Garwood Irrigation Company - Page 2

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          River, upon petitioner’s election to be treated as an S                     
          corporation effective January 1, 1997.                                      
               Our decision relies on the record, which is sufficient in              
          this case to make a decision based on a preponderance of the                
          evidence.  We do not rely on the burden of proof.  In addition,             
          there is cogent proof in the record that the value of                       
          petitioner’s water right was less than that stated on                       
          petitioner’s 1999 Federal income tax return.  Our decision that             
          the value was lower than that stated on petitioner’s return is              
          based on the factual circumstances surrounding an arm’s-length              
          sale of a portion of petitioner’s water right to the city of                
          Corpus Christi.  We conclude that as of January 1, 1997, the                
          value of petitioner’s water right was $22,532,519.                          
                                  FINDINGS OF FACT                                    
               Some of the facts have been stipulated and are so found.               
          The stipulation of facts and the attached exhibits are                      
          incorporated herein by this reference.  At the time the petition            
          was filed, petitioner’s principal place of business was in the              
          city of Garwood, Texas.                                                     
               Petitioner has been in the irrigation business in Texas                
          since 1900.  Petitioner existed as an S corporation from 1948               
          until 1978, when William K. Lehrer, one of petitioner’s                     
          shareholders, died.  At his death, William K. Lehrer’s shares in            
          petitioner passed to two trusts.  At that time and until 1996,              

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