Inaja Land Co., Ltd. v. Commissioner, 9 T.C. 727 (1947) was a United States

income tax An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed as the product of a tax rate times the taxable 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 An easement is a nonpossessory right to use and/or enter onto the real property of another without possessing it. It is "best typified in the right of way which one landowner, A, may enjoy over the land of another, B". An easement is a propert ...

on his land. HELD: :1. The $50,000 that

petitioner {{Unreferenced, date=December 2009 A petitioner is a person who pleads with governmental institution for a legal remedy or a redress of grievances, through use of a petition. In the courts The petitioner may seek a legal remedy if the state or anot ...

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 Taxable income refers to the base upon which an income tax system imposes tax. In other words, the income over which the government imposed tax. Generally, it includes some or all items of income and is reduced by expenses and other deductions. Th ...

under I.R.C. § 22(a) oday § 61(a)(a). :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.

Facts

In 1928, the taxpayer paid $61,000 for of land on the

Owens River The Owens River is a river in eastern California in the United States, approximately long.U.S. Geological Survey. National Hydrography Dataset high-resolution flowline dataThe National Map accessed March 17, 2011, It drains into and through the ...

. In 1934, the City diverted polluted waters upstream from the

taxpayer A taxpayer is a person or organization (such as a company) subject to pay a tax. Modern taxpayers may have an Taxpayer Identification Number, identification number, a reference number issued by a government to Citizenship, citizens or Company, f ...

's property, adversely affecting the

fishing Fishing is the activity of trying to catch fish. Fish are often caught as wildlife from the natural environment, but may also be caught from stocked bodies of water such as ponds, canals, park wetlands and reservoirs. Fishing techniques inclu ...

on the taxpayer's property and causing

flooding A flood is an overflow of water ( or rarely other fluids) that submerges land that is usually dry. In the sense of "flowing water", the word may also be applied to the inflow of the tide. Floods are an area of study of the discipline hydrolog ...

and

erosion Erosion is the action of surface processes (such as water flow or wind) that removes soil, rock, or dissolved material from one location on the Earth's crust, and then transports it to another location where it is deposited. Erosion is distin ...

. 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(a), 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 In macroeconomics and international finance, the capital account, also known as the capital and financial account records the net flow of investment transaction into an economy. It is one of the two primary components of the balance of payments, ...

, 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.

Academic Commentary

How much basis should be recovered from an easement? -- Three different cost recovery methods each has something to recommend it: :1) treat easement as leasehold (analogizing the award to dividends/rent, since land, like stock, is perpetual): ::*postpone recovery of any costs until ultimate sale: the remaining land retains its basis until eventual sale, and the award is fully taxed. ::*leasehold cases-- ''see Commissioner v. Gillette Motor Transport, Inc.'', 364 U.S. 130 (1960), ''Hort v. Commissioner,'' 313 U.S. 28 (1941). :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) ::*recover only the cost properly allocable to the fraction sold (even if the sale made the unsold land less attractive: that would just impact the basis of what remains.) :3) treat easement as open-ended installment sale or a

down payment Down payment (also called a deposit in British English), is an initial up-front partial payment for the purchase of expensive items/services such as a car or a house. It is usually paid in cash or equivalent at the time of finalizing the transactio ...

on the final purchase price (which today is uncertain) ::*recover costs out of the earliest proceeds of disposition -- the basis of the remaining land is diminished accordingly. ::*''Inaja'' held this way: since properly allocating proceeds to easement would require an appraisal of the remaining land.)

References

{{Reflist United States taxation and revenue case law United States Tax Court cases 1947 in United States case law