BIR Ruling No. 041-61

February 13, 1961 BIR RULING NO. 041-61 Reference is made to your letter of . . . , requesting information as follows: prcd "Our client, LEONARDO KNIAZEFF (deceased), was a mining engineer who rendered prospecting services to the SAMAR MINING COMPANY during his lifetime. In _________, he entered into a royalty agreement with the company which provides in part as follows: 'That there shall be paid and delivered by PANANINAS unto LEONARD KNIAZEFF (and in case of his demise to his heirs at law), during the life of this agreement, for prospecting services rendered by him on the Great Ridge Development Company, Inc. Group, the Empire Mining & Development Co., Inc. group, the Gold Coast Exploration & Development Co., Inc. group, the Masara Mining Company, Inc. group, the Oro Mining Association group, the Tapan Mining Association group, the Hijo Mining Association group, listed on pages 2 to 7 hereof and while such claims are being operated, a royalty on all ores extracted therefrom as follows: P0.50 per short ton on all ores which run P25.00 or over per ton, gross value, (Mi 11 Heads), P0.25 per short ton on all the ores which run less than P25.00 per ton, gross value (Mi 11 Heads), which royalty payment shall be charged as operating costs and deductible before determination of net profits, said royalty payments being in accord with pre-war agreement between LEONARD KNIAZEFF AND ELIZALDE; LLpr "In connection with the provisions of the above agreement, we would like to indicate two pertinent points: 1) That the royalties are payable to Leonard Kniazeff or to his heirs in the event of his death prior to actual operations; 2) That the royalties are payable when and if the claims are operated, based on the actual output of such claims. "In other words, the receipt of royalties by Mr. Kniazeff or his heirs is contingent on: 1) the actual operation of the mine, and 2) the possible yield or output upon such operation. "Mr. Kniazeff died in 1953 and the actual operation of the mines covered by the royalty agreement cited above started in 1956. Said mines do not belong to Leonard Kniazeff. QUERY: In view of the contingency of the actual receipts of royalties and the amounts to be received by the heirs under the terms and conditions of the royalty agreement, would such royalties receivable be classified as part of the gross estate of Mr. Kniazeff on the date of his death?" prll In an answer thereto, I have the honor to inform you that, under the circumstances quoted above, the royalties to be received pursuant to the contract do not form part of the gross estate of the deceased and, therefore, are not subject to the estate and inheritance taxes. However, they constitute taxable income to the heirs of the decedent who are entitled to receive the same. In this connection, it may be stated that the right under the contract to receive said royalties constitutes as an asset and the fair market value thereof should be included in the gross estate of the decedent. cdta