Tax Consequences and Risk Factors Associated with Mining Operations
TO: ABC Mining Company
FROM: T
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 luxury homes or for recreational facilities, such as man-made lakes, to make the subdivisions more desirable. In addition, county officials are also actively seeking certain properties upon which they may expand public services, such as right-of-ways, sewage and power lines, telephone line access, etc. County governments will typically either seek an easement or obtain land in fee simple via eminent domain. The original cost of the mine when it was purchased 25 years ago was $2 million. The current tax adjusted basis is $0 due to depletion deductions. Due to the recent desirability of the location, the current fair market value is $8 million assuming the tract is “shovel ready” for building structures or other construction projects.
II. ISSUE(S): Julie Jones, CFO, and Jim Nguyen, Vice-President of Tax, have four available options for their property and want to know what the tax implications would be along with any practical issues they should consider including tax filing requirements, audit risk, record keeping issues, etc. The four options that they have are as follows:
Option 1) Market the property to a private developer. The mining pit that currently exists as a result of the removal of mineral could be turned into a
FROM: T
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 luxury homes or for recreational facilities, such as man-made lakes, to make the subdivisions more desirable. In addition, county officials are also actively seeking certain properties upon which they may expand public services, such as right-of-ways, sewage and power lines, telephone line access, etc. County governments will typically either seek an easement or obtain land in fee simple via eminent domain. The original cost of the mine when it was purchased 25 years ago was $2 million. The current tax adjusted basis is $0 due to depletion deductions. Due to the recent desirability of the location, the current fair market value is $8 million assuming the tract is “shovel ready” for building structures or other construction projects.
II. ISSUE(S): Julie Jones, CFO, and Jim Nguyen, Vice-President of Tax, have four available options for their property and want to know what the tax implications would be along with any practical issues they should consider including tax filing requirements, audit risk, record keeping issues, etc. The four options that they have are as follows:
Option 1) Market the property to a private developer. The mining pit that currently exists as a result of the removal of mineral could be turned into a