DATE: April 14, 2012
RE: Tax consequences and other risk factors associated with mining operations
I. FACTS ABC Mining Company, Inc. is a publically traded, large domestic mining company with over 500 plants in the United States. ABC owns a tract of land in California upon which it has conducted a strip mining operation for coal. An unrelated party owns a tract of land adjacent to the tract of land in California, which is owned by ABC. This land is worth $5 million. The mine is located near an area that is rapidly growing and is becoming more valuable due to the relocation of several high-tech companies. Housing developers are anxious to acquire tracts of land in the area to either build new …show more content…
Treas. Reg. § 1.011-1 and Treas. Reg. § 1.012-1, giving detailed guidelines for calculating the basis in specific scenarios, further clarify the definitions found in IRC § 1011 and IRC § 1012.
Treas. Reg. § 1.1031(a)-1 states the term “like-kind” refers to the nature and character of two properties rather than their quality. If two properties are of the same nature, they are considered to be like-kind, regardless of their respective qualities.
To illustrate this point, Treas. Reg. § 1.1031(a)-1 gives as an example the exchange of two trucks. Although the trucks are in different conditions, they are of the same class and are therefore considered to be like kind. c. Case Law
In Peabody Natural Resources Company v. Comm'r, T.C. Memo. 2006-126, the court held that the tax payer, who exchanged a gold mine for a coal mine, was correct to consider the two properties to be like kind and defer any gains from the sale of the gold mine. The court held the fact that different minerals were mined from each property did not cause the properties fall into different categories. Rather the overall purpose of either property, being in this case the extraction of minerals from the earth, dictated the characteristic of the property. As both properties shared the same purpose, the court ruled that, for purposes of an exchange under IRC § 1031, both mines would be considered to be of like kind and therefore eligible to be utilized in a like kind exchange, therefore