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Inaja Land Co. v. Commissioner - 9 T.C. 727 (1947)

Rule:

A taxpayer should not be charged with gain on pure conjecture unsupported by any foundation of ascertainable fact. 

Facts:

This proceeding involved deficiencies in Federal income and declared value excess profits taxes for the taxable year 1939 in the amounts of $8,777.22 and $5,393.51, respectively of petitioner stock corporation. The petitioner's income and excess profits tax return for the taxable year 1939 did not report receipt of any income from the city of Los Angeles, but included a schedule which reported receipt of $50,000 from the city in connection with a certain written agreement and settlement of  certain specified matters, wherein expenses amounted to $1,055, and petitioner received a net amount of $48,945.  In his deficiency notice the respondent included the sum of $48,945 as taxable income to petitioner.

Issue:

Did the net amount received by petitioner in the taxable year 1939 under a certain city's indenture constitute taxable income?

Answer:

No.

Conclusion:

Apportionment with reasonable accuracy of the amount received not being possible, and this amount being less than petitioner's cost basis for the property, it cannot be determined that petitioner has, in fact, realized gain in any amount.  Applying the rule as above set out, no portion of the payment in question should be considered as income, but the full amount must be treated as a return of capital and applied in reduction of petitioner's cost basis.

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