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From 1983 through 1992, use of the water rights did not
produce for the partnership, in any direct or immediate sense,
ordinary income. Rather, using water received, land was planted,
fertilized, and irrigated. Crops grew. Eventually, crops were
harvested, transported, and sold. The water rights at issue
simply represent one component of the partnership’s investment in
and operation of its farming activity.
Certainly, the $1,088,132 the partnership received in 1993
upon relinquishment of the water rights did not represent merely
a substitute for ordinary income the partnership otherwise would
have received. Rather, it represented payments the partnership
received in exchange for making a shift in one significant aspect
of its farming activity; i.e., a shift in the source of its
irrigation water from the Colorado River at fixed prices to the
market place at market prices.
The above undisputed facts surrounding the origination,
allocation, and use of the water rights support the conclusion
that the partnership’s water rights should be treated as capital
assets. We so hold.
In spite of differences between the language of the
Reclamation Act, involved in Nevada v. United States, supra, and
Ickes v. Fox, supra, and the language of the Boulder Canyon
Project Act, involved in the instant case, we agree generally
with petitioners that such differences in the underlying
statutory language and in the above nontax opinions of the
Supreme Court do not support a conclusion that the water rights
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