Opinion
No. 7,881.
Submitted November 21, 1938.
Decided December 6, 1938.
Injunction — Mutual Irrigation Companies — Taxation of Irrigation Facilities — Delinquent Taxes — Issuance of Tax Deed Properly Enjoined — Water Rights — Ditches — Canals — Not Taxable When Appurtenant to Land — Corporations. Waters and Water Rights — Mutual Irrigation Companies — Relation Between Stockholders and Company Contractual in Nature. 1. The relation between a mutual (non-profit) irrigation company and its stockholders, each of whom is entitled to receive his pro rata share of the water stored by the company through its irrigation facilities, is contractual in its nature, his right in that behalf becoming appurtenant to the lands on which the water was used. Same — Aggregate Value of All Rights of Stockholders is Value of Property of Mutual Irrigation Company for Purposes of Taxation. 2. Where the property of a mutual irrigation company has no other use than the storing and distribution of water to its stockholders in satisfaction of their contractual rights to their pro rata shares therein, the aggregate value of all such rights is the total value of the property of the company for purposes of taxation. Same — Ditches Appurtenant to Land Bear Proportionate Share of Taxation by Added Taxable Value of Land. 3. While ditches and the right to use the water conveyed by them are property subject to taxation, when made appurtenant to lands they have no independent value, their value then entering as an element into the value of the lands to which they are appurtenant and bearing their proportionate burden of taxation by the added taxable value which it gives to such lands. Taxation — Value of Property Basis of Taxation — Value Results from Use of Property. 4. The rule of property taxation is that its value is the basis of taxation, and the value of property results from the use to which it is put, varying with the profitableness of its use, present and prospective, actual and anticipated. Water Rights — When Considered Independently of Land to Which Appurtenant, a Water Right is Personal Property. 5. While a water right partakes of the nature of real estate, it is not land in any sense, and when considered alone for the purpose of taxation, and independently of the land to which it is appurtenant, it is personal property. Taxation — Injunction — Tax Deeds — Mutual Irrigation Companies — Irrigation Facilities not Taxable Independently of Lands to Which Appurtenant. 6. Under the above rules, held, in a proceeding to enjoin a county from securing a tax deed to the reservoir site, dams, ditches, canals and other irrigation facilities of a mutual irrigation company sold for nonpayment of the usual property taxes levied thereon, that such property was not subject to such taxes independently of the lands on which the water was used, and that therefore the writ was properly granted. Corporations — When Circumstances Warrant It, Courts may Look Behind the Veil of Corporate Entities. 7. While, generally, courts will not look behind the veil of a corporate entity in determining rights and liabilities, they may, when the facts warrant it, do so.
Appeal from District Court, Teton County; R.M. Hattersley, Judge.
Mr. Stephen M. Swanberg, Special Deputy County Attorney of Defendant Teton County, for appellants, submitted a brief, and argued the cause orally.
Messrs. Church Jardine, Mr. J.W. Freeman and Mr. Ernest Abel, for Respondent, submitted a brief; Mr. Abel and Mr. J.P. Freeman argued the cause orally.
Messrs. Wood Cook, for Interveners, submitted a brief; Mr. Fred D. Moulton, of counsel, argued the cause orally.
This action was brought to secure a permanent injunction against the members of the board of county commissioners and the treasurer of Teton county to restrain them in their official capacities from securing a tax deed. The county was a party defendant. Judgment went against the defendants, and the county alone has appealed from the judgment.
In 1906 the Teton Cooperative Reservoir Company was organized as a corporation under the laws of Montana as a mutual company for the sole purpose of storing water and delivering it to its stockholders for irrigation, and not for profit. Its capital stock was divided into 1,000 shares. Each share of the capital stock of this company entitled the holder to the use, during the irrigation season of each year, to a "1/1000th part of the waters, water rights and irrigation facilities and systems" of the company, including the right to lease, pledge, sell and dispose of such use.
A reservoir site was set apart by the Department of the Interior, and some 500 acres of land in addition was acquired by this corporation, on which a dam was constructed. Water was impounded in the reservoir and distributed to the stockholders. Following the construction of the reservoir, the taxing authorities of Teton county assessed and levied the usual property taxes on the lands owned in fee, the reservoir, site, dams, ditches, canals and other like property belonging to this corporation. As a result of the delinquency of some or all of these taxes, these authorities threatened to take a tax deed covering this property of the corporation.
The stock of this corporation is owned as follows: 804 shares by the Bynum Irrigation District, a public corporation, which was created under our irrigation district law; 156 shares by the plaintiff Brady Irrigation Company, and some 40 shares by certain individuals. Each holder of a share of the Brady Irrigation Company represents and controls 1/500th part of all of the waters appropriated and diverted by the corporation and is entitled to control the use of such waters subject to the rules and regulations of the corporation. The interveners are the holders of bonds issued by the Bynum Irrigation District.
The owners of the stock in the Teton Cooperative Reservoir [1, 2] Company do not own the equitable title to the property of that corporation, but their relation to it is one of contract. ( Hyink v. Low Line Irr. Co., 62 Mont. 401, 205 P. 236; Dyk v. Buell Land Co., 70 Mont. 557, 227 P. 71.) These contracts give to the stockholder the right to receive, through the irrigation facilities of the Teton Company, his pro rata share of the water stored. The shareholder in the plaintiff company likewise has a contractual right to his pro rata share of the water received by that company. These rights, when used on certain lands, become appurtenant to such lands. (Sec. 6671, Rev. Codes.) The aggregate value of all of these rights is the total value of the property owned by the Teton Company, and its property has no other use than the storing and distribution of water in performance of these contractual rights.
This court said in the case of Hale v. County of Jefferson, [3] 39 Mont. 137, 101 P. 973, 975: "Viewed as independent property rights, ditches and the right to use the water conveyed by them are property subject to taxation; but, when made appurtenant to lands, they have no independent use. So situated and used, the value of this species of property enters as an element into the value of the corpus or principal estate to which it is attached or appurtenant, and bears its proportionate burden of taxation by the added taxable value which it gives to the principal estate. * * * `The rule of property taxation is that [4] the value of the property is the basis of taxation. It does not mean a tax upon the earnings which the property makes, nor for the privilege of using the property; but rests solely upon the value. But the value of property results from the use to which it is put and varies with the profitableness of that use, present and prospective, actual and anticipated. There is no pecuniary value outside of that which results from such use.' ( Cleveland etc. Ry. Co. v. Backus, 154 U.S. 439, 14 Sup. Ct. 1122, 38 L.Ed. 1041.) To illustrate: A ditch and water right, attached to agricultural lands, add a large element of value to them, by contributing to their productiveness, which, in turn, determines their actual value. They are taxed when the lands are taxed upon their value thus increased."
In the case of Verwolf v. Low Line Irr. Co., 70 Mont. 570, [5, 6] 227 P. 68, 71, this court said: "A water right — a right to the use of water — while it partakes of the nature of real estate ( Middle Creek Ditch Co. v. Henry, 15 Mont. 558, 39 P. 1054), is not land in any sense, and, when considered alone and for the purpose of taxation, is personal property. ( Helena Water Works Co. v. Settles, 37 Mont. 237, 95 P. 838.) When considered otherwise, it is not subject to taxation independently of the land to which it is appurtenant."
We concede the rules announced in the cases of Barnes v. Smith, 48 Mont. 309, 137 P. 541, State ex rel. Bankers' Trust Co. v. Walker, 70 Mont. 484, 226 P. 894, and Sun River Stock Land Co. v. Montana Trust Sav. Bank, 81 Mont. 222, 262 P. 1039, to be correct. In those cases there were considered corporations organized for profit. In such corporations the stockholder acquires the right to share in the profits, if any, in the form of dividends. Here the stockholders gain a right to secure water from the corporation to irrigate their lands.
While the general rule is that courts will not ordinarily look [7] behind the veil of the corporate entity, it at times becomes material "to consider what is this thing which is described as a `corporation.'" ( Palmolive Co. v. King, 1933 Canada L.R. 131.) The Supreme Court of the United States has not hesitated, when the facts warranted it, in looking behind the veil of the corporate entity in tax cases, as is illustrated by the cases of Southern P. Co. v. Lowe, 247 U.S. 330, 38 Sup. Ct. 540, 62 L.Ed. 1142, and Gulf Oil Corp. v. Lewellyn, 248 U.S. 71, 39 Sup. Ct. 35, 63 L.Ed. 133.
The judgment is affirmed.
MR. CHIEF JUSTICE GODDARD and ASSOCIATE JUSTICES STEWART, MORRIS and ANGSTMAN concur.