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settlement by the parties, on remand to us from the Court of
Appeals for the Ninth Circuit, of factual issues relating to the
water rights adjustment precludes the application of the
qualified offer provision.
In our prior Opinion in this case, Gladden v. Commissioner,
112 T.C. 209, 217-226 (1999), also involving the water rights
adjustment and the parties’ cross-motions for partial summary
judgment, we held in favor of petitioners that, as a matter of
law, the water rights owned by petitioners constituted capital
assets and the relinquishment thereof by petitioners in exchange
for monetary distributions constituted a taxable sale or exchange
(capital asset issues).
In the same opinion and in the context of the same cross-
motions for partial summary judgment, we held in favor of
respondent that, as a matter of law, petitioners were not
entitled to allocate any portion of their cost basis in the
underlying land (which petitioners had acquired prior to
acquiring the water rights) to their tax basis in the water
rights (legal allocation issue). Id. at 226-230.2
Because of our determinations on cross-motions for partial
summary judgment of the capital asset issues and of the legal
2 The water rights and the land actually were owned by a
partnership in which petitioners had an interest. For
convenience herein, we refer to the water rights and the land as
if owned by petitioners.
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