Peabody Natural Resources Company, f.k.a. Hanson Natural Resources Company, Cavenham Forest Industries, Inc., A Partner Other Than The Tax Matters Partner - Page 1

                                  126 T.C. No. 14                                     

                               UNITED STATES TAX COURT                                

              PEABODY NATURAL RESOURCES COMPANY, f.k.a. HANSON NATURAL                
                  OTHER THAN THE TAX MATTERS PARTNER, Petitioner v.                   
                    COMMISSIONER OF INTERNAL REVENUE, Respondent                      

               Docket Nos. 20328-04, 6899-05.    Filed May 8, 2006.                   

                    A partnership exchanged operating gold mines,                     
               including realty, for operating coal mines.  The coal                  
               mines were subject to two coal supply contracts that                   
               obligated the mine owner to provide electric utilities                 
               with coal.  The benefits and obligations under the                     
               contracts were governed by New Mexico law.  The gold                   
               mines were not subject to supply contracts.  The                       
               partnership treated the entire exchange as “tax free”                  
               under sec. 1031, I.R.C.  R determined that the coal                    
               supply contracts were not real property and/or like-                   
               kind property and constituted “boot” so that the value                 
               of the supply contracts would be taxable in the year of                
               the exchange.                                                          
                    Held:  The coal supply contracts were covenants                   
               running with and appurtenant to the real property under                

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