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involved herein do not constitute capital assets of the
partnership. To the contrary, as we read the above authority, we
believe they support the conclusion that the water rights
allocated to the partnership for use in its farming activity,
constitute contractual rights that are to be regarded as integral
to the partnership's farming activity (whether technically
appurtenant to the land or not) and as capital assets of the
partnership.
Respondent acknowledges that the water rights of HID
constitute capital assets. For purposes of analyzing the capital
asset character of the water rights, we perceive little
difference between HID's rights in Colorado River water and the
allocations the partnership received through the HID in Colorado
River water. We note, in particular, Ariz. Rev. Stat. Ann. sec.
48-2990, under which water districts must distribute all water
available for distribution "to the lands thereof pro rata”, and
Ariz. Rev. Stat. Ann. sec. 48-2902 (West 1997), under which water
districts are not allowed to divert allocated water from
landowners having a prior right to such water to other purposes
without first compensating the landowners.
Lastly, we note that respondent's rulings often treat as
capital assets allocations or rights that taxpayers receive from
governmental agencies. See Rev. Rul. 66-58, 1966-1 C.B. 186
(cotton acreage allotments treated as capital assets); Rev. Rul.
70-644, 1970-2 C.B. 167 (milk allocation rights treated as
capital assets); see also Madera Irrigation Dist. v. Hancock, 985
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