William T. and Nicole L. Gladden - Page 4

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          allocation issue, each of which related to the water rights                 
          adjustment, in our prior opinion we did not address the related             
          factual issue as to what amount of petitioners’ cost basis in the           
          land might be allocable to petitioners’ tax basis in the water              
          rights.                                                                     
               On May 12, 1999, after our above opinion was filed in April            
          of 1999, petitioners made a “qualified offer” to respondent to              
          settle the water rights adjustment, which offer respondent did              
          not accept.  On October 20, 1999, a decision was entered in this            
          case in which we redetermined petitioners’ tax deficiency based             
          on our prior opinion on summary judgment and on a stipulation               
          filed by the parties settling remaining issues.                             
               On January 5, 2000, petitioners filed an appeal with the               
          Court of Appeals for the Ninth Circuit with regard to our partial           
          summary judgment in favor of respondent on the legal allocation             
          issue.  Respondent did not appeal our partial summary judgment in           
          favor of petitioners on the capital asset issues.                           
               On August 20, 2001, the Court of Appeals for the Ninth                 
          Circuit in Gladden v. Commissioner, 262 F.3d 851 (9th Cir. 2001),           
          reversed our partial summary judgment in favor of respondent on             
          the legal allocation issue and concluded that petitioners may be            
          entitled to allocate some portion of their cost basis in the land           
          to their tax basis in the water rights.  Because the trial record           
          had not been developed on aspects of that factual allocation                






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