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provided for, and that under the Distribution Agreement it was
not expressly provided that relinquishment of the water rights
occurred “in exchange” for the funds distributed.
Respondent’s arguments are without merit. The transaction
before us constitutes a sale or exchange by the partnership of
water rights for the $1,088,132 received by the partnership.3
We grant petitioners' motion for partial summary judgment on
this issue.
Allocation of Partnership’s Tax Basis in Land
to $1,088,132 Partnership Received for Water Rights
If the above issues are resolved in favor of petitioners, as
they are, petitioners and respondent cross-move for partial
summary judgment on the issue as to whether any portion of the
partnership's $675,000 tax basis in its ownership interest in
Harquahala Valley land is allocable to the water rights and
should be available to offset the $1,088,132 the partnership
received in 1993 upon relinquishment of the water rights.
Petitioners contend that under the 1983 Subcontract and
under Arizona State law, the partnership’s water rights
constituted part of the bundle of rights represented by land
3 We note that neither party relies on court opinions
involving so-called vanishing or disappearing assets. See, e.g.,
Nahey v. Commissioner, 111 T.C. 256 (1998); Towers v.
Commissioner, 24 T.C. 199 (1955), affd. 247 F.2d 233 (2d Cir.
1957); Hudson v. Commissioner, 20 T.C. 734 (1953), affd. per
curiam sub nom. Ogilvie v. Commissioner, 216 F.2d 748 (6th Cir.
1954). Because the water rights that HID and the partnership
relinquished to the Interior Department reverted to the Interior
Department, survived, and were reallocated to other users, those
opinions would appear inapplicable to the instant controversy.
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