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ownership that the partnership held, that the water rights could
be neither bought nor sold separately by the partnership, and
therefore that the partnership's $675,000 cost of purchasing the
land in 1976 should be applied against the $1,088,132 the
partnership received in 1993 on relinquishment of the water
rights.
Because the water rights were received and sold by the
partnership separately from the land, respondent argues that no
allocation should be allowed of the partnership's land costs to
the funds the partnership received for the water rights.
For Federal income tax purposes, the general rule provides
that taxpayers recover tax free their cost or tax basis for
property on which gain is to be computed. See sec. 1001(a).
Section 1016(a)(1) provides in pertinent part that--
adjustment * * * [to basis shall be made]
(1) for expenditures, receipts, losses, or other
items, properly chargeable to capital account * * *
Petitioners contend that under section 1016, where property
that is sold does not have a separate, identifiable cost or tax
basis and where the property sold is sufficiently integrated with
or appurtenant to related property, the taxpayer’s total cost for
the related property should be charged to the transaction and
only after the taxpayer’s total cost for the related property is
recovered should the taxpayer be required to recognize any
taxable capital gain on the property sold.
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