Garwood Irrigation Company - Page 17

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          assets was.  It began examining the value of the remaining water            
          right in December 1997.  After the purchase, the LCRA recorded              
          $75 million as the fair market value of the assets it purchased             
          from petitioner and booked the entire amount to the water right.            
          The LCRA justified this conclusion based on the sales prices of             
          other water rights, inflation adjusted prices it had paid for               
          water rights in the past, and the cost of building a new                    
          reservoir with capacity equivalent to petitioner’s remaining                
               After the proposed sale to the LCRA had become public, the             
          city of San Antonio approached petitioner and inquired whether              
          petitioner would entertain a competing offer from San Antonio for           
          its water right.  Petitioner declined and indicated that it did             
          not want to start a bidding war.  In 2002, the LCRA entered into            
          a long-term water supply agreement with San Antonio, agreeing to            
          supply San Antonio 150,000 acre feet of water for 80 years.  San            
          Antonio is outside the Colorado River Basin.                                
          I.   Petitioner’s Conversion From C Corporation to S Corporation            
               The parties do not dispute that petitioner is subject to tax           
          on the built-in capital gain on its assets as of January 1, 1997.           
          We briefly discuss the law that subjects petitioner to such tax.            
               Subchapter S status entitles small, eligible corporations to           
          be taxed like partnerships, avoiding the corporate-level taxation           

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Last modified: May 25, 2011