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Commentary and Analysis Regarding Colorado Law

Water for Daffodils and Dreams

Madoline Wallace Gross

When daffodils pop up, so do the “for sale” signs on the ranch and mountain properties.  Whether you are buying your forever property or your just-for-now property, be sure to conduct water rights due diligence.   Water rights are complicated, and you need to protect your investment with the following steps.

Initially, ponder “What do I want to do with the property?”  Do you want a sprawling mansion or a quaint cabin?  Do you want a luscious lawn and a fish pond?  Have you always wanted horses and chickens? 

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Use it or Lose it

Godbehere Kara small

“Use it or lose it” is often colloquially used to describe the prior appropriation doctrine for water rights in Colorado.  Nowhere is that phrase more accurate than when it comes to the decennial abandonment list.  CRS § 37-92-401(1)(a) requires the Division Engineer to maintain a tabulation of water rights and priorities in their Water Division, but also to “prepare decennially, no later than July 1, 1990, and each tenth anniversary thereafter, a separate abandonment list comprising all absolute water rights that he or she has determined to have been abandoned in whole or in part and that previously have not been adjudged to have been abandoned.”  The next issuance of this decennial abandonment list will happen in 2020, and there are some important considerations of which water users should be aware before that list is issued.

Water rights can be abandoned in whole or in part.  The Division Engineers office may physically inspect diversion structures and/or diversion records, if kept, to determine if water rights have actively been used over the past ten years.  They may be placed on the abandonment list if they haven’t been used at all, but also if they have only been used in amounts less than the decreed amount. In addition to non-use, the water right owner must intend to abandon the right.  See CRS § 37-92-103(2), also Beaver Park Water, Inc. v. City of Victor, 649 P.2d 300 (Colo. 1982). This is a very important element to note in the abandonment process, as the burden is on the water right owner to show they did not have an intent to abandon, if they wish to have their water rights removed from the list. Pursuant to CRS § 37-92-103(5)(a), any water right owner who wishes to protest inclusion of their water rights on the abandonment list must file a protest no later than “June 30, 1992, or the respective tenth anniversary thereafter” (so for the upcoming 2020 abandonment list, no later than June 30, 2022).  The forms for protesting inclusion of water rights on the abandonment list can be found here: https://www.courts.state.co.us/Forms/Forms_List.cfm?Form_Type_ID=10. 

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Did 2017 Tax Code Changes Eliminate 1031 Exchanges of Ditch Stock?

1031 exhange

Since the passage of the 2007 Farm Bill, buyers and sellers of certain water rights have enjoyed the ability to use tax deferred exchanges under Section 1031 of the Internal Revenue Code.  Recent changes to the tax code, however, deleted any reference to mutual ditch or irrigation company stock from the definintion of qualifying “like kind property.”  None the less, the IRS will still allow exchanges involving ditch stock provided that your state’s laws consider such stock as real property.

Following the passage of the 2007 Farm Bill, Internal Revenue Code §1031(i) specifically provided that mutual ditch or irrigation company stock could be used for a tax deferred like kind exchange for real property used in a trade or business or held for investment purposes. As a result, the gain from the sale of eligible mutual ditch company stock could be deferred if the other requirements of §1031 were met.  Eligible stock was defined as any stock in a mutual ditch, reservoir, or irrigation company, as described in Code § 501(c)(12)(A). That section required at least 85% of the revenue into the company be from member assessments.

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Water Butts

Eve Canfield
Water Butt

According to http://www.treehugger.com, the UK calls rain barrels “water butts”. I was suspicious, but when I “Googled” water butts, a whole list of sites for rain barrels came up, so yes, rain barrels are really called water butts in the UK. The reason for this article is that until recently, rain barrels were illegal in Colorado. In Wisconsin where I grew up, my grandmother had rain barrels and used the water for flower boxes and also to wash her hair. She said it made her hair soft and slowed down the process of going gray. As I remember her now, she could have been right.

The Colorado Division of Water Resources website tells us that the State of Colorado claims the right to all rain that falls within the state. That is why rain barrels were illegal in Colorado until August 10, 2016. Practically speaking, there was concern that the collection of rain water would have an adverse effect on owners of senior water rights by taking too much water out of the natural water cycle. In 2009, there was Senate Bill 09-080, which allowed the use of rain barrels in limited circumstances, but it wasn’t until this year that the use of rain barrels or “rooftop precipitation collection” systems were made legal for most of homeowners in Colorado.

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Water Woes and Wars Shape Development in Northern Colorado


nicholson

If you can’t bring LA to the water, you bring the water to LA…– Roman Polanski’s Chinatown dramatizes the so-called “California Water Wars”.

I have yet to see Jack Nicholson roaming the plains of Northern Colorado but the factors that drove and challenged growth in Southern California in the late 1930s now take shape in Northern Colorado. It takes more than land and a strong market to create a successful development, at least around here.  In Northern Colorado, water is the key ingredient and that resource is in short supply.  The City of Longmont holds a lot of cards.  The Towns of Firestone, Frederick and Mead have the land and the demand.  Longmont’s City Council recently discussed Councilman Brian Bagley’s three point plan to protect Longmont’s eastern border from encroaching municipal neighbors.  A key prong in that plan is to protect Longmont’s store of water rights from being leased or sold to those towns.

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Smoke on the Water: Representing Grow Operations

Lyons Gaddis water lawyers have been asked by several of the firm’s clients to advise them on providing water to marijuana-related businesses cultivating marijuana in “grow operations.”  These matters are complicated by the fact that the cultivation and sale of marijuana remains illegal under federal law. Under the aiding and abetting doctrine of criminal law, persons or entities providing water to these businesses could be subject to a federal prosecution.

Lyons Gaddis attorneys Jeff Kahn and Matt Machado recently spoke to state and local bar associations regarding the legal and ethical implications of providing legal representation to water providers in negotiating sales or leases of water for grow operations.  Mr. Kahn’s presentation to the Colorado Bar Association, Water Law Section (available here) covered topics including the lack of clear direction provided by the Cole Memorandum and the Bureau of Reclamation policy regarding the use of reclaimed water for activities prohibited by the Controlled Substances Act.  Matt Machado participated in a panel at the Boulder County Bar Association Bench Bar Retreat, and discussed ethical requirements for lawyers representing marijuana-related businesses.  This is a new area of the law that continues to evolve rapidly.  If you have questions in this area of water law, please contact , Jeff Kahn or Matt Machado.

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Colorado Flood Relief Bill in Congress


Submitted by Jeff Kahn

On November 19th, Longmont’s Sean Cronin testified before the Senate Committee on Finance, Subcommittee on Taxation and IRS Oversight’s hearing entitled “Tax Relief after Disaster: How Individuals, Small Businesses, and Communities Recover.”  Mr. Cronin is the Executive Director for the St. Vrain and Left Hand Water Conservancy District.  (Watch Mr. Cronin’s testimony) He spoke to the challenges faced by farmers and mutual ditch companies as they work to rebuild important water infrastructure damaged by the 2013 flooding and the benefits that would be offered by adoption of the National Disaster Tax Relief Act of 2014., currently under review in the House and Senate. The full text of Mr. Cronin’s testimony is available here.

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Proposed Rule Redefining “Waters of the United States” Under the Clean Water Act and New Interpretive Rule for Agricultural Exemption for 404 Permits


Submitted by Matthew Machado The EPA has proposed a rule that will expand the need for federal permits under the federal Clean Water Act (CWA) for discharges or other impacts to waters of the U.S. The activities requiring such permits include discharges of “dredged or fill material” (Section 404 Permits) and permits for point source discharges of pollutants the Colorado Department of Health and Environment (CDPS Permit). Typical examples of activities requiring a 404 permit include replacement of a ditch headgate for a municipally owned ditch or digging in a wetland. Examples of activities requiring a CDPS permit include municipal stormwater discharges, CAFOs, and industrial discharges. Depending on the activity involved, obtaining a permit could take hours or take years and millions of dollars.

I. Proposed Rule Redefining Waters of the U.S.The EPA and the Army Corp of Engineer are currently considering adoption of a Proposed Rule intended to expand and/or clarify (depending on who you talk to) the types of streams and wetlands that are considered to be “waters of the U.S.,” and therefore subject to the CWA. Comments on the proposed rule may be submitted to the EPA and Corps until October 20, 2014.The proposed rule will expand the definition of waters of the U.S. to lands that have more marginal water attributes, and result in more projects requiring CWA permits. Under the current rule, the term “wetlands” generally includes those areas normally inundated sufficient to support wetlands vegetations, including swamps, marshes, bogs, and similar areas. Under the proposed rule, the focus would be less on the degree of inundation and more on the connection to a larger water body that is clearly a water of the U.S. For the most part, unless exempt (see below), tributaries and wetlands in the watershed of a stream or river will definitely be deemed waters of the U.S. Furthermore, land with more marginal water attributes in the watershed not currently considered water of the U.S. (e.g. dry gulches and drainage ditches common in Colorado) could be deemed on a case by case basis water of the U.S based on the connection and other factors (“significant nexus” test).

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Colorado Water Law Legislation Update


Submitted by Jeffrey J. KahnProposed Water Legislation and Ballot Initiative

Legislation:  The 2014 Colorado Legislative Session convened on January 8th and several pending bills appear headed for enactment, including:

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Longmont, CO 80502
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