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Introduction on Tax Treatment of Exchanges of Mutual Ditch Company Shares

Location: Washington, DC


* Mr. UDALL of Colorado. Madam Speaker, I am today introducing a bill dealing with the tax treatment of exchanges of mutual ditch company stock, a subject of special importance to Coloradans who hold such stock in order to make beneficial use of water transported through the companies' ditches and associated structures.

* The bill is cosponsored by my Colorado colleagues, Representatives SALAZAR, MUS-ÐGRAVE, and LAMBORN. I appreciate their assistance and support.

* Madam Speaker, mutual ditch companies are unique to Colorado. They are not organized for profit, but for the mutual benefit of the shareholders and operate on the premise that the company owns the water rights and other property and the shareholders have the right to use the water. The Colorado Supreme Court has held that shares of stock in a mutual ditch company represent a definite and specific water right, as well as a corresponding interest in the structures by which the water right is beneficially used.

* One such company, based in Windsor, in northeastern Colorado, is working to raise funds to improve the efficiency of its delivery system. To do so, it has contracted to give the City of Greeley and two local water districts part of its water in exchange for $30 million, part in cash and part in the stock of a reorganized corporation. As part of this plan, the Windsor company's shareholders will exchange their stock for shares in the new corporation.

* Other similar exchanges have occurred or will occur in the future. But there is concern that shareholders making such an exchange might be called upon to pay taxes in connection with such exchanges.

* Federal tax law (Section 1031 of the Internal Revenue Code of 1986) allows a tax-free exchange of like-kind property held for productive use in a trade or business. Generally this does not apply to exchanges of stock. However, shares of Colorado mutual ditch companies are different from normal stock shares, and the Colorado Supreme Court has held that because a mutual-ditch shareholder is entitled to apply water to a beneficial use, mutual-ditch shares are real property (like real estate), not personal property (like normal stocks or bonds).

* The mutual ditch companies say--and I think they are right--this means exchanges of their shares should be covered by the like-kind exchange exemption. Unfortunately, in 1986, the IRS's General Counsel ruled otherwise.

* Since that ruling, however, the Colorado Supreme Court, in a 1997 decision, made it clear that under Colorado law mutual ditch company shares are real property.

* The bill would remove any doubt on this point and make clear that Section 1031 of the Internal Revenue Code will apply to exchanges of shares in a Colorado mutual ditch, reservoir, or irrigation company covered by section 501(c)(12)(A) of the Code.

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