Inaja Land Co. v. Comm'r of Internal Revenue
| Decision Date | 21 October 1947 |
| Docket Number | Docket No. 9036. |
| Citation | 9 T.C. 727 |
| Parties | INAJA LAND COMPANY, LTD., A CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. The payment of the sum of $50,000 to petitioner in 1939 by the city of Los Angeles in consideration of the conveyance by it to the city of a right of way and certain easements to divert foreign waters into the Owens River as it flowed through petitioner's land, and releasing the city from all claims and demands, etc., did not constitute taxable income to petitioner under section 22(a), I.R.C.
2. Since, under the circumstances, it was practically impossible to allocate a basis to the easements granted, the net amount received, being less than the petitioner's basis for the entire property, will merely reduce that basis. Burnet v. Logan, 283 U.S. 404. Harrison Harkins, Esq., for the petitioner.
E. C. Crouter, Esq., for the respondent.
This proceeding involves deficiencies in Federal income and declared value excess profits taxes for the taxable year 1939 in the amounts of $8,777.22 and $5,393.51, respectively.
The issue is whether petitioner received taxable income of $48,945 under a certain indenture of August 11, 1939, whereby it granted the city of Los Angeles, California, certain easements over its land and settling all claims arising out of the release of foreign waters from the city's Mono Craters Tunnel project. Certain facts have been stipulated and are so found. Facts found other than those stipulated are found from the evidence.
Petitioner is a stock corporation, organized under the laws of California, with its principal office at 816 South Figueroa Street, Los Angeles, California. Petitioner's income and declared value excess profits tax return for the calendar year 1939 and its capital stock tax return for the fiscal year ended June 30, 1939, were filed with the collector of internal revenue for the sixth district of California.
On or about January 26, 1928, petitioner acquired approximately 1,236 acres of land in Mono County, California, together with all water and water rights appurtenant or belonging thereto, at a cost of approximately $61,000. This property was located along the banks of the Owens River, which flows through and over petitioner's land, involved in this controversy. The land was 2 1/2 miles long and 1 1/2 miles wide at its farthest extremities and included the following classifications:
+-------------------------------+
¦ ¦Acres ¦
+-----------------------+-------¦
¦Rocky hill lands ¦419 ¦
+-----------------------+-------¦
¦Irrigated rocky pasture¦195 ¦
+-----------------------+-------¦
¦Dry rocky pasture ¦104 ¦
+-----------------------+-------¦
¦Irrigated meadows ¦358 ¦
+-----------------------+-------¦
¦Dry tillable brush ¦160 ¦
+-----------------------+-------¦
¦Total ¦1,236 ¦
+-------------------------------+
When the property was acquired in 1928 there were two small cabins or shacks located thereon. In 1940 petitioner purchased and moved onto the property two cabins, one to replace the southwest cabin and the other as an addition to the caretaker's cabin. In the years prior to 1939, with the consent of the board of directors, four members, at their own expense, had each erected a cabin for his own use, and in 1940 two members at their own expense each purchased and moved onto the property an additional cabin.
Petitioner's purpose in acquiring its properties was to operate a private fishing club thereon, with incidental rental of its properties for grazing livestock. It has conducted these activities since the time of its incorporation to date.
Petitioner's organization consists of twenty-five members, each owning twenty shares of stock. It has a president, a vice president, a secretary-treasurer, an assistant secretary, and a board of five directors. The members pay no dues, but the stock is assessable. An annual assessment, with the exception of one or two years, has been levied to cover expenses and amortization of loans.
The principal value of petitioner's lands to petitioner arose from the fishing facilities offered by the Owens River as it flowed through and over petitioner's land; but it also had some value for grazing purposes. The property was not used for agricultural purposes, other than livestock grazing. Aside from the receipt of the amount in controversy, the only sources of income are, and have been, its receipts from guest card fees and its receipt of grazing rentals. The amounts of guest card fees received by petitioner in the years 1939 to 1946, inclusive, and the amount of grazing rentals for the years 1936 to 1946, inclusive, are as follows:
+-------------------+
¦ ¦Guest¦Grazing ¦
+----+-----+--------¦
¦Year¦fees ¦rentals ¦
+----+-----+--------¦
¦1936¦ ¦$300 ¦
+----+-----+--------¦
¦1937¦ ¦300 ¦
+----+-----+--------¦
¦1938¦ ¦300 ¦
+----+-----+--------¦
¦1939¦$330 ¦300 ¦
+----+-----+--------¦
¦1940¦310 ¦300 ¦
+----+-----+--------¦
¦1941¦130 ¦550 ¦
+----+-----+--------¦
¦1942¦105 ¦550 ¦
+----+-----+--------¦
¦1943¦145 ¦1,000 ¦
+----+-----+--------¦
¦1944¦110 ¦1,000 ¦
+----+-----+--------¦
¦1945¦275 ¦1,000 ¦
+----+-----+--------¦
¦1946¦340 ¦1,000 ¦
+-------------------+
Each stockholder is entitled to the use of the properties for guests for not exceeding eight guest days a season, and each day or fraction of a day a guest uses the privileges of petitioner is counted as one guest day. The fee collectible, either from the stockholder or the guest, is $5 per day. Petitioner's rules regarding guests and guest card fees are designed to restrict the number of guests and not to develop a source of revenue. The decline in guest card fee receipts following 1939 was due in part to poor fishing on account of increased flow and muddy water and, in later years, to gasoline rationing. The increase in grazing rental following the year 1939 was not due to any increase in grazing area or the number of grazing cattle, but to the fact that higher prices for cattle and cattle fodder enabled petitioner to demand higher grazing rentals, and for the year 1943 and subsequent years the leases were revised to free the lessee from the requirement of maintaining two men to keep poachers off petitioner's property.
The Department of Water and Power of the City of Los Angeles, a municipal corporation, is responsible for the construction, operation, and maintenance of the water supply of that city. On or about September 25, 1934, the Department of Water and Power commenced the construction of Mono Craters Tunnel in Mono County (the west portal of this tunnel being in Mono Basin and the east portal being in the Owens River Drainage Basin.) On or about January 18, 1940, the westerly aqueduct connecting this tunnel with Grant Lake Storage Reservoir was completed. On or about April 4, 1940, the first diversion of Mono Basin waters into the west portal of the tunnel was commenced. The east portal of the Mono Craters Tunnel opens into the Owens River at a point approximately two miles up the river from petitioner's property. In the operation of the Mono Craters Tunnel the city of Los Angeles has stored waters in the Grant Lake Storage Reservoir and Walker Lake, and natural storage has occurred in unregulated lakes, all in the Mono Basin. The object of the tunnel project was, and the result accomplished is, to divert waters which would naturally remain in the Mono Basin into the Owens River at a point upstream from petitioner's lands. These waters flow through or over petitioner's lands. The waters are recaptured from the river by the city at a point below petitioner's lands and are diverted into the water supply system of the city of Los Angeles. The waters flowing out of or released from the east portal of the Mono Craters Tunnel are ‘foreign waters‘ (that is, waters brought into the watershed from another source by artificial means) with respect to the Owens River Drainage Basin, and would not naturally flow into this river if it were not for the tunnel.
During the entire period of the construction of the Mono Craters Tunnel, seepage waters from the tunnel in a substantial amount of between 10 and 15 cubic second feet flowed out of the east portal of the tunnel into the Owens River and through and over petitioner's lands. These seepage waters were polluted to a substantial extent by concrete dust, sediment, and foreign matter, which injured and killed fish and interfered with the fishing on petitioner's lands.
Prior to the settling of the rights of petitioner and the city of Los Angeles by the execution of an indenture dated August 11, 1939, except as hereinafter stated, the city was not possessed of, and had not acquired, either by way of condemnation, prescription, user, grant or license, any right to divert, release, or suffer the release of waters into the Owens River in such a manner that such waters would flow through or over petitioner's lands, or to deposit or permit the deposit of foreign matter in or to pollute the Owens River as it flowed through petitioner's land; nor had the city compensated petitioner in respect to these matters. Petitioner had not given the city any release or acquittance with respect thereto, except for the period from November 12 to December 2, 1935, when petitioner gave the city a revocable license to ‘dump‘ waters into the river, and the city engineer was given permission to enter on petitioner's lands for the purpose of making surveys.
Between September 25, 1934, the date the Mono Craters Tunnel project was commenced, and August 11, 1939, petitioner and its attorneys complained to the city and its officials concerning trespasses and invasions by the city and its employees and against unauthorized fishing and poaching by city employees upon petitioner's lands and rights. Petitioner threatened...
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