| Inaja Land Co. v. Commissioner | |
| Court: | United States Tax Court |
| Full Name: | Inaja Land Company, Ltd. v. Commissioner of Internal Revenue |
| Citations: | 9 T.C. 727 |
| Judges: | James Russell Leech |
| Decision By: | Leech |
| Lawsapplied: | Internal Revenue Code |
| Italic Title: | yes |
Inaja Land Co., Ltd. v. Commissioner, 9 T.C. 727 (1947)[1] was a United States income tax case which discussed whether, and how much, basis the taxpayer could recover to offset a gain from compensation from the government for an easement on his land.HELD:
1. The $50,000 that petitioner received from the City -- for a right of way and an easement on taxpayer's land, and releasing the city from all claims and demands, etc. -- was lost (present) capital rather than lost (future) profits; i.e. it should be chargeable to the capital account for land, rather than treated as taxable income under I.R.C. § 22(a) [today § 61(a)].[2]
2. Since, under the circumstances, it was practically impossible to allocate a basis to the easements granted, entirety of the net amount received will be recovered from that basis.
In 1928, the taxpayer paid $61,000 for 1236acres of land on the Owens River.[1] In 1934, the City diverted polluted waters upstream from the taxpayer's property, adversely affecting the fishing on the taxpayer's property and causing flooding and erosion. The city settled with the taxpayer for $50,000; net of legal fees, taxpayer's gain was $49,000.
Does the $49,000 constitute taxable income under Section 61(a),[2] or is it chargeable to the taxpayer's capital account?
If the latter, how much basis should be recovered?
The Tax Court held that the payment was return of capital rather than lost profits. It should be chargeable to the taxpayer's capital account, as a reduction of the taxpayer's cost basis. Because the recovery did not exceed the basis of the property, it was not yet taxable.
Agreeing with the taxpayer that it is impracticable to accurately apportion a basis to the easements, the entirety of the net amount received will be reduced from that basis.
How much basis should be recovered from an easement? -- Three different cost recovery methods each has something to recommend it:[3]
1) treat easement as leasehold (analogizing the award to dividends/rent, since land, like stock, is perpetual):
2) treat easement as unit sale of a section of land (since the easement is perpetual, and represents a forced divestment of the taxpayer's original property)
3) treat easement as open-ended installment sale or a down payment on the final purchase price (which today is uncertain)