Las Vegas residence, petitioner rented from his employer a dormitory room approximately 12 by 8 feet in size in Bagdad, Ariz., at a cost of $ 20 per week. Petitioner generally remained in Bagdad, where he worked, during the week, returning approximately once each 2 or 3 weeks to Las Vegas. Petitioner commuted between Las Vegas and Bagdad by means of his personal automobile, customarily taking with him a portion of the litigation files to work with while he remained in Bagdad. These files remained in his dormitory room for the period of his stay in Bagdad but accompanied petitioner on his weekend trips to Las Vegas. The distance between Las Vegas and Bagdad is approximately 220 miles.
Petitioner's prospecting activities required a substantial amount of automobile travel. His expenses incurred in prospecting were largely attributable to such travel. Petitioner used his personal automobile for such purpose. During the taxable years in question petitioner owned a 1953 Oldsmobile which he had purchased new in 1953. In 1965 petitioner purchased a used 1959 Cadillac for approximately $ 1,100.
On the joint Federal income tax returns for the taxable years 1963, 1964, and 1965, petitioner *84 reported "total income," primarily from salaries, of $ 8,505.37, $ 11,127.06, and $ 12,942.19, respectively. In itemizing deductions for these years petitioner deducted "litigation expenses" of $ 2,009.48, $ 2,326.87, and $ 3,065.73, respectively. In addition, petitioner deducted other litigation-related expenses of maintaining an office, as follows:
| Expense | 1963 | 1964 | 1965 |
| Rent, one half to business | $ 1,200.00 | $ 1,087.50 | 1 $ 1,050.50 |
| Dormitory rent, one half to business | 45.00 | 108.00 | |
| Utilities | 242.87 | 194.95 | 137.69 |
| Additional legal expense | 180.15 |
*1646 The claimed litigation expenses are in part attributable to petitioner's use of his automobile in traveling between Bagdad and Las Vegas, computed at the rate of 17 cents per mile of travel.
Respondent disallowed the claimed litigation expenses on the grounds, first, that they were unsubstantiated, and, second, that they constitute nondeductible capital expenditures. The litigation-related expenses of maintaining an office in petitioner's home and dormitory were disallowed for the stated reason that they were nondeductible personal expenses.
Petitioner deducted as assessment and prospecting expenses for the taxable years *85 1963, 1964, and 1965 the amounts of $ 1,375.96, $ 977.66, and $ 1,764.47, respectively. Such expenses were incurred in using his automobile for prospecting purposes and, as in the case of his litigation expense deduction, were computed on the basis of mileage at 17 cents per mile. Respondent recomputed such deduction at the rate of 10 cents per mile in accordance with Rev. Proc. 64-10, 1964-1 C.B. (Part 1) 667.
In addition to the above deductions, petitioner deducted the disputed items listed below. Respondent disallowed such deductions in whole or in part for the reasons stated:
| Expense | 1963 | 1964 | 1965 |
| Subscriptions (trade and professional | $ 51.85 | $ 62.00 | $ 66.00 |
| magazines). | |||
| Post office box rental | 8.00 | 14.00 | 21.07 |
| Auto expenses (insurance, license, | 356.31 | 313.07 | 668.33 |
| depreciation). | |||
| Moving expense | 63.00 | ||
| Mailing expense | 3.78 |
| Expense | Reason for disallowance |
| Subscriptions (trade and professional | Nondeductible personal expense. |
| magazines). | |
| Post office box rental | Nondeductible personal expense. |
| Auto expenses (insurance, license, | Double deduction -- deduction on |
| depreciation). | basis of mileage already taken. |
| Moving expense | Nondeductible personal expense. |
| Mailing expense | Nondeductible personal expense. |
For the taxable *86 years 1964 and 1965 petitioner also claimed net operating loss deductions of $ 6,168.20 and $ 31,523.66, respectively. Respondent disallowed such deductions on the grounds, first, that such carryovers are precluded by the statute of limitations of section 172(b), and second, that section 172(d) modifications for the purpose of computing net operating loss carryovers reduce the net operating losses of prior years to zero.
OPINION
The primary issue for decision concerns the deductibility of expenses related to litigation conducted by petitioner during the taxable years in question. These expenses consist primarily of travel costs incurred in the course of such litigation. Additional litigation-related expenses, also at issue in this case, consist of rent and utilities expenses allocable to the use of petitioner's home and dormitory as a business office principally for the purpose of conducting litigation. Respondent *1647 maintains that the alleged litigation expenses constituted capital expenditures in defense of title to property rather than currently deductible expenses incurred in the production of income under section 212. Petitioner's position is to the contrary.
Petitioner, a mining *87 engineer employed in such capacity between 1962 and 1966, also engaged for many years prior to and during the taxable years at issue in prospecting activities with the expectation of locating valuable mining claims. Petitioner located numerous mining claims in 1950 and in 1951 sold a number of these claims to Molybdenum for the sum of $ 150,000, plus the right to receive royalties with respect to minerals extracted from such mining claims. The terms of the sale are set forth in detail in an agreement dated June 11, 1951, between the parties. Pursuant to this agreement the mining claims were in fact deeded to Molybdenum on September 21, 1951. Petitioner received royalties in 1952 amounting to $ 37,128.34 but thereafter, as a result of a dispute respecting the interpretation of the sale agreement, received no further royalty payments. The dispute between petitioner and Molybdenum resulted in a complex series of lawsuits, the first of which was instituted by Molybdenum against petitioner in 1953. We are requested to and do take judicial notice of several reported opinions which resulted from the foregoing litigation. A careful examination of this litigation is necessary to the *88 resolution of the issue before us.
In the first of the cases, Kasey v. Molybdenum Corporation of America, 1 Cal. Rptr. 393">1 Cal. Rptr. 393 (1959), petitioner brought an --
action for declaratory relief respecting plaintiff's alleged right to use certain roads and develop certain ore deposits in the Clark Mountain Mining District of San Bernadino County; for an injunction to prevent interference with such rights; and for the determination of the title of the parties to certain mining claims.
The principal controversy in that case arose from the location by Molybdenum, after the execution of the agreement but before the transfer of the deed to the various mining claims, of a new claim referred to as Betty Anne, the discovery point of which embraced all or part of the claims deeded by Kasey to Molybdenum, including a claim called Somnabulist Fraction No. 1. Under the agreement, the substance of which is set forth in part above in our Findings of Fact, royalties were payable only with respect to mining claims of petitioner which were valid at the time of sale. Furthermore, under section Ninth, a key provision of the agreement which became the focal point of the litigation, Molybdenum retained the right, *89 notwithstanding the execution of the agreement, to contest the validity of petitioner's mining claims and assert the superiority of its own overlapping claims. On this basis Molybdenum refused to pay royalties to petitioner as to *1648 Somnabulist Fraction No. 1, alleging that it possessed a superior claim by virtue of the location of Betty Anne. The court concluded, inter alia, that petitioner's title to Somnabulist Fraction No. 1 was valid at the time of sale within the meaning of the agreement and he was therefore entitled to royalties with respect to such claim.
In the second action, Molybdenum Corporation of America v. Kasey, 1 Cal. Rptr. 400 (1959), Molybdenum sought "an adjudication that [would] relieve it of the obligation to pay [royalties] on minerals mined by it from the claims in question" while Kasey sought a contrary adjudication. The court, although stating that "All decisions in this case necessarily depend to some degree on the priority and validity of the various claims," decided the issue presented primarily on the basis of its interpretation of several ambiguous clauses of the agreement. The issue in that case arose, as in the former one, from the fact that Molybdenum *90 was obligated to pay royalties only with respect to valid mining claims of petitioner. Molybdenum sought a declaratory judgment freeing itself of the obligation to pay royalties on the ground that petitioner's claims were invalid at the time of sale. The court determined which of the claims deeded to Molybdenum were subject to the payment of royalties to petitioner.
In addition to the foregoing State court litigation, petitioner instituted an action in the Federal District Court of California for "recovery of certain mining properties, for an accounting, and for damages," which action was decided in favor of Molybdenum on the ground that the action was precluded by the 5-year California statute of limitations applicable to real property. This decision was upheld on appeal to the Ninth Circuit. Kasey v. Molybdenum Corporation of America, 336 F. 2d 560 (C.A. 9, 1964).
While petitioner and respondent have referred in the course of trial to all of the above-mentioned cases, it is presumably in connection with the Federal litigation last described, conducted during the taxable years in question, that the claimed litigation expenses were incurred. Therefore, it is the nature of the 1964 *91 case which, we think, controls the disposition of this issue. The California cases decided in 1959, prior to the taxable period in question, are deemed relevant to the present inquiry only to the extent they may reflect upon the nature and background of the 1964 decision. We are persuaded, based upon our careful examination of such case, that the litigation expenses attributable thereto must be characterized as either the cost of defending or perfecting title to property, or as a personal expense. In either case the costs of litigation are not currently deductible.
The law applicable to the instant controversy is generally well settled. The cost of defending or perfecting title to property is treated as *1649 a capital expenditure within the meaning of section 263, 5 and hence is not deductible. Sec. 1.263(a)-2(c), Income Tax Regs.; Farmer v. Commissioner, 126 F. 2d 542 (C.A. 10, 1942), affirming on this issue sub nom. Central Material & Supply Co., 44 B.T.A. 282">44 B.T.A. 282 (1941); Jones Estate v. Commissioner, 127 F. 2d 231 (C.A. 5, 1942), affirming 43 B.T.A. 691">43 B.T.A. 691 (1941); Porter Royalty Pool, Inc., 7 T.C. 685">7 T.C. 685 (1946), affd. 165 F. 2d 933 (C.A. 6, 1948), certiorari denied 334 U.S. 833">334 U.S. 833 (1948). Moreover, *92 expenditures in connection with unsuccessful litigation to establish an interest in property constitute a nondeductible personal expense. Marion A. Burt Beck, 15 T.C. 642 (1950), affirmed per curiam 194 F. 2d 537 (C.A. 2, 1952), certiorari denied 344 U.S. 821">344 U.S. 821 (1952).
The specific action in the 1964 case, described above, appears on its face to have been brought by petitioner for the primary purpose of reclaiming title to the mining claims deeded in 1951 to Molybdenum, on the ground that the agreement was void. Unlike the 1959 cases which involved principally petitioner's entitlement to royalties under the agreement and peripherally the determination of the validity of petitioner's title to the claims in question at the time of sale, the 1964 litigation involved as its principal issue the adjudication of present title to the mining claims. While the 1959 litigation may arguably fall within the category of expenses deductible under section 212, as *93 having been incurred for the production of income (see, e.g., Pierce Estates, Inc., 3 T.C. 875">3 T.C. 875 (1944)), the 1964 case in our view must be regarded purely as an adjudication of the title to the mining claims. As such, legal expenses incurred in its unsuccessful prosecution by petitioner are personal expenditures and thus are not deductible. Marion A. Burt Beck, supra.
We consider this conclusion unaffected by petitioner's inclusion in his 1964 action of a request for an accounting and for damages. Petitioner's right to receive an accounting or damages was wholly dependent upon and incident to the resolution of the primary issue, viz, the determination of title, and it is clear that the litigation concerned exclusively this issue. The request for accounting and damages attending petitioner's attempt to recover title to property formerly deeded to another cannot, under the circumstances of this case, vary the fundamental character of the litigation which was the determination of title. Porter Royalty Pool, Inc., supra; Safety Tube Corp. v. Commissioner, 168 F. 2d 787 (C.A. 6, 1948), affirming 8 T.C. 757">8 T.C. 757 (1947). Looking to the 1964 case alone, in the absence of petitioner's introduction *94 of *1650 evidence as to any other litigation conducted during the taxable years in question, we are constrained to uphold the respondent's determination on this issue.
With respect to the use of petitioner's home and dormitory in part as a business office, petitioner has testified that the use of the office was primarily related to the litigation pursued during the years in question rather than to his business of prospecting in general. Thus, these items, as well as other expenses such as mailing expenses and post office box rentals (presumably incurred in connection with the litigation), must be disallowed for reasons stated above.
Respondent has disallowed subscription expenses with respect to trade and professional magazines. These expenses, unlike those discussed above, appear from the record to have been related to the conduct of petitioner's trade or business as prospector and mining engineer. We regard such expenditures, therefore, as a deductible expense incurred in the trade or business of petitioner under section 162.
Petitioner has deducted as assessment and prospecting expenses amounts computed on the basis of mileage at the rate of 17 cents per mile of travel. Respondent recomputed *95 such deduction pursuant to Rev. Proc. 64-10, 1964-1 C.B. (Part 1) 667, granting petitioner a deduction computed at 10 cents per mile. Petitioner's contention in this regard is that the 10 cents rate of respondent is arbitrary in that it does not adequately cover the cost of automobile travel. While petitioner's assertion may very well be true, we must deny his claimed deduction for the fundamental reason that he has failed to substantiate the amount of his actual expenses related to the use of his automobile. Rev. Proc. 64-10 merely represents an optional method of computing automobile expenses. The taxpayer is free, notwithstanding such ruling, to establish at trial the actual cost of operating his automobile including such items as depreciation, insurance, oil, gas, license, and repairs. The burden of proof resting as it does on petitioner (Rule 32, United States Tax Court Rules of Practice; Helvering v. Taylor, 293 U.S. 507">293 U.S. 507 (1935)), he has properly been granted a deduction based upon the optional method provided in Rev. Proc. 64-10 at 10 cents per mile rather than 17 cents per mile that he claimed.
Respondent has disallowed net operating loss carryovers on grounds, stated in our *96 findings above, which appear on their face to be correct. Petitioner, who bears the burden of proving his entitlement to such deductions, has neither introduced any evidence nor attempted to justify these deductions. We therefore have no choice but to uphold respondent's disallowance of these deductions. Similarly, we uphold the respondent's determination with respect to moving expenses.
Finally, respondent has asserted additions to tax under section 6653(a) *1651 for negligence. We think on the basis of the record as a whole that petitioner, in good faith, believed the items he deducted to have been deductible and that such deductions did, for the most part, present substantial issues of law and fact. We therefore hold that petitioner is not liable for the additions to tax asserted by respondent. Tatem Wofford, 5 T.C. 1152 (1945); Herman Senner, 22 B.T.A. 655">22 B.T.A. 655 (1931).
Decision will be entered under Rule 50.
Footnotes
1. All section references are to the Internal Revenue Code of 1954, unless otherwise specified.↩
2. Petitioner was two-thirds owner and Pasken one-third owner of the mining claims which were the subject of this agreement.↩
3. This agreement has been the subject of prior litigation before this Court. For a more detailed description of the agreement and circumstances surrounding its execution, see J. Bryant Kasey, 33 T.C. 656">33 T.C. 656↩ (1960).
4. Additional Federal tax litigation instituted by petitioner may be found in Kasey v. Commissioner, an unreported case (D. Nev. 1969, 23 A.F.T.R. 2d 69-1360, 69-2U.S.T.C. par. 9651); and Kasey v. Commissioner, an unreported case (C.A. 9, 1969, 23 A.F.T.R. 2d 69↩-1362, 69-2U.S.T.C. par. 9652).
1. One half of rent of home and dormitory↩
5. SEC. 263. CAPITAL EXPENDITURES.
(a) General Rule. -- No deduction shall be allowed for --
(1) Any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate. * * *↩