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trusts were ineligible to be S corporation shareholders. As a
result, petitioner operated as a C corporation from 1978 until
1997. William N. Lehrer (Mr. Lehrer), who is William K. Lehrer’s
son, was petitioner’s chairman of the board and chief executive
officer on the valuation date and for several years before the
valuation date.
On March 19, 1997, petitioner filed Form 2553, Election By A
Small Business Corporation, to elect to be an S corporation under
section 13621 (the election). The election was effective January
1, 1997. At the time of the election, petitioner’s primary asset
was the right to divert 168,000 acre feet2 of water from the
Colorado River at a specified diversion point near Garwood,
Texas. Petitioner also held an investment portfolio at the time
of the election, the value of which has been agreed upon by the
parties.
On January 7 and 8, 1999, petitioner sold its water right
and related assets to the Lower Colorado River Authority (LCRA)
and the city of Corpus Christi, Texas (Corpus Christi).
Petitioner timely filed Form 1120S, U.S. Income Tax Return for an
1Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
2An acre foot of water is the amount of water necessary to
cover an acre of land 1 foot deep and is equal to approximately
326,000 gallons.
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