Inaja Land Co. v. Commissioner
Inaja Land Co., Ltd. v. Commissioner, 9 T.C. 727 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:
Facts
In 1928, the taxpayer paid $61,000 for of land on the Owens River. 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.Issues
Does the $49,000 constitute taxable income under Section 61, or is it chargeable to the taxpayer's capital account?If the latter, how much basis should be recovered?
Holding and Decision
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.