In 1939, Inaja Land Company, Ltd. (Inaja) (plaintiff) filed a corporate income-tax return that did not account for the net gain resulting from Inaja’s $50,000 sale of an easement to the City of Los Angeles (City). In 1928, Inaja had paid $61,000 to acquire 1,236 acres of land that Inaja used as a private fishing club for shareholders. Inaja charged guest fees to shareholders in order to limit use of the property. The City constructed a tunnel near Inaja’s land. The City’s tunnel diverted foreign waters into the fishing stream on Inaja’s land, impairing the land’s value as a fishing club. Inaja threatened the City with legal action. The City and Inaja entered into a settlement agreement, pursuant to which the City paid Inaja $50,000 for an easement permitting the City’s foreign waters to pass through Inaja’s land. The commissioner for the Bureau of Internal Revenue (defendant) issued a deficiency notice, holding that the net gain from the settlement with the City was income to Inaja. Inaja petitioned the United States Tax Court for a determination.