William T. Gladden Nicole L. Gladden v. Commissioner of Internal Revenue

WILLIAM A. FLETCHER, Circuit Judge:

William and Nicole Gladden (“the Gladdens”) appeal the Tax Court’s ruling that they cannot allocate any of their cost basis in farmland to the sale of water rights appurtenant to the land. The Tax Court held that the Gladdens acquired the water rights in a “separate transaction” that occurred after the original land purchase, and that the cost basis of the rights was therefore zero. We reverse and remand.

I

The Gladdens are 50% partners in the Saddle Mountain Ranch partnership (“the partnership”), which farms 880 acres of land in the Harquahala Valley in…