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Neither party herein suggests that any of the above five
statutory exceptions applies to the water rights in issue.
Petitioners, in their briefs, note that if the water rights in
issue were to be treated as “real property” used in the trade or
business of the partnership's farming activity, and therefore as
excluded from capital asset treatment under section 1221, gain
realized on the sale of the water rights would, in any event, be
treated as capital gain under section 1231. Neither party,
however, pursues this possible treatment of the partnership's
water rights as section 1231 “real property”. Thus, the only
question before us is whether the partnership's water rights
constitute “property” and capital assets under section 1221.2
1(...continued)
(including the Congressional Record) which is received
from the United States Government or any agency
thereof, other than by purchase at the price at which
it is offered for sale to the public, and which is held
by--
(A) a taxpayer who so received such
publication, or
(B) a taxpayer in whose hands the basis of
such publication is determined, for purposes of
determining gain from a sale or exchange, in whole
or in part by reference to the basis of such
publication in the hands of a taxpayer described
in subparagraph (A).
2 The fact that the water rights involved herein constitute
surface water rights, rather than in situ water rights, may
explain why petitioners do not argue that the water rights
qualify as “real property” and therefore qualify for capital gain
treatment under sec. 1231.
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