Garwood Irrigation Company - Page 4

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          S Corporation on September 16, 2000 (the 1999 return).  The 1999            
          return reported a built-in gains tax of $9,636,736 on the sale of           
          petitioner’s water right.  The built-in gains tax amount reported           
          by petitioner was based on a valuation of $31,410,000 as of                 
          January 1, 1997 (valuation date) for the water right and the                
          investment portfolio.                                                       
               Respondent determined a deficiency in petitioner’s 1999                
          Federal income tax of $15,819,650, based on a valuation of                  
          $76,609,000 for the water right and the investment portfolio.               
          1.   Petitioner’s Irrigation Business                                       
               The State of Texas owns the water in its public waterways.             
          The right to divert and use or sell water from a waterway is                
          known as a “water right”.  The Texas Commission on Environmental            
          Quality, formerly known as the Texas Natural Resources                      
          Conservation Commission (hereinafter, the TNRCC), is a State                
          agency that regulates the water rights in Texas and controls the            
          transfer and use of such rights.  The TNRCC formally recognized a           
          water right by issuing to the holder a Certificate of                       
          Adjudication, which contained the limits of that right, its                 
          priority date, and any special or unique conditions associated              
          with its use.                                                               
               On June 28, 1989, the TNRCC formally recognized petitioner’s           
          water right and issued to it Certificate of Adjudication No. 14-            
          5434 (certificate).  Petitioner’s certificate allowed it to                 

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Last modified: May 25, 2011