Garwood Irrigation Company - Page 3

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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             
               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              
               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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