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Inaja Land Co., Ltd. v. Commissioner, 9 T.C. 727 (1947) 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:
Contents
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. 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 1,236 acres (5.00 km2) of land on a river bank. 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(a), or is it chargeable to the taxpayer's capital account?
If the latter, how much basis should be recovered?
Holding and Decision
Chargeable to the taxpayer's capital account. The court treats the indenture agreement as lost capital rather than lost profits.
Conceding to taxpayer that it is impracticable to accurately apportion a basis to the easements, the entirety of the net amount received will be recovered 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): 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)