Inaja Land Co. v. Commissioner 9 T.C. 727 (Tax Ct. 1947) Inaja operated a fishing club on some property in California. The City of Los Angeles dumped pollution into the river and killed all the fish. Inaja threatened to sue L.A. to protect their riparian rights. L.A. settled and paid Inaja money in return for an easement to allow L.A. to continue to pollute the river. The IRS claimed that the payments to Inaja were taxable as gross income. Inaja disagreed. IRS argued that the payments from L.A. were similar to rent, and rent is gross income. Inaja argued that the payments were a replacement of capital because when Inaja bought the property, they acquired a bundle or rights. In the bundle or rights was a right to not have pollution in their river. When they agreed to the easement, they were effectively selling off part of the bundle. The Tax Court found for Inaja. The Tax Court found that the easement was the sale of part of a bundle of rights, so the replacement of capital. The Tax Court found that the adjusted basis for that specific right was difficult to determine, because Inaja hadn't paid for each right individually. Therefore, the Court found that since there was no rational way of allocating the basis, then the company is allowed to reduce the adjusted basis in the land by the same amount as the payments from L.A. So Inaja didn't have to pay any taxes as gross income, but they would have to eventually pay capital gains tax when they sold the land. Under 26 U.S.C. §1001, realized gain = amount realized - adjusted basis.