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restriction did not apply to the incidental use of water by
livestock directly at the reservoir site.
Knauss Suit
On February 28, 1991, a lawsuit was filed in the State court
against petitioners by Lee R. Knauss and Joan F. Knauss (the
Knausses), and other associated parties, to obtain an easement in
a roadway bisecting the Pescadero property. The Knauss suit
alleged, among other things, that the Knausses had been deprived
of access to their adjoining property.
On June 28, 1993, a judgment was filed in the Knauss suit,
whereby the State court determined that petitioners had acquired
by the doctrine of adverse possession or prescriptive
extinguishment all right, title, and interest in the Pescadero
ranch roadway. In that regard, the Knausses were found to have
no right-of-way or easement in petitioners' property.
Expenses and Other Items
Petitioner husband kept a series of separate folders in a
file cabinet for each line item on Schedule F. As each expense
was incurred, he obtained a receipt and placed it in the proper
folder. Petitioner husband segregated receipts for expenses
connected with the farm from those for expenses that were not
farm related. No separate checking account was maintained for
farm-related expenses because checks relating to the property
were infrequent. Petitioner husband believed that he was able to
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