II

106TH CONGRESS

1ST SESSION S. 1042

To amend the Internal Revenue Code of 1986 to encourage domestic oil

and gas production, and for other purposes.

IN THE SENATE OF THE UNITED STATES

MAY 13, 1999

Mrs. HUTCHISON (for herself, Mr. BREAUX, Mr. DOMENICI, Mr. BINGAMAN,

Mr. LOTT, Ms. LANDRIEU, Mr. COCHRAN, Mr. THOMAS, Mr.

BROWNBACK, and Mr. GRAMM) introduced the following bill; which was

read twice and referred to the Committee on Finance

A BILL

To amend the Internal Revenue Code of 1986 to encourage

domestic oil and gas production, and for other purposes.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE;

4 TABLE OF CONTENTS.

5 (a) SHORT TITLE.—This Act may be cited as the

6 ‘‘Domestic Energy Production Security and Stabilization

7 Act.’’

8 (b) AMENDMENT OF 1986 CODE.—Except as other9 wise expressly provided, whenever in this Act an amend-
2

•S 1042 IS

1 ment or repeal is expressed in terms of an amendment

2 to, or repeal of, a section or other provision, the reference

3 shall be considered to be made to a section or other provi4 sion of the Internal Revenue Code of 1986.

5 (c) TABLE OF CONTENTS.—The table of contents of

6 this Act is as follows:

Sec. 1. Short title; amendment of 1986 Code; table of contents.

Sec. 2. Tax credit for marginal domestic oil and natural gas well production.

Sec. 3. Phase-out of certain minimum tax preferences relating to energy production.

Sec. 4. Depreciation adjustment not to apply to oil and gas assets.

Sec. 5. Repeal certain adjustments based on adjusted current earnings relating

to oil and gas assets.

Sec. 6. Enhanced oil recovery credit and credit for producing fuel from a nonconventional source allowed against minimum tax.

Sec. 7. 10-year carryback for percentage depletion for oil and gas property.

Sec. 8. Net income limitation on percentage depletion repealed for oil and gas

properties.

Sec. 9. Election to expense geological and geophysical expenditures and delay

rental payments.

Sec. 10. Waiver of limitations.

7 SEC. 2. TAX CREDIT FOR MARGINAL DOMESTIC OIL AND

8 NATURAL GAS WELL PRODUCTION.

9 (a) PURPOSE.—The purpose of this section is to pre10 vent the abandonment of marginal oil and gas wells re11 sponsible for half of the domestic production of oil and

12 gas in the United States.

13 (b) CREDIT FOR PRODUCING OIL AND GAS FROM

14 MARGINAL WELLS.—Subpart D of part IV of subchapter

15 A of chapter 1 (relating to business credits) is amended

16 by adding at the end the following new section:
3

•S 1042 IS

1 ‘‘SEC. 45D. CREDIT FOR PRODUCING OIL AND GAS FROM

2 MARGINAL WELLS.

3 ‘‘(a) GENERAL RULE.—For purposes of section 38,

4 the marginal well production credit for any taxable year

5 is an amount equal to the product of—

6 ‘‘(1) the credit amount, and

7 ‘‘(2) the qualified crude oil production and the

8 qualified natural gas production which is attrib9 utable to the taxpayer.

10 ‘‘(b) CREDIT AMOUNT.—For purposes of this

11 section—

12 ‘‘(1) IN GENERAL.—The credit amount is—

13 ‘‘(A) $3 per barrel of qualified crude oil

14 production, and

15 ‘‘(B) 50 cents per 1,000 cubic feet of

16 qualified natural gas production.

17 ‘‘(2) REDUCTION AS OIL AND GAS PRICES IN18 CREASE.—

19 ‘‘(A) IN GENERAL.—The $3 and 50 cents

20 amounts under paragraph (1) shall each be re21 duced (but not below zero) by an amount which

22 bears the same ratio to such amount (deter23 mined without regard to this paragraph) as—

24 ‘‘(i) the excess (if any) of the applica25 ble reference price over $14 ($1.56 for

26 qualified natural gas production), bears to
4

•S 1042 IS

1 ‘‘(ii) $3 ($0.33 for qualified natural

2 gas production).

3 The applicable reference price for a taxable

4 year is the reference price for the calendar year

5 preceding the calendar year in which the tax6 able year begins.

7 ‘‘(B) INFLATION ADJUSTMENT.—In the

8 case of any taxable year beginning in a calendar

9 year after 2000, each of the dollar amounts

10 contained in subparagraph (A) shall be in11 creased to an amount equal to such dollar

12 amount multiplied by the inflation adjustment

13 factor for such calendar year (determined under

14 section 43(b)(3)(B) by substituting ‘1999’ for

15 ‘1990’).

16 ‘‘(C) REFERENCE PRICE.—For purposes of

17 this paragraph, the term ‘reference price’

18 means, with respect to any calendar year—

19 ‘‘(i) in the case of qualified crude oil

20 production, the reference price determined

21 under section 29(d)(2)(C), and

22 ‘‘(ii) in the case of qualified natural

23 gas production, the Secretary’s estimate of

24 the annual average wellhead price per
5

•S 1042 IS

1 1,000 cubic feet for all domestic natural

2 gas.

3 ‘‘(c) QUALIFIED CRUDE OIL AND NATURAL GAS

4 PRODUCTION.—For purposes of this section—

5 ‘‘(1) IN GENERAL.—The terms ‘qualified crude

6 oil production’ and ‘qualified natural gas production’

7 mean domestic crude oil or natural gas which is pro8 duced from a marginal well.

9 ‘‘(2) LIMITATION ON AMOUNT OF PRODUCTION

10 WHICH MAY QUALIFY.—

11 ‘‘(A) IN GENERAL.—Crude oil or natural

12 gas produced during any taxable year from any

13 well shall not be treated as qualified crude oil

14 production or qualified natural gas production

15 to the extent production from the well during

16 the taxable year exceeds 1,095 barrels or barrel

17 equivalents.

18 ‘‘(B) PROPORTIONATE REDUCTIONS.—

19 ‘‘(i) SHORT TAXABLE YEARS.—In the

20 case of a short taxable year, the limitations

21 under this paragraph shall be proportion22 ately reduced to reflect the ratio which the

23 number of days in such taxable year bears

24 to 365.
6

•S 1042 IS

1 ‘‘(ii) WELLS NOT IN PRODUCTION EN2 TIRE YEAR.—In the case of a well which is

3 not capable of production during each day

4 of a taxable year, the limitations under

5 this paragraph applicable to the well shall

6 be proportionately reduced to reflect the

7 ratio which the number of days of produc8 tion bears to the total number of days in

9 the taxable year.

10 ‘‘(3) DEFINITIONS.—

11 ‘‘(A) MARGINAL WELL.—The term ‘mar12 ginal well’ means a domestic well—

13 ‘‘(i) the production from which during

14 the taxable year is treated as marginal

15 production under section 613A(c)(6), or

16 ‘‘(ii) which, during the taxable year—

17 ‘‘(I) has average daily production

18 of not more than 25 barrel equiva19 lents, and

20 ‘‘(II) produces water at a rate

21 not less than 95 percent of total well

22 effluent.

23 ‘‘(B) CRUDE OIL, ETC.—The terms ‘crude

24 oil’, ‘natural gas’, ‘domestic’, and ‘barrel’ have
7

•S 1042 IS

1 the meanings given such terms by section

2 613A(e).

3 ‘‘(C) BARREL EQUIVALENT.—The term

4 ‘barrel equivalent’ means, with respect to nat5 ural gas, a conversion ratio of 6,000 cubic feet

6 of natural gas to 1 barrel of crude oil.

7 ‘‘(d) OTHER RULES.—

8 ‘‘(1) PRODUCTION ATTRIBUTABLE TO THE TAX9 PAYER.—In the case of a marginal well in which

10 there is more than one owner of operating interests

11 in the well and the crude oil or natural gas produc12 tion exceeds the limitation under subsection (c)(2),

13 qualifying crude oil production or qualifying natural

14 gas production attributable to the taxpayer shall be

15 determined on the basis of the ratio which tax16 payer’s revenue interest in the production bears to

17 the aggregate of the revenue interests of all oper18 ating interest owners in the production.

19 ‘‘(2) OPERATING INTEREST REQUIRED.—Any

20 credit under this section may be claimed only on

21 production which is attributable to the holder of an

22 operating interest.

23 ‘‘(3) PRODUCTION FROM NONCONVENTIONAL

24 SOURCES EXCLUDED.—In the case of production

25 from a marginal well which is eligible for the credit
8

•S 1042 IS

1 allowed under section 29 for the taxable year, no

2 credit shall be allowable under this section unless

3 the taxpayer elects not to claim the credit under sec4 tion 29 with respect to the well.’’

5 ‘‘(c) CREDIT TREATED AS BUSINESS CREDIT.—Sec6 tion 38(b) is amended by striking ‘‘plus’’ at the end of

7 paragraph (11), by striking the period at the end of para8 graph (12) and inserting ‘‘, plus’’, and by adding at the

9 end the following new paragraph:

10 ‘‘(13) the marginal oil and gas well production

11 credit determined under section 45D(a).’’

12 (d) CREDIT ALLOWED AGAINST REGULAR AND MIN13 IMUM TAX.—

14 (1) IN GENERAL.—Subsection (c) of section 38

15 (relating to limitation based on amount of tax) is

16 amended by redesignating paragraph (3) as para17 graph (4) and by inserting after paragraph (2) the

18 following new paragraph:

19 ‘‘(3) SPECIAL RULES FOR MARGINAL OIL AND

20 GAS WELL PRODUCTION CREDIT.—

21 ‘‘(A) IN GENERAL.—In the case of the

22 marginal oil and gas well production credit—

23 ‘‘(i) this section and section 39 shall

24 be applied separately with respect to the

25 credit, and
9

•S 1042 IS

1 ‘‘(ii) in applying paragraph (1) to the

2 credit—

3 ‘‘(I) subparagraphs (A) and (B)

4 thereof shall not apply, and

5 ‘‘(II) the limitation under para6 graph (1) (as modified by subclause

7 (I)) shall be reduced by the credit al8 lowed under subsection (a) for the

9 taxable year (other than the marginal

10 oil and gas well production credit).

11 ‘‘(B) MARGINAL OIL AND GAS WELL PRO12 DUCTION CREDIT.—For purposes of this sub13 section, the term ‘marginal oil and gas well pro14 duction credit’ means the credit allowable under

15 subsection (a) by reason of section 45D(a).’’

16 (2) CONFORMING AMENDMENT.—Subclause (II)

17 of section 38(c)(2)(A)(ii) is amended by inserting

18 ‘‘or the marginal oil and gas well production credit’’

19 after ‘‘employment credit’’.

20 (e) CARRYBACK.—Subsection (a) of section 39 (relat21 ing to carryback and carryforward of unused credits gen22 erally) is amended by adding at the end the following new

23 paragraph:
10

•S 1042 IS

1 ‘‘(3) 10-YEAR CARRYBACK FOR MARGINAL OIL

2 AND GAS WELL PRODUCTION CREDIT.—In the case

3 of the marginal oil and gas well production credit—

4 ‘‘(A) this section shall be applied sepa5 rately from the business credit (other than the

6 marginal oil and gas well production credit),

7 ‘‘(B) paragraph (1) shall be applied by

8 substituting ‘10 taxable years’ for ‘1 taxable

9 years’ in subparagraph (A) thereof, and

10 ‘‘(C) paragraph (2) shall be applied—

11 ‘‘(i) by substituting ‘31 taxable years’

12 for ‘21 taxable years’ in subparagraph (A)

13 thereof, and

14 ‘‘(ii) by substituting ‘30 taxable years’

15 for ‘20 taxable years’ in subparagraph (B)

16 thereof.’’

17 (f) COORDINATION WITH SECTION 29.—Section

18 29(a) is amended by striking ‘‘There’’ and inserting ‘‘At

19 the election of the taxpayer, there’’.

20 (g) CLERICAL AMENDMENT.—The table of sections

21 for subpart D of part IV of subchapter A of chapter 1

22 is amended by adding at the end the following item:

‘‘Sec. 45D. Credit for producing oil and gas from marginal wells.’’

23 (h) EFFECTIVE DATE.—The amendments made by

24 this section shall apply to production in taxable years be25 ginning after December 31, 1998.
11

•S 1042 IS

1 SEC. 3. PHASE-OUT OF CERTAIN MINIMUM TAX PREF2 ERENCES RELATING TO ENERGY PRODUC3 TION.

4 (a) ENERGY PREFERENCES FOR INTEGRATED OIL

5 COMPANIES.—Section 56 (relating to alternative min6 imum taxable income) is amended by adding at the end

7 the following new subsection:

8 ‘‘(h) ADJUSTMENT BASED ON ENERGY PREF9 ERENCE.—

10 ‘‘(1) IN GENERAL.—In computing the alter11 native minimum taxable income of any taxpayer for

12 any taxable year beginning after 1998, there shall be

13 allowed as a deduction an amount equal to the alter14 native tax energy preference deduction.

15 ‘‘(2) PHASE-OUT OF DEDUCTION AS OIL PRICES

16 INCREASES.—The amount of the deduction under

17 paragraph (1) (determined without regard to this

18 paragraph) shall be reduced (but not below zero) by

19 the amount which bears the same ratio to such

20 amount as—

21 ‘‘(A) the amount by which the reference

22 price for the calendar year preceding the cal23 endar year in which the taxable year begins ex24 ceeds $14, bears to

25 ‘‘(B) $3.
12

•S 1042 IS

1 For purposes of this paragraph, the reference price

2 for any calendar year shall be determined under sec3 tion 29(d)(2)(C), and, in the case of any taxable

4 year beginning in a calendar year after 2000, the

5 $14 amount under subparagraph (A) shall be ad6 justed at the same time and in the same manner as

7 under section 43(b)(3) by substituting ‘1999’ for

8 ‘1990’.

9 ‘‘(3) ALTERNATIVE TAX ENERGY PREFERENCE

10 DEDUCTION.—For purposes of paragraph (1), the

11 term ‘alternative tax energy preference deduction’

12 means an amount equal to the sum of—

13 ‘‘(A) the intangible drilling cost preference,

14 and

15 ‘‘(B) the depletion preference.

16 ‘‘(4) INTANGIBLE DRILLING COST PREF17 ERENCE.—For purposes of this subsection, the term

18 ‘intangible drilling cost preference’ means the

19 amount by which alternative minimum taxable in20 come would be reduced if it were computed without

21 regard to section 57(a)(2).

22 ‘‘(5) DEPLETION PREFERENCE.—For purposes

23 of this subsection, the term ‘depletion preference’

24 means the amount by which alternative minimum
13

•S 1042 IS

1 taxable income would be reduced if it were computed

2 without regard to section 57(a)(1).

3 ‘‘(6) ALTERNATIVE MINIMUM TAXABLE IN4 COME.—For purposes of paragraphs (1), (4), and

5 (5), alternative minimum taxable income shall be de6 termined without regard to the deduction allowable

7 under this subsection and the alternative tax net op8 erating loss deduction under subsection (a)(4).

9 ‘‘(7) REGULATIONS.—The Secretary may by

10 regulation provide for appropriate adjustments in

11 computing alternative minimum taxable income or

12 adjusted current earnings for any taxable year fol13 lowing a taxable year for which a deduction was al14 lowed under this subsection to ensure that no double

15 benefit is allowed by reason of such deduction.’’

16 (b) REPEAL OF LIMIT ON REDUCTION FOR INDE17 PENDENT PRODUCERS.—Subparagraphs (E) of section

18 57(a)(2) (relating to exception for independent producers)

19 is amended to read as follows:

20 ‘‘(E) EXCEPTION FOR INDEPENDENT PRO21 DUCERS.—In the case of any oil or gas well,

22 this paragraph shall not apply to any taxpayer

23 which is not an integrated oil company (as de24 fined in section 291(b)(4)).’’
14

•S 1042 IS

1 (c) EFFECTIVE DATE.—The amendments made by

2 this section shall apply to taxable years beginning after

3 December 31, 1998.

4 SEC. 4. DEPRECIATION ADJUSTMENT NOT TO APPLY TO

5 OIL AND GAS ASSETS.

6 (a) IN GENERAL.—Subparagraph (B) of section

7 56(a)(1) (relating to depreciation adjustments) is amend8 ed to read as follows:

9 ‘‘(B) EXCEPTIONS.—This paragraph shall

10 not apply to—

11 ‘‘(i) property described in paragraph

12 (1), (2), (3), or (4) of section 168(f), or

13 ‘‘(ii) property used in the active con14 duct of the trade or business of exploring

15 for, extracting, developing, or gathering

16 crude oil or natural gas.’’

17 (b) EFFECTIVE DATE.—The amendment made by

18 this section shall apply to property placed in service in

19 taxable years beginning after December 31, 1998.

20 SEC. 5. REPEAL CERTAIN ADJUSTMENTS BASED ON AD21 JUSTED CURRENT EARNINGS RELATING TO

22 OIL AND GAS ASSETS.

23 (a) INTANGIBLE DRILLING COSTS.—Clause (i) of

24 section 56(g)(4)(D) is amended by striking the second

25 sentence and inserting ‘‘In the case of any oil or gas well,
15

•S 1042 IS

1 this clause shall not apply in the case of amounts paid

2 or incurred in taxable years beginning after December 31,

3 1998.’’

4 (b) DEPLETION.—Clause (ii) of section 56(g)(4)(F)

5 is amended to read as follows:

6 ‘‘(ii) EXCEPTION FOR OIL AND GAS

7 WELLS.—In the case of any taxable year

8 beginning after December 31, 1998, clause

9 (i) (and subparagraph (C)(i)) shall not

10 apply to any deduction for depletion com11 puted in accordance with section 613A.’’

12 (c) EFFECTIVE DATE.—The amendments made by

13 this section shall apply to taxable years beginning after

14 December 31, 1998.

15 SEC. 6. ENHANCED OIL RECOVERY CREDIT AND CREDIT

16 FOR PRODUCING FUEL FROM A NONCONVEN17 TIONAL SOURCE ALLOWED AGAINST MIN18 IMUM TAX.

19 (a) ENHANCED OIL RECOVERY CREDIT ALLOWED

20 AGAINST REGULAR AND MINIMUM TAX.—

21 (1) ALLOWING CREDIT AGAINST MINIMUM

22 TAX.—Subsection (c) of section 38 (relating to limi23 tation based on amount of tax), as amended by sec24 tion 2(d), is amended by redesignating paragraph
16

•S 1042 IS

1 (4) as paragraph (5) and by inserting after para2 graph (3) the following new paragraph:

3 ‘‘(4) SPECIAL RULES FOR ENHANCED OIL RE4 COVERY CREDIT.—

5 ‘‘(A) IN GENERAL.—In the case of the en6 hanced oil recovery credit—

7 ‘‘(i) this section and section 39 shall

8 be applied separately with respect to the

9 credit, and

10 ‘‘(ii) in applying paragraph (1) to the

11 credit—

12 ‘‘(I) subparagraphs (A) and (B)

13 thereof shall not apply, and

14 ‘‘(II) the limitation under para15 graph (1) (as modified by subclause

16 (I)) shall be reduced by the credit al17 lowed under subsection (a) for the

18 taxable year (other than the enhanced

19 oil recovery credit).

20 ‘‘(B) ENHANCED OIL RECOVERY CRED21 IT.—For purposes of this subsection, the term

22 ‘enhanced oil recovery credit’ means the credit

23 allowable under subsection (a) by reason of sec24 tion 43(a).’’

25 (2) CONFORMING AMENDMENTS.—
17

•S 1042 IS

1 (A) Subclause (II) of section

2 38(c)(2)(A)(ii), as amended by section 2(d), is

3 amended by striking ‘‘or the marginal oil and

4 gas well production credit’’ and inserting ‘‘, the

5 marginal oil and gas well production credit, or

6 the enhanced oil recovery credit’’.

7 (B) Subclause (II) of section

8 38(c)(3)(A)(ii), as added by section 2(d), is

9 amended by inserting ‘‘or the enhanced oil re10 covery credit’’ after ‘‘recovery credit’’.

11 (b) CREDIT FOR PRODUCING FUEL FROM A NON12 CONVENTIONAL SOURCE.—

13 (1) ALLOWING CREDIT AGAINST MINIMUM

14 TAX.—Section 29(b)(6) is amended to read as fol15 lows:

16 ‘‘(6) APPLICATION WITH OTHER CRED17 ITS.—The credit allowed by subsection (a) for

18 any taxable year shall not exceed—

19 ‘‘(A) the regular tax for the taxable

20 year and the tax imposed by section 55, re21 duced by

22 ‘‘(B) the sum of the credits allowable

23 under subpart A and section 27.’’

24 (2) CONFORMING AMENDMENTS.—
18

•S 1042 IS

1 (A) Section 53(d)(1)(B)(iii) is amended by

2 inserting ‘‘as in effect on the date of the enact3 ment of the Domestic Energy Production Secu4 rity and Stabilization Act,’’ after

5 ‘‘29(b)(6)(B),’’.

6 (B) Section 55(c)(2) is amended by strik7 ing ‘‘29(b)(6),’’.

8 (c) EFFECTIVE DATE.—The amendments made by

9 this section shall apply to taxable years beginning after

10 December 31, 1998.

11 SEC. 7. 10-YEAR CARRYBACK FOR PERCENTAGE DEPLE12 TION FOR OIL AND GAS PROPERTY.

13 (a) IN GENERAL.—Subsection (d)(1) of section 613A

14 (relating to limitations on percentage depletion in case of

15 oil and gas wells) is amended to read as follows:

16 ‘‘(1) LIMITATION BASED ON TAXABLE IN17 COME.—

18 ‘‘(A) IN GENERAL.—The deduction for the

19 taxable year attributable to the application of

20 subsection (c) shall not exceed so much of the

21 taxpayer’s taxable income for the year as the

22 taxpayer elects computed without regard to—

23 ‘‘(i) any depletion on production from

24 an oil or gas property which is subject to

25 the provisions of subsection (c),
19

•S 1042 IS

1 ‘‘(ii) any net operating loss carryback

2 to the taxable year under section 172,

3 ‘‘(iii) any capital loss carryback to the

4 taxable year under section 1212, and

5 ‘‘(iv) in the case of a trust, any dis6 tributions to its beneficiary, except in the

7 case of any trust where any beneficiary of

8 such trust is a member of the family (as

9 defined in section 267(c)(4)) of a settlor

10 who created inter vivos and testamentary

11 trusts for members of the family and such

12 settlor died within the last six days of the

13 fifth month in 1970, and the law in the ju14 risdiction in which such trust was created

15 requires all or a portion of the gross or net

16 proceeds of any royalty or other interest in

17 oil, gas, or other mineral representing any

18 percentage depletion allowance to be allo19 cated to the principal of the trust.

20 ‘‘(B) CARRYBACKS AND CARRYFOR21 WARDS.—

22 ‘‘(i) IN GENERAL.—If an amount is

23 disallowed as a deduction for the taxable

24 year (in this subparagraph referred to as

25 the ‘unused depletion year’) by reason of
20

•S 1042 IS

1 application of subparagraph (A), the dis2 allowed amount shall be treated as an

3 amount allowable as a deduction under

4 subsection (c) for—

5 ‘‘(I) any of the 10 taxable years

6 preceding the unused depletion year,

7 and

8 ‘‘(II) the taxable year following

9 the unused depletion year,

10 subject to the application of subparagraph

11 (A) to such taxable year.

12 ‘‘(ii) ELECTION TO WAIVE

13 CARRYBACK.—Any taxpayer entitled to a

14 carryback period under this subparagraph

15 may elect to relinquish such carryback for

16 any of the taxable years to which it would

17 apply. Such election made in any taxable

18 year may be revised in the succeeding tax19 able year in such manner as the Secretary

20 may prescribe.

21 ‘‘(C) ALLOCATION OF DISALLOWED

22 AMOUNTS.—For purposes of basis adjustments

23 and determining whether cost depletion exceeds

24 percentage depletion with respect to the produc25 tion from a property, any amount disallowed as
21

•S 1042 IS

1 a deduction on the application of this para2 graph shall be allocated to the respective prop3 erties from which the oil or gas was produced

4 in proportion to the percentage depletion other5 wise allowable to such properties under sub6 section (c).’’

7 (b) EFFECTIVE DATE.—The amendment made by

8 this section shall apply to taxable years beginning after

9 December 31, 1998, and to any taxable year beginning

10 on or before such date to the extent necessary to apply

11 section 613A(d)(1) of the Internal Revenue Code of 1986

12 (as added by subsection (a)).

13 SEC. 8. NET INCOME LIMITATION ON PERCENTAGE DEPLE14 TION REPEALED FOR OIL AND GAS PROP15 ERTIES.

16 (a) IN GENERAL.—Section 613(a) (relating to per17 centage depletion) is amended by striking the second sen18 tence and inserting: ‘‘Except in the case of oil and gas

19 properties, such allowance shall not exceed 50 percent of

20 the taxpayer’s taxable income from the property (com21 puted without allowances for depletion).’’

22 (b) CONFORMING AMENDMENTS.—

23 (1) Section 613A(c)(7) (relating to special

24 rules) is amended by striking subparagraph (C) and
22

•S 1042 IS

1 redesignating subparagraph (D) as subparagraph

2 (C).

3 (2) Section 613A(c)(6) (relating to oil and nat4 ural gas produced from marginal properties) is

5 amended by striking subparagraph (H).

6 (c) EFFECTIVE DATE.—The amendments made by

7 this section shall apply to taxable years beginning after

8 December 31, 1998.

9 SEC. 9. ELECTION TO EXPENSE GEOLOGICAL AND GEO10 PHYSICAL EXPENDITURES AND DELAY RENT11 AL PAYMENTS.

12 (a) PURPOSE.—The purpose of this section is to rec13 ognize that geological and geophysical expenditures and

14 delay rentals are ordinary and necessary business expenses

15 that should be deducted in the year the expense is in16 curred.

17 (b) ELECTION TO EXPENSE GEOLOGICAL AND GEO18 PHYSICAL EXPENDITURES.—

19 (1) IN GENERAL.—Section 263 (relating to cap20 ital expenditures) is amended by adding at the end

21 the following new subsection:

22 ‘‘(j) GEOLOGICAL AND GEOPHYSICAL EXPENDI23 TURES FOR OIL AND GAS WELLS.—Notwithstanding sub24 section (a), a taxpayer may elect to treat geological and

25 geophysical expenses incurred in connection with the ex-
23

•S 1042 IS

1 ploration for, or development of, oil or gas as expenses

2 which are not chargeable to capital account. Any expenses

3 so treated shall be allowed as a deduction in the taxable

4 year in which paid or incurred.’’

5 (2) CONFORMING AMENDMENT.—Section

6 263A(c)(3) is amended by inserting ‘‘263(j),’’ after

7 ‘‘263(i),’’.

8 (3) EFFECTIVE DATE.—

9 (A) IN GENERAL.—The amendments made

10 by this subsection shall apply to expenses paid

11 or incurred after the date of the enactment of

12 this Act.

13 (B) TRANSITION RULE.—In the case of

14 any expenses described in section 263(j) of the

15 Internal Revenue Code of 1986, as added by

16 this subsection, which were paid or incurred on

17 or before the date of the enactment of this Act,

18 the taxpayer may elect, at such time and in

19 such manner as the Secretary of the Treasury

20 may prescribe, to amortize the suspended por21 tion of such expenses over the 36-month period

22 beginning with the month in which the date of

23 the enactment of this Act occurs. For purposes

24 of this subparagraph, the suspended portion of

25 any expense is that portion of such expense
24

•S 1042 IS

1 which, as of the first day of the 36-month pe2 riod, has not been included in the cost of a

3 property or otherwise deducted.

4 (c) ELECTION TO EXPENSE DELAY RENTAL PAY5 MENTS.—

6 (1) IN GENERAL.—Section 263 (relating to cap7 ital expenditures), as amended by subsection (b)(1),

8 is amended by adding at the end the following new

9 subsection:

10 ‘‘(k) DELAY RENTAL PAYMENTS FOR DOMESTIC OIL

11 AND GAS WELLS.—

12 ‘‘(1) IN GENERAL.—Notwithstanding subsection

13 (a), a taxpayer may elect to treat delay rental pay14 ments incurred in connection with the development

15 of oil or gas within the United States (as defined in

16 section 638) as payments which are not chargeable

17 to capital account. Any payments so treated shall be

18 allowed as a deduction in the taxable year in which

19 paid or incurred.

20 ‘‘(2) DELAY RENTAL PAYMENTS.—For purposes

21 of paragraph (1), the term ‘delay rental payment’

22 means an amount paid for the privilege of deferring

23 the drilling of an oil or gas well under an oil or gas

24 lease.’’
25

•S 1042 IS

1 (2) CONFORMING AMENDMENT.—Section

2 263A(c)(3), as amended by subsection (b)(2), is

3 amended by inserting ‘‘263(k),’’ after ‘‘263(j),’’.

4 (3) EFFECTIVE DATE.—

5 (A) IN GENERAL.—The amendments made

6 by this subsection shall apply to payments made

7 or incurred after the date of the enactment of

8 this Act.

9 (B) TRANSITION RULE.—In the case of

10 any payments described in section 263(k) of the

11 Internal Revenue Code of 1986, as added by

12 this subsection, which were made or incurred on

13 or before the date of the enactment of this Act,

14 the taxpayer may elect, at such time and in

15 such manner as the Secretary of the Treasury

16 may prescribe, to amortize the suspended por17 tion of such payments over the 36-month period

18 beginning with the month in which the date of

19 the enactment of this Act occurs. For purposes

20 of this subparagraph, the suspended portion of

21 any payment is that portion of such payment

22 which, as of the first day of the 36-month pe23 riod, has not been included in the cost of a

24 property or otherwise deducted.
26

•S 1042 IS

1 SEC. 10. WAIVER OF LIMITATIONS.

2 If refund or credit of any overpayment of tax result3 ing from the application of the amendments made by this

4 Act is prevented at any time before the close of the 1-

5 year period beginning on the date of the enactment of this

6 Act by the operation of any law or rule of law (including

7 res judicata), such refund or credit may nevertheless be

8 made or allowed if claim therefor is filed before the close

9 of such period.

Æ