[Congressional Record Volume 153, Number 30 (Friday, February 16, 2007)]
[Extensions of Remarks]
[Page E375]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




  INTRODUCTION OF BILL ON TAX TREATMENT OF EXCHANGES OF MUTUAL DITCH 
                             COMPANY SHARES

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                            HON. MARK UDALL

                              of colorado

                    in the house of representatives

                       Friday, February 16, 2007

  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-
grave, 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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