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Inaja Land Co. v. Commissioner | 9 T.C. 727 (1947)

Do settlement proceeds ever have to be reported as taxable income? If so, under what circumstances? We explore those questions in the Nineteen Forty-Seven case Inaja Land Company versus Commissioner of Internal Revenue.

Inaja Land Company owned property in Mono County, California. The Owens River flowed through Inaja’s property. Inaja operated a private fishing club on the land. It also rented portions of the property for livestock grazing.

In Nineteen Thirty-Four, the City of Los Angeles began construction of a project to increase the city’s water supply. This project involved diverting waters into the Owens River above Inaja’s property and recapturing them later. The increased water flow caused flooding on Inaja’s property. The water was also polluted, causing many of the fish in the Owens River to die.

Inaja threated to sue the city. The parties were ultimately able to resolve their dispute without going to court. In Nineteen Thirty-Nine, Inaja and the city entered into a written indenture memorializing their agreement. The parties mutually released any claims they may have had against each other. Inaja also granted the city an easement to convey foreign waters across its land. In exchange, the city paid Inaja fifty thousand dollars. Inaja’s basis, or capital investment for tax purposes, in the property was more than fifty thousand dollars in Nineteen Thirty-Nine.

Inaja incurred expenses in connection with the dispute. After expenses were deducted, Inaja netted approximately forty-nine thousand dollars from the settlement. Inaja didn’t claim this amount as taxable income on its tax return. The Commissioner of Internal Revenue issued a deficiency notice. Inaja then petitioned the United States Tax Court to determine whether the payment it received from the city was taxable income.

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