SCOTUS Reports

Tag: Parker v. Commissioner

  • Parker v. Commissioner, 86 T.C. 547 (1986): Deductibility of Mining Exploration Expenses and Charitable Contribution Deductions

    Richard E. Parker and Jana J. Parker, Petitioners v. Commissioner of Internal Revenue, Respondent, 86 T. C. 547 (1986)

    Payments for mining exploration must be proven to be for actual exploration expenses to be deductible, and charitable contributions must be accurately valued to be deductible.

    Summary

    In Parker v. Commissioner, the Tax Court disallowed a $7,500 deduction claimed by the Parkers as exploration expense under IRC section 617, finding the payment to Einar Erickson was not for actual exploration. The court also rejected a $125,000 charitable contribution deduction for a donated mining claim, DS 82, as it had no proven value. The Parkers were found negligent in their tax reporting, leading to additional taxes and interest under IRC sections 6653(a) and 6621(d). The case highlights the necessity of proving the nature of expenses and the accurate valuation of charitable contributions.

    Facts

    In 1977, the Parkers paid $7,500 to Einar Erickson, a geologist, intending it as an exploration expense for mining claims in Nevada. Erickson provided a receipt and later staked two claims on behalf of the Parkers and their relatives. In 1978, the Parkers donated one claim, DS 82, to Brigham Young University, claiming a $125,000 charitable deduction based on Erickson’s valuation. The IRS disallowed both the exploration and charitable deductions, asserting the payment to Erickson was not for exploration and the claim had no value.

    Procedural History

    The IRS issued a notice of deficiency disallowing the deductions, leading the Parkers to petition the U. S. Tax Court. The court heard the case and ruled against the Parkers, denying both the exploration expense and charitable contribution deductions. The court also imposed additions to tax for negligence and additional interest due to a valuation overstatement.

    Issue(s)

    1. Whether the $7,500 payment to Erickson constituted a deductible exploration expense under IRC section 617.
    2. Whether the Parkers were entitled to a charitable contribution deduction for the donation of DS 82 to Brigham Young University.
    3. Whether the Parkers were liable for additions to tax under IRC section 6653(a) for negligence.
    4. Whether the Parkers were liable for additional interest under IRC section 6621(d) due to a valuation overstatement.

    Holding

    1. No, because the Parkers failed to prove the payment was for exploration expenses; it was used for other purposes by Erickson.
    2. No, because the Parkers did not establish that DS 82 had any value, let alone the claimed $125,000.
    3. Yes, because the Parkers were negligent in claiming deductions without sufficient basis, resulting in an underpayment of taxes.
    4. Yes, because the valuation of DS 82 exceeded 150% of its correct value, constituting a valuation overstatement.

    Court’s Reasoning

    The court scrutinized the nature of the $7,500 payment, finding no credible evidence that it was used for exploration. Erickson’s testimony was deemed unreliable, and the funds were traced to his personal accounts. For the charitable contribution, the court rejected Erickson’s and his consultant’s valuation of DS 82, noting errors in the claim’s location and the absence of independent corroboration for the claim’s alleged value. The court also found the Parkers negligent in relying on Erickson’s valuation without further inquiry, warranting the addition to tax. The valuation overstatement justified the imposition of additional interest under IRC section 6621(d).

    Practical Implications

    This case underscores the importance of documenting and proving the nature of expenses claimed as deductions, particularly in the context of mining exploration. Taxpayers must substantiate that payments are for actual exploration, not merely labeled as such. For charitable contributions, accurate valuation is critical, and reliance on potentially biased appraisals can lead to denied deductions and penalties. Legal practitioners should advise clients to seek independent valuations and ensure compliance with IRS regulations to avoid similar outcomes. Subsequent cases have cited Parker for its principles on the burden of proof for deductions and the consequences of valuation overstatements.

  • Parker v. Commissioner, 74 T.C. 29 (1980): Section 1231 Capital Gains as Tax Preference Items for Minimum Tax

    Parker v. Commissioner, 74 T. C. 29 (1980)

    Section 1231 capital gains are considered tax preference items subject to the minimum tax under section 56 of the Internal Revenue Code.

    Summary

    In Parker v. Commissioner, the Tax Court addressed whether gains from the sale of business assets under section 1231 should be treated as tax preference items under section 56, thus subjecting them to the minimum tax. The petitioners, shareholders in a coal processing business, argued that section 1231 gains were not subject to the minimum tax. The court rejected this argument, holding that section 1231 capital gains are indeed tax preference items because they are treated as long-term capital gains subject to the same tax rules as other capital gains. The decision reinforced the policy of the minimum tax, which was to ensure a minimum level of taxation on income receiving preferential treatment under the tax code.

    Facts

    Nathan K. Parker, Jr. , and Janice C. Parker were shareholders in P. G. Coal Co. , Inc. , which had elected to be taxed as a small business corporation. P. G. Coal was involved in a partnership, P/G/P Associates, which operated a coal plant until its sale in 1976. The sale resulted in a gain reported under section 1231, which was allocated to the petitioners. The IRS determined a deficiency in the petitioners’ income tax for 1976, asserting that the section 1231 gain was subject to the minimum tax under section 56.

    Procedural History

    The case was submitted to the U. S. Tax Court under Rule 122 of the Tax Court Rules of Practice and Procedure. The IRS issued a notice of deficiency to the petitioners, who then filed a petition with the Tax Court challenging the deficiency. The court reviewed the case based on stipulated facts and entered a decision in favor of the respondent (Commissioner of Internal Revenue).

    Issue(s)

    1. Whether gains on the sale of assets used in a trade or business, treated as long-term capital gains under section 1231, are items of tax preference subject to the minimum tax under section 56?

    Holding

    1. Yes, because section 1231 gains are considered long-term capital gains and thus fall within the definition of tax preference items under section 57(a)(9)(A), making them subject to the minimum tax under section 56.

    Court’s Reasoning

    The court interpreted section 1231, which states that gains from the sale of business assets are treated as long-term capital gains if they exceed losses. The court found that these gains are subject to the same tax rules as other capital gains, including the provisions of sections 1201 through 1212, which are referenced in the regulations. The court also emphasized the policy behind the minimum tax, enacted to ensure that income receiving preferential treatment under the tax code was subject to at least a minimum level of tax. The court cited regulations under section 57, which included section 1231 gains as examples of tax preference items, and upheld these regulations as a reasonable interpretation of the law. The court also dismissed the petitioners’ unargued challenge to the constitutionality of the effective date provisions of section 56, citing precedent that upheld these provisions.

    Practical Implications

    This decision clarified that gains from the sale of business assets under section 1231 are subject to the minimum tax, impacting how taxpayers and tax professionals should treat such gains. It reinforced the policy of the minimum tax to ensure taxation of income receiving preferential treatment. Taxpayers with section 1231 gains must now consider the potential for minimum tax liability in their tax planning. The ruling also provides guidance for future cases involving the classification of gains as tax preference items, and it has been cited in subsequent cases addressing similar issues. Legal practitioners must be aware of this ruling when advising clients on the tax implications of business asset sales.

  • Parker v. Commissioner, 62 T.C. 192 (1974): Marital Deduction and the Concept of Property ‘Passing’ to the Surviving Spouse

    Parker v. Commissioner, 62 T. C. 192 (1974)

    The marital deduction under IRC § 2056(a) is allowed for the full amount of property that passes to the surviving spouse, even if not formally distributed to them.

    Summary

    Grace M. Parker, as executrix of her late husband’s estate, elected to take under his will, which included a formula marital bequest of 50% of the adjusted gross estate. She distributed most of this to herself but allocated $62,473. 68 directly to a residuary trust of which she was trustee and beneficiary. The IRS argued that the estate’s marital deduction should be limited to the amount actually distributed to her. The Tax Court disagreed, ruling that the full amount bequeathed under the will ‘passed’ to her for marital deduction purposes, despite her subsequent transfer to the trust being treated as a taxable gift.

    Facts

    S. E. Parker died testate in 1967, leaving a will that provided Grace M. Parker, his surviving spouse, with a formula marital deduction bequest of 50% of his adjusted gross estate. Grace elected to take under the will and, as executrix, distributed most of the bequest to herself but directed $62,473. 68 to be paid directly to the residuary trust, of which she was trustee and life beneficiary. She conceded that this transfer was a taxable gift but argued that the full bequest should be considered for the marital deduction.

    Procedural History

    The estate filed a tax return claiming a marital deduction based on the full bequest. After audit, the IRS allowed a deduction but later issued a notice of deficiency, arguing the deduction should be limited to the amount distributed to Grace. Grace, as trustee and transferee, petitioned the Tax Court for a redetermination of the deficiency.

    Issue(s)

    1. Whether the full amount of the formula marital bequest, including the $62,473. 68 not distributed to Grace M. Parker but instead to the residuary trust, qualifies for the marital deduction under IRC § 2056(a).

    Holding

    1. Yes, because the full amount of the bequest ‘passed’ to Grace under the will, qualifying for the marital deduction even though she subsequently transferred part of it to the trust as a taxable gift.

    Court’s Reasoning

    The court interpreted IRC § 2056(a) to allow a marital deduction for any interest in property that ‘passes or has passed’ from the decedent to the surviving spouse, as long as it’s included in the gross estate. The court emphasized that ‘passing’ does not require actual distribution, citing legislative history and regulations that focus on the interest given to the surviving spouse by the will or state law. Grace’s election to take under the will meant the full bequest ‘passed’ to her, even if she later chose to transfer part of it to the trust. The court rejected the IRS’s argument that the marital deduction should be limited to the amount distributed, stating this would make the deduction calculation impossible in estates not yet distributed at the time of filing. The court also dismissed the IRS’s alternative argument that Grace’s actions constituted a disclaimer, as her election to take under the will was an acceptance, not a refusal, of her rights under the will.

    Practical Implications

    This ruling clarifies that the marital deduction is based on the interest that ‘passes’ to the surviving spouse under the will, not on the actual distribution of assets. Practitioners should advise clients that the full amount of a formula marital bequest can qualify for the deduction, even if the surviving spouse later transfers part of it to another beneficiary. This decision impacts estate planning by allowing greater flexibility in asset distribution while still maximizing the marital deduction. It also affects IRS audits by establishing that the marital deduction calculation is not contingent on the timing or manner of asset distribution. Subsequent cases have followed this principle, further solidifying its application in estate tax law.

  • Parker v. Commissioner, 12 T.C. 1079 (1949): Sufficiency of Deficiency Notice Sent to Taxpayer’s Address

    12 T.C. 1079 (1949)

    A notice of deficiency is sufficient if mailed to the taxpayer’s last known address, even if the taxpayer has also provided an attorney’s address and requested that all correspondence be sent there.

    Summary

    The Tax Court dismissed the Parkers’ petitions for lack of jurisdiction because they were filed more than 90 days after the deficiency notices were mailed. The IRS mailed the notices to the Parkers’ address listed on a power of attorney, although the power of attorney also included their attorney’s address and a request that all correspondence be sent there. The court held that mailing the notice to the taxpayer’s last known address, as required by statute, was sufficient, even if the taxpayer requested correspondence be sent to an attorney.

    Facts

    The Commissioner mailed deficiency notices to Bert and Violet Parker at 3619 East Gage Avenue, Bell, California, which they received. Their 1944 tax returns listed 6340 Loma Vista Avenue, Bell, California, as their address. A power of attorney, received by the IRS in 1947, listed Bert and Violet Parker at 3619 East Gage Avenue, Bell, California, and their attorney, Monroe F. Marsh, at 424 S. Beverly Drive, Beverly Hills, California. The power of attorney directed that all correspondence be sent to Marsh. The IRS sent other letters regarding the Parkers’ taxes to Marsh’s address.

    Procedural History

    The Commissioner issued deficiency notices to the Parkers. The Parkers filed petitions with the Tax Court more than 90 days after the notices were mailed. The Commissioner moved to dismiss for lack of jurisdiction. The Tax Court granted the Commissioner’s motions and dismissed the cases.

    Issue(s)

    Whether the Commissioner was required to mail the notice of deficiency to the taxpayers in care of their attorney, instead of to the taxpayers at their own address, because the taxpayers directed that “all correspondence, documents, warrants or other data” be sent in care of their attorney, and whether the deficiency notice was insufficient to start the 90-day period of limitation running despite the taxpayers receiving the notices in due course at their own address.

    Holding

    No, because the Commissioner complied with the statute by mailing the deficiency notice to the taxpayers’ last known address, and the statute does not require mailing to an attorney’s address even if requested by the taxpayer.

    Court’s Reasoning

    The court reasoned that Section 272(k) of the Internal Revenue Code requires the notice of deficiency to be mailed to the taxpayer’s last known address. The court found that the last known address was 3619 East Gage Avenue, Bell, California. While the power of attorney requested that all correspondence be sent to the attorney, the directive did not specifically refer to the notice of deficiency. The court stated, “In the face of the statute stating that such notice is sufficient if mailed to the last known address of the taxpayer, the Commissioner would not have been justified, in our view, in addressing the deficiency notice in care of the attorney.” Furthermore, the court emphasized that the taxpayers actually received the notices in due course at their address.

    The court distinguished between general correspondence and a formal notice of deficiency. While the IRS had previously sent other letters to the attorney, this did not obligate them to send the deficiency notice to the attorney, particularly since the taxpayers received the notice at their own address. The court concluded that “no logical reason appears for preferring the one address, that of the attorney, over the other, that of the taxpayer, when both are given in the power of attorney, and the statute speaks only of the address of the taxpayer.”

    Practical Implications

    This case clarifies that the IRS satisfies its obligation to provide notice of deficiency by mailing it to the taxpayer’s last known address, regardless of any requests to send correspondence to an attorney. Tax practitioners should advise clients that while the IRS may send routine correspondence to a designated representative, the official notice of deficiency will likely be sent directly to the taxpayer. Therefore, taxpayers must monitor their mail and respond to deficiency notices within the statutory timeframe, even if they have an attorney handling their tax matters. This decision emphasizes the importance of taxpayers keeping the IRS informed of their current address.

  • Parker v. Commissioner, 6 T.C. 974 (1946): Tax Treatment of Husband-Wife Partnerships

    6 T.C. 974 (1946)

    A husband and wife can be recognized as partners for federal income tax purposes if they genuinely intend to conduct a business together and the wife contributes either capital originating from her, substantial control and management, or vital additional services.

    Summary

    Francis A. Parker and his wife, Irene, operated a business in Massachusetts. Francis primarily sold machine tools on commission, while Irene managed the office, handled correspondence, and fulfilled orders. They divided the profits, with Francis receiving 80% and Irene 20%. The Commissioner of Internal Revenue argued that no valid partnership existed because Massachusetts law prohibited contracts between spouses, and thus, all income should be taxed to Francis. The Tax Court held that a valid partnership existed for federal tax purposes because Irene contributed vital services to the business, and therefore, Irene’s share of the profits was taxable to her, not Francis.

    Facts

    Francis A. Parker and his wife, Irene M. Parker, operated a business out of their home in Massachusetts. Francis worked as a salesman for machine tool manufacturers, earning commissions on sales. Irene managed the office, handling correspondence, securing orders, managing inventory, and handling customer complaints. Irene devoted all of her time to the business and contributed some capital. They agreed to split the profits, with Francis receiving 80% and Irene 20%. Irene used her share of the profits to purchase assets in her own name, over which Francis exercised no control.

    Procedural History

    The Commissioner determined deficiencies in Francis’s income tax for 1940 and 1941, asserting that all income from the business was taxable to him. The Commissioner disallowed the partnership status and also disallowed a deduction for attorney fees paid by the partnership. Parker contested these adjustments in the Tax Court.

    Issue(s)

    1. Whether a valid partnership existed between Francis and Irene Parker for federal income tax purposes, given that Massachusetts law prohibits contracts between spouses.
    2. Whether legal fees paid by the partnership for advice on forming a corporation and preparing partnership tax returns are deductible as ordinary and necessary business expenses.

    Holding

    1. Yes, because federal law defines partnership independently of state law, and Irene contributed vital services and some capital to the business.
    2. Yes, because the legal fees were incurred for ordinary and necessary business expenses related to business operations and tax compliance.

    Court’s Reasoning

    The Tax Court reasoned that while Massachusetts law prohibits contracts between spouses, federal law has its own definition of partnership for income tax purposes. The court relied on Regulation 111, which states that local law is not controlling in determining whether a partnership exists for federal tax purposes. The court emphasized that Irene contributed substantial services to the business, including managing the office, handling correspondence, and fulfilling orders. Citing Commissioner v. Tower, 327 U.S. 280 (1946), the court noted that a husband and wife can be partners for tax purposes if the wife invests capital, contributes to control and management, performs vital services, or does all of these things. The court found that Irene’s contributions met these criteria, thus establishing a valid partnership. Regarding the attorney fees, the court distinguished this case from situations involving capital expenditures, finding that the fees were for advice on business structure and tax compliance, making them deductible as ordinary and necessary business expenses.

    The dissenting judge argued that the majority opinion misconstrued the facts and made an error of law by not recognizing that the majority of income was earned by Francis as commissions and his wife did not actively take part in those sales. The dissenting judge felt it was the cardinal rule that income is taxable to the person who earns it. Also the dissent stated it was questionable at best given there was no written partnership agreement executed, the partnership was conducted in petitioner’s own name and the inability under Massachusetts law for a husband and wife to enter into a valid enforceable partnership.

    Practical Implications

    This case clarifies that the existence of a partnership for federal income tax purposes is determined by federal law, not state law. It reinforces the principle that a spouse can be a partner in a business if they contribute capital, services, or management, even if state law restricts spousal contracts. The decision emphasizes the importance of documenting the contributions of each spouse to a business. It also provides guidance on the deductibility of legal fees, distinguishing between capital expenditures and ordinary business expenses. This case is significant for tax planning involving family-owned businesses and highlights the need to carefully structure and document the roles and contributions of each family member to ensure favorable tax treatment. Later cases often cite Parker in determining if a valid partnership exists between family members for tax purposes, especially when services are provided by one of the partners. This case is applicable when evaluating business structures and tax liabilities related to partnerships involving spouses or family members.

  • A.L. Parker v. Commissioner, 5 T.C. 1355 (1945): Taxation of Settlement Income from Employment Contract

    5 T.C. 1355 (1945)

    Payments received in settlement of a lawsuit arising from a contract for personal services are taxed as ordinary income, not as capital gains, even if the settlement includes property.

    Summary

    A.L. Parker sued his former employer, National Hotel Co., for breach of contract, seeking 25% of the profits from hotels he brought into the chain. The suit was settled with Parker receiving cash and a hotel property. The Tax Court held that the settlement proceeds constituted ordinary income, not capital gains, because the underlying claim stemmed from a personal services contract. The court also upheld the Commissioner’s valuation of the property received and the determination of gain from the sale of stock in a related corporation.

    Facts

    Parker, experienced in the hotel business, contracted with National Hotel Co. to manage hotels and develop new hotel acquisitions. He was to receive a salary plus 25% of the net profits from hotels he brought into the organization. Parker successfully brought four hotels into the chain. However, National Hotel Co. later terminated Parker’s contract and refused to pay him the agreed-upon share of profits. Parker sued for breach of contract, seeking an accounting and specific performance.

    Procedural History

    Parker filed suit in the District Court of the United States for the Northern District of Texas. The litigation was settled by agreement. The Commissioner of Internal Revenue determined a deficiency in Parker’s income tax, asserting that the settlement income was ordinary income. Parker petitioned the Tax Court, contesting this determination.

    Issue(s)

    1. Whether the cash and fair market value of property received in settlement of the lawsuit constitutes ordinary income under Section 22 of the Internal Revenue Code or long-term capital gain under Section 117 of the Code?

    2. Whether the Commissioner correctly valued the property received in the settlement?

    3. Whether a short-term capital gain was realized from the sale or exchange of Parker’s interest in the Cliff Towers Hotel Co.?

    Holding

    1. No, because the settlement was compensation for services rendered under an employment contract.

    2. Yes, because Parker failed to provide sufficient evidence to prove the Commissioner’s valuation was incorrect.

    3. The Tax Court approved whatever determination was made by the Commissioner, because Parker failed to establish a cost basis for the stock.

    Court’s Reasoning

    The Tax Court reasoned that the settlement arose from a contract for personal services. The court relied on Albert C. Becken, Jr., which held that payments received in compromise settlement of employment contracts constitute ordinary income. The court stated, “the ‘nature and basis of the action’ which the petitioner here brought in the District Court of the United States was to recover from the defendants a 25 percent interest in the profits theretofore realized and thereafter as realized, of the four hotels under petitioner’s contract of employment…” This showed the settlement consideration was ordinary income. The court distinguished cases cited by Parker, noting they involved assignments of already-earned income or joint ventures where the taxpayer contributed capital. The court found Parker’s contract was an ordinary employment contract, not a joint venture, as Parker had no control over the hotels or shared in their operating risks. The court also found Parker had not presented sufficient evidence to show the Commissioner’s valuation of the settlement property was incorrect. With respect to the stock, the court found Parker had not established a cost basis, so it approved the Commissioner’s determination.

    Practical Implications

    This case illustrates that the character of income received in a settlement is determined by the nature of the underlying claim. Attorneys must carefully analyze the origin of the claim to advise clients on the tax implications of settlements. Specifically, if a settlement relates to compensation for services, it will likely be treated as ordinary income, even if the settlement includes property. This principle impacts litigation strategy and settlement negotiations, as the tax consequences can significantly affect the net benefit received by the client. Later cases applying this ruling would focus on whether the original claim stemmed from services rendered, or from something else like the sale of property.

  • Parker v. Commissioner, 1 T.C. 709 (1943): Deductibility of Losses Incurred During Mining Venture Investigation

    1 T.C. 709 (1943)

    Expenditures made during an actual business operation, even if preliminary to a larger undertaking, qualify as a transaction entered into for profit, allowing for loss deductions upon abandonment under Section 23(e)(2) of the Internal Revenue Code.

    Summary

    Charles T. Parker claimed a deduction for a loss incurred while investigating a mining project. Parker contributed $1,000 to a joint venture to test the viability of placer mining operations on Burnt River, Oregon. After unfavorable test runs revealed a lower-than-expected gold recovery rate, the venture was abandoned. Parker sought to deduct his $1,000 loss under Section 23(e)(2) of the Internal Revenue Code, which allows deductions for losses incurred in transactions entered into for profit. The Tax Court held that Parker was entitled to the deduction because the test runs constituted an actual business operation, not just a preliminary investigation.

    Facts

    Parker, a partner in a general contracting business, was approached with a potential investment in placer mining operations on Burnt River, Oregon. Prior operations at the site had been profitable. Parker engaged a contractor, Anderson, to evaluate the property. Following a favorable report from Anderson, Parker, Anderson, and others each contributed $1,000 to conduct test runs of the mining operation. The $4,000 was used to repair equipment, employ workers, and conduct mining operations for approximately 30 days. The test runs yielded disappointing results, leading to the abandonment of the venture.

    Procedural History

    Parker claimed a deduction on his 1940 income tax return for the $1,000 loss. The Commissioner of Internal Revenue denied the deduction, resulting in a deficiency assessment. Parker petitioned the Tax Court for a redetermination of the deficiency.

    Issue(s)

    Whether the expenditure of $1,000 by the petitioner for test runs of placer mining operations constitutes a transaction entered into for profit, such that the loss incurred upon abandonment is deductible under Section 23(e)(2) of the Internal Revenue Code.

    Holding

    Yes, because the activities undertaken by the petitioner and others constituted actual mining operations, not merely a preliminary investigation, thereby qualifying as a transaction entered into for profit under the statute.

    Court’s Reasoning

    The Tax Court distinguished this case from Robert Lyons Hague, 24 B.T.A. 288, where the taxpayer only sought advice about a potential investment. Here, Parker went beyond a preliminary investigation by contributing funds and participating in actual mining operations. The court emphasized that the venture involved “actual operations” including repairing equipment, hiring workers, and conducting test runs over a 30-day period. These activities demonstrated an intent to generate profit. The court stated, “All that was done involve the elements of entering into a transaction for profit within the meaning of the statute…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.” The court found that Parker sustained a loss when the venture was abandoned, entitling him to a deduction under Section 23(e)(2) of the Internal Revenue Code.

    Practical Implications

    This case clarifies the distinction between preliminary investigations and actual business operations for tax deduction purposes. It suggests that taxpayers can deduct losses incurred in ventures that involve tangible activities aimed at generating profit, even if those ventures ultimately fail to become permanent businesses. Attorneys advising clients on tax matters should consider the extent of operational activity undertaken in a venture when evaluating the deductibility of losses. The Parker decision provides a basis for arguing that losses incurred during active exploration and testing phases of a potential business are deductible if the activities demonstrate a genuine intent to generate profit, differentiating it from mere preparatory or advisory expenditures. Later cases may distinguish Parker if the activities are deemed too preliminary or exploratory in nature.