# Acreage Limitation and Water Conservation Rules and Regulations

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/fr%3A95-7524

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** April 3, 1995
- **Citation:** 60 FR 16922

## Text

SUMMARY: This proposed rulemaking would retitle and revise the existing
Rules and Regulations for Projects Governed by Federal Reclamation Law
(Part 426) and add new Water Conservation Rules and Regulations (Part
427). These rules would replace and expand upon existing rules that
pertain to the administration of the Reclamation Reform Act of 1982
(RRA) and are in partial fulfillment of the requirements of a
Settlement Contract between the Department of the Interior, Department
of Justice, and the Natural Resources Defense Council (NRDC).

DATES: Written comments on these proposed rules and regulations must be
received by June 2, 1995.

ADDRESSES: Written comments should be mailed to the Westwide Settlement
Manager, Bureau of Reclamation, P.O. Box 25007 (Mail Code D-5010),
Denver, Colorado 80225.

FOR FURTHER INFORMATION CONTACT: Concerning part 426, contact Richard
Rizzi, Bureau of Reclamation, P.O. Box 25007 (Mail Code D-5200),
Denver, Colorado 80225, telephone (303) 236-1061 ext. 235; concerning
part 427, contact Craig Phillips, Bureau of Reclamation, P.O. Box 25007
(Mail Code D-5300), Denver, Colorado 80225, telephone (303) 236-1061
ext. 265.

SUPPLEMENTARY INFORMATION: The RRA (43 U.S.C. 390aa, et seq.) was
signed into law on October 12, 1982. It was the culmination of an
effort to modernize Federal reclamation law. The RRA made a number of
changes to prior Federal reclamation law while retaining the basic
principle of limiting the amount of land in ownership which may receive
water deliveries from Bureau of Reclamation (Reclamation) projects.
Rules and regulations for implementing the RRA were published in
the Federal Register (43 FR 54768, Dec. 6, 1983) and became effective
on January 5, 1984. In 1987, the rules and regulations were amended,
primarily to implement Section 203(b) of the RRA, which was not
addressed in the 1983 rulemaking. Revisions also were made to those
provisions of the rules and regulations pertaining to submission of
certification and reporting forms, trusts, non-resident aliens, water
transfers, covenant restrictions, and religious and charitable
organizations.
The 1987 rules and regulations and three alternatives were
evaluated in an Environmental Assessment (EA) published by Reclamation
in April 1987. The EA concluded that the impacts of the proposed
rulemaking were primarily economic in nature and that no significant
impacts to the natural environment would result from the rulemaking. A
Finding of No Significant Impact concerning the 1987 rulemaking was
therefore issued by Reclamation on April 8, 1987. The final rules and
regulations were published in the Federal Register (52 FR 11954, Apr.
13, 1987) and became effective on May 13, 1987.
The Omnibus Budget Reconciliation Act of 1987, enacted on December
22, 1987, included amendments to the RRA. The amendments addressed
revocable trust agreements, provisions for audits by Reclamation to
confirm information from reporting procedures, application of full-cost
water rates for lands under extendable recordable contracts, and
interest on underpayments or nonpayments. Consequently, further
proposed amendments to the rules and regulations were evaluated in a
supplemental EA published by Reclamation in September 1988. The
supplemental EA concluded that the impacts of the proposed rulemaking
were primarily economic in nature and that no significant impacts to
the natural environment would result from the rulemaking. A Finding of
No Significant Impact concerning the 1988 rulemaking was therefore
issued by Reclamation on September 23, 1988. The final rules and
regulations were published in the Federal Register (53 FR 50535, Dec.
16, 1988) and became effective on January 17, 1989.

Litigation Concerning the RRA Rules and Regulations

The NRDC and others filed a lawsuit challenging the validity of the
1987 and 1988 rules and regulations (NRDC v. Underwood, No. Civ. S-88-
375-LKK). On July 26, 1991, the United States District Court for the
Eastern District of California (Court) granted NRDC's partial motion
for summary judgment. The Court ruled that Reclamation had not complied
with the requirements of the National Environmental Policy Act (NEPA)
and the regulations of the Council of Environmental Quality in
preparing the EA and the Findings of No Significant Impact in the
promulgation of the 1987 rules and regulations.
Reclamation appealed the District Court's decision to the Ninth
Circuit Court of Appeals. In September 1993, while the appeal was still
pending, the Department of the Interior (Interior), the Department of
Justice, and NRDC entered into a Settlement Contract which requires
Reclamation ``to propose new rules and regulations implementing, on a
westwide basis, the * * * (RRA) as part of a new rulemaking proceeding
that comprehensively reexamines the implementation of the RRA.'' The
Settlement Contract also requires Interior to prepare an environmental
impact statement (EIS) considering the impact of the proposed rules and
regulations and alternatives thereto. However, nothing in the contract
requires Interior to adopt changes to the rules now in effect.
The required draft EIS has been published separately and notice of
its availability will be published in the ``notice'' section of the
Federal Register.

Public Scoping

A notice of intent regarding the EIS and a notice of intent
regarding the rulemaking were both published in the Federal Register
(58 FR 64277 and 58 FR 64336, Dec. 6, 1993). A press release was issued
on December 29, 1993, and approximately 3,500 information packets were
distributed to environmental groups, entities that have contracts with
Reclamation for project water supplies, the media, and other interested
parties. Public scoping meetings were held in January 1994 to receive
public input regarding the issues and alternatives to be considered in
the EIS and rulemaking. Scoping sessions were held in Billings, MT;
Fresno, CA; Salt Lake City, UT; Phoenix, AZ; Boise, ID; Spokane, WA;
Portland, OR; and Denver, CO. In addition to the oral comments received
at the scoping sessions, approximately 150 letters were received.
Public comments generally focused on 5 areas: process, acreage
limitations on receipt of project water, water conservation, the
Settlement Contract, and EIS alternatives. Each comment was considered
in the development of EIS alternatives, the EIS analysis, and these
proposed rules and regulations.

Partnerships for Improved Resources Management

In December 1994, the Commissioner of Reclamation announced a new
initiative to develop formal partnerships between Reclamation and water
districts in a collaborative effort to improve the management of water
and associated resources throughout the Western [[Page 16923]] United
States. The partnerships will address mutually desirable water
resources management objectives and provide for public involvement to
consider the broadest range of traditional and emerging societal needs
and water resources management solutions.
Under this initiative, partnerships will be formed with one or more
districts on a district basis, project basis, or watershed basis.
Partnerships will involve agricultural water districts, municipal and
industrial water districts, other Reclamation contractors, and other
water suppliers and users throughout the 17 Western States. The
initiative will also provide for State participation in the
partnerships to assure compliance with State water law and
consideration of State resources priorities.
These proposed regulations acknowledge this new partnership
initiative. Certain requirements are modified if a formal partnership
with a district achieves the same objectives through similar or
alternative means. One section specifically allows for this type of
flexibility: Sec. 426.17 regarding landholder information requirements.

Description and Analysis of Part 426

Reclamation has taken advantage of the opportunity afforded by the
NRDC settlement to rework part 426 in its entirety. The majority of the
changes have been made for the sole purpose of improving the clarity of
the regulation. Thus, the bulk of the changes do not represent new
Reclamation policy regarding the RRA, but rather an attempt on
Reclamation's part to resolve any uncertainty that may have been
associated with the interpretation of the existing regulations. In some
cases, these proposed regulations include Reclamation policies that
have been in effect for some time, but which are not specifically
covered in the existing regulations.
However, a number of substantive changes have been proposed. The
key topics under which substantive changes have been made is summarized
as follows:
Reduction in certification and reporting burden
Definition of lease
Nonresident alien and foreign legal entity entitlements
Types of contracts considered additional and supplemental
benefits
Application of the RRA to religious and charitable
organizations
Application of class 1 equivalency
Involuntary acquisition and future operation of formerly
excess land by excess land sellers
Application of the compensation rate and administrative
fees in cases of irrigation of ineligible excess land
New procedures for administrative appeals of RRA-related
determinations.
Also, a new ordering of the sections has been proposed with the
objectives of grouping related topics and of attaining a more logical
and progressive sequence. For example, Secs. 426.4 through 426.6 would
address how basic landholding entitlements are determined, followed by
Secs. 426.7 through 426.9, which would discuss the entitlements of
particular types of landholders. Sections 426.10 through 426.14 would
be generally categorized as addressing the status of land under acreage
limitation laws, and the remaining sections would address
administrative and miscellaneous provisions.
Finally, all examples would be deleted from the text of the
regulations and would be instead included, if necessary, in the
following section-by-section analysis. This change would make the rule
more compact, and would promote our effort to improve precision in the
text of the regulation.

Section-by-Section Analysis

Section 426.1. The proposed rule would change the title of this
section from Objectives to Purpose, and the narrative would be
rewritten to include a straightforward statement as to the purpose of
these regulations.
Section 426.2. The existing section on applicability would be
removed because it is not possible to write a concise, yet accurate,
statement as to the applicability of these regulations. Because the
rule's scope of effect is not the same for the various provisions of
the regulations, Reclamation proposes that the best approach would be
to have each section speak for itself as to its applicability.
The proposed Sec. 426.2 defines terms used in the regulation and
would replace Sec. 426.4 from the existing regulation.
Numerous changes would be made to the definition section. The more
significant of the proposed changes are discussed as follows in
alphabetical order:
Acreage limitation entitlement, acreage limitation provisions, and
acreage limitation status would be added to the proposed regulations to
add precision and to replace the compound term ownership limitation and
pricing restrictions.
Arable land would be deleted because the term's only use is within
the definition of irrigable land. The term arable land is included in
the existing rules because the definition of irrigable land is based on
one more useful for formal land classification purposes. It is
suggested that a simpler definition of the term irrigable land would be
appropriate for this regulation, and, therefore, a definition of the
term arable land would be unnecessary.
Compensation rate would be newly defined in these proposed
regulations to describe the full-cost charges applied to certain types
of illegal irrigation water deliveries that are not discovered until
after they have taken place.
For conciseness only, the two sentences in the definition of the
term contract would be merged. In addition, the term agreement was
added to broaden the definition to ensure all arrangements between
Reclamation and water users that may be subject to application of the
acreage limitation provisions are captured.
Contract rate would be changed to reflect awareness of the fact
that many contracts do not include per acre or per acre-foot rates. For
purposes of this part, however, contract rate would mean such a rate on
a per acre or per-acre-foot basis.
Direct and indirect would be defined in this proposed regulation
because they are used in the RRA and are frequently used in the text of
the regulation. The terms apply in situations wherein land is held
directly by a landowner or lessee, or indirectly by a party that has a
beneficial interest in a legal entity that is a landowner or lessee
(such as a stockholder, partner, or trust beneficiary).
Discretionary provisions of Title II would be deleted and would be
replaced with the more concise discretionary provisions. Also, section
203(b) would be excepted from this definition, since it applies even to
prior law districts and landholders. Finally, United States Code
citations would be substituted, as they are more useful in locating the
relevant statutes.
District would be changed to replace the phrase eligible to
contract with can potentially enter into a contract, in order to avoid
the use of the term eligible, which has its own specific meaning under
part 426.
Eligible would be included to reflect its common meaning among
those familiar with acreage limitation laws: the right to receive
irrigation water without consideration of the price paid for that
water. This definition can be compared with that of ineligible.
Exempt land would be replaced with the term exempt primarily
because that term can be applied to districts and certain types of
landholders (e.g., [[Page 16924]] trustees and government agencies), as
well as to specific land parcels.
In the definition of the term full cost, Secretary would be changed
to Reclamation.
Full-cost rate and full-cost charge are defined to differentiate
between the two terms.
Indirect would be added. See the above discussion of the term
direct.
The reference to the Internal Revenue Code would be deleted from
the definition of individual because that concept is covered in the
definition of dependent.
Ineligible would be added to reflect that term's common meaning
among those familiar with acreage limitation laws: The lack of
eligibility to receive irrigation water at any price. This definition
can be compared with that of eligible.
Intermediate entity would be added to define a term used in these
regulations.
Irrevocable election would be changed to delete both the reference
to Title II and the second sentence which presently contains additional
explanation that is redundant with that contained in the text of the
existing rule.
Irrigable land would be changed to be more concise and
understandable. The phrases from the existing regulation excluding
permanent buildings, etc., would be transferred to the definition of
nonexempt land.
Irrigation land would be modified primarily to exclude land exempt
from acreage limitation laws. Also, the phrase in a given water year
would be added to clarify that land which has received irrigation water
retains irrigation land status for the entire water year, even if
irrigation is not taking place at any particular time.
Landholder would be modified to delete the references to the terms
qualified recipient, limited recipient, and prior law recipient,
because not all landholders fall into these categories (i.e. government
agencies, Native American tribes, etc.).
Landholding would be greatly simplified. The proposed definition is
clearer, and takes advantage of the new term nonexempt land. It should
be noted that involuntarily acquired land would be included within this
definition of landholding.
Lease would be substantially modified. Under the existing
regulation, one of the key elements in the definition of lease is the
assumption of economic risk by the reputed lessee. This definition
permits the development of arrangements under which an individual or
legal entity is paid a fixed fee for operating a farming enterprise.
Since the operator under these arrangements assumes no economic risk,
Reclamation currently does not deem operator to be in a lease
relationship. Therefore, under the existing rules, operators are not
subject to full-cost irrigation water rates.
The new definition would make possession the singular element
indicating the existence of a lease. The definition would eliminate
economic interest as an essential element of a lease (although economic
risk would remain a factor indicating the existence of a lease). Thus,
under the proposed regulation, whenever someone other than the
landowner has possession of nonexempt land, a lease would exist.
Reclamation would consider fixed-fee operations leases and would
subject the parties to full cost pricing if possession of the land has
been transferred, and if nonfull-cost entitlements are exceeded.
The second and third sentences of the definition would address the
situation where more than one party has some degree of possession; for
example, a landowner may contract with a farm manager but may retain
some decisionmaking authority.
Reclamation intends the proposed definition of the term lease to
exclude arrangements between landholders and custom operators,
employees, lenders, and other landholders with whom farm equipment is
shared.
Legal entity would be broadened to include certain types of
landholding arrangements whose status for acreage limitation purposes
had been unclear under the existing regulation.
Nondiscretionary provisions would be modified to eliminate the
reference to Title II, to include section 203(b), and to include the
United States Code citation. The second sentence of the current
definition has been eliminated because that concept is covered
elsewhere in the regulations.
Nonexempt land would be newly defined in these proposed regulations
to replace the compound term irrigable and irrigation land. Nonexempt
land would be defined more precisely than irrigable and irrigation
land, and would be used as a concise term to describe, generally, all
land subject to the acreage limitation provisions of Federal
reclamation law.
Nonfull-cost entitlement would be modified to enhance clarity by
including the defined term nonfull-cost rate.
Nonresident alien entitlement would be eliminated because, under
the proposed rules, nonresident aliens would be treated as prior law
recipients, and their entitlements derived accordingly. This fact would
be made clear in the definition of prior law recipient.
Operation and maintenance costs or O&M costs would be newly defined
in order to clarify the types of activities that are included in the
calculation of operation and maintenance costs.
Part owner would be added to define a term that is used in these
regulations.
Prior law would be modified primarily to include United States Code
citations.
Prior law recipient would be modified to include within the
definition, nonresident aliens and legal entities not registered in the
United States. Under the proposed regulations such persons and entities
could only be prior law recipients. This conclusion results from the
RRA's definitions of qualified recipient and limited recipient.
Public entity would be added to define a term that is used in these
regulations.
Qualified recipient would be modified to include married couples in
which only one spouse is a U.S. citizen or resident alien.
Reclamation fund would be modified to eliminate unnecessary
language.
RRA would be added. This term would be used throughout the part as
it is concise and well understood by most readers.
Title II would be eliminated in favor of a definition of the term
RRA which would be used throughout the part.
Section 426.3. The section in the existing regulations, entitled
Authority, would be removed because it is redundant with the
authorities statement that immediately follows the table of contents.
The proposed Sec. 426.3, Conformance to the discretionary
provisions, would replace the existing Sec. 426.5 and add a more
precise description of the section's contents.
The section would be generally rewritten to eliminate redundancy
with other sections and paragraphs within the section. Paragraph (a)
categorically describes the conditions under which districts remain
subject to prior law. These conditions are summarized in the following
table:

[[Page 16925]]
------------------------------------------------------------------------
If a district * * * then * * *
------------------------------------------------------------------------
Executes a new or renewed contract The discretionary provisions apply
with Reclamation after October 12, as of the execution date of the
1982. new or renewed contract.
Amends its contract to conform to The district is subject to the
the discretionary provisions discretionary provisions from the
(following the procedures date it requests the amendment.
specified in these regulations)
and Reclamation amends the
contract.
Amends its contract after October The discretionary provisions apply
12, 1982 to provide the district as of the date that the Secretary
with additional or supplemental executes the contract amendment.
benefits (as described in these
regulations) and the amendment
includes the district's
conformance to the discretionary
provisions.
------------------------------------------------------------------------

A new standard RRA contract article is included under paragraph (c)
to clarify any misconceptions concerning the applicability of the
Acreage Limitation Rules and Regulations and Reclamation's right to
administer contracts.
Another substantial proposed change in the rule would involve
specific contract actions that would be considered additional and
supplemental benefits. Under this proposed regulation, Rehabilitation
and Betterment Act and Small Reclamation Projects Act (SRPA) loans,
which are not currently considered additional and supplemental
benefits, would now be considered as such. Any district already subject
to the acreage limitation provisions that obtains benefits under these
programs would be required to conform to the discretionary provisions.
Furthermore, Emergency Fund Act and Distribution Systems Loan Act
contracts, whose treatment is not clearly established under the current
rules and policy, would be considered additional and supplemental
benefits under this proposal. The listing of types of contract
amendments requiring district conformance to the discretionary
provisions should not, however, be considered comprehensive.
Actions pursuant to the Reclamation Safety of Dams Act of 1978
would be added to the list of items not considered to provide
additional and supplemental benefits, as provided by statute.
The following statement and table are being considered as an
alternative to Sec. 426.3(a)(3)(iv)(F) in the final rules :
(F) Transfer of water on an annual basis from one district to
another if the parties to the transfer meet the conditions in the table
below:

------------------------------------------------------------------------
Party Condition
------------------------------------------------------------------------
Both districts..................... Must have contracts with the United
States.
District receiving transferred Must pay a rate that:
water. --is the higher of the applicable
water rate for either district;
--does not result in any increased
operating losses to the United
States above those that would have
existed if there had not been a
transfer; and
--does not decrease the capital
repayment to the United States
below what it would have been if
there had been no transfer.
Recipients of transferred water.... Must pay a rate that is at least
equal to the actual O&M costs or
the full-cost rate if the
recipients would have been subject
to these costs in the absence of a
transfer.
------------------------------------------------------------------------

Paragraph (d), The effect of a master contractor's and
subcontractor's actions to conform to the discretionary provisions, of
the proposed regulation has been rewritten for conciseness. The
following examples illustrate the application of this paragraph:

Example (1). Assume Districts A, B, and C are members of a water
conservancy district which entered into a master contract with the
United States prior to October 12, 1982. The water conservancy
district has allocated all the irrigation water made available to it
under the master contract to Districts A and B, pursuant to pre-
October 12, 1982, subcontracts with the conservancy district to
which the United States is a party. The irrigation water is not made
available to District C or any other districts or landholders within
the water conservancy district. Consequently, Districts A and B are
subject to the acreage limitation and pricing provisions of prior
law. Districts A and B may amend their subcontracts to conform to
the discretionary provisions without making it necessary for the
conservancy district or the other subcontracting entity with the
conservancy district to so amend their contract or the subcontract.
Example (2). Assume District XYZ has a pre-October 12, 1982,
contract with the United States for the delivery of irrigation
water. The district also has allocated that irrigation water
pursuant to subcontracts with six subcontracting entities. However,
the United States is not a party to these subcontracts. A
subcontractor may choose to conform to the discretionary provisions
only if it makes the United States a party to the subcontract. Such
action will not require the prior law master contractor or the other
subcontractors to so amend.
Example (3). Assume District A, a master contracting agency,
executes a water service contract with the United States after
October 12, 1982. The irrigation water is to be delivered to only
two of the eight member agencies within District A. Subcontracts are
executed between District A, the United States, and each of the two
member agencies to provide irrigation water service to the two
member agencies. In this instance, the discretionary provisions
become applicable to only the two member agencies which execute
subcontracts with District A and the United States.

Paragraph (e) is new that would explain the effect of a district's
becoming subject to the discretionary provisions on a landholder's
status. It would explain how certain indirect landholders in districts
with an amended contract can conform to the discretionary provisions by
simply submitting a certification form. The provision would also
explain how Reclamation would treat direct and indirect landholdings of
nonresident aliens and foreign entities in amended districts.
Paragraph (f) would expand on the current rules' discussion of
individual elections to address the effects of elections by part owners
on entities and vice versa.
Section 426.4 in the existing regulations, Definitions, would be
renumbered Sec. 426.2. The proposed new Sec. 426.4, entitled
Attribution of land, is intended to clarify how Reclamation would
attribute land to indirect landholders, and to landholders who are
[[Page 16926]] part owners or are entities not wholly owned by an
individual. It would also concisely summarize existing policy regarding
on how land is attributed for entitlement purposes.
Paragraph (a) would establish the general rule that individuals and
entities cannot enhance their entitlements or eligibility through the
creation or acquisition of legal entities. For example, a prior law
recipient could not increase his or her 160-acre ownership entitlement
(see Sec. 426.5) by creating or acquiring an interest in a qualified
recipient legal entity. Such a prior law recipient would need to
conform to the discretionary provisions (through district contract
action or individual irrevocable election) in order to realize an
increase in his or her entitlements.

Example (1). Corporation A, a limited recipient that did not
receive water on or before October 1, 1981, and therefore is not
entitled to receive irrigation water at a nonfull-cost rate (see
Sec. 426.6). Such an entity may not gain entitlement to receive
irrigation water at a nonfull-cost rate by acquiring Corporation B,
an entity that received water on or before that date. If the latter
entity were so acquired, irrigation water could be delivered to the
entities' landholding only at the appropriate full-cost rate.
The converse is also true. If the entities' roles in the
preceding example were reversed (that is, if Corporation B acquired
Corporation A), the landholding of Corporation A could be irrigated
only at the appropriate full-cost rate as long as Corporation A
continued to exist. In this case, it should be noted that
Corporation B, which is eligible to receive irrigation water at a
nonfull-cost rate, could potentially receive nonfull-cost irrigation
water on other land in its holding that is not held through
Corporation A; but any land held by or through Corporation A could
be irrigated only at full cost.
Example (2). Corporation C is a qualified recipient which owns
and irrigates 500 acres. Corporation C is subsequently acquired by
Corporation D, a limited recipient which received irrigation water
on or before October 1, 1981, but which currently has no
landholdings other than Corporation C's 500 acres. On the date of
acquisition, Corporation C becomes a limited recipient because it
benefits all the stockholders of Corporation D. Thus, both
Corporations C and D are entitled to own and irrigate 640 acres (see
Sec. 426.5), but only 320 acres at the nonfull-cost water rate (see
Sec. 426.6). Therefore, if all 500 acres are irrigated, the full-
cost water rate must be paid for water delivered to 180 of those
acres.
Example (3). The trustees of five irrevocable trusts, each of
which have six natural persons as beneficiaries, form a partnership
that holds land subject to the acreage limitation provisions in a
discretionary district. In order to determine if that partnership is
a limited or qualified recipient, it is necessary to ascertain how
many natural persons will benefit from the partnership. In this
case, 30 natural persons will benefit (none of the trust
beneficiaries benefit from more than one trust) and, therefore, the
partnership has the acreage limitation status of limited recipient.
Although the five trusts are not limited in the amount of land they
can hold and receive irrigation water at the nonfull-cost rate
(other than through the entitlements of their beneficiaries) the
acreage limitation status of the partnership will limit how much
land can be held through that entity by the trusts and receive such
water.

Paragraph (b) would establish that, for purposes of acreage
limitation entitlements, owned land is attributed to each indirect
landholder proportionally based on that landholder's interest.
Paragraph (c) would establish that leased land counts against the
entitlements of both the owner and the lessee. Paragraph (d) would
establish that if a series of legal entities has ownership
relationships with each other, Reclamation would proportionately
attribute the land to each such entity.

Example (4). Assume Trust A has two beneficiaries, beneficiary A
and beneficiary B. Beneficiary A has a 60 percent interest in the
trust, and beneficiary B has a 40 percent interest. Trust A owns 800
acres of nonexempt land. Reclamation attributes 480 acres toward her
ownership entitlement, and beneficiary B must attribute 320 acres
toward his ownership entitlement.
Example (5). Assume Corporation C wholly owns Corporation D, and
that Corporation D owns a 60 percent interest in Corporation E.
Corporation E leases 500 acres of irrigation land. Reclamation will
attribute to Corporation E all 500 acres toward the company's
nonfull-cost entitlement, and Corporations C and D must each
attribute 300 acres toward their nonfull-cost entitlements.
Example (6). Attribution to both owner and lessee is
demonstrated by Farmer A who owns 400 acres of irrigation land which
she leases to Farmer B. Farmer A must count all 400 acres toward her
ownership and nonfull-cost entitlements, and Farmer B must count all
400 acres toward his nonfull-cost entitlement.
Paragraph (e) addresses how land that is owned by a landholder
and then is indirectly leased by the same landholder will be counted
by that landholder.
Example (7). Farmer A owns 60 acres and leases that land to
Corporation XYZ that leases a total of 200 acres. Farmer A also owns
50 percent of Corporation XYZ. Farmer A would claim his 60 owned
acres, but would not have to claim the entire 200 acres leased by
Corporation XYZ. Instead, Farmer A would claim 70 acres leased by
Corporation XYZ (200 acres minus the 60 owned acres times the 50
percent ownership interest). Accordingly, Farmer A would claim a
total landholding of 130 acres. If Farmer B was the other part owner
of Corporation XYZ and leased his 140 owned acres to that entity,
his claimed landholding would be 170 acres (140 owned acres, plus
200 acres minus the 140 owned acres times the 50 percent ownership
interest).

Paragraph (f) would establish that, for purposes of eligibility,
land is attributed in its entirety to all direct and indirect
landholders, unless they hold divided interests. The provision
acknowledges that irrigation water cannot be delivered to a legal
entity without benefiting all indirect owners of undivided interests in
that entity; therefore, all such indirect owners must be eligible in
order for the entity to be eligible.

If the interests of the entity's indirect owners are divided,
however, then the district could deliver irrigation water to the entity
without necessarily benefiting all such owners. In this situation, it
may be possible to deliver irrigation water to the entity even if one
or more of the entity's indirect owners is not eligible.

Example (8). Assume two qualified recipients, Farmer A and
Farmer B, form a qualified recipient partnership with equal,
undivided interests. Farmer A has no landholding outside the
partnership, but Farmer B owns 960 acres of nonexempt and nonexcess
land outside the partnership, and has therefore completed his
ownership entitlement. The partnership has no remaining ownership
entitlement, because any land irrigated by the partnership would
cause Farmer B to exceed his ownership entitlement.
If, however, the partnership agreement in this example provided
that the partners' interests were separable and alienable, the
partnership could receive irrigation water on that land attributable
to Farmer A. It would need to be shown that Farmer B does not
benefit from the receipt of irrigation water by the partnership.

Section 426.5 in the existing regulations, Contracts, would be
renamed and renumbered Sec. 426.3. The proposed new Sec. 426.5,
Ownership entitlement, would replace Sec. 426.6 of the existing
regulations. This section would summarize the ownership entitlements of
individuals and most types of entities, and would be generally
rewritten for conciseness.
Paragraph (a) would be rewritten to achieve better organization and
clarity. Moreover, the reference in the current language to the
regulation on class 1 equivalency would be deleted because that topic
is addressed in the discussion of qualified and limited recipient
entitlement.
All descriptions of what constitutes qualified, limited, and prior
law recipients would be deleted because they are redundant with the
definitions found in Sec. 426.2.
The trust discussion would be placed in a new Sec. 426.7.
The following table summarizes the ownership entitlements specified
in this section:

[[Page 16927]]
------------------------------------------------------------------------
The size of his or
If the landowner is her ownership Basis of computation
a: entitlement is:
------------------------------------------------------------------------
Qualified recipient.. 960 acres or class 1 Westwide.
equivalent.
Limited recipient.... 640 acres westwide or Westwide
class 1 equivalent.
Prior law recipient
and is a(n):
Individual....... 160 acres............ Westwide for land acquired
after 12/6/79. District-
by-district for land
acquired on or before 12/
6/79.
Husband and wife 320 acres............ Westwide for land acquired
who jointly own after 12/6/79. District-
equal interest. by-district for land
acquired on or before 12/
6/79.
Surviving spouse. Up to 320 acres...... Westwide for land acquired
after 12/6/79. District-
by-district for land
acquired on or before 12/
6/79.
Child............ 160 acres............ Westwide for land acquired
after 12/6/79. District-
by-district for land
acquired on or before 12/
6/79.
Joint tenancy or 160 acres per tenant. Westwide for land acquired
tenancy-in- after 12/6/79. District-
common, if by-district for land
interests are acquired on or before 12/
equal. 6/79.
Partnership if 160 acres per partner Westwide for land acquired
interests are: after 12/6/79. District-
alienable, by-district for land
equal, and acquired on or before 12/
separable. 6/79.
Partnership if 160 acres total...... Westwide for land acquired
interests are: after 12/6/79. District-
not alienable or by-district for land
not separable. acquired on or before 12/
6/79.
Corporation...... 160 acres............ Westwide for land acquired
after 12/6/79. District-
by-district for land
acquired on or before 12/
6/79.
------------------------------------------------------------------------

The following examples illustrate the application of this section:

Example (1). Farmer A receives irrigation water on 160 acres
owned in District X, a district subject to prior law. District X
subsequently amends its contract to conform to the discretionary
provisions. Farmer A automatically becomes a qualified recipient by
virtue of the district decision and is entitled to receive
irrigation water on a maximum of 960 acres of irrigation land in his
ownership.
Example (2). Farmer B and her husband are a qualified recipient
by virtue of an irrevocable election. They own in joint tenancy 960
acres of nonexempt land. As a qualified recipient, they may irrigate
the entire 960-acre landholding. However, they have completed their
ownership entitlement.
Example (3). Farmer C and Farmer D are a married couple, and
each owns 480 acres of irrigation land under separate title in
District A. District A has amended its contract to conform to the
discretionary provisions. Even though the land is held in separate
title, Farmer C and Farmer D as a married couple have reached the
limits of their ownership entitlement as a qualified recipient.
Example (4). Farmer E is a citizen of Germany, but has taken up
permanent residency in the United States. Farmer E owns 160 acres in
District Y and desires to purchase an additional 800 acres. District
Y has not amended its contract to conform to the discretionary
provisions. Farmer E; however, decides to execute an irrevocable
election. After the election, Farmer E becomes entitled to receive
irrigation water on 960 acres of owned land. This entitlement as a
qualified recipient remains in force so long as Farmer E, as a
resident alien, maintains permanent residency in the United States.
If Farmer E were to become a U.S. citizen, his eligibility as a
qualified recipient would, of course, remain in force.
Example (5). Farmer F is a citizen and resident of Switzerland.
Farmer F owns 160 acres of irrigation land in District X, a district
subject to prior law. Subsequently, District X amends its contract
to conform to the discretionary provisions. Farmer F, as a
nonresident alien, cannot meet the requirements of either a
qualified recipient or limited recipient. For that reason, and
because he owned the irrigation land prior to the district's
contract amendment, Farmer F may, as set forth in Sec. 426.11(e),
place the land under recordable contract and receive irrigation
water at the nonfull-cost rate for 5 years. (If the land were not
placed under recordable contract or had Farmer F not acquired the
irrigation land prior to the district's contract amendment, the 160
acres owned would be ineligible for service until such time as it
was sold or otherwise transferred to an eligible recipient or Farmer
F qualifies as a resident alien in the United States.)
Example (6). ABC Farms is a general partnership comprised of
four individuals who are qualified recipients and who own equal
interests in the partnership's 960-acre landownership. The land is
located in District Z, which is subject to the discretionary
provisions. Therefore, ABC Farms satisfies the requirements for a
qualified recipient and may receive irrigation water for all 960
acres in its ownership. Moreover, the members of the partnership, as
qualified recipients, may each receive irrigation water on a maximum
of 720 acres in some ownership or ownerships other than ABC Farms.
Example (7). Six brothers who are citizens and residents of
Canada form a family corporation registered in the State of Montana
with each brother holding equal shares in the corporation. The
corporation makes an irrevocable election and is therefore a
qualified recipient entitled to receive irrigation water on 960
acres or less of owned land. The brothers cannot meet the
requirements to be qualified recipients since none are citizens of
the United States or residents aliens thereof. Therefore, each
brother has completed his 160-acre ownership entitlement as a prior
law recipient. In a district subject to the discretionary
provisions, nonresident aliens may receive irrigation water only on
lands held through legal entities (i.e., indirectly) and may not
receive irrigation water on land they hold directly.
Example (8). Corporation A is a qualified recipient receiving
irrigation water on a landownership of 960 acres. Farmer Brown is
also a qualified recipient who owns 25 percent of Corporation A and
farms 800 acres of owned land using irrigation water. In this
instance, Farmer Brown exceeds his individual ownership entitlement
by 80 acres and must either divest an appropriate share of his
ownership in Corporation A or designate 80 acres of his directly
owned land as excess.
Example (9). Corporation B and Corporation C, wholly owned
subsidiaries of Corporation D, each own 500 acres in District Z
which has amended its contract to conform to the discretionary
provisions. All three corporations are qualified recipients. The
landholdings of Corporations B and C are counted against the
entitlement of the parent corporation, Corporation D. Therefore,
Corporation D has exceeded its 960-acre ownership entitlement by 40
acres, and 40 acres must be declared excess.
Example (10). AAA Land Company, a corporation benefiting more
than 25 persons and registered in the State of California, owns 320
acres in District Y. In the absence of district action, the company
makes an irrevocable election to conform to the discretionary
provisions. Thereby AAA Land Company becomes a limited recipient and
is entitled to receive irrigation water on 640 acres or less owned
westwide.
Example (11). BBB Fertilizer Company is a corporation registered
in Nebraska and owns 160 acres of nonexcess and 480 acres of excess
land in District X, a district subject to prior law. District X
subsequently amends its contract to conform to the discretionary
provisions. BBB Fertilizer Company benefits more than 25 persons and
therefore automatically becomes a limited recipient with a 640-acre
ownership entitlement. BBB Fertilizer Company may therefore
redesignate the 480 excess acres as nonexcess.
[[Page 16928]] Example (12). CDE Development Company is a
corporation, incorporated in the Greater Antilles, with more than 25
shareholders. CDE Development Company buys 160 acres in a district
which has amended its contract to conform to the discretionary
provisions. However, unless and until such time as CDE Development
Company establishes itself as a legal entity under State or Federal
law, it cannot meet the requirements to become a limited recipient,
and none of its directly held land is eligible for irrigation water.
Had CDE Development Company been receiving irrigation water on the
160 acres prior to the district's amendment, it could have placed
the land under recordable contract as set forth in Sec. 426.11(e)(3)
and could have continued to receive irrigation water for 5 years.
Example (13). FGH Corporation is owned by more than 25
stockholders and is registered in France. IJK Corporation is
registered in California and is a wholly-owned subsidiary of FGH
Corporation. IJK owns 640 acres in a district subject to the
discretionary provisions. IJK is a limited recipient that would
normally be entitled to irrigate the entire 640-acre landownership;
however, FGH cannot become a limited recipient because it is not
registered in the United States. Therefore, FGH has only the 160-
acre ownership entitlement of a prior law recipient. As a result,
only 160 acres of IJK's owned land is eligible to receive irrigation
water. The remaining 480 acres must be declared excess.
Example (14). Farmer G, a prior law recipient, owns 160 acres of
irrigation land in each of four districts. None of the districts in
which Farmer G owns land has amended its contract to conform to the
discretionary provisions, and Farmer G held title to the land prior
to December 6, 1979. Thus, Farmer G remains eligible to receive
irrigation water on the 640 acres owned in the four different
districts.

Note: If title to the irrigated land changes hands, the 160-acre
westwide entitlement will automatically apply to the transferred
land, assuming the new landholder is a prior law recipient.

Example (15). Farmer H owns 160 acres in each of two prior law
districts, and all of the acreage is eligible for irrigation water
by virtue of the fact Farmer H owned the land prior to December 6,
1979. On January 1, 1983, Farmer H purchased another 160 acres of
nonexcess land which is located in a third prior law district. The
land newly purchased in this district must be declared excess,
except as provided for in Sec. 426.11(d).
Example (16). Farmer I and his wife own 320 acres of irrigation
land in each of two prior law districts, for a total of 640 acres.
The couple purchased both parcels of land in 1976. Farmer I and his
wife have not made an irrevocable election. Since the land was
purchased prior to December 6, 1979, Farmer I and his wife are
entitled to receive irrigation water on all 640 acres. The couple
has reached the limit of their ownership entitlement.
Example (17). Farmer J and Farmer K own equal interests in a
tenancy-in-common which owns 320 acres of irrigation land in
District Y. District Y has not amended its contract to become
subject to the discretionary provisions. Both Farmers J and K own
nonexempt land only through their interests in the tenancy; however,
Farmer J wishes to purchase additional land in the district so he
makes an irrevocable election. Since the tenancy remains subject to
prior law, Farmers J and K may each receive irrigation water on a
maximum of 160 acres through their interests in the entity.
Therefore, the tenancy's 320 acres remain eligible to receive
irrigation water, but the tenancy and Farmer K have both reached the
limits of their ownership entitlements under prior law. However, as
a qualified recipient, Farmer J may receive irrigation water on an
additional 800 acres of owned land.
Example (18). Mr. and Mrs. L, who purchased all of their owned
land prior to December 6, 1979, may receive Reclamation irrigation
water on the 320 acres they jointly own as prior law recipients in
District A and also on the 100 acres they own in District B. On July
1, 1991, Mr. and Mrs. L purchase an additional 40 acres in District
B. Since the 40 acres were acquired after December 6, 1979, all 460
acres in their ownership must be taken into consideration to
determine if the newly acquired land is within the couple's
ownership entitlement. In this case, the total owned acres westwide
(460 acres) exceeds the couple's maximum westwide entitlement as
prior law recipients (320 acres). Therefore, the 40 newly acquired
acres are considered to be excess land and ineligible to receive
Reclamation irrigation water in the couple's landholding.
Example (19). EFG Farms, a partnership composed of four
individuals who hold equal, separable, and alienable interests in
the partnership, owns 960 acres of nonexempt land located in
District Y. District Y has not amended its contract to become
subject to the discretionary provisions. EFG Farms and two of the
partners are subject to prior law; the other two partners have made
irrevocable elections. Neither EFG Farms nor any of the partners
owns irrigation land outside the partnership. Based on these facts,
each partner may own and receive irrigation water on a maximum of
160 acres through the partnership. Therefore, 640 of the EFG Farms'
960 acres are entitled to receive irrigation water; the remaining
320 acres must be declared excess. The two partners who have made
irrevocable elections may each purchase and receive irrigation water
on another 800 acres outside the partnership in order to complete
their individual 960-acre ownership entitlement for qualified
recipients.
Example (20). Corporation GHI owns 320 acres in District Y, a
prior law district. Corporation GHI's two shareholders, Farmer L and
Farmer M, hold equal interests in the corporation. Both District Y
and Farmer L are subject to prior law; however, Farmer M is a
qualified recipient by virtue of having made an irrevocable
election. As a corporation subject to prior law, only 160 of
Corporation GHI's 320 acres can be declared nonexcess. Eighty acres
of the corporation's nonexcess ownership is attributed toward the
ownership entitlement of each shareholder. As a prior law recipient,
Farmer L may receive irrigation water on another 80 acres of
irrigation land through ownership arrangements outside the
corporation in order to complete his individual 160-acre ownership
entitlement. To complete his 960-acre ownership entitlement as a
qualified recipient, Farmer M may receive irrigation water on an
additional 880 acres outside the corporation.
Example (21). Farmer N and Farmer O form a corporation in which
Farmer N owns a 60 percent interest and Farmer O owns a 40 percent
interest. Neither individual owns land outside the corporation.
Farmer N and the corporation are qualified recipients, but Farmer O
remains subject to prior law. The maximum nonexempt acreage that the
corporation can own as nonexcess is 400 acres (160 divided by 40
percent). If the corporation owned more than 400 nonexempt acres,
this would cause Farmer O to exceed his ownership entitlement.
Example (22). Farmer P, a qualified recipient, owns 1,400
nonexempt acres and has designated 960 acres as nonexcess and
eligible to receive irrigation water. In 1995, Farmer P irrigates
only 800 acres; however, the entire 960 nonexcess acres are still
counted against his ownership entitlement.
Example (23). Farmer Q, a qualified recipient, owns 640 acres
receiving irrigation water. Farmer Q also owns 320 acres which are
not in a district, but Farmer Q has individually entered into a 10-
year contract with the United States for irrigation water for that
land. All 960 acres receiving irrigation water must be counted for
purposes of determining ownership entitlement.
Example (24). Farmer R, a prior law recipient, owns 160
nonexempt acres. However, only 120 acres were deemed irrigable and
eligible to receive irrigation water. Some years subsequent to this
determination, Farmer R installed a center pivot irrigation system
and now irrigates 160 acres with the same amount of water as he once
used to irrigate 120 acres. For purposes of ownership entitlement
under the RRA, all 160 acres must be counted.
Example (25). Farmer S remains under prior law. Farmer S
irrigates 160 acres of owned land. Subsequently, Farmer S buys, in
another prior law district, a 160-acre farm which is also receiving
irrigation water. All the land newly purchased by Farmer S thereby
becomes ineligible for service except as provided for in
Sec. 426.11(d). If the 160 acres which Farmer S purchased had never
received irrigation water and were in an area for which water
distribution facilities had not been constructed, Farmer S could, as
provided in Sec. 426.11(d)(1)(ii) or (2)(ii), place the 160 acres
under recordable contract when the facilities became available to
serve the land.

Section 426.6 in the existing regulations, Ownership entitlement,
would be renumbered Sec. 426.5. The proposed new Sec. 426.6, Leasing
and full-cost pricing, would replace Sec. 426.7 of the existing
regulations. This section would describe the conditions under which
full-cost charges would be applied (see examples 1 through 14), and
would describe how full-cost rates [[Page 16929]] are determined (see
examples 15 through 21).
The paragraph in the existing regulation on what constitutes a
lease would be deleted because it more properly belongs in the
definition section.
Care has been taken to distinguish between the definition of a
lease and the requirements of a lease. It is important to note that
failure to meet the requirements of a lease does not mean failure to
meet the definition of a lease. Thus, for example, it cannot be argued
that an agreement does not constitute a lease because it is not in
writing. Rather, a lease which is not written would not qualify for
treatment as a lease for the purposes of the RRA, and therefore, the
land associated with the lease would be ineligible to receive
irrigation water.
In the discussion of nonfull-cost entitlements, the term irrigation
land would be used liberally. The reference to exempt land would be
deleted since use of the term irrigation land automatically excludes
exempt land.
The citation regarding extended recordable contracts would be
deleted because the paragraphs on extended recordable contracts are
proposed for deletion from Sec. 426.11 of the regulations. (This
deletion will be addressed in the discussion of section 11.)
Under the discussion of nonfull-cost entitlements of qualified,
limited, and prior law recipients, the sentences describing various
types of land not subject to full cost would be deleted to eliminate
redundancy with other sections. Land subject to recordable contracts is
discussed in Sec. 426.11; exempt land does not need discussion because
it has been excluded through use of the term irrigation land; and
involuntarily acquired land is addressed earlier in the section.
The paragraph on multidistrict landholdings would be deleted
because it is redundant with the discussion of these topics in
Sec. 426.3.
The following table summarizes the nonfull-cost entitlements
specified in this section:

------------------------------------------------------------------------
The landholder's
nonfull-cost
entitlement is
If the landholder is a: computed on a
westwide basis and
is:
------------------------------------------------------------------------
Qualified recipient.............................. 960 acres.
Limited recipient who acquired the land:
Prior to or on October 1, 1981................. 320 acres.
After October 1, 1981.......................... 0 acres.
Prior law recipient and is a(n):
Individual..................................... 160 acres.
Husband and wife who jointly own equal interest 320 acres.
Surviving spouse............................... Up to 320 acres.
Child.......................................... 160 acres.
Joint tenancy or tenancy-in-common, if 160 acres per tenant.
interests are equal.
Partnership if interests are: alienable, equal, 160 acres per
and separable. partner.
Partnership if interests are: not alienable or 160 acres total.
not separable.
Corporation.................................... 160 acres.
------------------------------------------------------------------------

The application of Sec. 426.6 is illustrated by the following
examples:

Example (1). Farmer A, a qualified recipient, receives
irrigation water on 900 of the 960 acres of nonexempt land in his
ownership in District X. Farmer A leases and receives irrigation
water on another 320 acres in District Y. Since Farmer A receives
water on 260 acres over and above his nonfull-cost entitlement, he
must select 260 acres of owned land, leased land, or a combination
of both, and pay the full-cost rate for water delivered to that
land.
Example (2). Farmer B, a qualified recipient, owns and receives
irrigation water on 960 acres in District X. Farmer B decides to
lease all 960 acres to another qualified recipient, Farmer C. Farmer
C, however, already farms 960 acres receiving irrigation water.
Therefore, Farmer C would be eligible for nonfull-cost rate
irrigation water delivered to only 960 acres.
Example (3). Farmer D has made an irrevocable election and owns
and receives irrigation water on 960 acres. Farmer E is subject to
prior law and owns and receives water on 160 acres. Farmer D hires
Farmer E to operate Farmer D's equipment in performance of all the
physical farm work on Farmer D's 960 acres. Farmer E receives
compensation for such services, which does not consist of a share of
the crop and is not based, in advance, on the degree of economic
success or failure of the production or marketing of the crop.
Farmer D retains at all times the economic risk associated with both
crop production and marketing from his 960 acres. Farmer D also
makes all major decisions concerning the farming operation, and
Farmer E merely carries out Farmer D's instructions. This
arrangement between Farmer D and Farmer E does not constitute a
lease because Farmer D has not transferred possession of his land to
Farmer E.
Example (4). Assume the same facts as in example 3 of this
section, except that Farmer E makes the major decisions concerning
the farming operation. This arrangement between Farmer D and Farmer
E constitutes a lease because possession of the land has transferred
from Farmer D to Farmer E. Therefore, Farmer E has exceeded her
nonfull-cost entitlement by 960 acres and must pay full cost for
water delivered to 960 acres of her landholding.
Example (5). Landholder F, a qualified recipient, receives
irrigation water on 960 acres of owned land in District X and 800
acres leased in District Y. At the beginning of the water year,
Landholder F selects 360 owned acres plus 600 leased acres to
receive irrigation water at the nonfull-cost rate. He pays the full-
cost rate for water delivered to the remaining 800 acres. In July,
Landholder F terminates the lease on the 600 acres of leased land
which are part of his nonfull-cost entitlement. However, since
nonfull-cost acreage is counted against one's entitlement on a
cumulative basis during any 1 water year, Landholder F has already
reached the limits of his nonfull-cost entitlement for this water
year. Therefore, Landholder F may not replace in that water year
those 600 nonfull-cost acres, even though they no longer receive
irrigation water, with 600 acres from his full-cost land. Landholder
F also must pay the full-cost rate for irrigation water delivered to
any new land he irrigates during that water year.
Example (6). Landholder G, a qualified recipient, owns and
irrigates 1,200 acres, 400 of which are subject to a recordable
contract. Landholder G also irrigates 300 acres leased from another
party. All of Landholder G's landholding, a total of 1,500 acres,
counts against his nonfull-cost entitlement; therefore, he is in
excess of his nonfull-cost entitlement by 540 acres. However, the
400 acres under recordable contract are not subject to full-cost
pricing, so Landholder G need select only 140 acres for full-cost
pricing. The full-cost land may be selected from the nonexcess,
recordable contract, or leased land in his holding.
Example (7). ABC Farms remains under prior law. It owns and was
receiving irrigation water on 160 acres in District X prior to
October 1, 1981. ABC Farms also owns and irrigates 480 acres in
another prior law district which are subject to a recordable
contract. ABC Farms may continue to receive irrigation water at the
nonfull-cost rate on its entire landholding until the end of the
recordable contract period. At that time, if ABC Farms remains under
prior law, only 160 acres in District X may continue to receive
irrigation water. If ABC Farms makes an irrevocable election prior
to the maturity of the recordable contract, it may amend the
recordable contract to allow it to own and receive irrigation water
on all 640 acres owned. Upon electing, ABC Farms may receive
irrigation water at the nonfull-cost rate on 320 acres, but it must
pay the full-cost rate on the 320 acres by which it has exceeded its
nonfull-cost entitlement.
Example (8). CDE Farms, a limited recipient, owns 640 acres of
land eligible to receive irrigation water. The purchase of the land
took place after October 1, 1981, and CDE Farms was not receiving
irrigation water on any other land on or before October 1, 1981.
Therefore, in order for CDE Farms to receive irrigation water for
any nonexempt land, it must pay the full-cost rate for that
water. [[Page 16930]]
Example (9). FGH Fertilizer Company, a limited recipient, buys
160 acres of land receiving irrigation water in District X. The
purchase of the land is made subsequent to October 1, 1981. However,
the company was receiving irrigation water on 160 leased acres in
District B prior to October 1, 1981. Therefore, the 160 acres
recently purchased are eligible to receive irrigation water at the
nonfull-cost rate. If FGH Fertilizer Company buys or leases
additional land, the company would have to select and pay the full-
cost rate for any irrigation water delivered to land in excess of
its 320-acre nonfull-cost entitlement.
Example (10). The XYZ Corporation, a limited recipient, owns 640
acres of irrigation land in District A. Since the corporation was
receiving irrigation water prior to October 1, 1981, it is entitled
to irrigate 320 acres at the nonfull-cost rate and 320 acres at the
full-cost rate. If the corporation were to lease the owned land
subject to full cost to another landholder, the full-cost rate would
still apply.
Example (11). Farmer H and her husband receive irrigation water
on 320 owned acres of irrigation land and on 40 leased acres in
District X. District X has not amended its contract to become
subject to the discretionary provisions and Farmer H and her husband
have not made an irrevocable election. Since Farmer H and her
husband receive irrigation water on 40 acres in excess of their 320-
acre nonfull-cost entitlement, the couple must select 40 acres in
their landholding and pay the full-cost rate for water delivered to
that land. If Farmer H and her husband make an irrevocable election
or if District X amends its contract to become subject to the
discretionary provisions, the couple would thereby become a
qualified recipient with a nonfull-cost entitlement of 960 acres.
Since their landholding is within that entitlement, Farmer H and her
husband would be able to receive irrigation water at the nonfull-
cost rate on all 360 acres.
Example (12). Farmer I and his wife lease 640 acres of
irrigation land in District X and another 640 acres of irrigation
land in District Y. Districts X and Y have not amended their
contracts to become subject to the discretionary provisions and
Farmer I and his wife have not made an irrevocable election. Since
the couple has exceeded their 320-acre nonfull-cost entitlement by
960 acres, Farmer I and his wife must select 960 acres in their
landholding and pay the full-cost rate for water delivered to that
land.
Example 13. Four brothers hold equal, separable, and alienable
interests in a partnership they formed. The partnership owns 160
acres of irrigation land in District X and also leases another 320
acres from another party in District Y. The partnership and both
districts remain subject to prior law. Since the partnership's
landholding is within its 640-acre nonfull-cost entitlement (160
times 4), no full-cost charges will be assessed to water delivered
to any land in the holding.
Example (14). Farmer J, a prior law recipient, owns 5,000 acres
of irrigation land in District X, 4,900 of which are under
recordable contract. He also receives irrigation water on another
320 acres which he leases in this same district. Thus, Farmer J is
receiving irrigation water on 5,160 acres (5,320 minus 160) in
excess of his nonfull-cost entitlement. However, his recordable
contract land is not subject to full-cost pricing; therefore, Farmer
J must select 260 acres (5,160 minus 4,900) for full-cost pricing.
Although his recordable contract land is not subject to full-cost
pricing, Farmer J may, at his option, select part or all of the 260
full-cost acres from the land under recordable contract in lieu of
his nonexcess or leased land.
Example (15). District A contains 90,000 irrigable acres. The
construction costs allocated to irrigation for the project and to be
repaid by District A amount to $240 million. As of October 12, 1982,
the district's accumulated repayments are $174 million, and 11 years
remain on its contract term. The established annual contract rate is
$66.67 per acre. This amount repays the outstanding balance of the
contractual obligation ($66 million, or $733.33 per acre) in 11
years. The applicable interest rate is determined to be 7.5 percent;
therefore, the equal annual payments for full cost would be $100.24.
This payment is calculated using standard amortization procedures
and is the annual payment necessary to retire a debt of $733.33 at a
7.5 percent rate of interest over 11 years. This full-cost charge
will apply regardless of when District A amends its contract. Full
O&M charges must be added to this charge and included in the
assessment for any landholder subject to full-cost rates.
Example (16). District B has a water service contract that
establishes a rate of $6.50 per acre-foot for 90,000 acre-feet of
water delivered to the district, a rate which is fixed over the
remaining 10 years of the contract term. Currently, $1 of the $6.50
rate is used to pay annual O&M charges. The remainder is credited to
the repayment of irrigation construction costs, although inflation
over the next 10 years is expected to leave a $5 per acre-foot
payment to irrigation, averaged over the remaining 10 years. The
construction costs to be repaid from irrigation revenues and
assignable to be repaid by the land in District B are $24 million,
and the district has paid $15.5 million of those costs to date.
As of October 12, 1982, the accumulated payments credited to
repayment on construction are $15.5 million. The unpaid balance for
full cost is $8.5 million ($24 million minus $15.5 million), and the
applicable interest rate is determined to be 7.5 percent. Amortizing
the unpaid balance over the remaining contract term of 10 years
results in an annual full-cost charge of $1,384,016, or $15.38 per
acre-foot. Full O&M charges must be added to this charge and
included in the assessment for any landholder subject to full-cost
rates. Upon expiration of the current contract, the district expects
to enter into a subsequent water service contract in order to expand
its water deliveries. If District B desires to amortize its unpaid
balance for full cost over a longer period than 10 years, it can
choose to renegotiate its existing contract before the current
contract expires to bring it into conformance with current
Reclamation policy. When the district renegotiates its contract, the
unpaid balance for full cost could be reamortized, at the district's
option, for any period up to the term of the new water service
contract, which cannot exceed the repayment period authorized by
Congress. For example, suppose the new water service contract runs
for 18 years and is executed immediately. If the district chooses to
amortize full cost over the longest permissible repayment period (18
years), then the full-cost charge would be $10.88 per acre-foot. If
the district chooses to amortize over 15 years, the full-cost charge
would be $11.96 per acre-foot, assuming the unpaid costs remain the
same.
Example (17). District C contains 90,000 irrigable acres, and
the construction costs allocated to irrigation for the project and
assignable to be repaid amount to $240 million. As of October 12,
1982, the accumulated repayments of the district are $174 million.
The district's repayment obligation is $200 million. (The $40
million difference between construction costs allocated to
irrigation and the repayment obligation is scheduled to be paid from
other project revenues.) The unpaid obligation on District C's
repayment contract is $26 million, and 11 years remain on its
contract term. The annual rate established by the contract is $26.26
per acre. This amount repays the outstanding balance of the
contractual obligation in 11 years. As of October 12, 1982, the
unpaid balance for full cost is $66 million (allocated cost, less
payments) or $733.33 per acre, and the applicable interest rate is
determined to be 7.5 percent. Therefore, the equal annual payment
for full cost would be $100.24 per acre.
Example (18). District D has a 40-year water service contract
for 90,000 acre-feet of water per year. The District's current
contract expires in 1997 and will be renewed for another 40-year
term, resulting in an expiration date of 2036. Construction costs
assigned to District D are $24 million, and such costs are to be
repaid from irrigation water service revenues. As of October 12,
1982, the accumulated payments credited to construction costs are
$15.5 million. The unpaid balance for full cost is $8.5 million and
the applicable interest rate is determined to be 7.5 percent. Water
service rates for this project are designed to completely repay
applicable expenditures by the end of the authorized repayment
period, which occurs in 2030. Amortizing the unpaid balance over the
remaining authorized repayment period of 48 years results in an
annual full-cost charge of $657,945 or $7.31 per acre-foot. Normal
O&M charges would be collected annually in addition to this rate. It
should be noted that even though the contract renewal extends beyond
2030, the repayment period is limited to the authorized repayment
period ending in 2030, with full-cost charges calculated
accordingly.
Example (19). Farmer K, a qualified recipient, owns 960 acres
receiving irrigation water in Alpha Irrigation District. Farmer K
also leases 100 acres receiving irrigation water in Alpha Irrigation
District from another party. Alpha Irrigation District's repayment
contract specifies an annual assessment of $5 per irrigable acre.
Alpha Irrigation District's annual full-cost rate is
[[Page 16931]] calculated to be $15 per irrigable acre. Therefore,
Farmer K's total water charge for that year is (960 acres times $5)
plus (100 acres times $15), for a total of $6,300.
Example (20). Farmer L and his wife own 320 acres receiving
irrigation water in Beta Irrigation District and lease another 320
acres receiving irrigation water in the same district. Farmer L, his
wife, and Beta Irrigation District all remain subject to prior law.
Beta Irrigation District's water service contract specifies a rate
of $10 per acre-foot, and its full-cost rate is calculated to be $25
per acre-foot. Farmer L has a turnout and measuring device to the
320 acres he has selected to pay full cost, and a separate turnout
and measuring device to the 320 acres receiving water at the
contract rate. At the end of the water year, district records show
that Farmer L received 1,000 acre-feet of water on his full-cost
land, and 1,050 acre-feet of water on his nonfull-cost land. These
measurements are judged to be accurate and reliable; therefore,
Farmer L's water charges for that year are (1,000 acre-feet times
$25) plus (1,050 acre-feet times $10) for a total of $35,500. If
accurate records showing the amounts of water delivered to Farmer
L's full-cost and nonfull-cost land had not been maintained, it
would have been necessary to assume that equal amounts of water per
acre had been delivered to both types of land. Without accurate
water delivery records, Farmer L's water charges for that year would
have been (1,025 acre-feet times $25) plus (1,025 acre-feet times
$10) or $35,875.
Example (21). Farmer M, a qualified recipient, leases 1,000
acres in Gamma Irrigation District where the contract rate is $5 per
acre-foot, and the full-cost rate is $15 per acre-foot. Farmer M
applies irrigation water to 960 acres and irrigates the remaining 40
acres from a private well. In 1 particular year, Farmer M applied
water to the land six times during the irrigation season; but in the
final two applications, his well failed, so he chose to apply
irrigation water to his entire landholding. Because there were no
separate measuring devices for the 40 full-cost acres, it was
necessarily assumed that equal amounts of water per acre were
applied to the full-cost and nonfull-cost land during the final two
applications of water. Gamma Irrigation District's record showed
that 600 acre-feet were delivered to Farmer M during each of the
first four applications, and 625 acre-feet during each of the last
two applications. Farmer M's water charges for that year were
calculated as follows: The first four applications did not include
any full-cost water; therefore, the appropriate charge was (4 times
600 acre-feet x $5) or $12,000. The final two applications were 96
percent contract rate and 4 percent full cost. Thus, the appropriate
charges were (2 times 625 acre-feet times .96 times $5) plus (2
times 625 times .04 times $15), or $6,750. Farmer M's total charge
for the year was $12,000 for the first four applications plus $6,750
for the last two applications, for a total of $18,750.

Section 426.7 of the existing regulations, Leasing and full-cost
pricing, would be renumbered Sec. 426.6. The proposed new Sec. 426.7,
Trusts, would be a new section devoted to describing the requirements
and entitlements of trusts. This new section would not alter existing
Reclamation policy regarding trusts, but would include some existing
policies that are not referenced in the current regulation.
Paragraph (a) would define the three categories of trusts. The
effects of inclusion or absence of required elements of each category
of trust would be described in paragraph (b)
Paragraph (b)(1) would establish that land held by an irrevocable
trust would be attributed to the trust's beneficiaries, provided that
the trust agreement is in writing, has been approved by Reclamation,
and the beneficiaries and that their interests are identified.
Otherwise, the land would be attributed to the trustee.
Paragraph (b)(2) would describe attribution of trusted land in the
case of a revocable trust that provides for reversion of the trusted
land to the grantor upon revocation. Land held by trusts in this
situation would be attributed to the grantor(s) of the trust,
conditioned on the facts immediately prior to the transfer of the land
to the trust, if specified criteria are met.
Paragraph (b)(3) would describe attribution of trusted land for all
types of revocable trusts other than those covered under paragraph
(b)(2). Land held by trusts in this category would be attributed to
either the beneficiaries or to the trustee, depending on whether
specified criteria are met. If the revocable trust, however, does not
specify its grantors, the conditions under which it may be revoked, or
to whom the land would revert upon revocation, the trusted land would
be ineligible to receive irrigation water until these issues were
resolved.
Application of this section is illustrated by the following
examples:

Example (1). Bank X is the trustee for five irrevocable trusts,
each of which has more than one beneficiary. The irrevocable trusts
contain 1,280, 960, 640, 800, and 400 acres, respectively, and all
meet the criteria set forth in Sec. 426.7(b)(1). All trust
beneficiaries are qualified recipients, and none has any
landholdings outside of the trusts. Since all the trusts' land is
attributable to the trust beneficiaries, and Reclamation determines
all the beneficiaries are within their ownership and nonfull-cost
entitlements, all 4,080 acres in the five irrevocable trusts are
eligible to receive irrigation water.
Example (2). Farmer A, a qualified recipient, provides in his
will for the establishment of a trust and the conveyance of 640
acres of his land receiving irrigation water into that trust for his
daughter upon his death. The trust meets the criteria set forth in
Sec. 426.7(b)(1). The land is located in a district which has
amended its contract to conform to the discretionary provisions. The
brother, who is designated as trustee for the trust, owns 800 acres
in the same district which receives an irrigation water supply.
Farmer A dies, and the testamentary trust he has established is
activated. The trust's land is attributable to the daughter as the
sole trust beneficiary. Therefore, the trust's land is eligible to
receive irrigation water at the nonfull-cost rate, assuming the
daughter has not exceeded her acreage limitation entitlements as a
result of this action.
Example (3). Farmer B, a qualified recipient, owns 960 acres
eligible to receive irrigation water in a district subject to the
discretionary provisions. He decides to place 160 acres of his land
in an irrevocable trust with his daughter as the life tenant. The
trust agreement satisfies the criteria of Sec. 426.7(b)(1). The 160
acres of trust land shall be attributed to the daughter's
entitlement if she is independent. If she is dependent, the 160
acres of trust land shall be attributed to Farmer B as her parent or
to the person who is acting as her guardian.
Example (4). ABC Corporation, a prior law recipient, establishes
a grantor revocable trust and places 160 acres of land receiving
irrigation water in the trust for the benefit of J. Jones. The trust
agreement satisfies all criteria of Sec. 426.7(b)(2). Under the
terms of the revocable trust, the trust will terminate and title to
the 160 acres will revert back to ABC Corporation in 10 years. All
160 acres of the land in trust are attributed to the corporation and
to the corporation's stockholders in proportion to their percent of
stock held in the corporation.
Example (5). Assume the same facts as in Example 4 above, except
that Corporation X, a legal entity fully independent of ABC
Corporation, contributes the 160 acres to the trust created by ABC
Corporation. In this example, the 160 acres are attributed to the
beneficiary of the trust, J. Jones, since the criteria for
attribution to the grantor (Corporation X) have not been met,
namely, the 160 acres will revert in 10 years to the trustor (ABC
Corporation), not the grantor, and the grantor does not have the
power to revoke the trust. As such the trust is in fact an otherwise
revocable trust.
Example (6). Farmer C, a qualified recipient, places 960 acres
of land receiving irrigation water in a trust for his son. The trust
agreement satisfies all criteria of Sec. 426.7(b)(2) and (3). It
provides that the trust shall expire in 20 years, and ownership of
the trust land shall be vested in Corporation Y, of which Farmer C
is a part owner with 5 percent interest. Because title to 5 percent
of the trust land will revert indirectly to Farmer C upon
termination of the trust, 48 acres (960 times 5 percent) of the
trust land are attributed to Farmer C. The remaining 912 acres of
trust land is attributable to the beneficiaries of the trust. If
Farmer C's interest in Corporation Y changes during the term of the
trust, the amount of trust land attributed to Farmer C will change
accordingly.

Section 426.8 of the existing regulations, Operation and
Maintenance (O&M) charges, would be renumbered Sec. 426.22. The
proposed new Sec. 426.8, Religious or charitable organizations, would
replace Sec. 426.15 of the existing [[Page 16932]] regulations. This
section would describe the entitlements of these types of
organizations.
Paragraph (a) would define religious or charitable organizations
for the purpose of this section. The titles of paragraphs (b) and (c)
would be modified to reflect their application to both the ownership
and nonfull-cost entitlements of religious and charitable
organizations. This change would eliminate the need for paragraph (d)
in the existing regulation.
A more significant modification would change the consequences of
failure by a subdivision of a religious or charitable organization to
satisfy the three criteria established by the RRA. Under the current
rules, failure by such a subdivision to meet these criteria results in
the entire organization being reduced to the entitlements of a single
limited recipient. Under the proposed rules, only the subdivision in
question would be affected by its failure to meet the criteria; the
central organization and other subdivisions would be unaffected.
The new language would also establish that the qualified or limited
recipient status of a subdivision which fails to meet the three
criteria would be determined by counting the subdivision's membership.
Thus, most subdivisions which fail to meet the criteria would be
treated as limited recipients.
Paragraph (d) on leasing would be deleted as unnecessary. The
provisions establishing that religious or charitable organizations are
treated either as qualified or limited recipients would eliminate any
need for a separate statement regarding leasing. The proposed paragraph
(d) on affiliated farm management would replace the existing paragraph.
Section 426.9 in the existing regulations, Class 1 equivalency,
would be renumbered Sec. 426.10. The proposed new Sec. 426.9, Public
entities, would replace Sec. 426.17 of the existing regulations. This
section would describe the application of acreage limitation laws to
public entities and would be rewritten for clarity and organization.
Paragraph (a) would define the term public entities for purposes of
this section. Paragraph (b) would be rewritten to show that public
entities are exempt from certain acreage limitation provisions rather
than the land. The rephrasing would more accurately state Reclamation
policy, as the land can become subject to ownership limitations through
the holding of a lessee. Also, the wording of paragraph (d) would be
changed to state that land leased from a public entity would count
toward the lessee's ownership entitlement, rather than being worded as
a prohibition of leasing in excess of ownership entitlements.
Section 426.10 in the existing regulations, Information
requirements, would be replaced by Secs. 426.17, Landholder information
requirements, 426.18, District responsibilities, and 426.24 Reclamation
audits. The proposed new Sec. 426.10, Class 1 equivalency, would
replace Sec. 426.9 of the existing regulations.
Substantial editorial and organizational changes would be made
throughout this section. The only substantive change would be in
Sec. 426.10(g). Provisions to this paragraph would prohibit application
of class 1 equivalency in cases where irrigation of the land would
result in hazardous or toxic return flows. This rule would affect
existing equivalency determinations only if the land is reclassified
for some reason.
The wording of paragraph (b) would be changed to make clear that
only districts, and not individual landholders, can make requests to
Reclamation for class 1 equivalency determinations. Individual
landholders must work through their districts to obtain class 1
equivalency.
The following examples illustrate the application of Sec. 426.10:

Example (1). Farmer X has a total landholding of 1,300 acres in
District A. That acreage includes 800 acres of class 1 land, 300
acres of class 2 land, and 200 acres of class 3 land. The
equivalency factors for the district have been determined to be:
Class 1 equals 1.0, class 2 equals 1.20, and class 3 equals 1.50.
Using these equivalency factors, the following landholding in terms
of class 1 equivalency would apply:
Class 1: 800 acres divided by 1.0 equals 800 acres
class 1 equivalent
Class 2: 300 acres divided by 1.2 equals 250 acres
class 1 equivalent
Class 3: 200 acres divided by 1.5 equals 133 acres
class 1 equivalent
Thus, Farmer X's total landholding of 1,300 acres is equal to
1,183 acres of class 1 land in terms of productive capacity. It will
be necessary for him to declare the equivalent of 223 acres of class
1 land (1,183 acres minus 960 acres), as excess and ineligible to
receive irrigation water while in his landholding. This can be
accomplished in any combination of class 1, 2, and 3 land that
achieves the necessary result. If Farmer X desires to maximize his
actual nonexcess acreage, he would declare 223 acres of class 1 land
as excess and designate 577 acres of class 1, 300 acres (250 acres
class 1 equivalent) of class 2, and 200 acres (133 acres class 1
equivalent) of class 3 as nonexcess and eligible to receive
irrigation water. This would result in a total of 1,077 actual acres
which would equal 960 acres of class 1 land in productive capacity.
Or, he could maximize his holding of class 1 and 2 lands by
designating as nonexcess 800 acres of class 1 land and 192 acres
(192 divided by 1.2 equals 160 acres class 1 equivalent) of class 2
land. This total landholding of 992 acres would, again, be equal in
productive capacity to 960 acres of class 1 land. In the latter
case, all 200 acres of Farmer X's class 3 land and 108 acres of his
class 2 land would be considered excess and ineligible to receive
irrigation water in his landholding.
Example (2). A district with an existing contract decides not to
amend its contract to conform to the discretionary provisions.
However, an individual landholder within the district makes an
irrevocable election to conform to these provisions. The landholder
requests equivalency through the district, and the district requests
Reclamation to make the equivalency determination for the entire
district. Under such conditions, the district would be required to
pay the United States for the cost of making the equivalency
determination. The payment of the costs between the landholder and
the district would be a district matter. The application of
equivalency would be available only to the landholder(s) who
exercise an irrevocable election.
Example (3). A district decides to amend its contract to conform
to the discretionary provisions, but it elects not to request
equivalency. Thus, individual landholders within the district are
not entitled to equivalency until after the district makes the
equivalency request and Reclamation has acted upon that request.
Example (4). Landholder X is a qualified recipient who owns no
land, but leases 1,100 acres in a district which has requested
equivalency. The land leased is a mix of class 1, 2, and 3 land.
During the time the equivalency determination was being made,
Landholder X would be required to pay the full-cost water rate on
140 acres (1,100 acres leased minus her 960-acre nonfull-cost
entitlement) if she continued to receive irrigation water on that
land. Once the equivalency determinations had been completed,
Landholder X would be entitled to lease the equivalent of 960 acres
of class 1 land at the nonfull-cost rate (something greater than 960
acres). Landholder X would also be reimbursed for certain full-cost
payments made for land which became nonfull-cost as a result of the
equivalency determination.
Example (5). Corporation Y is a limited recipient that owns 600
acres of irrigation land and leases another 160 acres in District A.
District A has requested and received an equivalency determination.
However, Corporation Y was not receiving irrigation water on or
before October 1, 1981. Thus, even with equivalency, Corporation Y
would be required to pay the full-cost water rate for all land
served in its landholding. (If Corporation Y had been receiving
irrigation water on or before October 1, 1981, it would have been
entitled to receive irrigation water on the equivalent of 320 acres
of class 1 land at the nonfull-cost rate. Deliveries on the
remaining 440 acres or less, depending on application of class 1
equivalency, would be at the full-cost rate.)
Example (6). Farmer Jones is a qualified recipient and owns 320
acres in each of three districts. One of those districts, District
A, [[Page 16933]] requests and receives an equivalency
determination. From the equivalency determination, Farmer Jones is
shown to own the equivalent of 240 acres of class 1 land in District
A. Farmer Jones is therefore entitled to purchase and receive
irrigation water on an additional 80 acres of irrigation land (or
the class 1 equivalent thereof in District A) in any district. He
could also lease 80 acres (class 1 equivalent thereof in District A)
in any district and receive irrigation water on that land at the
nonfull-cost rate.
Example (7). Landholder Y owns 1,200 acres in District A and 160
acres in District B. Landholder Y is a qualified recipient and has
designated 800 acres in District A as nonexcess and 400 acres in
District A as excess. She has placed the 400 acres of excess land
under recordable contract so that it can be irrigated while still in
her ownership. Subsequent to this nonexcess land designation,
District A requests and receives an equivalency determination.
Landholder Y is then free to withdraw excess land from recordable
contract and redesignate it as nonexcess to take advantage of
District A's equivalency determination, as provided in
Sec. 426.11(b) and (j)(5), if an appraisal of the excess land has
not already been performed. The maturity date as determined in the
original recordable contract, however, would not change.

Section 426.11 would be generally rewritten for conciseness.
The In general section has been deleted because the first sentence
contained a definition of excess land redundant with that found in
Sec. 426.2.
Paragraphs (d) (2) and (3) of the existing regulation would be
merged in paragraph (d)(2) of the proposed regulation.
In the proposed paragraph (j)(4)(i), paragraph (e) of the existing
regulation, the new language would make clear that land subject to a
recordable contract can receive irrigation water at a less-than-full
O&M rate only if both the owner and the lessee are subject to prior
law. The sentence from the current rules allowing recordable contract
land to be selected as full-cost land was deleted because that issue is
addressed in Sec. 426.6.
Paragraphs 426.11(g) and (i) of the current rules would be deleted.
These paragraphs apply to only a very small number of landholders who
have pre-1982 recordable contracts. Reclamation proposes to not retain
paragraphs in the CFR that (1) currently apply to only a few
landholders, and (2) are likely to become completely obsolete in the
next few years. These few landholders' recordable contracts will
continue to be administered as provided in the existing rule.
Paragraph 426.11(i) of the proposed regulation, which corresponds
to paragraph 426.11(h) of the existing regulation, would add a new
paragraph to the deed covenant language. The proposed language would
provide that the covenant terms, which permit removal of the covenant
and eliminate the requirement for sale price approval, would not apply
if the acquiring party is the party who originally held the land as
excess. It should be noted that the provisions of the deed covenant
would apply only when title to the land is transferred. Thus, the deed
covenant would apply only to direct landowners, and would not apply to
the sale or purchase of an indirect interest in a legal entity that is
the direct landholder.
In paragraph 426.11(e) of the proposed regulation, which
corresponds to paragraph 426.11(k) of the current regulation, a new
provision has been proposed. This language would permit direct
landowners to place under recordable contract certain land indirectly
held by nonresident aliens or legal entities not established under
State or Federal law. If such land is not placed under a recordable
contract it would become ineligible as a result of implementation of
the proposed regulation.
The proposed regulation would add a new paragraph (g) which would
promote the intent of statutes concerning the disposal of excess land
by prohibiting excess land sellers from receiving irrigation water if
they lease back or reacquire the land either voluntarily or
involuntarily. Such lease back or reacquisition situations, however,
would be grandfathered if the agreement or transaction transferring the
land back to the excess land seller takes place prior to July 1, 1995.
The proposed regulation would also add a new paragraph (h) which
would provide for assessment of the compensation rate (see Sec. 426.2),
which has been Reclamation policy, and an administrative fee (see
Sec. 426.19) if ineligible excess land is irrigated in violation of
Federal reclamation law and regulations.
Application of the section is illustrated by the following
examples:

Example (1). Landowner A owns 1,200 acres of irrigable land in
District S. He purchased this land before the district entered its
first repayment contract with the United States after October 12,
1982. Landowner A, as a qualified recipient, designates 960 of his
1,200 acres as nonexcess. With Reclamation approval, Landowner A may
designate the 240 acres, which are now excess, as nonexcess and
eligible to receive irrigation water, provided he redesignates 240
acres of presently nonexcess land as excess.
Example (2). Landowner B is a U.S. citizen and a qualified
recipient by virtue of District T's contract amendment to conform to
the discretionary provisions. Landowner B purchased 1,400 acres of
irrigable land in this district before the district entered a
repayment contract to receive an irrigation water supply. After the
district's contract amendment, Landowner B designates 960 acres of
his land as nonexcess. Subsequent to this designation, the district
requests and receives an equivalency determination. All 1,400 acres
of Landowner B's land is class 3 land, and in District T, 1 acre of
class 1 land is equal to 1.4 acres of class 3 land. With
equivalency, Landowner B may irrigate 1,344 acres of class 3 land in
District T. Thus, he may redesignate everything in his ownership as
nonexcess except for 56 acres. In the future, if Landowner B sells
some of this 1,344 acres of nonexcess land, he may not designate any
of the 56 excess acres as nonexcess.
Example (3). Farmer C, who owns irrigable land in excess of his
ownership entitlement, sells 960 acres of his excess land to Farmer
D, a qualified recipient, at a Reclamation-approved price. Farmer D
owns no other irrigable land and designates the 960 acres as
nonexcess and eligible to receive irrigation water in his ownership.
After the 10-year period of the deed covenant expires, Farmer D
sells the 960 acres at fair market value and purchases another 960
acres of irrigable land located in yet another district. Farmer D
purchases the latter parcel at a Reclamation-approved price because
the land was excess in the seller's holding. However, since Farmer D
has already reached his 960-acre limit for recapturing the fair
market value of land purchased at a Reclamation-approved price, the
newly purchased land is not eligible to receive irrigation water
while in his holding. In order to regain eligibility, the land must
be sold to an eligible buyer at a Reclamation-approved price. After
Farmer D sells that land at a Reclamation-approved price, he may
purchase and receive irrigation water on another 960 acres, provided
it is bought from nonexcess status.
Example (4). Landowner E is a resident alien and owns 480 acres
of irrigable land in District X, which is subject to prior law.
Landowner E has designated 160 acres as nonexcess, and it is
receiving irrigation water. Following this designation, District X
amends its contract to conform to the discretionary provisions. As a
result of the district amendment, Landowner E satisfies the
requirements for a qualified recipient and may designate all 480
acres owned as nonexcess.
Example (5). Landowner F and his wife own 1,200 acres of
irrigable land in District Y which is subject to prior law. They
owned this land even before District Y entered into a repayment
contract with the United States. Landowner F and his wife have
designated 320 acres as nonexcess and eligible to receive irrigation
water. The remaining 880 acres are excess and ineligible to receive
irrigation water. This excess land cannot be placed under recordable
contract because the 10-year grace period for executing recordable
contracts, as provided in the district's contract, has expired.
Landowner F makes an irrevocable election to conform to the
discretionary provisions. By that election, Landowner F becomes a
qualified recipient, and is therefore entitled to redesignate 640
[[Page 16934]] additional acres as nonexcess. Landowner F's
remaining 240 acres can become eligible if he sells it to an
eligible buyer at an approved price or redesignates it, with the
approval of Reclamation, as nonexcess.
Example (6). Landowner G is a resident alien and owns 160 acres
of irrigation land in District A. District A is subject to prior
law. Landowner G purchases an additional 160 acres which had been
designated nonexcess while in the landholding of the seller. Since
Landowner G has purchased himself into excess status, the newly
purchased land becomes ineligible to receive irrigation water in his
holding. However, 3 weeks later, Landowner G makes an irrevocable
election. Since he meets the requirements of a qualified recipient
and since he has become subject to the discretionary provisions,
Landowner G may designate the newly purchased 160 acres as
nonexcess. As a qualified recipient, he may also purchase and
receive irrigation water on another 640 acres of eligible land.
Example (7). In 1986, Landowner H bought 160 acres of irrigable
land from excess status in District Z. Landowner H, however, failed
to get sale price approval from Reclamation. This land is ineligible
for service in his holding unless the sale is reformed at a
Reclamation-approved price. If the price is not reformed, the 160
acres must be sold to an eligible buyer at a Reclamation-approved
price in order to become eligible to receive irrigation water.
Example (8). In 1980, Landowner I, a U.S. citizen, buys 1,920
acres of land in District U. In addition to its own water supply,
District U wishes to receive supplemental irrigation water.
Therefore, it enters into a water service contract with the United
States on May 14, 1984. Thereby, all direct landholders in the
district automatically become subject to the discretionary
provisions. As a qualified recipient, Landowner I may receive
irrigation water on any 960 acres which he designates as nonexcess.
The remaining 960 acres are excess and ineligible for service until
Landowner I places the land under recordable contract, sells it to
an eligible buyer at a price approved by Reclamation, or receives
Reclamation approval to redesignate the land as nonexcess. If
Landowner I had purchased the 1,920 acres from nonexcess status in
1985, rather than before the date of the district's contract, he
still would have been able to designate 960 acres as nonexcess and
eligible to receive irrigation water. However, the remaining 960
acres of excess land would not have been eligible until sold to an
eligible buyer at a Reclamation-approved price, the sale is
cancelled, or he receives Reclamation approval to redesignate the
land as nonexcess. The excess acres could not have been placed under
recordable contract unless irrigation water had not been physically
available when the land was purchased.
Example (9). Landowner J is a qualified recipient and owns 1,400
acres of irrigable land in District Z. The landowner places 440
acres under recordable contract so that he may receive irrigation
water at the nonfull-cost rate on all owned land in the district.
Subsequently, Landowner J leases the 440 acres under recordable
contract to Landowner K who is a limited recipient that did not
receive irrigation water prior to October 1, 1981. Therefore, the
full-cost rate must be paid for irrigation water delivered to the
440 leased acres. Leasing the land to Landholder K does not affect
other terms of the recordable contract.
Example (10). Farmer L owns 160 acres of irrigable land in
District V and 1,000 acres in District W. Districts V and W are both
subject to prior law, and both have fixed-rate water service
contracts which no longer cover actual operation and maintenance
costs. Farmer L has designated the 160 acres in District V as
nonexcess and has placed the 1,000 acres in District W under
recordable contract. This means that Farmer L is able to receive
irrigation water at the contract rate on all her owned land.
Subsequently, District V amends its contract to become subject to
the discretionary provisions. As provided in Sec. 426.11(b)(1),
Farmer L withdraws 800 acres from under recordable contract and
redesignates that land as part of her 960-acre entitlement as a
qualified recipient. Since Farmer L is now a qualified recipient,
she must pay the full operation and maintenance costs applicable in
each district for all land in her landholding, including the 200
acres remaining under recordable contract.
Example (11). Landowner M and his wife are U.S. citizens and own
320 acres of irrigation land purchased on or prior to December 6,
1979, and designated as nonexcess in each of Districts A, B, C, and
D. In June of 1980, Landowner M purchased an additional 280 acres in
District E. District A amends its contract to conform to the
discretionary provisions. Landowner M and his wife automatically and
without benefit of choice become a qualified recipient and as such
are entitled to irrigate no more than 960 acres westwide with
irrigation water. Their present ownership exceeds their 960-acre
ownership entitlement by 600 acres. Since the 280 acres in District
E were purchased after December 6, 1979, that land was ineligible to
receive irrigation water even under prior law. Therefore, no part of
that parcel can be placed under recordable contract and the land
remains ineligible until sold to an eligible buyer at an approved
price, the sale is cancelled, or the land is redesignated with
Reclamation approval. The remaining 320 excess acres, however, have
been eligible under prior law. Therefore, that land can continue to
receive irrigation water if Landowner M either sells it to an
eligible buyer or places the land under a 5-year recordable
contract. In either case, Landowner M can sell the land at fair
market value.
Example (12). ABC Corporation, which was established under the
laws of Switzerland, is owned by two stockholders who are citizens
and residents of Switzerland. The corporation owns 480 acres of
irrigation land in District X and has designated 160 acres as
nonexcess and eligible to receive irrigation water, and the
remaining 320 acres as excess and ineligible. District X
subsequently amends its contract to conform to the discretionary
provisions. Thereby, ABC Corporation becomes ineligible to receive
irrigation water as a qualified recipient because it is not
established under State or Federal law. However, since 160 acres of
its land were eligible to receive irrigation water under prior law,
this land will continue to be eligible if it is placed under a
recordable contract or sold to an eligible buyer. The 160 acres,
whether or not under recordable contract, may be sold at fair market
value; however, the 320 acres which were excess under prior law
remain ineligible until sold to an eligible buyer at an approved
price.
Example (13). Corporation N, a foreign corporation owned by two
stockholders who are citizens and residents of Norway, purchased 480
acres of irrigation land in District A. Subsequent to the purchase,
District A entered into its first contract with the United States,
thereby becoming subject to the discretionary provisions.
Corporation N, however, is not eligible to receive irrigation water
as a qualified recipient because it is not established under State
or Federal law. Since Corporation N's land had never been subject to
prior law, it does not fall under the purview of Sec. 426.11(e)(2).
However, since the land was purchased before the date of the
district's contract, the corporation can receive irrigation water by
placing the land under a recordable contract requiring Reclamation
sale price approval, as provided in Sec. 426.11(e)(3)(i).
Example (14). Landholder O, a nonresident alien, is the sole
stockholder in Corporation P, a qualified recipient legal entity
registered in Idaho. In 1990, Corporation P purchased 960 acres of
nonexempt land in District B. This land was all designated nonexcess
under the then-current regulations. However, on the effective date
of these regulations, Landholder O's ownership entitlement decreases
to 160 acres, even for indirectly held land. The remaining 800 acres
that become excess can continue to receive irrigation water if
Corporation P places the land under recordable contract, and the
land can be sold at fair market value and remain eligible if sold to
an eligible buyer.
Example (15). Landholder P sold 500 acres of excess land to
Landholder Q, and financed the purchase, in 1996. In 1998,
Landholder Q defaults and Landholder P forecloses and repossesses
the land. Upon transfer of the land's title back to Landholder P,
the land becomes ineligible to receive irrigation water because that
transaction took place after the effective date of these
regulations. Furthermore, Landholder P may not make any part of the
land nonexcess in his holding. Thus, Landholder P must sell the land
to an eligible landholder at a Reclamation-approved price if it is
to be eligible to receive irrigation water.
Example (16). Landholder R sold 500 acres of excess land to
Landholder S in 1993. In 1994, Corporation T, of which Landholder R
is the sole stockholder, leases the land from Landholder S. The land
remains eligible until the expiration or termination date of the
lease. If Corporation T renews the lease after the effective date of
these regulations, the land becomes ineligible while the renewed
lease is in effect, because of Landholder R's interest in
Corporation T and the renewed agreement took effect after the
effective date of these regulations.

[[Page 16935]] Section 426.12. Editorial changes would be made to
the existing regulation.
Section 426.13 in the existing regulation, Exemptions, would be
renumbered Sec. 426.15. The proposed new Sec. 426.13, Involuntary
acquisition of land, would replace Sec. 426.16 of the existing
regulations.
Paragraph (a) would define involuntarily acquired land. A change
would be made to paragraph (e) of this section to reflect the changes
discussed in Sec. 426.11 regarding the reacquisition of formerly excess
land by the party that originally held the land as excess.
Section 426.14 in the existing regulations, Residency, would be
deleted because residency has not been a provision of acreage
limitation law since it was repealed by the RRA in 1982. The proposed
new Sec. 426.14, Commingling, would replace Sec. 426.18 of the existing
regulations. Editorial changes would be made to the existing
regulation.
The following examples illustrate the application of this section:

Example (1). District A has a distribution system constructed
without funds made available pursuant to Federal reclamation law and
irrigates land therein with nonproject surface supplies and ground
water distributed to users within the district through its
distribution system. The district enters into a contract with the
United States for a supplemental irrigation water supply and intends
to distribute that supplemental water through its distribution
system. Only the landholders within the district who are eligible to
receive a supply of irrigation water as specified in
Sec. 426.14(c)(1) are subject to reclamation law. The district is
not restricted in its use of the nonproject surface water or ground
water, and will be in compliance with the provisions of its contract
so long as there is sufficient eligible land to receive the
Reclamation irrigation water supply.
Example (2). District A has a contract with Reclamation for a
supply of irrigation water. Within the boundary of the district
there are several parcels of ineligible excess lands which are not
supplied with irrigation water. Those lands are irrigated from the
ground-water resources under them. If irrigation water furnished to
the district pursuant to the contract reaches the underground strata
of these ineligible lands as an unavoidable result of the furnishing
of the irrigation water by the district to eligible lands, the
continued irrigation of the ineligible excess lands with that ground
water shall not be deemed to be in violation of reclamation law.

Note: Example 2 also is applicable to the issue of unavoidable
ground-water recharge and can also serve as an example in Sec. 426.15.

Example (3). A district has nonproject water available to
deliver to lands considered not eligible (ineligible) for irrigation
water under provisions of Federal reclamation law and these
regulations. To eliminate the need to build a duplicate private
conveyance system to transport nonproject water, the district would
like to transport such water through facilities constructed with
funds made available pursuant to Federal reclamation law without the
nonproject water being subject to Federal reclamation law and these
regulations. If the district agrees, with prior Reclamation
approval, the nonproject water may be commingled in federally
financed facilities and delivered to ineligible lands if the
district pays the incremental fee, as determined by Reclamation, for
the use of the federally financed facilities required to deliver the
nonproject water. The fee will be in addition to the capital,
operation, maintenance, and replacement costs the district is
obligated to pay and will be based on a methodology designed to
reasonably reflect an appropriate share of the cost to the Federal
Government, including interest, of providing the service.
Example (4). The State of Euphoria has a water supply it wishes
to transport in the same direction and elevation as planned in the
Federal reclamation project. If Reclamation and the State each
finance their share of the costs to construct and operate the
project, the water supply of the State will not be subject to
Federal reclamation law and these regulations.
Example (5). District A has water rights to divert water from a
river. These water rights are adequate to meet its requirements. It
is located immediately adjacent to a federally subsidized facility,
District B. District B is located immediately adjacent to the river
but several miles from the Federal facility. District B contracts
with the United States for a supply of irrigation water, but rather
than construct several miles of conveyance facility, District B,
with the approval of the United States, contracts with District A to
allow District A's water rights water to flow down the river for use
by District B, and the irrigation water is in turn delivered to
District A. District A is not subject to Federal reclamation law and
these regulations by virtue of this exchange, provided it does not
materially benefit from that exchange. District B, however, is
subject to Federal reclamation law and these regulations since it is
the beneficiary of the exchange, i.e. a water supply.

Section 426.15 in the existing regulation, Religious and charitable
organizations, would be renumbered Sec. 426.8. The proposed new
Sec. 426.15, Exemptions and exclusions, would replace Sec. 426.13 of
the existing regulation.
This section would be rewritten for editorial changes and
clarification. Paragraph (f) would be added to make clear that the RRA
is not applicable to Indian trust or restricted lands.
It should be noted that a given contract action could be considered
an additional or supplemental benefit pursuant to Sec. 426.3 of this
proposed regulation even though it neither invokes nor extends the
application of acreage limitation laws in general. For example,
Rehabilitation and Betterment Act contracts are considered additional
and supplemental benefits under Sec. 426.3 even though they would
neither extend nor reinstate the application of acreage limitations, as
provided in Sec. 426.15.
Section 426.16 in the existing regulation, Involuntary acquisition
of land, would be renumbered Sec. 426.13. The proposed new Sec. 426.16,
Small reclamation projects, would replace Sec. 426.21 of the existing
regulation.
The only substantive changes that would be made to this section are
in paragraph (a). A phrase would be added to reflect the fact that
Small Reclamation Projects Act loans would be considered additional and
supplemental benefits as provided in Sec. 426.3 of the new regulation.
In addition, language has been added to reflect Title III of Pub. L.
99-546 and its effect of reducing the acreage limitation entitlements
from 960 to 320 acres for districts that enter into a new SRPA contract
or amend their SRPA contract after October 27, 1986.
Section 426.17 in the existing regulation, Land held by
governmental agencies, would be renumbered Sec. 426.9. The proposed new
Sec. 426.17, Landholder information requirements, would replace, in
part, Sec. 426.10 of the existing regulation.
This section would be rewritten to address only the certification
and reporting requirements of landholders. A new definition paragraph
and section regarding district responsibilities (Sec. 426.18) would be
added. This section would clarify district certification and reporting
requirements. In addition, a new section concerning Reclamation audits
(Sec. 426.24) would be added.
References to the contents of the certification and reporting forms
would be deleted because a comprehensive list of these contents would
be too unwieldy for these regulations, and a partial list would be
inappropriate.
A paragraph on eligibility would be added stating that landholders
that have not filed the required forms are not eligible to receive
irrigation water. The phrase must not accept delivery of would be added
to make clear that the landholder, as well as the district, is
responsible for water deliveries in the absence of the required forms.
Wholly-owned subsidiaries would be specifically exempted from forms
requirements, provided the ultimate parent legal entity has met its
forms requirement.
The 40-acre certification and reporting exemption threshold would
be replaced with a new system which would permit higher exemption
thresholds for landholders in districts that meet the following
requirements: [[Page 16936]] district conformance by contract with the
discretionary provisions; the district's financial obligations are not
delinquent; and the district has entered into a formal resources
management partnership with Reclamation. Districts that meet the
requirements would be granted Category 1 status. Category 1 districts
would be allowed exemption thresholds as high as 240 acres for
qualified recipients and 80 acres for some limited recipients. The
specific threshold for a district would be determined and documented in
the partnership agreement with the district, based on factors such as
the resources management objectives of the partnership and the
achievements of the district(s) under the partnership. Landholders in
districts which have not formed formal partnerships with Reclamation or
do not meet the other two criteria, would remain in Category 2 status.
Such districts would be subject to an 80-acre exemption threshold for
qualified recipients and a 5-acre threshold for all limited recipients.
For both categories, the exemption threshold for prior law recipients
remains set at 40 acres.
The following examples illustrate the application of this section:

Example (1). Landholder A failed to submit the required
certification forms to District X in 1994 and 1995. District X
delivered, and Landholder A accepted delivery of, irrigation water
in those years. Landholder A submitted certification forms for 1996;
however, Landholder A's landholding is not eligible to receive
irrigation water until he submits the necessary forms for 1994 and
1995.
Example (2). Corporation A, which is registered in Venezuela,
owns 100 percent of the stock of Corporation B, which is registered
in Iowa. Corporation B, in turn, owns 100 percent of the stock in
Corporations C and D, each of which are registered in Arizona and
own and irrigate nonexempt land in two different Arizona irrigation
districts. The landholdings exceed applicable certification and
reporting exemption thresholds. Corporation A, as a prior law parent
legal entity, must submit reporting forms to both Arizona districts.
The forms must describe the corporate structure and Corporation A's
entire landholding, including those of its subsidiaries.
Furthermore, any stockholders of Corporation A that exceed
applicable reporting thresholds must submit the necessary forms in
order for the landholding to be eligible. Corporations B, C, and D
are not required to file.
Example (3). In September 1996, the management of District A
enters into a formal partnership agreement with Reclamation to
improve resources management in the district. The district and
Reclamation agree to develop an integrated resources management plan
and develop and implement an incentive pricing mechanism for the
district. As part of the close working relationship with the
district and the information generated by the partnership, and the
fact that the other two requirements specified in Sec. 426.17(h)
have been met, the Regional Director determines that a 240-acre
reporting threshold would be appropriate for qualified recipients in
the district and an 80-acre threshold would be appropriate for
limited recipients who first received irrigation water on or before
October 1, 1981. The partnership agreement establishes these
thresholds as part of Category 1 status for the district.
Example (4). Landholder A is a qualified recipient who leases
120 acres in District X and 40 acres in District Y. For 1997,
District X achieves Category 1 status, but District Y does not.
Landholder A is therefore subject to Category 2 thresholds and must
certify in both districts in 1997 because his total landholding
exceeds the 80-acre qualified recipient threshold of Category 2.
Example (5). Bank Y is a limited recipient and has 12,000 acres
of involuntarily acquired excess landholdings, some of which are
located in Category 2 districts. Bank Y has also designated 500
acres as nonexcess. Stockholder A, a qualified recipient, owns a 15
percent interest in Bank Y. Thus, Stockholder A is attributed with
1,800 acres of involuntarily acquired excess land and 75 acres of
nonexcess land. The fact that most of its landholdings are
involuntarily acquired does not afford Bank Y with any exemption
with respect to certification thresholds; therefore, Bank Y is
subject to Category 2 thresholds and must file certification forms.
Stockholder A need not consider the bank's involuntarily acquired
excess land in determining whether she is required to certify, but
she must consider the 75 acres of attributed nonexcess land. Because
she has not exceeded the 80-acre threshold applicable to qualified
recipients in Category 2 districts, she is not required to file.
However, had Stockholder A exceeded a certification or reporti

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A95-7524. Public record. Not legal advice.