DESCRIPTION AND TECHNICAL EXPLANATION 

OF THE CONFERENCE AGREEMENT 

OF H.R. 6, TITLE XIII, 

THE “ENERGY TAX INCENTIVES ACT OF 2005” 

Prepared by the Staff 

of the 

JOINT COMMITTEE ON TAXATION 

July 28, 2005 

JCX-60-05
ii 

CONTENTS

Page

INTRODUCTION .......................................................................................................................... 1 

A. Energy Infrastructure Tax Incentives .............................................................................. 2 

1. Natural gas gathering lines treated as seven-year property (sec. 1301 of the 

House bill, sec. 1326 of the conference agreement, and sec. 168 of the Code)......... 2 

2. Natural gas distribution lines treated as fifteen-year property (sec. 1302 of the 

House bill, sec. 1515 of the Senate amendment, sec. 1325 of the conference 

agreement, and sec. 168 of the Code)........................................................................ 3 

3. Transmission property treated as fifteen-year property (sec. 1303 of the House 

bill, sec. 1308 of the conference agreement, and sec. 168 of the Code).................... 4 

4. Amortization of atmospheric pollution control facilities (sec. 1304 of the House 

bill, sec. 1309 of the conference agreement, and sec. 169 of the Code).................... 5 

5. Modification of credit for producing fuel from a non-conventional source 

(sec. 1305 of the House bill, secs. 1321 and 1322 of the conference agreement, 

and sec. 29 and new sec. 45K of the Code) ............................................................... 6 

6. Modification to special rules for nuclear decommissioning costs (sec. 1306 of the 

House bill, sec. 1310 of the conference agreement, and sec. 468A of the Code)...... 8 

7. Arbitrage rules not to apply to prepayments for natural gas (sec. 1307 of the 

House bill, sec. 1327 of the conference agreement, and sec. 148 of the Code)....... 11 

8. Determination of small refiner exception to oil depletion deduction 

(sec. 1308 of the House bill, sec. 1328 of the conference agreement, and 

sec. 613A of the Code)............................................................................................. 15 

9. Extension and modification of renewable electricity production credit 

(secs. 1501 - 1503 of the Senate amendment, secs. 1301 and 1302 of the 

conference agreement, and sec. 45 of the Code) ..................................................... 16 

10. Clean renewable energy bonds (sec. 1504 of the Senate amendment, 

sec. 1303 of the conference agreement, and new sec. 54 of the Code) ................... 24 

11. Treatment of income of certain electric cooperatives (sec. 1505 of the Senate 

amendment, sec. 1304 of the conference agreement, and sec. 501(c)(12) of the 

Code)........................................................................................................................ 28

12. Dispositions of transmission property to implement FERC restructuring policy 

(sec. 1506 of the Senate amendment, sec. 1305 of the conference agreement, 

and sec. 451 of the Code)......................................................................................... 33 

13. Credit for production from advanced nuclear power facilities (sec. 1507 of the 

Senate amendment, sec. 1306 of the conference agreement, and new sec. 45J 

of the Code).............................................................................................................. 34 

14. Credit for investment in clean coal facilities (sec. 1508 of the Senate amendment, 

sec. 1307 of the conference agreement, and new secs. 48A and 48B of the 

Code)........................................................................................................................ 36

15. Clean energy coal bonds (sec. 1509 of the Senate amendment).............................. 38 

16. Credit for investment in clean coke/cogeneration manufacturing facilities 

(sec. 1511 of the Senate amendment) ...................................................................... 41
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17. Temporary expensing for equipment used in the refining of liquid fuels 

(sec. 1512 of the Senate amendment, sec. 1323 of the conference agreement, 

and new sec. 179C of the Code) .............................................................................. 41 

18. Allow pass through to owners of deduction for capital costs incurred by small 

refiner cooperative in complying with Environmental Protection Agency sulfur 

regulations (sec. 1513 of the Senate amendment, sec. 1324 of the conference 

agreement, and sec. 179B of the Code) ................................................................... 44 

19. Modification of enhanced oil recovery credit (sec. 1514 of the Senate 

amendment).............................................................................................................. 46 

B. Miscellaneous Energy Tax Incentives ........................................................................... 48 

1. Credit for residential energy efficient property (sec. 1311 of the House bill, 

sec. 1527 of the Senate amendment, sec. 1335 of the conference agreement, 

and new sec. 25D of the Code) ................................................................................ 48 

2. Credit for business installation of qualified fuel cells and stationary microturbine 

power plants (sec. 1528 of the Senate amendment, sec. 1336 of the conference 

agreement, and sec. 48 of the Code)........................................................................ 50 

3. Business solar investment tax credit (sec. 1529 of the Senate amendment, 

sec. 1337 of the conference agreement, and sec. 48 of the Code) ........................... 52 

4. Diesel-water fuel emulsion (sec. 1313 of the House bill, sec. 1343 of the 

conference agreement, and sec. 4081 of the Code) ................................................. 53 

5. Amortization of delay rental payments (sec. 1314 of the House bill) ..................... 54 

6. Amortization of geological and geophysical expenditures (sec. 1315 of the 

House bill, sec. 1329 of the conference agreement, and sec. 167 of the Code)....... 55 

7. Alternative technology vehicle credits (sec. 1316 of the House bill, sec. 1553 

of the Senate amendment, secs. 1341 and 1348 of the conference agreement, 

sec. 179A of the Code, and new sec. 30B of the Code)........................................... 57 

8. Modification and extension of credit for electric vehicles (sec. 1532 of the 

Senate amendment).................................................................................................. 68 

9. Credit for installation of alternative fuel refueling property (sec. 1533 of the 

Senate amendment, sec. 1342 of the conference agreement, and new sec. 30C 

of the Code).............................................................................................................. 69 

10. Volumetric excise tax credit for alternative fuels (sec. 1534 of the Senate 

amendment).............................................................................................................. 71 

11. Extend excise tax provisions and income tax credit for biodiesel and create 

similar incentives for renewable diesel (sec. 1535 of the Senate amendment, 

secs. 1344 and 1346 of the conference agreement, and secs. 40A, 6426 and 6427 

of the Code).............................................................................................................. 73 

12. Credit for certain nonbusiness energy property (sec. 1317 of the House bill, 

sec. 1524 of the Senate amendment, sec. 1333 of the conference agreement, 

and new sec. 25C of the Code) ................................................................................ 75 

13. Energy efficient commercial buildings deduction (sec. 1521 of the Senate 

amendment sec. 1331 of the conference agreement, and new sec. 179D of the 

Code)........................................................................................................................ 78

14. Deduction for business energy property (sec. 1523 of the Senate amendment)...... 81
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iv 

15. Energy efficient new homes (sec. 1522 of the Senate amendment, sec. 1332 

of the conference agreement, and new sec. 45L of the Code) ................................. 83 

16. Energy credit for combined heat and power system property (sec. 1525 of the 

Senate amendment).................................................................................................. 84 

17. Energy efficient appliances (sec. 1526 of the Senate amendment, sec. 1334 

of the conference agreement, and new sec. 45M of the Code)................................ 85 

C. Alternative Minimum Tax Relief Provisions................................................................. 88 

1. Allow nonbusiness energy credits against the alternative minimum tax 

(sec. 1321 of the House bill).................................................................................... 88 

2. Allow certain business energy credits against the alternative minimum tax 

(sec. 1322 of the House bill and sec. 1548(c) of the Senate amendment) ............... 88 

D. Additional Energy Tax Incentives ................................................................................. 90 

1. Ten-year recovery period for underground natural gas storage facilities and 

cushion gas (sec. 1541 of the Senate amendment) .................................................. 90 

2. Modify research credit for research relating to energy (sec. 1542 of the Senate 

amendment, sec. 1351 of the conference agreement, and sec. 41 of the Code) ...... 90 

3. Small agri-biodiesel producer credit (sec. 1543 of the Senate amendment, 

sec. 1345 of the conference agreement, and sec. 40A of the Code) ........................ 93 

4. Modifications to small ethanol producer credit (sec. 1544 of the Senate 

amendment, sec. 1347 of the conference agreement, and sec. 40 of the Code) ...... 95 

5. Credit for equipment for processing or sorting materials gathered through 

recycling (sec. 1545 of the Senate amendment and sec. 1353 of the conference 

agreement)................................................................................................................ 95 

6. Five-year carryback of net operating losses for certain electric utility companies 

(sec. 1546 of the Senate amendment, sec. 1311 of the conference agreement, 

and sec. 172 of the Code)......................................................................................... 96 

7. Qualifying pollution control equipment credit (sec. 1547 of the Senate 

amendment).............................................................................................................. 99 

8. Credit for production of coal owned by Indian tribes (sec. 1548 of the Senate 

amendment)............................................................................................................ 100 

9. Replacement stoves meeting environmental standards in non-attainment areas 

(sec. 1549 of the Senate amendment) .................................................................... 101 

10. Exemption for bulk beds from excise tax on retail sale of heavy trucks and 

trailers (sec. 1550 of the Senate amendment) ........................................................ 102 

11. National Academy of Sciences study (sec. 1551 of the Senate amendment and 

sec. 1352 of the conference agreement)................................................................. 103 

12. Income tax exclusion for certain fuel costs of rural carpoolers (sec. 1552 of the 

Senate amendment)................................................................................................ 104 

13. Three-year applicable recovery period for depreciation of qualified energy 

management devices (sec. 1553 of the Senate amendment).................................. 105 

14. Exception from volume cap for certain cooling facilities (sec. 1554 of the 

Senate amendment)................................................................................................ 106 
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E. Revenue Raising Provisions ........................................................................................ 108 

1. Treatment of kerosene for use in aviation (sec. 1561 of the Senate 

amendment)............................................................................................................ 108 

2. Repeal of ultimate vendor refund claims with respect to farming 

(sec. 1562 of the Senate amendment) .................................................................... 111 

3. Refunds of excise taxes on exempt sales of taxable fuel by credit card 

(sec. 1563 of the Senate amendment) .................................................................... 112 

4. Recertification of exempt status (sec. 1564 of the Senate amendment) ................ 115 

5. Reregistration in event of change in ownership (sec. 1565 of the Senate 

amendment)............................................................................................................ 117 

6. Registration of operators of deep-draft vessels (sec. 1566 of the Senate 

amendment)............................................................................................................ 118 

7. Reconciliation of on-loaded cargo to entered cargo (sec. 1567 of the Senate 

amendment)............................................................................................................ 120 

8. Gasoline blend stocks and kerosene (sec. 1568 of the Senate amendment) .......... 121 

9. Nonapplication of export exemption to delivery of fuel to motor vehicles 

removed from United States (sec. 1569 of the Senate amendment)...................... 126 

10. Impose assessable penalty on dealers of adulterated fuel (sec. 1570 of the 

Senate amendment)................................................................................................ 128 

11. Oil Spill Liability Trust Fund (sec. 1571 of the Senate amendment, 

sec. 1361 of the conference agreement, and sec. 4611 of the Code) ..................... 129 

12. Leaking Underground Storage Tank Trust Fund (sec. 1562 of the Senate 

amendment, sec. 1362 of the conference agreement, secs. 4041, 4081(d), 4082, 

9508, and new sec. 6430 of the Code)................................................................... 130 

13. Clarification of tire excise tax (sec. 1573 of the Senate amendment, 

sec. 1364 of the conference agreement, and sec. 4072(e) of the Code)................. 131 

14. Modify recapture of section 197 amortization (sec. 1363 of the conference 

agreement and sec. 1245 of the Code)................................................................... 132 

F. Tax Complexity Analysis ............................................................................................ 134 
1

INTRODUCTION 

This document,1

 prepared by the staff of the Joint Committee on Taxation at the request 

of House Ways and Means Committee Chairman, Bill Thomas, and Senate Finance Committee 

Chairman, Chuck Grassley, provides a description and technical explanation of the conference 

agreement to H.R. 6, Title XIII, the “Energy Tax Incentives Act of 2005.” This document 

reproduces the description and technical explanation of the conference agreement included in the 

Congressional Record of July 27, 2005, by Chairman Grassley. 

 1

 This document may be cited as follows: Joint Committee on Taxation, Description and 

Technical Explanation of the Conference Agreement of H.R. 6, Title XIII, the “Energy Tax Incentives Act 

of 2005” (JCX-60-05), July 28, 2005. 
2

A. Energy Infrastructure Tax Incentives 

1. Natural gas gathering lines treated as seven-year property (sec. 1301 of the House bill, 

sec. 1326 of the conference agreement, and sec. 168 of the Code) 

Present Law

The applicable recovery period for assets placed in service under the Modified 

Accelerated Cost Recovery System is based on the “class life of the property.” The class lives of 

assets placed in service after 1986 are generally set forth in Revenue Procedure 87-56.2

 Revenue 

Procedure 87-56 includes two asset classes either of which could describe natural gas gathering 

lines owned by nonproducers of natural gas. Asset class 46.0, describing pipeline transportation, 

provides a class life of 22 years and a recovery period of 15 years. Asset class 13.2, describing 

assets used in the exploration for and production of petroleum and natural gas deposits, provides 

a class life of 14 years and a depreciation recovery period of seven years. The uncertainty 

regarding the appropriate recovery period of natural gas gathering lines has resulted in litigation 

between taxpayers and the IRS. In each of three recent cases, appellate courts have held that 

natural gas gathering lines owned by nonproducers fall within the scope of Asset class 13.2 (i.e.,

seven-year recovery period).3

 The appellate court in each case reversed a lower court holding 

that natural gas gathering lines owned by nonproducers fall within the scope of Asset class 46.0 

(i.e., 15-year recovery period). The IRS has not yet indicated whether it acquiesces in the result 

in these three appellate decisions in cases arising in other circuits. 

House Bill

The House bill establishes a statutory seven-year recovery period and a class life of 14 

years for natural gas gathering lines. In addition, no adjustment will be made to the allowable 

amount of depreciation with respect to this property for purposes of computing a taxpayer’s 

alternative minimum taxable income. A natural gas gathering line is defined to include any pipe, 

equipment, and appurtenance that is (1) determined to be a gathering line by the Federal Energy 

Regulatory Commission, or (2) used to deliver natural gas from the wellhead or a common point 

to the point at which such gas first reaches (a) a gas processing plant, (b) an interconnection with 

an interstate transmission line, (c) an interconnection with an intrastate transmission line, or (d) a 

direct interconnection with a local distribution company, a gas storage facility, or an industrial 

consumer. 

Effective date.−The House bill provision is effective for property placed in service after 

April 11, 2005. No inference is intended as to the proper treatment of natural gas gathering lines 

placed in service on or before April 11, 2005. 

 2

 1987-2 C.B. 674 (as clarified and modified by Rev. Proc. 88-22, 1988-1 C.B. 785). 

3

 Clajon Gas Co, L.P. v. Commissioner, 354 F.3d 786 (8th Cir. 2004), rev’g 119 T.C. 197 (2002); 

Saginaw Bay Pipeline Co. v. United States, 338 F.3d 600 (6th Cir. 2003), rev’g 88 A.F.T.R.2d 2001-6019 

(E.D. Mich. 2001); Duke Energy v. Commissioner, 172 F.3d 1255 (10th Cir. 1999), rev’g 109 T.C. 416 

(1997). 
3

Senate Amendment

No provision. 

Conference Agreement

The conference agreement follows the House bill, except that the provision requires that 

the original use of the property begin with the taxpayer. The provision does not apply to 

property with respect to which the taxpayer (or a related party) had a binding acquisition contract 

on or before April 11, 2005. 

2. Natural gas distribution lines treated as fifteen-year property (sec. 1302 of the House 

bill, sec. 1515 of the Senate amendment, sec. 1325 of the conference agreement, and sec. 168 

of the Code) 

Present Law

The applicable recovery period for assets placed in service under the Modified 

Accelerated Cost Recovery System is based on the “class life of the property.” The class lives of 

assets placed in service after 1986 are generally set forth in Revenue Procedure 87-56.4 Natural 

gas distribution pipelines are assigned a 20-year recovery period and a class life of 35 years. 

House Bill

The House bill establishes a statutory 15-year recovery period and a class life of 35 years 

for natural gas distribution lines. 

Effective date.−The House bill provision is effective for property placed in service after 

April 11, 2005. 

Senate Amendment

The Senate amendment is the same as the House bill, except the Senate amendment 

requires that the original use of the property begin with the taxpayer and that the property be 

placed in service prior to January 1, 2008. 

Effective date.−The Senate amendment provision is effective for property placed in 

service after the date of enactment. However, the provision does not apply to property subject to 

a binding contract on or before June 14, 2005.5

 4

 1987-2 C.B. 674 (as clarified and modified by Rev. Proc. 88-22, 1988-1 C.B. 785). 

5

 In the case of self-constructed property, the provision does not apply to property under 

construction on or before June 14, 2005. 
4

Conference Agreement

The conference agreement follows the House bill, with the following modifications. The 

conference agreement is effective for property, the original use of which begins with the 

taxpayer after April 11, 2005, which is placed in service after April 11, 2005 and before January 

1, 2011. The provision does not apply to property subject to a binding contract on or before 

April 11, 2005.6

 

3. Transmission property treated as fifteen-year property (sec. 1303 of the House bill, 

sec. 1308 of the conference agreement, and sec. 168 of the Code) 

Present Law

The applicable recovery period for assets placed in service under the Modified 

Accelerated Cost Recovery System is based on the “class life of the property.” The class lives of 

assets placed in service after 1986 are generally set forth in Revenue Procedure 87-56.7 Assets 

used in the transmission and distribution of electricity for sale and related land improvements are 

assigned a 20-year recovery period and a class life of 30 years. 

House Bill

The House bill provision establishes a statutory 15-year recovery period and a class life 

of 30 years for certain assets used in the transmission of electricity for sale and related land 

improvements. For purposes of the provision, section 1245 property used in the transmission at 

69 or more kilovolts of electricity for sale, the original use of which commences with the 

taxpayer after April 11, 2005, will qualify for the new recovery period. 

Effective date.−The House bill provision is effective for property placed in service after 

April 11, 2005. 

Senate Amendment

No provision. 

Conference Agreement

The conference agreement follows the House bill, except that the provision does not 

apply to property which is the subject of a binding contract on or before April 11, 2005.8

 6

 In the case of self-constructed property, the provision does not apply to property under 

construction on or before April 11, 2005. 

7

 1987-2 C.B. 674 (as clarified and modified by Rev. Proc. 88-22, 1988-1 C.B. 785). 

8

 In the case of self-constructed property, the provision does not apply to property under 

construction on or before April 11, 2005. 
5

4. Amortization of atmospheric pollution control facilities (sec. 1304 of the House bill, 

sec. 1309 of the conference agreement, and sec. 169 of the Code) 

Present Law

In general, a taxpayer may elect to recover the cost of any certified pollution control 

facility over a period of 60 months.9 A certified pollution control facility is defined as a new, 

identifiable treatment facility which (1) is used in connection with a plant in operation before 

January 1, 1976, to abate or control water or atmospheric pollution or contamination by 

removing, altering, disposing, storing, or preventing the creation or emission of pollutants, 

contaminants, wastes or heat; and (2) does not lead to a significant increase in output or capacity, 

a significant extension of useful life, a significant reduction in total operating costs for such plant 

or other property (or any unit thereof), or a significant alteration in the nature of a manufacturing 

production process or facility. Certification is required by appropriate State and Federal 

authorities that the facility complies with appropriate standards. 

For a pollution control facility with a useful life greater than 15 years, only the portion of 

the basis attributable to the first 15 years is eligible to be amortized over a 60-month period.10 

In addition, a corporate taxpayer must reduce the amount of basis otherwise eligible for the 60-

month recovery by 20 percent.11 The amount of basis not eligible for 60-month amortization is 

depreciable under the regular tax rules for depreciation. 

House Bill

The House bill expands the provision allowing a taxpayer to recover the cost of certain 

certified air pollution control facilities (but not water pollution control facilities) over 60 months 

by repealing the requirement that only certified pollution control facilities used in connection 

with a plant in operation before January 1, 1976 qualify. Under the House bill, a certified air 

pollution control facility which used in connection with an electric generation plant which is 

primarily coal fired will be eligible for 60-month amortization regardless of whether the 

associated plant or other property was in operation prior to January 1, 1976. In the case of a 

facility used in connection with a plant or other property not in operation before January 1, 1976, 

the facility must be property that either (i) the construction, reconstruction, or erection of which 

is completed by the taxpayer after April 11, 2005 (to the extent of the portion of the basis 

properly attributable to the construction, reconstruction, or erection after that date), or (ii) is 

acquired after April 11, 2005, if the original use of the property commences with the taxpayer 

after that date. The House bill does not change the present-law rules relating to corporate 

 9

 Sec. 169. For purposes of computing alternative minimum taxable income, the depreciation 

deduction is determined using the straight-line method over the applicable regular tax recovery period. 

10 The amount attributable to the first 15 years is equal to an amount which bears the same ratio 

to the portion of the adjusted basis of the facility, which would be eligible for amortization but for the 

application of this rule, as 15 bears to the number of years of useful life of the facility. 

11 Sec. 291(a)(5). 
6

taxpayers or to pollution control facilities with a useful life greater than 15 years, and the House 

bill does not modify in any way the treatment of water pollution control facilities. 

Effective date.−The provision is effective for air pollution control facilities placed in 

service after April 11, 2005. 

Senate Amendment

No provision. 

Conference Agreement

The conference agreement follows the House bill, except that the amortization period is 

84 months (rather than 60 months) for certified air pollution control facilities used in connection 

with an electric generation plant which is primarily coal fired and which was not in operation 

before January 1, 1976. 

5. Modification of credit for producing fuel from a non-conventional source (sec. 1305 of 

the House bill, secs. 1321 and 1322 of the conference agreement, and sec. 29 and new sec. 

45K of the Code) 

Present Law

Certain fuels produced from “non-conventional sources” and sold to unrelated parties are 

eligible for an income tax credit equal to $3 (generally adjusted for inflation)12 per barrel or Btu 

oil barrel equivalent (“section 29 credit”). Qualified fuels must be produced within the United 

States. 

Qualified fuels include: 

• oil produced from shale and tar sands; 

• gas produced from geopressured brine, Devonian shale, coal seams, tight formations, 

or biomass; and 

• liquid, gaseous, or solid synthetic fuels produced from coal (including lignite). 

Generally, the section 29 credit has expired, except for certain biomass gas and synthetic 

fuels sold before January 1, 2008, and produced at facilities placed in service after December 31, 

1992, and before July 1, 1998. 

The section 29 credit may not exceed the excess of the regular tax liability over the 

tentative minimum tax. Unused section 29 credits may not be carried forward or carried back to 

other taxable years. However, to the extent the section 29 credit is disallowed because of the 

 12 The value of the credit in 2004 was $6.56 per barrel-of-oil equivalent produced, which is 

approximately $1.16 per thousand cubic feet of natural gas. 
7

tentative minimum tax, the minimum tax credit allowable in future years is increased by the 

amount so disallowed. 

Other business credits are included in the general business credit (sec. 38). Generally, the 

general business credit may not exceed the excess of the taxpayer’s net income tax over the 

greater of the taxpayer's tentative minimum tax or 25 percent of so much of the taxpayer's net 

regular tax liability as exceeds $25,000. General business credits in excess of this limitation may 

be carried back one year and forward up to 20 years. The section 29 credit is not part of the 

general business credit. 

The section 29 credit includes definitional cross-references and a credit limitation relating 

to the Natural Gas Policy Act of 1978. The Natural Gas Policy Act of 1978 has been repealed. 

House Bill

The provision makes the credit for producing fuel from a non-conventional source part of 

the general business credit. Thus, the credit for producing fuel from a non-conventional source 

will be subject to the limitations applicable to the general business credit. Any unused credits 

may be carried back one year and forward 20 years. 

The provision also makes certain clerical changes in cross-references to the Natural Gas 

Policy Act of 1978, which has been repealed. 

Effective date.−The provision applies to credits determined for taxable years ending after 

December 31, 2005.13 The clerical changes are effective on the date of enactment. 

Senate Amendment

No provision. 

Conference Agreement

The conference agreement follows the House provision with modifications. In addition 

to making the section 29 credit part of the general business credit, the conference agreement adds 

a production credit for qualified facilities that produce coke or coke gas. Qualified facilities 

must have been placed in service before January 1, 1993, or after June 30, 1998, and before 

January 1, 2010. The conferees understand that a single facility for the production of coke or 

coke gas is generally composed of multiple coke ovens or similar structures. 

The production credit may be claimed with respect to coke and coke gas produced and 

sold during the period beginning on the later of January 1, 2006, or the date such facility is 

placed in service and ending on the date which is four years after such period began. The 

amount of credit-eligible coke produced may not exceed an average barrel-of-oil equivalent of 

 13 The credit may not be carried back to a taxable year ending before January 1, 2006 (sec. 

39(d)). 
8

4,000 barrels per day. The $3.00 credit for coke or coke gas is indexed for inflation using 2004 

as the base year instead of 1979. A facility that has claimed a credit under Code section 29(g) is 

not eligible to claim the new credit for producing coke or coke gas. 

The conferees understand that the Internal Revenue Service has stopped issuing private 

letter rulings and other taxpayer-specific guidance regarding the section 29 credit. The conferees 

believe that the Internal Revenue Service should consider issuing such rulings and guidance on 

an expedited basis to those taxpayers who had pending ruling requests at the time the 

moratorium was implemented. 

6. Modification to special rules for nuclear decommissioning costs (sec. 1306 of the House 

bill, sec. 1310 of the conference agreement, and sec. 468A of the Code) 

Present Law

Overview

Special rules dealing with nuclear decommissioning reserve funds were enacted in the 

Deficit Reduction Act of 1984 (“1984 Act”), when tax issues regarding the time value of money 

were addressed generally. Under general tax accounting rules, a deduction for accrual basis 

taxpayers is deferred until there is economic performance for the item for which the deduction is 

claimed. However, the 1984 Act contains an exception under which a taxpayer responsible for 

nuclear powerplant decommissioning may elect to deduct contributions made to a qualified 

nuclear decommissioning fund for future decommissioning costs. Taxpayers who do not elect 

this provision are subject to general tax accounting rules. 

Qualified nuclear decommissioning fund

A qualified nuclear decommissioning fund (a “qualified fund”) is a segregated fund 

established by a taxpayer that is used exclusively for the payment of decommissioning costs, 

taxes on fund income, management costs of the fund, and for making investments. The income 

of the fund is taxed at a reduced rate of 20 percent for taxable years beginning after December 

31, 1995.14 

Contributions to a qualified fund are deductible in the year made to the extent that these 

amounts were collected as part of the cost of service to ratepayers (the “cost of service 

requirement”).15 Funds withdrawn by the taxpayer to pay for decommissioning costs are 

 14 As originally enacted in 1984, a qualified fund paid tax on its earnings at the top corporate rate 

and, as a result, there was no present-value tax benefit of making deductible contributions to a qualified 

fund. Also, as originally enacted, the funds in the trust could be invested only in certain low risk 

investments. Subsequent amendments to the provision have reduced the rate of tax on a qualified fund to 

20 percent and removed the restrictions on the types of permitted investments that a qualified fund can 

make.

15 Taxpayers are required to include in gross income customer charges for decommissioning 

costs (sec. 88). 
9

included in the taxpayer’s income, but the taxpayer also is entitled to a deduction for 

decommissioning costs as economic performance for such costs occurs. 

Accumulations in a qualified fund are limited to the amount required to fund 

decommissioning costs of a nuclear powerplant for the period during which the qualified fund is 

in existence (generally post-1984 decommissioning costs of a nuclear powerplant). For this 

purpose, decommissioning costs are considered to accrue ratably over a nuclear powerplant’s 

estimated useful life. In order to prevent accumulations of funds over the remaining life of a 

nuclear powerplant in excess of those required to pay future decommissioning costs of such 

nuclear powerplant and to ensure that contributions to a qualified fund are not deducted more 

rapidly than level funding (taking into account an appropriate discount rate), taxpayers must 

obtain a ruling from the IRS to establish the maximum annual contribution that may be made to a 

qualified fund (the “ruling amount”). In certain instances (e.g., change in estimates), a taxpayer 

is required to obtain a new ruling amount to reflect updated information. 

A qualified fund may be transferred in connection with the sale, exchange or other 

transfer of the nuclear powerplant to which it relates. If the transferee is a regulated public utility 

and meets certain other requirements, the transfer will be treated as a nontaxable transaction. No 

gain or loss will be recognized on the transfer of the qualified fund and the transferee will take 

the transferor’s basis in the fund.16 The transferee is required to obtain a new ruling amount from 

the IRS or accept a discretionary determination by the IRS.17 

Nonqualified nuclear decommissioning funds

Federal and State regulators may require utilities to set aside funds for nuclear 

decommissioning costs in excess of the amount allowed as a deductible contribution to a 

qualified fund. In addition, taxpayers may have set aside funds prior to the effective date of the 

qualified fund rules.18 The treatment of amounts set aside for decommissioning costs prior to 

1984 varies. Some taxpayers may have received no tax benefit while others may have deducted 

such amounts or excluded such amounts from income. Since 1984, taxpayers have been required 

to include in gross income customer charges for decommissioning costs (sec. 88), and a 

deduction has not been allowed for amounts set aside to pay for decommissioning costs except 

through the use of a qualified fund. Income earned in a nonqualified fund is taxable to the fund’s 

owner as it is earned. 

 16 Treas. reg. sec. 1.468A-6.

17 Treas. reg. sec. 1.468A-6(f). 

18 These funds are generally referred to as “nonqualified funds.” 
10

House Bill

Repeal of cost of service requirement 

The House bill repeals the cost of service requirement for deductible contributions to a 

nuclear decommissioning fund. Thus, all taxpayers, including unregulated taxpayers, are 

allowed a deduction for amounts contributed to a qualified fund. 

Permit contributions to a qualified fund for pre-1984 decommissioning costs

The House bill also repeals the limitation that a qualified fund only accumulate an 

amount sufficient to pay for a nuclear powerplant’s decommissioning costs incurred during the 

period that the qualified fund is in existence (generally post-1984 decommissioning costs). 

Thus, any taxpayer is permitted to accumulate an amount sufficient to cover the present value of 

100 percent of a nuclear powerplant’s estimated decommissioning costs in a qualified fund. The 

House bill does not change the requirement that contributions to a qualified fund not be deducted 

more rapidly than level funding. 

Exception to ruling amount for certain decommissioning costs 

The House bill permits a taxpayer to make contributions to a qualified fund in excess of 

the ruling amount in one circumstance. Specifically, a taxpayer is permitted to contribute up to 

the present value of total nuclear decommissioning costs with respect to a nuclear powerplant 

previously excluded under section 468A(d)(2)(A).19 It is anticipated that an amount that is 

permitted to be contributed under this special rule shall be determined using the estimate of total 

decommissioning costs used for purposes of determining the taxpayer’s most recent ruling 

amount. Any amount transferred to the qualified fund under this special rule is allowed as a 

deduction over the remaining useful life of the nuclear powerplant.20 If a qualified fund that has 

received amounts under this rule is transferred to another person, the transferor will be permitted 

a deduction for any remaining deductible amounts at the time of transfer. 

Effective date.−The provision is effective for taxable years beginning after December 31, 

2005. 

 19 For example, if $100 is the present value of the total decommissioning costs of a nuclear 

powerplant, and if under present law the qualified fund is only permitted to accumulate $75 of 

decommissioning costs over such plant’s estimated useful life (because the qualified fund was not in 

existence during 25 percent of the estimated useful life of the nuclear powerplant), a taxpayer could 

contribute $25 to the qualified fund under this component of the provision. 

20 A taxpayer recognizes no gain or loss on the contribution of property to a qualified fund under 

this special rule. The qualified fund will take a transferred (carryover) basis in such property. 

Correspondingly, a taxpayer’s deduction (over the estimated life of the nuclear powerplant) is to be based 

on the adjusted tax basis of the property contributed rather than the fair market value of such property. 
11

Senate Bill

No provision. 

Conference Agreement

The conference agreement follows the House bill, with the following modification. The 

conference agreement requires that a taxpayer apply for a new ruling amount with respect to a 

nuclear powerplant in any tax year in which the powerplant is granted a license renewal, 

extending its useful life. 

7. Arbitrage rules not to apply to prepayments for natural gas (sec. 1307 of the House bill, 

sec. 1327 of the conference agreement, and sec. 148 of the Code) 

Present Law

Arbitrage restrictions

Interest on bonds issued by States or local governments to finance activities carried out or 

paid for by those entities generally is exempt from income tax. Restrictions are imposed on the 

ability of States or local governments to invest the proceeds of these bonds for profit (the 

“arbitrage restrictions”).21 One such restriction limits the use of bond proceeds to acquire 

“investment-type property.” The term investment-type property includes the acquisition of 

property in a transaction involving a prepayment if a principal purpose of the prepayment is to 

receive an investment return from the time the prepayment is made until the time payment 

otherwise would be made. A prepayment can produce prohibited arbitrage profits when the 

discount received for prepaying the costs exceeds the yield on the tax-exempt bonds. In general, 

prohibited prepayments include all prepayments that are not customary in an industry by both 

beneficiaries of tax-exempt bonds and other persons using taxable financing for the same 

transaction. 

On August 4, 2003, the Treasury Department issued final regulations deeming to be 

customary, and not in violation of the arbitrage rules, certain prepayments for natural gas and 

electricity.22 Generally, a qualified prepayment under the regulations requires that 90 percent of 

the natural gas or electricity purchased with the prepayment be used for a qualifying use. 

Generally, natural gas is used for a qualifying use if it is to be (1) furnished to retail gas 

customers of the issuing municipal utility who are located in the natural gas service area of the 

issuing municipal utility, however, gas used to produce electricity for sale is not included under 

this provision (2) used by the issuing municipal utility to produce electricity that will be 

furnished to retail electric service area customers of the issuing utility, (3) used by the issuing 

municipal utility to produce electricity that will be sold to a utility owned by a governmental 

person and furnished to the service area retail electric customers of the purchaser, (4) sold to a 

 21 Sec. 148. 

22 Treas. Reg. sec. 1.148-1(e)(2)(iii). 
12

utility that is owned by a governmental person if the requirements of (1), (2) or (3) are satisfied 

by the purchasing utility (treating the purchaser as the issuing utility) or (5) used to fuel the 

pipeline transportation of the prepaid gas supply. Electricity is used for a qualifying use if it is to 

be (1) furnished to retail service area electric customers of the issuing municipal utility or (2) 

sold to a municipal utility and furnished to retail electric customers of the purchaser who are 

located in the electricity service area of the purchaser. 

Private activity bond tests

State and local bonds may be classified as either governmental bonds or private activity 

bonds. Governmental bonds are bonds the proceeds of which are primarily used to finance 

governmental functions or the debt is repaid with governmental funds. Private activity bonds are 

bonds where the State or local government serves as a conduit providing financing to private 

businesses or individuals. A bond will be treated as a private activity bond if more than five 

percent of the proceeds of the bond issue, or, if less, more than $5,000,000 is used (directly or 

indirectly) to make or finance loans to persons other than governmental units (the “private loan 

financing test”) or if it meets the requirements of a two-part private business test.23 

The exclusion from income for State and local bonds does not apply to private activity 

bonds, unless the bonds are issued for certain purposes permitted by the Code. Section 141(d) of 

the Code provides that the term “private activity bond” includes any bond issued as part of an 

issue if the amount of the proceeds of the issue which are to be used (directly or indirectly) for 

the acquisition by a governmental unit of nongovernmental output property exceeds the lesser of 

five percent of such proceeds or $5 million. “Nongovernmental output property” generally 

means any property (or interest therein) which before such acquisition was used (or held for use) 

by a person other than a governmental unit in connection with an output facility (other than a 

facility for the furnishing of water). An exception applies to output property which is to be used 

in connection with an output facility 95 percent or more of the output of which will be consumed 

in (1) a qualified service area of the governmental unit acquiring the property, or (2) a qualified 

annexed area of such unit. 

House Bill

In general 

The House bill creates a safe harbor exception to the general rule that tax-exempt bondfinanced prepayments violate the arbitrage restrictions. The term “investment type property” 

does not include a prepayment under a qualified natural gas supply contract. The provision also 

 23 Sec. 141(b) and (c). Under the private business test, a bond is a private activity bond if it is 

part of an issue in which: (1) more than 10 percent of the proceeds of the issue (including use of the 

bond-financed property) are to be used in the trade or business of any person other than a governmental 

unit (“private business use”); and (2) more than 10 percent of the payment of principal or interest on the 

issue is, directly or indirectly, secured by (a) property used or to be used for a private business use or (b) 

to be derived from payments in respect of property, or borrowed money, used or to be used for a private 

business use (“private payment test”). 
13

provides that such prepayments are not treated as private loans for purposes of the private 

business tests. 

Under the House bill, a prepayment financed with tax-exempt bond proceeds for the 

purpose of obtaining a supply of natural gas for service area customers of a governmental utility 

is not treated as the acquisition of investment-type property. A contract is a qualified natural gas 

contract if the volume of natural gas secured for any year covered by the prepayment does not 

exceed the sum of (1) the average annual natural gas purchased (other than for resale) by 

customers of the utility within the service area of the utility (“retail natural gas consumption”) 

during the testing period, and (2) the amount of natural gas that is needed to fuel transportation 

of the natural gas to the governmental utility. The testing period is the 5-calendar-year period 

immediately preceding the calendar year in which the bonds are issued. A retail customer is one 

who does not purchase natural gas for resale. Natural gas used to generate electricity by a utility 

owned by a governmental unit is counted as retail natural gas consumption if the electricity was 

sold to retail customers within the service area of the governmental electric utility. 

Adjustments

The volume of gas permitted by the general rule is reduced by natural gas otherwise 

available on the date of issuance. Specifically, the amount of natural gas permitted to be 

acquired under a qualified natural gas contract for any period is to be reduced by the applicable 

share of natural gas held by the utility on the date of issuance of the bonds and natural gas that 

the utility has a right to acquire for the prepayment period (determined as of the date of 

issuance). For purposes of the preceding sentence, “applicable share” means, with respect to any 

period, the natural gas allocable to such period if the gas were allocated ratably over the period to 

which the prepayment relates. 

For purposes of the safe harbor, if after the close of the testing period and before the issue 

date of the bonds (1) the government utility enters into a contract to supply natural gas (other 

than for resale) for a commercial person for use at a property within the service area of such 

utility and (2) the gas consumption for such property was not included in the testing period or the 

ratable amount of natural gas to be supplied under the contract is significantly greater than the 

ratable amount of gas supplied to such property during the testing period, then the amount of gas 

permitted to be purchased may be increased to accommodate the contract. 

The calculation of average annual retail natural gas consumption for purposes of the safe 

harbor, however, is not to exceed the annual amount of natural gas reasonably expected to be 

purchased (other than for resale) by persons who are located within the service area of such 

utility and who, as of the date of issuance of the issue, are customers of such utility. 

Intentional acts

The safe harbor does not apply if the utility engages in intentional acts to render (1) the 

volume of natural gas covered by the prepayment to be in excess of that needed for retail natural 

gas consumption, and (2) the amount of natural gas that is needed to fuel transportation of the 

natural gas to the governmental utility. 
14

Definition of service area

Service area is defined as (1) any area throughout which the governmental utility 

provided (at all times during the testing period) in the case of a natural gas utility, natural gas 

transmission or distribution services, or in the case of an electric utility, electricity distribution 

services; (2) limited areas contiguous to such areas, and (3) any area recognized as the service 

area of the governmental utility under State or Federal law. Contiguous areas are limited to any 

area within a county contiguous to the area described in (1) in which retail customers of the 

utility are located if such area is not also served by another utility providing the same service. 

Ruling request for higher prepayment amounts

Upon written request, the Secretary may allow an issuer to prepay for an amount of gas 

greater than that allowed by the safe harbor based on objective evidence of growth in gas 

consumption or population that demonstrates that the amount permitted by the exception is 

insufficient. 

Nongovernmental output property restrictions

A qualified natural gas supply contract as defined in the provision is not 

nongovernmental output property for purposes of subsection (d) of section 141. Subsection (d) 

of section 141 does not apply to prepayment contracts for natural gas or electricity that either 

under the Treasury regulations or statutory safe harbor are not investment-type property for 

purposes of the arbitrage rules under section 148. No inference is intended regarding the 

application of subsection 141(d) to prepayment contracts not covered by the statutory safe harbor 

or Treasury regulations. 

Application to joint action agencies

In a number of States, joint action agencies serve as purchasing agents for their member 

municipal gas utilities. The provision is intended to allow municipal utilities in a State to 

participate in such buying arrangements as established under State law, subject to the same 

limitations that would apply if an individual utility were to purchase gas directly. When acting 

on behalf of its municipal gas utility members, the total amount of gas that can be purchased by a 

joint action agency under the provision’s exception to the arbitrage rules is the aggregate of what 

each such member could purchase for itself on a direct basis. Thus, with respect to qualified 

natural gas supply contracts entered into by joint action agencies for or on behalf of one or more 

member municipal utilities, the requirements of the safe harbor are tested at the individual 

municipal utility level based on the amount of gas that would be allocated to such member 

during any year covered by the contract. 

Effective date.−The provision is effective for bonds issued after the date of enactment. 

Senate Amendment

No provision. 
15

Conference Agreement

The conference agreement follows the House bill. 

8. Determination of small refiner exception to oil depletion deduction (sec. 1308 of the 

House bill, sec. 1328 of the conference agreement, and sec. 613A of the Code) 

Present Law

Present law classifies oil and gas producers as independent producers or integrated 

companies. The Code provides special tax rules for operations by independent producers. One 

such rule allows independent producers to claim percentage depletion deductions rather than 

deducting the costs of their asset, a producing well, based on actual production from the well 

(i.e., cost depletion). 

A producer is an independent producer only if its refining and retail operations are 

relatively small. For example, an independent producer may not have refining operations the 

runs from which exceed 50,000 barrels on any day in the taxable year during which independent 

producer status is claimed.24 A refinery run is the volume of inputs of crude oil (excluding any 

product derived from oil) into the refining stream.25

House Bill

The bill increases the current 50,000-barrel-per-day limitation to 75,000. In addition, the 

bill changes the refinery limitation on claiming independent producer status from a limit based 

on actual daily production to a limit based on average daily production for the taxable year. 

Accordingly, the average daily refinery runs for the taxable year may not exceed 75,000 barrels. 

For this purpose, the taxpayer calculates average daily refinery runs by dividing total refinery 

runs for the taxable year by the total number of days in the taxable year. 

Effective date.−The provision is effective for taxable years ending after date of 

enactment. 

Senate Amendment

No provision. 

Conference Agreement

The conference agreement follows the House bill. 

 24 Sec. 613A(d)(4). 

25 Treas. Reg. sec. 1.613A-7(s). 
16

9. Extension and modification of renewable electricity production credit (secs. 1501 - 1503 

of the Senate amendment, secs. 1301 and 1302 of the conference agreement, and sec. 45 of 

the Code) 

Present Law

In general

An income tax credit is allowed for the production of electricity from qualified facilities 

sold by the taxpayer to an unrelated person (sec. 45). Qualified facilities comprise wind energy 

facilities, closed-loop biomass facilities, open-loop biomass (including agricultural livestock 

waste nutrients) facilities, geothermal energy facilities, solar energy facilities, small irrigation 

power facilities, landfill gas facilities, and trash combustion facilities. In addition, an income tax 

credit is allowed for the production of refined coal. 

Credit amounts and credit period

In general

The base amount of the credit is 1.5 cents per kilowatt-hour (indexed for inflation) of 

electricity produced. The amount of the credit is 1.9 cents per kilowatt-hour for 2005. A 

taxpayer may claim credit for the 10-year period commencing with the date the qualified facility 

is placed in service. The credit is reduced for grants, tax-exempt bonds, subsidized energy 

financing, and other credits. The amount of credit a taxpayer may claim is phased out as the 

market price of electricity (or refined coal in the case of the refined coal production credit) 

exceeds certain threshold levels. 

Reduced credit amounts and credit periods

In the case of open-loop biomass facilities (including agricultural livestock waste nutrient 

facilities), geothermal energy facilities, solar energy facilities, small irrigation power facilities, 

landfill gas facilities, and trash combustion facilities, the 10-year credit period is reduced to five 

years commencing on the date the facility is placed in service. In general, for eligible preexisting facilities and other facilities placed in service prior to January 1, 2005, the credit period 

commences on January 1, 2005. In the case of a closed-loop biomass facility modified to co-fire 

with coal, to co-fire with other biomass, or to co-fire with coal and other biomass, the credit 

period begins no earlier than October 22, 2004. 

In the case of open-loop biomass facilities (including agricultural livestock waste nutrient 

facilities), small irrigation power facilities, landfill gas facilities, and trash combustion facilities, 

the otherwise allowable credit amount is 0.75 cent per kilowatt-hour, indexed for inflation 

measured after 1992 (currently 0.9 cents per kilowatt-hour for 2005). 

Credit applicable to refined coal

The amount of the credit for refined coal is $4.375 per ton (also indexed for inflation 

after 1992 and equaling $5.481 per ton for 2005). 
17

Other limitations on credit claimants and credit amounts

In general, in order to claim the credit, a taxpayer must own the qualified facility and sell 

the electricity produced by the facility (or refined coal in the case of the refined coal production 

credit) to an unrelated party. A lessee or operator may claim the credit in lieu of the owner of the 

qualifying facility in the case of qualifying open-loop biomass facilities originally placed in 

service on or before the date of enactment and in the case of a closed-loop biomass facilities 

modified to co-fire with coal, to co-fire with other biomass, or to co-fire with coal and other 

biomass. In the case of a poultry waste facility, the taxpayer may claim the credit as a lessee or 

operator of a facility owned by a governmental unit. 

For all qualifying facilities, other than closed-loop biomass facilities modified to co-fire 

with coal, to co-fire with other biomass, or to co-fire with coal and other biomass, the amount of 

credit a taxpayer may claim is reduced by reason of grants, tax-exempt bonds, subsidized energy 

financing, and other credits, but the reduction cannot exceed 50 percent of the otherwise 

allowable credit. In the case of closed-loop biomass facilities modified to co-fire with coal, to 

co-fire with other biomass, or to co-fire with coal and other biomass, there is no reduction in 

credit by reason of grants, tax-exempt bonds, subsidized energy financing, and other credits. 

The credit for electricity produced from renewable sources is a component of the general 

business credit (sec. 38(b)(8)). Generally, the general business credit for any taxable year may 

not exceed the amount by which the taxpayer’s net income tax exceeds the greater of the 

tentative minimum tax or so much of the net regular tax liability as exceeds $25,000. Excess 

credits may be carried back one year and forward up to 20 years. 

A taxpayer’s tentative minimum tax is treated as being zero for purposes of determining 

the tax liability limitation with respect to the section 45 credit for electricity produced from a 

facility (placed in service after October 22, 2004) during the first four years of production 

beginning on the date the facility is placed in service. 

Qualified facilities

Wind energy facility

A wind energy facility is a facility that uses wind to produce electricity. To be a qualified 

facility, a wind energy facility must be placed in service after December 31, 1993, and before 

January 1, 2006. 

Closed-loop biomass facility

A closed-loop biomass facility is a facility that uses any organic material from a plant 

which is planted exclusively for the purpose of being used at a qualifying facility to produce 

electricity. In addition, a facility can be a closed-loop biomass facility if it is a facility that is 

modified to use closed-loop biomass to co-fire with coal, with other biomass, or with both coal 

and other biomass, but only if the modification is approved under the Biomass Power for Rural 

Development Programs or is part of a pilot project of the Commodity Credit Corporation. 
18

To be a qualified facility, a closed-loop biomass facility must be placed in service after 

December 31, 1992, and before January 1, 2006. In the case of a facility using closed-loop 

biomass but also co-firing the closed-loop biomass with coal, other biomass, or coal and other 

biomass, a qualified facility must be originally placed in service and modified to co-fire the 

closed-loop biomass at any time before January 1, 2006. 

Open-loop biomass (including agricultural livestock waste nutrients) facility

An open-loop biomass facility is a facility using open-loop biomass to produce 

electricity. Open-loop biomass is defined as (1) any agricultural livestock waste nutrients, or 

(2) any solid, nonhazardous, cellulosic or lignin waste material which is segregated from other 

waste materials and which is derived from certain forest-related resources, solid wood waste 

materials, or agricultural sources. Eligible forest-related resources are mill residues, other than 

spent chemicals from pulp manufacturing, precommercial thinnings, slash, and brush. Solid 

wood waste materials include waste pallets, crates, dunnage, manufacturing and construction 

wood wastes (other than pressure-treated, chemically-treated, or painted wood wastes), and 

landscape or right-of-way tree trimmings. Agricultural sources include orchard tree crops, 

vineyard, grain, legumes, sugar, and other crop by-products or residues. However, qualifying 

open-loop biomass does not include municipal solid waste (garbage), gas derived from 

biodegradation of solid waste, or paper that is commonly recycled. In addition, open-loop 

biomass does not include closed-loop biomass or any biomass burned in conjunction with fossil 

fuel (co-firing) beyond such fossil fuel required for start up and flame stabilization. 

Agricultural livestock waste nutrients are defined as agricultural livestock manure and 

litter, including bedding material for the disposition of manure. 

To be a qualified facility, an open-loop biomass facility must be placed in service after 

October 22, 2004 and before January 1, 2006, in the case of a facility using agricultural livestock 

waste nutrients and must be placed in service at any time prior to January 1, 2006 in the case of a 

facility using other open-loop biomass. 

Geothermal facility

A geothermal facility is a facility that uses geothermal energy to produce electricity. 

Geothermal energy is energy derived from a geothermal deposit which is a geothermal reservoir 

consisting of natural heat which is stored in rocks or in an aqueous liquid or vapor (whether or 

not under pressure). To be a qualified facility, a geothermal facility must be placed in service 

after October 22, 2004 and before January 1, 2006. 

Solar facility

A solar facility is a facility that uses solar energy to produce electricity. To be a qualified 

facility, a solar facility must be placed in service after October 22, 2004 and before January 1, 

2006. 
19

Small irrigation facility

A small irrigation power facility is a facility that generates electric power through an 

irrigation system canal or ditch without any dam or impoundment of water. The installed 

capacity of a qualified facility must be not less than 150 kilowatts but less than five megawatts. 

To be a qualified facility, a small irrigation facility must be originally placed in service after 

October 22, 2004 and before January 1, 2006. 

Landfill gas facility

A landfill gas facility is a facility that uses landfill gas to produce electricity. Landfill gas 

is defined as methane gas derived from the biodegradation of municipal solid waste. To be a 

qualified facility, a landfill gas facility must be placed in service after October 22, 2004 and 

before January 1, 2006. 

Trash combustion facility

Trash combustion facilities are facilities that burn municipal solid waste (garbage) to 

produce steam to drive a turbine for the production of electricity. To be a qualified facility, a 

trash combustion facility must be placed in service after October 22, 2004 and before January 1, 

2006. 

Refined coal facility

A qualifying refined coal facility is a facility producing refined coal that is placed in 

service after October 22, 2004 and before January 1, 2009. Refined coal is a qualifying liquid, 

gaseous, or solid synthetic fuel produced from coal (including lignite) or high-carbon fly ash, 

including such fuel used as a feedstock. A qualifying fuel is a fuel that when burned emits 20 

percent less nitrogen oxides and either SO2 or mercury than the burning of feedstock coal or 

comparable coal predominantly available in the marketplace as of January 1, 2003, and if the 

fuel sells at prices at least 50 percent greater than the prices of the feedstock coal or comparable 

coal. In addition, to be qualified refined coal the fuel must be sold by the taxpayer with the 

reasonable expectation that it will be used for the primary purpose of producing steam. 
20

Summary of credit rate and credit period by facility type

Table 1.–Summary of Section 45 Credit for Electricity Produced 

from Certain Renewable Resources and Refined Coal 

Electricity produced from 

renewable resources 

Credit amount for 

2005 

(cents per kilowatthour; dollars per ton)

Credit period 

(years from 

placed-in-service 

date)1

Wind............................................................... 

Closed-loop biomass...................................... 

Open-loop biomass ........................................ 

 (including agricultural livestock 

 waste nutrient facilities) 

Geothermal..................................................... 

 Solar......................................................... 

Small irrigation power ................................... 

Municipal solid waste .................................... 

 (including landfill gas facilities 

 and trash combustion facilities) 

1.9 

1.9 

0.9 

1.9 

1.9 

0.9 

0.9 

 10 

 10 

 5 

 5 

 5 

 5 

 5 

Refined Coal 5.481 10 

1

 For eligible pre-existing facilities and other facilities placed in service prior to January 1, 2005, the credit period 

commences on January 1, 2005. In the case of certain co-firing closed-loop facilities, the credit period begins no 

earlier than October 22, 2004. 

Taxation of cooperatives and their patrons

For Federal income tax purposes, a cooperative generally computes its income as if it 

were a taxable corporation, with one exception--the cooperative may exclude from its taxable 

income distributions of patronage dividends. Generally, cooperatives that are subject to the 

cooperative tax rules of subchapter T of the Code26 are permitted a deduction for patronage 

dividends from their taxable income only to the extent of net income that is derived from 

transactions with patrons who are members of the cooperative.27 The availability of such 

deductions from taxable income has the effect of allowing the cooperative to be treated like a 

conduit with respect to profits derived from transactions with patrons who are members of the 

cooperative. Present law does not permit cooperatives to pass any portion of the income tax 

credit for electricity production through to their patrons. 

 26 Sec. 1381, et seq. 

27 Sec. 1382. 
21

House Bill

No provision. 

Senate Amendment

Extension of placed-in-service date for qualifying facilities

The provision extends the placed-in-service date by three years (through December 31, 

2008) for the following qualifying facilities: wind facilities; closed-loop biomass facilities 

(including a facility co-firing the closed-loop biomass with coal, other biomass, or coal and other 

biomass); open-loop biomass facilities; geothermal facilities; small irrigation power facilities; 

landfill gas facilities; and trash combustion facilities. The proposal does not extend the 

terminating placed-in-service date for solar facilities (December 31, 2005) or refined coal 

facilities (December 31, 2008). 

New qualifying energy resources

The provision adds three new qualifying energy resources: fuel cells; hydropower; and 

wave, current, tidal, and ocean thermal energy. 

Fuel cells

A qualifying fuel cell facility is an integrated system composed of a fuel cell stack 

assembly and associated balance of plant components that converts a fuel into electricity using 

electrochemical means. A qualifying facility must have an electricity-only generation efficiency 

of greater than 30 percent, generate at least 0.5 megawatt of electricity, and be placed in service 

after December 31, 2005 and before January 1, 2009.28 

Hydropower

A qualifying hydropower facility is (1) a facility that produced hydroelectric power (a 

hydroelectric dam) prior to the date of enactment at which efficiency improvements or additions 

to capacity have been made after the date of enactment and before January 1, 2009, that enable 

the taxpayer to produce incremental hydropower or (2) a facility placed in service before the date 

of enactment that did not produce hydroelectric power (a nonhydroelectric dam) on the date of 

enactment and to which turbines or other electricity generating equipment have been added after 

the date of enactment and before January 1, 2009. 

At an existing hydroelectric facility, the taxpayer may only claim credit for the 

production of incremental hydroelectric power. Incremental hydroelectric power for any taxable 

year is equal to the percentage of average annual hydroelectric power produced at the facility 

attributable to the efficiency improvement or additions of capacity determined by using the same 

 28 A qualifying fuel cell facility does not include any property for which credit was claimed 

under section 48. 
22

water flow information used to determine an historic average annual hydroelectric power 

production baseline for that facility. The Federal Energy Regulatory Commission will certify the 

baseline power production of the facility and the percentage increase due to the efficiency and 

capacity improvements. 

At a nonhydroelectric dam, the facility must be licensed by the Federal Energy 

Regulatory Commission and meet all other applicable environmental, licensing, and regulatory 

requirements and the turbines or other generating devices are added to the facility after the date 

of enactment and before January 1, 2009. In addition there must not be any enlargement of the 

diversion structure, or construction or enlargement of a bypass channel, or the impoundment or 

any withholding of additional water from the natural stream channel. 

In the case of electricity generated from a qualifying hydropower facility, the taxpayer 

may claim a credit equal to one-half the otherwise allowable amount. 

Wave, current, tidal, and ocean thermal energy 

A qualifying wave, current, tidal, and ocean thermal energy facility is a facility placed in 

service after the date of enactment and before January 1, 2009 that uses free flowing ocean water 

derived from tidal currents, ocean currents, waves, or estuary currents, ocean thermal energy, or 

free flowing water in rivers, lakes, man-made channels , or streams to produce electricity. 

However, a qualifying facility does not include any facility that includes impoundment structures 

or a small irrigation power facility. 

Equalization of credit period for all qualifying renewable resources

The provision extends the credit period from five years to 10 years for electricity 

produced from qualifying open-loop biomass facilities (including agricultural livestock waste 

nutrient facilities), geothermal facilities, solar facilities, small irrigation power facilities, landfill 

gas facilities, and trash combustion facilities placed in service after the date of enactment. The 

provision also provides that for electricity produced from the energy resources newly qualified 

under the bill - fuel cells, hydropower, and wave, current, tidal, and ocean thermal energy - the 

credit period is 10 years. 

Clarification of units added to pre-existing trash combustion facilities 

The provision clarifies that a qualifying trash combustion facility includes a new unit, 

placed in service after October 22, 2004, that increases electricity production capacity at an 

existing trash combustion facility. A new unit generally would include a new burner/boiler and 

turbine. The new unit may share certain common equipment, such as trash handling equipment, 

with other pre-existing units at the same facility. Electricity produced at a new unit of an 

existing facility qualifies for the production credit only to the extent of the increased amount of 

electricity produced at the entire facility. 

Taxation of cooperatives and their patrons

The Senate amendment allows eligible cooperatives to elect to pass any portion of the 

credit through to their patrons. An eligible cooperative is defined as a cooperative organization 
23

that is owned more than 50 percent by agricultural producers or entities owned by agricultural 

producers. 

Under the Senate amendment, the credit may be apportioned among patrons eligible to 

share in patronage dividends on the basis of the quantity or value of business done with or for 

such patrons for the taxable year. The election must be made on a timely filed return for the 

taxable year, and once made, is irrevocable for such taxable year. 

The amount of the credit apportioned to patrons is not included in the organization’s 

credit for the taxable year of the organization. The amount of the credit apportioned to a patron is 

included in the taxable year the patron with or within which the taxable year of the organization 

ends. If the amount of the credit for any taxable year is less than the amount of the credit shown 

on the cooperative’s return for such taxable year, an amount equal to the excess of the reduction 

in the credit over the amount not apportioned to patrons for the taxable year is treated as an 

increase in the cooperative’s tax. The increase is not treated as tax imposed for purposes of 

determining the amount of any tax credit. 

Effective date.−The provision generally is effective on the date of enactment. 

Conference Agreement

The conference agreement follows the Senate amendment with modifications. 

Extension of placed-in-service date for qualifying facilities

The conference agreement extends the placed-in-service date by two years (through 

December 31, 2007) for the following qualifying facilities: wind facilities; closed-loop biomass 

facilities (including a facility co-firing the closed-loop biomass with coal, other biomass, or coal 

and other biomass); open-loop biomass facilities; geothermal facilities; small irrigation power 

facilities; landfill gas facilities; and trash combustion facilities. The conference agreement does 

not alter the terminating placed-in-service date for solar facilities (December 31, 2005) or refined 

coal facilities (December 31, 2008). 

New qualifying energy resources

The conference agreement adds two new qualifying energy resources: hydropower; and 

Indian coal. 

Hydropower

The conference agreement follows the Senate amendment with respect to hydropower. 

Indian coal

The conference agreement adds Indian coal as a new energy source. The taxpayer may 

claim a credit for sales of coal to an unrelated third party from a qualified facility for the sevenyear period beginning on January 1, 2006, and ending after December 31, 2012. The value of 

the credit is $1.50 per ton for the first four years of the seven-year period and $2.00 per ton for 
24

the last three years of the seven-year period. The credit amounts are indexed for inflation. A 

qualified Indian coal facility is a facility that produces coal from reserves that on June 14, 2005, 

were owned by a Federally recognized tribe of Indians or were held in trust by the United States 

for a tribe or its members. 

Equalization of credit period for all qualifying renewable resources

The conference agreement follows the Senate amendment with respect to equalization of 

the credit period for qualifying open-loop biomass facilities (including agricultural livestock 

waste nutrient facilities), geothermal facilities, solar facilities, small irrigation power facilities, 

landfill gas facilities, trash combustion facilities, and hydropower facilities. The conference 

agreement provides a seven-year credit period for Indian coal facilities, as explained above. 

Clarification of units added to pre-existing trash combustion facilities 

The conference agreement follows the Senate amendment with respect to clarification of 

units added to pre-existing trash combustion facilities. 

Taxation of cooperatives and their patrons

The conference agreement follows the Senate amendment with respect to the taxation of 

cooperatives and their patrons. 

Effective date.−The provision generally is effective on the date of enactment. With 

respect to the taxation of cooperatives and their patrons, the provision applies to taxable years 

ending after the date of enactment. 

10. Clean renewable energy bonds (sec. 1504 of the Senate amendment, sec. 1303 of the 

conference agreement, and new sec. 54 of the Code) 

Present law

Tax-exempt bonds

Interest on State and local governmental bonds generally is excluded from gross income 

for Federal income tax purposes if the proceeds of the bonds are used to finance direct activities 

of these governmental units or if the bonds are repaid with revenues of the governmental units. 

Subject to certain restrictions, activities that can be financed with these tax-exempt bonds include 

electric power facilities (i.e., generation, transmission, distribution, and retailing). 

Generally, interest on State or local government bonds to finance activities of private 

persons (“private activity bonds”) is taxable unless a specific exception is contained in the Code. 

The term “private person” generally includes the Federal Government and all other individuals 

and entities other than States or local governments. The Code includes exceptions permitting 

States or local governments to act as conduits providing tax-exempt financing for certain private 

activities. In most cases, the aggregate volume of these tax-exempt private activity bonds is 

restricted by annual aggregate volume limits imposed on bonds issued by issuers within each 

State. For calendar year 2005, the State volume cap is the greater of $80 per resident or $239 
25

million. The Code imposes several additional restrictions on tax-exempt private activity bonds 

that do not apply to bonds for governmental activities. 

The tax exemption for State and local bonds also does not apply to any arbitrage bond.29 

An arbitrage bond is defined as any bond that is part of an issue if any proceeds of the issue are 

reasonably expected to be used (or intentionally are used) to acquire higher yielding investments 

or to replace funds that are used to acquire higher yielding investments.30 In general, arbitrage 

profits may be earned only during specified periods (e.g., defined “temporary periods”) before 

funds are needed for the purpose of the borrowing or on specified types of investments (e.g., 

“reasonably required reserve or replacement funds”). Subject to limited exceptions, investment 

profits that are earned during these periods or on such investments must be rebated to the Federal 

government. 

An issuer must file with the IRS certain information in order for a bond issue to be taxexempt.31 Generally, this information return is required to be filed no later the 15th day of the 

second month after the close of the calendar quarter in which the bonds were issued. 

Qualified zone academy bonds

As an alternative to traditional tax-exempt bonds, States and local governments may issue 

“qualified zone academy bonds.”32 “Qualified zone academy bonds” are defined as any bond 

issued by a State or local government, provided that (1) at least 95 percent of the proceeds are 

used for the purpose of renovating, providing equipment to, developing course materials for use 

at, or training teachers and other school personnel in a “qualified zone academy” and (2) private 

entities have promised to contribute to the qualified zone academy certain equipment, technical 

assistance or training, employee services, or other property or services with a value equal to at 

least 10 percent of the bond proceeds. A school is a “qualified zone academy” if (1) the school is 

a public school that provides education and training below the college level, (2) the school 

operates a special academic program in cooperation with businesses to enhance the academic 

curriculum and increase graduation and employment rates, and (3) either (a) the school is located 

in an empowerment zone or enterprise community designated under the Code, or (b) it is 

reasonably expected that at least 35 percent of the students at the school will be eligible for free 

or reduced-cost lunches under the school lunch program established under the National School 

Lunch Act. 

Financial institutions that hold qualified zone academy bonds are entitled to a 

nonrefundable tax credit in an amount equal to a credit rate multiplied by the face amount of the 

bond. The Treasury Department sets the credit rate at a rate estimated to allow issuance of 

 29 Secs. 103(a) and (b)(2). 

30 Sec. 148. 

31 Sec. 149(e). 

32 Sec. 1397E. 
26

qualified zone academy bonds without discount and without interest cost to the issuer. The 

credit is includable in gross income (as if it were a taxable interest payment on the bond), and 

may be claimed against regular income tax and AMT liability. The maximum term of the bond 

is determined by the Treasury Department, so that the present value of the obligation to repay the 

bond is 50 percent of the face value of the bond. 

There is an annual limitation of $400 million on the amount of qualified zone academy 

bonds that may be issued in calendar years 1998 through 2005. The $400 million aggregate 

bond cap is allocated each year to the States according to their respective populations of 

individuals below the poverty line. Each State, in turn, allocates the credit authority to qualified 

zone academies within such State. 

Tax credits for production of electricity from renewable sources

An income tax credit is allowed for the production of electricity from qualified facilities 

sold by the taxpayer to an unrelated person.33 The base amount of the credit is 1.5 cents per 

kilowatt-hour (indexed for inflation) of electricity produced. The amount of the credit is 1.9 cents 

per kilowatt-hour for 2005. A taxpayer may claim credit for the 10-year period commencing 

with the date the qualified facility is placed in service. The credit is reduced for grants, taxexempt bonds, subsidized energy financing, and other credits. The amount of credit a taxpayer 

may claim is phased out as the market price of electricity (or refined coal in the case of or refined 

coal production credit) exceeds certain threshold levels. 

Qualified facilities comprise wind energy facilities, closed-loop biomass facilities, openloop biomass (including agricultural livestock waste nutrients) facilities, geothermal energy 

facilities, solar energy facilities, small irrigation power facilities, landfill gas facilities, and trash 

combustion facilities. In addition, an income tax credit is allowed for the production of refined 

coal. 

For purposes of the credit, qualified facilities must be placed in service by certain dates. 

However, with the exception of qualifying refined coal facilities, in no event may qualifying 

facilities be placed in service after December 31, 2005. 

House Bill

No provision. 

Senate Amendment

The provision creates a new category of tax credit bonds: Clean Renewable Energy 

Bonds (“CREBs”). CREBs are defined as any bond issued by a qualified issuer if, in addition to 

the requirements discussed below, 95 percent or more of the proceeds of such bonds are used to 

finance capital expenditures incurred by qualified borrowers for facilities that qualify for the tax 

 33 Sec. 45. 
27

credit under section 45 (“qualified projects”), without regard to the placed-in-service date 

requirements of that section. 

Like qualified zone academy bonds, CREBs are not interest-bearing obligations. Rather, 

the taxpayer holding CREBs on a credit allowance date would be entitled to a tax credit. The 

amount of the credit is determined by multiplying the bond’s credit rate by the face amount on 

the holder’s bond. The credit rate on the bonds is determined by the Secretary and is to be a rate 

that permits issuance of CREBs without discount and interest cost to the qualified issuer. The 

credit accrues quarterly and is includible in gross income (as if it were an interest payment on the 

bond), and can be claimed against regular income tax liability and alternative minimum tax 

liability. 

The provision also imposes a maximum maturity limitation on any CREBs. The 

maximum maturity is the term which the Secretary estimates will result in the present value of 

the obligation to repay the principal on a CREBs being equal to 50 percent of the face amount of 

such bond. Moreover, the provision requires level amortization of CREBs during the period 

such bonds are outstanding. 

For purposes of the provision, “qualified issuers” include (1) governmental bodies 

(including Indian tribal governments); (2) the Tennessee Valley Authority; (3) mutual or 

cooperative electric companies (described in section 501(c)(12) or section 1381(a)(2)(C), or a 

not-for-profit electric utility which has received a loan or guarantee under the Rural 

Electrification Act); and (4) clean energy bond lenders. A clean energy bond lender means a 

cooperative which is owned by, or has outstanding loans to, 100 or more cooperative electric 

companies and is in existence on February 1, 2002. The term “qualified borrower” includes a 

governmental body, the Tennessee Valley Authority, and a mutual or cooperative electric 

company. 

Under the provision, CREBs are subject to the arbitrage requirements of section 148 that 

apply to traditional tax-exempt bonds. Principles under section 148 and the regulations 

thereunder shall apply for purposes of determining the yield restriction and arbitrage rebate 

requirements applicable to CREBs. For example, for arbitrage purposes, the yield on an issue of 

CREBs is computed by taking into account all payments of interest, if any, on such bonds, i.e., 

whether the bonds are issued at par, premium, or discount. However, for purposes of 

determining yield, the amount of the credit allowed to a taxpayer holding CREBs is not treated 

as interest, although such credit amount is treated as interest income to the taxpayer. 

In addition, to qualify as CREBs, the qualified issuer must reasonably expect to and 

actually spend 95 percent or more of the proceeds of such bonds on qualified projects within the 

five-year period that begins on the date of issuance. To the extent less than 95 percent of the 

proceeds are used to finance qualified projects during the five-year spending period, bonds will 

continue to qualify as CREBs if unspent proceeds are used within 90 days from the end of such 

five-year period to redeem any “nonqualified bonds.” For these purposes, the amount of 

nonqualified bonds is to be determined in the same manner as Treasury regulations under section 
28

142.34 In addition, the provision provides that the five-year spending period may be extended by 

the Secretary upon the qualified issuer’s request. 

Unlike qualified zone academy bonds, the provision requires issuers of CREBs to report 

issuance to the IRS in a manner similar to the information returns required for tax-exempt bonds. 

Under the provision, there is a national limitation of $1 billion of CREBs that the Secretary may 

allocate, in the aggregate, to qualified projects. The authority to issue CREBs expires December 

31, 2008. 

Effective date.−The provision is effective for bonds issued after December 31, 2005. 

Conference Agreement

The conference agreement follows the Senate amendment with modifications. Under the 

conference agreement, the term “qualified issuers” includes (1) governmental bodies (including 

Indian tribal governments); (2) mutual or cooperative electric companies (described in section 

501(c)(12) or section 1381(a)(2)(C), or a not-for-profit electric utility which has received a loan 

or guarantee under the Rural Electrification Act); and (3) clean energy bond lenders. The term 

“qualified borrower” includes a governmental body (including an Indian tribal government) and 

a mutual or cooperative electric company. 

Under the conference agreement, there is a national limitation of $800 million of CREBs 

that the Secretary may allocate, in the aggregate, to qualified projects. Qualified projects are any 

“qualified facilities” within the meaning of section 45 (without regard to the placed-in-service 

date requirements of that section), other than Indian coal production facilities. In addition, the 

conference agreement provides that the authority to issue CREBs expires December 31, 2007. 

However, the Secretary shall not allocate more than $500 million of CREBs to finance qualified 

projects for qualified borrowers that are governmental bodies (as defined under the conference 

agreement). 

11. Treatment of income of certain electric cooperatives (sec. 1505 of the Senate 

amendment, sec. 1304 of the conference agreement, and sec. 501(c)(12) of the Code) 

Present Law

In general

Under present law, an entity must be operated on a cooperative basis in order to be 

treated as a cooperative for Federal income tax purposes. Although not defined by statute or 

regulation, the two principal criteria for determining whether an entity is operating on a 

cooperative basis are: (1) ownership of the cooperative by persons who patronize the 

cooperative; and (2) return of earnings to patrons in proportion to their patronage. The Internal 

Revenue Service requires that cooperatives must operate under the following principles: (1) 

subordination of capital in control over the cooperative undertaking and in ownership of the 

 34 Treas. Reg. sec. 1.142-2(e). 
29

financial benefits from ownership; (2) democratic control by the members of the cooperative; (3) 

vesting in and allocation among the members of all excess of operating revenues over the 

expenses incurred to generate revenues in proportion to their participation in the cooperative 

(patronage); and (4) operation at cost (not operating for profit or below cost).35 

In general, cooperative members are those who participate in the management of the 

cooperative and who share in patronage capital. As described below, income from the sale of 

electric energy by an electric cooperative may be member or non-member income to the 

cooperative, depending on the membership status of the purchaser. A municipal corporation 

may be a member of a cooperative. 

For Federal income tax purposes, a cooperative generally computes its income as if it 

were a taxable corporation, with one exception--the cooperative may exclude from its taxable 

income distributions of patronage dividends. In general, patronage dividends are the profits of 

the cooperative that are rebated to its patrons pursuant to a pre-existing obligation of the 

cooperative to do so. The rebate must be made in some equitable fashion on the basis of the 

quantity or value of business done with the cooperative. 

Except for tax-exempt farmers’ cooperatives, cooperatives that are subject to the 

cooperative tax rules of subchapter T of the Code36 are permitted a deduction for patronage 

dividends from their taxable income only to the extent of net income that is derived from 

transactions with patrons who are members of the cooperative.37 The availability of such 

deductions from taxable income has the effect of allowing the cooperative to be treated like a 

conduit with respect to profits derived from transactions with patrons who are members of the 

cooperative. 

Cooperatives that qualify as tax-exempt farmers’ cooperatives are permitted to exclude 

patronage dividends from their taxable income to the extent of all net income, including net 

income that is derived from transactions with patrons who are not members of the cooperative, 

provided the value of transactions with patrons who are not members of the cooperative does not 

exceed the value of transactions with patrons who are members of the cooperative.38

Taxation of electric cooperatives exempt from subchapter T

In general, the cooperative tax rules of subchapter T apply to any corporation operating 

on a cooperative basis (except mutual savings banks, insurance companies, other tax-exempt 

organizations, and certain utilities), including tax-exempt farmers’ cooperatives (described in 

 35 Announcement 96-24, “Proposed Examination Guidelines Regarding Rural Electric 

Cooperatives,” 1996-16 I.R.B. 35. 

36 Sec. 1381, et seq. 

37 Sec. 1382. 

38 Sec. 521. 
30

sec. 521(b)). However, subchapter T does not apply to an organization that is “engaged in 

furnishing electric energy, or providing telephone service, to persons in rural areas.”39 Instead, 

electric cooperatives are taxed under rules that were generally applicable to cooperatives prior to 

the enactment of subchapter T in 1962. Under these rules, an electric cooperative can exclude 

patronage dividends from taxable income to the extent of all net income of the cooperative, 

including net income derived from transactions with patrons who are not members of the 

cooperative.40

Tax exemption of rural electric cooperatives

Section 501(c)(12) provides an income tax exemption for rural electric cooperatives if at 

least 85 percent of the cooperative's income consists of amounts collected from members for the 

sole purpose of meeting losses and expenses of providing service to its members. The IRS takes 

the position that rural electric cooperatives also must comply with the fundamental cooperative 

principles described above in order to qualify for tax exemption under section 501(c)(12).41 The 

85-percent test is determined without taking into account any income from: (1) qualified pole 

rentals; (2) open access electric energy transmission services; (3) open access electric energy 

distribution services; (4) any nuclear decommissioning transaction; (5) any asset exchange or 

conversion transaction.42

Income from open access transactions

Income received or accrued by a rural electric cooperative (other than income received or 

accrued directly or indirectly from a member of the cooperative) from the provision or sale of 

electric energy transmission services or ancillary services on a nondiscriminatory open access 

basis under an open access transmission tariff approved or accepted by FERC or under an 

independent transmission provider agreement approved or accepted by FERC (including an 

agreement providing for the transfer of control−but not ownership−of transmission facilities) is 

excluded in determining whether a rural electric cooperative satisfies the 85-percent test for tax 

exemption under section 501(c)(12). 

In addition, income is excluded for purposes of the 85-percent test if it is received or 

accrued by a rural electric cooperative (other than income received or accrued directly or 

indirectly from a member of the cooperative) from the provision or sale of electric energy 

distribution services or ancillary services, provided such services are provided on a 

nondiscriminatory open access basis to distribute electric energy not owned by the cooperative: 

(1) to end-users who are served by distribution facilities not owned by the cooperative or any of 

its members; or (2) generated by a generation facility that is not owned or leased by the 

 39 Sec. 1381(a)(2)(C) 

40 See Rev. Rul. 83-135, 1983-2 C.B. 149. 

41 Rev. Rul. 72-36, 1972-1 C.B. 151. 

42 Sec. 501(c)(12)(C). 
31

cooperative or any of its members and that is directly connected to distribution facilities owned 

by the cooperative or any of its members. 

The exclusion for income from open access transactions does not apply to taxable years 

beginning after December 31, 2006. 

Income from nuclear decommissioning transactions

Income received or accrued by a rural electric cooperative from any “nuclear 

decommissioning transaction” also is excluded in determining whether a rural electric 

cooperative satisfies the 85-percent test for tax exemption under section 501(c)(12). The term 

“nuclear decommissioning transaction” is defined as— 

1. any transfer into a trust, fund, or instrument established to pay any nuclear 

decommissioning costs if the transfer is in connection with the transfer of the 

cooperative’s interest in a nuclear powerplant or nuclear powerplant unit; 

2. any distribution from a trust, fund, or instrument established to pay any nuclear 

decommissioning costs; or 

3. any earnings from a trust, fund, or instrument established to pay any nuclear 

decommissioning costs. 

The exclusion for income from nuclear decommissioning transactions does not apply to 

taxable years beginning after December 31, 2006. 

Income from asset exchange or conversion transactions

Gain realized by a tax-exempt rural electric cooperative from a voluntary exchange or 

involuntary conversion of certain property is excluded in determining whether a rural electric 

cooperative satisfies the 85-percent test for tax exemption under section 501(c)(12). This 

provision only applies to the extent that: (1) the gain would qualify for deferred recognition 

under section 1031 (relating to exchanges of property held for productive use or investment) or 

section 1033 (relating to involuntary conversions); and (2) the replacement property that is 

acquired by the cooperative pursuant to section 1031 or section 1033 (as the case may be) 

constitutes property that is used, or to be used, for the purpose of generating, transmitting, 

distributing, or selling electricity or natural gas. 

The exclusion for income from asset exchange or conversion transactions does not apply 

to taxable years beginning after December 31, 2006. 

Treatment of income from load loss transactions

Tax-exempt rural electric cooperatives

Under present law, income received or accrued by a tax-exempt rural electric cooperative 

from a “load loss transaction” is treated under section 501(c)(12) as income collected from 

members for the sole purpose of meeting losses and expenses of providing service to its 
32

members.43 Therefore, income from load loss transactions is treated as member income in 

determining whether a rural electric cooperative satisfies the 85-percent test for tax exemption 

under section 501(c)(12). In addition, income from load loss transactions does not cause a taxexempt electric cooperative to fail to be treated for Federal income tax purposes as a mutual or 

cooperative company under the fundamental cooperative principles described above. 

The term “load loss transaction” is generally defined as any wholesale or retail sale of 

electric energy (other than to a member of the cooperative) to the extent that the aggregate 

amount of such sales during a seven-year period beginning with the “start-up year” does not 

exceed the reduction in the amount of sales of electric energy during such period by the 

cooperative to members. The “start-up year” is defined as the first year that the cooperative 

offers nondiscriminatory open access or, if later and at the election of the cooperative, 2004. 

Present law also excludes income received or accrued by rural electric cooperatives from 

load loss transactions from the tax on unrelated trade or business income. 

The special rule for income received or accrued by a tax-exempt rural electric 

cooperative from a load loss transaction does not apply to taxable years beginning after 

December 31, 2006. 

Taxable electric cooperatives

The receipt or accrual of income from load loss transactions by taxable electric 

cooperatives is treated as income from patrons who are members of the cooperative.44 Thus, 

income from a load loss transaction is excludible from the taxable income of a taxable electric 

cooperative if the cooperative distributes such income pursuant to a pre-existing contract to 

distribute the income to a patron who is not a member of the cooperative. In addition, income 

from load loss transactions does not cause a taxable electric cooperative to fail to be treated for 

Federal income tax purposes as a mutual or cooperative company under the fundamental 

cooperative principles described above. 

The special rule for income received or accrued by a taxable electric cooperative from a 

load loss transaction does not apply to taxable years beginning after December 31, 2006. 

House Bill

No provision. 

Senate Amendment

The Senate amendment eliminates the sunset date for the rules excluding income received 

or accrued by tax-exempt rural electric cooperatives from open access electric energy 

 43 Sec. 501(c)(12)(H). 

44 Sec. 501(c)(12)(H). 
33

transmission or distribution services, any nuclear decommissioning transaction, and any asset 

exchange or conversion transaction for purposes of the 85-percent test under section 501(c)(12). 

The provision also eliminates the sunset date for the rule that allows income from load loss 

transactions to be treated as member income in determining whether a rural electric cooperative 

satisfies the 85-percent test. In addition, the provision eliminates the sunset date for the rule that 

permits taxable electric cooperatives to treat the receipt or accrual of income from load loss 

transactions as income from patrons who are members of the cooperative. 

Effective date.−The provision is effective on the date of enactment. 

Conference Agreement

The conference agreement follows the Senate amendment. 

12. Dispositions of transmission property to implement FERC restructuring policy 

(sec. 1506 of the Senate amendment, sec. 1305 of the conference agreement, and sec. 451 of 

the Code) 

Present Law

Generally, a taxpayer selling property recognizes gain to the extent the sales price (and 

any other consideration received) exceeds the seller’s basis in the property. The recognized gain 

is subject to current income tax unless the gain is deferred or not recognized under a special tax 

provision. 

One such special tax provision permits taxpayers to elect to recognize gain from 

qualifying electric transmission transactions ratably over an eight-year period beginning in the 

year of sale if the amount realized from such sale is used to purchase exempt utility property 

within the applicable period45 (the “reinvestment property”). If the amount realized exceeds the 

amount used to purchase reinvestment property, any realized gain is recognized to the extent of 

such excess in the year of the qualifying electric transmission transaction. 

A qualifying electric transmission transaction is the sale or other disposition of property 

used by the taxpayer in the trade or business of providing electric transmission services, or an 

ownership interest in such an entity, to an independent transmission company prior to January 1, 

2007. In general, an independent transmission company is defined as: (1) an independent 

transmission provider46 approved by the FERC; (2) a person (i) who the FERC determines under 

section 203 of the Federal Power Act (or by declaratory order) is not a “market participant” and 

(ii) whose transmission facilities are placed under the operational control of a FERC-approved 

independent transmission provider before the close of the period specified in such authorization, 

 45 The applicable period for a taxpayer to reinvest the proceeds is four years after the close of the 

taxable year in which the qualifying electric transmission transaction occurs. 

46 For example, a regional transmission organization, an independent system operator, or an 

independent transmission company. 
34

but not later than January 1, 2007; or (3) in the case of facilities subject to the jurisdiction of the 

Public Utility Commission of Texas, (i) a person which is approved by that Commission as 

consistent with Texas State law regarding an independent transmission organization, or (ii) a 

political subdivision, or affiliate thereof, whose transmission facilities are under the operational 

control of an organization described in (i). 

Exempt utility property is defined as: (1) property used in the trade or business of 

generating, transmitting, distributing, or selling electricity or producing, transmitting, 

distributing, or selling natural gas, or (2) stock in a controlled corporation whose principal trade 

or business consists of the activities described in (1). 

If a taxpayer is a member of an affiliated group of corporations filing a consolidated 

return, the reinvestment property may be purchased by any member of the affiliated group (in 

lieu of the taxpayer). 

House Bill

No provision. 

Senate Amendment

The Senate amendment provision extends the treatment under the present-law deferral 

provision to sales or dispositions to an independent transmission company prior to January 1, 

2008. 

Effective date.−The Senate amendment provision is effective for transactions occurring 

after the date of enactment. However, because the provision is an extension of a present law 

provision which expires on December 31, 2006, only transactions occurring after December 31, 

2006 and prior to January 1, 2008 will be affected. 

Conference Agreement

The conference agreement follows the Senate amendment. 

13. Credit for production from advanced nuclear power facilities (sec. 1507 of the Senate 

amendment, sec. 1306 of the conference agreement, and new sec. 45J of the Code) 

Present Law

An income tax credit is allowed for production of electricity from qualified facilities sold 

by the taxpayer to an unrelated person (sec. 45). Qualified facilities comprise wind energy 

facilities, “closed-loop” biomass facilities, open-loop biomass (including agricultural livestock 

waste nutrients) facilities, geothermal energy facilities, solar energy facilities, small irrigation 

power facilities, landfill gas facilities, and trash combustion facilities. The base amount of the 

credit is 1.5 cents per kilowatt-hour (indexed for inflation) of electricity produced. The amount 

of the credit is 1.9 cents per kilowatt-hour for 2005. However, electricity produced at open-loop 

biomass, small irrigation power, and municipal solid waste facilities receives only 50 percent of 

the credit, or 0.9 cents per kilowatt-hour for 2005. Generally, wind and closed-loop biomass 
35

facilities may claim this credit for 10 years from the placed-in-service date of the facility. Other 

qualified facilities may claim the credit for only five years from the placed-in-service date. 

Present law does not provide a credit for electricity produced at advanced nuclear power 

facilities. 

House Bill

No provision. 

Senate Amendment

The provision permits a taxpayer producing electricity at a qualifying advanced nuclear 

power facility to claim a credit equal to 1.8 cents per kilowatt-hour of electricity produced for the 

eight-year period starting when the facility is placed in service.47 The aggregate amount of credit 

that a taxpayer may claim in any year during the eight-year period is subject to limitation based 

on allocated capacity and an annual limitation as described below. 

A qualifying advanced nuclear facility is an advanced nuclear facility for which the 

taxpayer has received an allocation of megawatt capacity from the Secretary and is placed in 

service before January 1, 2021. The taxpayer may only claim credit for production of electricity 

equal to the ratio of the allocated capacity that the taxpayer receives from the Secretary to the 

rated nameplate capacity of the taxpayer’s facility. For example, if the taxpayer receives an 

allocation of 750 megawatts of capacity from the Secretary and the taxpayer’s facility has a rated 

nameplate capacity of 1,000 megawatts, then the taxpayer may claim three-quarters of the 

otherwise allowable credit, or 1.35 cents per kilowatt-hour, for each kilowatt-hour of electricity 

produced at the facility (subject to the annual limitation described below). The Secretary may 

allocate up to 6,000 megawatts of capacity. 

A taxpayer operating a qualified facility may claim no more than $125 million in tax 

credits per 1,000 megawatts of allocated capacity in any one year of the eight-year credit period. 

If the taxpayer operates a 1,350 megawatt rated nameplate capacity system and has received an 

allocation from the Secretary for 1,350 megawatts of capacity eligible for the credit, the 

taxpayer’s annual limitation on credits that may be claimed is equal to 1.35 times $125 million, 

or $168.75 million. If the taxpayer operates a facility with a nameplate rated capacity of 1,350 

megawatts, but has received an allocation from the Secretary for 750 megawatts of credit eligible 

capacity, then the two limitations apply such that the taxpayer may claim a credit equal to 1.35 

cents per kilowatt-hour of electricity produced (as described above) subject to an annual credit 

limitation of $93.75 million in credits (three-quarters of $125 million). 

 47 The 1.8-cents credit amount is reduced, but not below zero, if the annual average contract price 

per kilowatt-hour of electricity generated from advanced nuclear power facilities in the preceding year 

exceeds eight cents per kilowatt-hour. The eight-cent price comparison level is indexed for inflation after 

1992. 
36

An advanced nuclear facility is any nuclear facility for the production of electricity, the 

reactor design for which was approved after 1993 by the Nuclear Regulatory Commission. For 

this purpose, a qualifying advanced nuclear facility does not include any facility for which a 

substantially similar design for a facility of comparable capacity was approved before 1994. 

In addition, the credit allowable to the taxpayer is reduced by reason of grants, taxexempt bonds, subsidized energy financing, and other credits, but such reduction cannot exceed 

50 percent of the otherwise allowable credit. The credit is treated as part of the general business 

credit. 

Effective date.−The provision applies to electricity produced in taxable years beginning 

after the date of enactment. 

Conference Agreement

The conference agreement follows the Senate amendment. 

14. Credit for investment in clean coal facilities (sec. 1508 of the Senate amendment, sec. 

1307 of the conference agreement, and new secs. 48A and 48B of the Code) 

Present Law

Present law does not provide an investment credit for electricity production facilities 

property that uses coal as a fuel or for the gasification of coal or other materials. However, a 

nonrefundable, 10-percent investment tax credit (“energy credit”) is allowed for the cost of new 

property that is equipment (1) that uses solar energy to generate electricity, to heat or cool a 

structure, or to provide solar process heat, or (2) that is used to produce, distribute, or use energy 

derived from a geothermal deposit, but only, in the case of electricity generated by geothermal 

power, up to the electric transmission stage (sec. 48). The energy credit is a component of the 

general business credit (sec. 38(b)(1)). 

House Bill

No provision. 

Senate Amendment

The provision creates two new 20-percent investment tax credits. Both credits are 

available only to projects certified by the Secretary of Treasury, in consultation with the 

Secretary of Energy. Certifications are issued using a competitive bidding process. 

With respect to the first investment tax credit, the provision establishes a 10-year 

program to produce 7,500 megawatts of power generation capacity using integrated gasification 

combined cycle (“IGCC”) and other advanced coal-based electricity generation technologies. 

Qualified projects must be economically feasible and use the appropriate clean coal technologies. 

The Secretary of Treasury, in consultation with the Secretary of Energy, must allocate up to 

4,125 megawatts of power generation capacity to credit-eligible projects using IGCC technology. 
37

The remaining 3,375 megawatts of power generation capacity must be allocated to credit-eligible 

projects that use other advanced coal-based technologies. 

In determining which projects to certify that use IGCC technology, the Secretary must 

allocate power generation capacity in relatively equal amounts to projects that use bituminous 

coal, subbituminous coal, and lignite as primary feedstock. In addition, the Secretary must give 

high priority to projects which include greenhouse gas capture capability, increased by-product 

utilization, and other benefits. 

With respect to the second investment tax credit, the provision authorizes the certification 

of certain gasification projects. Qualified gasification projects convert coal, petroleum residue, 

biomass, or other materials recovered for their energy or feedstock value into a synthesis gas 

composed primarily of carbon monoxide and hydrogen for direct use or subsequent chemical or 

physical conversion. Under the provision, certified gasification projects are eligible for the new 

20 percent investment tax credit. The total qualified investment which may be certified as 

eligible for credit under the gasification program may not exceed $4 billion. In addition, the 

Secretary may certify a maximum of $1 billion in qualified investment as eligible for credit with 

respect to any single project. 

Effective date.− The credits apply to periods after the date of enactment, under rules 

similar to the rules of section 48(m) (as in effect before its repeal). 

Conference Agreement

The conference agreement follows the Senate amendment with modifications. Under the 

conference agreement, the Secretary may allocate investment credits for projects using IGCC 

and other advanced coal-based technologies based on the amount invested, rather than on 

megawatts of power generation capacity. The Secretary may allocate $800 million of credits to 

IGCC projects and $500 million of credits to projects using other advanced coal-based 

technologies. 

Under the agreement, the credit available to IGCC projects remains 20 percent of 

qualified investments; however, the credit for other advanced coal-based projects is reduced to 

15 percent of qualified investments. With respect to IGCC projects, the conference agreement 

narrows the definition of credit-eligible investments to include only investments in property 

associated with the gasification of coal, including any coal handling and gas separation 

equipment. Thus, investments in equipment that could operate by drawing fuel directly from a 

natural gas pipeline do not qualify for the credit. 

The conference agreement retains the 20 percent investment credit for certified 

gasification projects. The agreement, however, reduces the total amount of gasification credits 

allocable by the Secretary to $350 million. A maximum of $650 million of credit-eligible 

investment may be allocated to any single gasification project. The conference agreement also 

clarifies that only property which is part of a qualifying gasification project and necessary for the 

gasification technology of such project is eligible for the gasification credit. 
38

15. Clean energy coal bonds (sec. 1509 of the Senate amendment) 

Present law

Tax-exempt bonds

Interest on State and local governmental bonds generally is excluded from gross income 

for Federal income tax purposes if the proceeds of the bonds are used to finance direct activities 

of these governmental units or if the bonds are repaid with revenues of the governmental units. 

Subject to certain restrictions, activities that can be financed with these tax-exempt bonds include 

electric power facilities (i.e., generation, transmission, distribution, and retailing). 

Generally, interest on State or local government bonds to finance activities of private 

persons (“private activity bonds”) is taxable unless a specific exception is contained in the Code. 

The term “private person” generally includes the Federal Government and all other individuals 

and entities other than States or local governments. The Code includes exceptions permitting 

States or local governments to act as conduits providing tax-exempt financing for certain private 

activities. In most cases, the aggregate volume of these tax-exempt private activity bonds is 

restricted by annual aggregate volume limits imposed on bonds issued by issuers within each 

State. For calendar year 2005, the State volume cap is the greater of $80 per resident or $239 

million. The Code imposes several additional restrictions on tax-exempt private activity bonds 

that do not apply to bonds for governmental activities. 

The tax exemption for State and local bonds also does not apply to any arbitrage bond.48 

An arbitrage bond is defined as any bond that is part of an issue if any proceeds of the issue are 

reasonably expected to be used (or intentionally are used) to acquire higher yielding investments 

or to replace funds that are used to acquire higher yielding investments.49 In general, arbitrage 

profits may be earned only during specified periods (e.g., defined “temporary periods”) before 

funds are needed for the purpose of the borrowing or on specified types of investments (e.g., 

“reasonably required reserve or replacement funds”). Subject to limited exceptions, investment 

profits that are earned during these periods or on such investments must be rebated to the Federal 

Government. 

An issuer must file with the IRS certain information in order for a bond issue to be taxexempt.50 Generally, this information return is required to be filed no later the 15th day of the 

second month after the close of the calendar quarter in which the bonds were issued. 

 48 Secs. 103(a) and (b)(2). 

49 Sec. 148. 

50 Sec. 149(e). 
39

Qualified zone academy bonds

As an alternative to traditional tax-exempt bonds, States and local governments may issue 

“qualified zone academy bonds.”51 “Qualified zone academy bonds” are defined as any bond 

issued by a State or local government, provided that (1) at least 95 percent of the proceeds are 

used for the purpose of renovating, providing equipment to, developing course materials for use 

at, or training teachers and other school personnel in a “qualified zone academy” and (2) private 

entities have promised to contribute to the qualified zone academy certain equipment, technical 

assistance or training, employee services, or other property or services with a value equal to at 

least 10 percent of the bond proceeds. A school is a “qualified zone academy” if (1) the school is 

a public school that provides education and training below the college level, (2) the school 

operates a special academic program in cooperation with businesses to enhance the academic 

curriculum and increase graduation and employment rates, and (3) either (a) the school is located 

in an empowerment zone or enterprise community designated under the Code, or (b) it is 

reasonably expected that at least 35 percent of the students at the school will be eligible for free 

or reduced-cost lunches under the school lunch program established under the National School 

Lunch Act. 

Financial institutions that hold qualified zone academy bonds are entitled to a 

nonrefundable tax credit in an amount equal to a credit rate multiplied by the face amount of the 

bond. The Treasury Department sets the credit rate at a rate estimated to allow issuance of 

qualified zone academy bonds without discount and without interest cost to the issuer. The 

credit is includable in gross income (as if it were a taxable interest payment on the bond), and 

may be claimed against regular income tax and AMT liability. The maximum term of the bond 

is determined by the Treasury Department, so that the present value of the obligation to repay the 

bond is 50 percent of the face value of the bond. 

There is an annual limitation of $400 million on the amount of qualified zone academy 

bonds that may be issued in calendar years 1998 through 2005. The $400 million aggregate 

bond cap is allocated each year to the States according to their respective populations of 

individuals below the poverty line. Each State, in turn, allocates the credit authority to qualified 

zone academies within such State. 

House Bill

No provision. 

Senate Amendment

The provision creates a new category of tax credit bonds: Clean Energy Coal Bonds 

(“ClECos”). ClECos are defined as any bond issued by a qualified issuer if, in addition to the 

requirements discussed below, 95 percent or more of the proceeds of such bonds are used to 

finance capital expenditures incurred by qualified borrowers for “certified coal property.” 

 51 Sec. 1397E. 
40

Certified coal property is defined as any property that is part of a qualifying advanced coal 

project certified by the Secretary. 

Like qualified zone academy bonds, ClECos are not interest-bearing obligations. Rather, 

the taxpayer holding a ClECos on a credit allowance date would be entitled to a tax credit. The 

amount of the credit is determined by multiplying the bond’s credit rate by the face amount on 

the holder’s bond. The credit rate on the bonds is determined by the Secretary and is to be a rate 

that permits issuance of ClECos without discount and interest cost to the qualified issuer. The 

credit accrues quarterly and is includible in gross income (as if it were an interest payment on the 

bond), and can be claimed against regular income tax liability and alternative minimum tax 

liability. 

For purposes of the provision, “qualified issuers” include (1) governmental bodies; (2) 

the Tennessee Valley Authority; (3) mutual or cooperative electric companies (described in 

section 501(c)(12) or section 1381(a)(2)(C), or a not-for-profit electric utility which has received 

a loan or guarantee under the Rural Electrification Act); and (4) clean energy bond lenders. A 

clean energy bond lender means a cooperative which is owned by, or has outstanding loans to, 

100 or more cooperative electric companies and is in existence on February 1, 2002. The term 

“qualified borrower” includes a governmental body, the Tennessee Valley Authority, and a 

mutual or cooperative electric company. 

Under the provision, ClECos are subject to the arbitrage requirements of section 148 that 

apply to traditional tax-exempt bonds. In addition, to qualify as ClECos, the qualified issuer 

must reasonably expect to and actually spend 95 percent or more of the proceeds of such bonds 

on certified coal property within the five-year period that begins on the date of issuance. To the 

extent less than 95 percent of the proceeds are used to finance qualified projects during the fiveyear spending period, bonds will continue to qualify as ClECos if unspent proceeds are used 

within 90 days from the end of such five-year period to redeem any “nonqualified bonds.” For 

these purposes, the amount of nonqualified bonds is to be determined in the same manner as 

Treasury regulations under section 142.52 In addition, the provision provides that the five-year 

spending period may be extended by the Secretary upon the qualified issuer’s request. 

The provision also imposes a maximum maturity limitation on any ClECos. The 

maximum maturity is the term which the Secretary estimates will result in the present value of 

the obligation to repay the principal on a ClECos being equal to 50 percent of the face amount of 

such bond. Moreover, the provision requires level amortization of ClECos during the period 

such bonds are outstanding. 

Unlike qualified zone academy bonds, the provision requires issuers of ClECos to report 

issuance to the IRS in a manner similar to the information returns required for tax-exempt bonds. 

Under the provision, there is a national limitation of $1 billion of ClECos that the Secretary may 

allocate, in the aggregate, to certified coal property projects. The authority to issue ClECos 

expires December 31, 2010. 

 52 Treas. Reg. sec. 1.142-2(e). 
41

Effective date.−The provision is effective for bonds issued after December 31, 2005. 

Conference Agreement

The conference agreement does not include the Senate amendment provision. 

16. Credit for investment in clean coke/cogeneration manufacturing facilities (sec. 1511 of 

the Senate amendment) 

Present Law

Present law does not provide a credit for investment in clean coke/cogeneration 

manufacturing facilities property. 

House Bill

No provision. 

Senate Amendment

The provision provides a 20-percent investment tax credit for qualified investments in 

clean coke/cogeneration facilities property. The provision defines clean coke/cogeneration 

manufacturing facilities property as depreciable real and tangible personal property located in the 

United States that meets certain emission standards and is used for the manufacture of 

metallurgical coke or for the production of steam or electricity from waste heat generated during 

the production of metallurgical coke. 

The qualified investment for any taxable year is the basis of each coke/cogeneration 

facilities property placed in service by the taxpayer during such taxable year. The provision 

excludes the credit from the basis adjustment rules for investment credit property set out in 

section 50(c) of the Code. Under the basis adjustment rules, the basis in investment credit 

property is generally reduced by the amount of the investment credit. 

Effective date.−The provision applies to periods after December 31, 2004, and before 

January 1, 2010, under rules similar to the rules of section 48(m) (as in effect before its repeal). 

Conference Agreement

The conference agreement does not include the Senate amendment provision. 

17. Temporary expensing for equipment used in the refining of liquid fuels (sec. 1512 of the 

Senate amendment, sec. 1323 of the conference agreement, and new sec. 179C of the Code) 

Present Law

Depreciation of refinery assets

Under present law, depreciation allowances for property used in a trade or business 

generally are determined under the Modified Accelerated Cost Recovery System (“MACRS”) of 
42

section 168 of the Internal Revenue Code. Under MACRS, petroleum refining assets are 

depreciated for regular tax purposes over a 10-year recovery period using the double declining 

balance method. Petroleum refining assets are assets used for distillation, fractionation, and 

catalytic cracking of crude petroleum into gasoline and its other components. Present law also 

provides a special expensing rule for small refiners for capital costs incurred in complying with 

Environmental Protection Agency sulfur regulations. 

Taxation of cooperatives and their patrons

For Federal income tax purposes, a cooperative generally computes its income as if it 

were a taxable corporation, with one exception--the cooperative may exclude from its taxable 

income distributions of patronage dividends. Generally, cooperatives that are subject to the 

cooperative tax rules of subchapter T of the Code53 are permitted a deduction for patronage 

dividends from their taxable income only to the extent of net income that is derived from 

transactions with patrons who are members of the cooperative.54 The availability of such 

deductions from taxable income has the effect of allowing the cooperative to be treated like a 

conduit with respect to profits derived from transactions with patrons who are members of the 

cooperative. 

House Bill

No provision. 

Senate Amendment

The Senate amendment provision provides a temporary election to expense qualified 

refinery property.55 Qualified refinery property includes assets, located in the United States, 

used in the refining of liquid fuels: (1) with respect to the construction of which there is a 

binding construction contract before January 1, 2008; (2) which are placed in service before 

January 1, 2012; (3) which increase the capacity of an existing refinery by at least five percent or 

increase the percentage of total throughput56 attributable to qualified fuels (as defined in present 

 53 Sec. 1381, et seq. 

54 Sec. 1382. 

55 For purposes of the provision, the term “refinery” refers to facilities the primary purpose of 

which is the processing of crude oil (whether or not previously refined) or qualified fuels (as defined in 

present law section 29(c), which is redesignated as section 45K(c) under section 1322(a)(1) of the Act). 

The limitation of present law section 29(d) (redesignated as section 45K(d) under the Act) requiring 

domestic production of qualified fuels is not applicable with respect to the definition of refinery under this 

provision; thus, otherwise qualifying refinery property will be eligible for the provision even if the 

primary purpose of the refinery is the processing of oil produced from shale and tar sands outside the 

United States. The term refinery would include a facility which processes coal via gas into liquid fuel. 

56 For purposes of the provision, the throughput of a refinery is measured on the basis of barrels 

per calendar day. Barrels per calendar day is the amount of fuels that a facility can process under usual 
43

law section 29(c), which is redesignated as section 45K(c) by section 1322(a)(1) of the Act)57

such that it equals or exceeds 25 percent; and (4) which meet all applicable environmental laws 

in effect when the property is placed in service.58 

The expensing election is not available with respect to identifiable refinery property built 

solely to comply with Federally mandated projects or consent decrees. For example, a taxpayer 

may not elect to expense the cost of a scrubber, even if the scrubber is installed as part of a larger 

project, if the scrubber does not increase throughput or increased capacity to accommodate 

qualified fuels and is necessary for the refinery to comply with the Clean Air Act. This 

exclusion applies regardless of whether the mandate or consent decree addresses environmental 

concerns with respect to the refinery itself or the refined fuels. 

The Senate amendment provision allows cooperative organizations to pass through to the 

owners of such organizations the expensing deduction for qualified refinery property. To the 

extent the deduction is passed through to owners, the cooperative is denied deductions it would 

otherwise be entitled with respect to qualified refinery property. 

As a condition of eligibility for the expensing of equipment used in the refining of liquid 

fuels, the Senate amendment provision provides that a refinery must report to the IRS concerning 

its refinery operations (e.g. production and output). 

Effective date.−The Senate amendment provision is effective for property placed in 

service after the date of enactment, the original use of which begins with the taxpayer, provided 

the property was not subject to a binding contract for construction on or before June 14, 2005. 

Conference Agreement

The conference agreement follows the Senate amendment, with the following 

modifications. Under the conference agreement, the expensing election is limited to 50% of the 

taxpayer’s qualifying expenditures. The remaining 50% is recovered as under present law. 

Under the conference agreement, the five percent capacity requirement refers to the 

output capacity of the refinery, as measured by the volume of finished products other than 

asphalt and lube oil, rather than input capacity, as measured by rated capacity. 

 

operating conditions, expressed in terms of capacity during a 24-hour period and reduced to account for 

down time and other limitations. 

57 The limitation of present law section 29(d) (redesignated as section 45K(d) under section 

1322(a)(1) of the Act) regarding domestic production is not applicable with respect to the definition of 

qualified fuels under this provision. 

58 The requirement to meet all applicable environmental laws applies specifically to the refinery 

or portion of a refinery placed in service after the date of enactment. A refinery’s failure to meet 

applicable environmental laws with respect to a portion of the refinery which was in service prior to the 

effective date will not disqualify the taxpayer from making the election under the provision with respect 

to otherwise qualifying refinery property. 
44

The conference agreement includes a clarification that the expensing election is not 

available with respect to identifiable refinery property built solely to comply with consent 

decrees or projects mandated by Federal, State, or local governments. 

Finally, an exception to the original use requirement is provided for property which 

would meet the requirement but for a sale-leaseback transaction within the first three months 

after the property is originally placed in service. 

Under the conference agreement, a cooperative organization electing to pass the 

expensing deduction through to its owners must make such an election on the tax return for the 

taxable year to which the deduction relates. Once made, the election is irrevocable. Moreover, 

the organization making the election must provide cooperative owners receiving an allocation of 

the deduction written notice of the amount of such allocation.

18. Allow pass through to owners of deduction for capital costs incurred by small refiner 

cooperative in complying with Environmental Protection Agency sulfur regulations (sec. 

1513 of the Senate amendment, sec. 1324 of the conference agreement, and sec. 179B of the 

Code) 

Present Law

Expensing and credit for small refiners

Taxpayers generally may recover the costs of investments in refinery property through 

annual depreciation deductions. In addition, the Code permits small business refiners to 

immediately deduct as an expense up to 75 percent of the costs paid or incurred for the purpose 

of complying with the Highway Diesel Fuel Sulfur Control Requirements of the Environmental 

Protection Agency (“EPA”). Costs qualifying for the deduction are those costs paid or incurred 

with respect to any facility of a small business refiner during the period beginning on January 1, 

2003 and ending on the earlier of the date that is one year after the date on which the taxpayer 

must comply with the applicable EPA regulations or December 31, 2009. 

The Code also provides that a small business refiner may claim credit equal to five cents 

per gallon for each gallon of low sulfur diesel fuel produced during the taxable year that is in 

compliance with the Highway Diesel Fuel Sulfur Control Requirements. The total production 

credit claimed by the taxpayer is limited to 25 percent of the capital costs incurred to come into 

compliance with the EPA diesel fuel requirements. As with the deduction permitted under 

present law, costs qualifying for the credit are those costs paid or incurred with respect to any 

facility of a small business refiner during the period beginning on January 1, 2003 and ending on 

the earlier of the date that is one year after the date on which the taxpayer must comply with the 

applicable EPA regulations or December 31, 2009. The taxpayer’s basis in property with respect 

to which the credit applies is reduced by the amount of production credit claimed. 

For these purposes a small business refiner is a taxpayer who is within the business of 

refining petroleum products employs not more than 1,500 employees directly in refining and has 

less than 205,000 barrels per day (average) of total refinery capacity. The deduction is reduced, 

pro rata, for taxpayers with capacity in excess of 155,000 barrels per day. 
45 

In the case of a qualifying small business refiner that is owned by a cooperative, the 

cooperative is allowed to elect to pass any production credits to patrons of the organization. 

Present law does not permit cooperatives to pass through to members the deduction permitted for 

the costs paid or incurred for the purpose of complying with the Highway Diesel Fuel Sulfur 

Control Requirements. 

Taxation of cooperatives and their patrons

For Federal income tax purposes, a cooperative generally computes its income as if it 

were a taxable corporation, with one exception--the cooperative may exclude from its taxable 

income distributions of patronage dividends. In general, patronage dividends are the profits of 

the cooperative that are rebated to its patrons pursuant to a pre-existing obligation of the 

cooperative to do so. The rebate must be made in some equitable fashion on the basis of the 

quantity or value of business done with the cooperative. 

Except for tax-exempt farmers’ cooperatives, cooperatives that are subject to the 

cooperative tax rules of subchapter T of the Code59 are permitted a deduction for patronage 

dividends from their taxable income only to the extent of net income that is derived from 

transactions with patrons who are members of the cooperative.60 The availability of such 

deductions from taxable income has the effect of allowing the cooperative to be treated like a 

conduit with respect to profits derived from transactions with patrons who are members of the 

cooperative. 

Cooperatives that qualify as tax-exempt farmers’ cooperatives are permitted to exclude 

patronage dividends from their taxable income to the extent of all net income, including net 

income that is derived from transactions with patrons who are not members of the cooperative, 

provided the value of transactions with patrons who are not members of the cooperative does not 

exceed the value of transactions with patrons who are members of the cooperative.61

House Bill

No provision. 

Senate Amendment

The Senate amendment allows cooperatives to pass through to their owners the deduction 

permitted for costs paid or incurred for the purpose of complying with the Highway Diesel Fuel 

Sulfur Control Requirements. To the extent the deduction is passed through to owners, the 

cooperative is denied deductions it would otherwise be entitled with respect to costs attributable 

to complying with the Highway Diesel Fuel Sulfur Control Requirements. 

 59 Sec. 1381, et seq. 

60 Sec. 1382. 

61 Sec. 521. 
46 

Effective date.−The provision is effective as if included in the amendments made by 

section 338(a) of the American Jobs Creation Act of 2004.62

Conference Agreement

The conference agreement follows the Senate amendment with modifications. The 

conference agreement clarifies the manner in which a cooperative organization may elect to pass 

through to cooperative owners the deduction for costs paid or incurred for the purpose of 

complying with the Highway Diesel Fuel Sulfur Control Requirements. Specifically, the 

election must be made on the tax return of the organization for the taxable year to which the 

deduction relates. Once made, the election is irrevocable. Moreover, the organization making 

such an election must provide cooperative owners receiving an allocation of the deduction 

written notice of the amount of such allocation. The written notice must be provided by the due 

date for the tax return on which the election is made. 

19. Modification of enhanced oil recovery credit (sec. 1514 of the Senate amendment) 

Present Law

Taxpayers may claim a credit equal to 15 percent of enhanced oil recovery (“EOR”) costs 

(sec. 43). Qualified EOR costs include the following costs associated with an EOR project: (1) 

amounts paid for depreciable tangible property; (2) intangible drilling and development 

expenses; (3) tertiary injectant expenses; and (4) construction costs for certain Alaskan natural 

gas treatment facilities. 

The EOR credit is ratably reduced over a $6 phase-out range when the reference price for 

domestic crude oil exceeds $28 per barrel (adjusted for inflation after 1991). The reference price 

is determined based on the annual average price of domestic crude oil for the calendar year 

preceding the calendar year in which the taxable year begins (sec. 29(d)(2)(C)).63

House Bill

No provision. 

Senate Amendment

The provision modifies the EOR credit to increase the credit rate to 20 percent with 

respect to any new EOR project or substantial expansion of an existing EOR project that occurs 

after December 31, 2005, and uses carbon dioxide flooding or injection as an oil recovery 

method. The increased credit is available only for qualified EOR projects that use carbon 

 62 Pub. L. No. 108-357. 

63 The inflation adjustment factor for 2004 was 1.2952, so the EOR credit would have phased out 

in 2004 if the reference price had exceeded $36.27. However, the reference price for 2003 was only 

$27.56, so there was no phase out of the EOR credit for 2004. 
47 

dioxide that is (1) from an industrial source or (2) separated from natural gas and natural gas 

liquids at a natural gas processing plant. 

The provision also expands the definition of a qualified EOR project to include qualified 

deep gas well projects. A qualified deep gas well project is defined as any project located in the 

United States which involves the production of natural gas from onshore formations deeper than 

20,000 feet. Under the provision, the credit for qualified deep gas well projects phases out as 

crude oil prices increase using the same formula applicable to other EOR projects. 

Effective date.−The provision applies to costs paid or incurred in taxable years ending 

after December 31, 2005, but terminates for costs paid or incurred after December 31, 2009. 

Conference Agreement

The conference agreement does not include the Senate amendment provision.
48

B. Miscellaneous Energy Tax Incentives 

1. Credit for residential energy efficient property (sec. 1311 of the House bill, sec. 1527 of 

the Senate amendment, sec. 1335 of the conference agreement, and new sec. 25D of the 

Code) 

Present Law

A taxpayer may exclude from income the value of any subsidy provided by a public 

utility for the purchase or installation of an energy conservation measure. An energy 

conservation measure means any installation or modification primarily designed to reduce 

consumption of electricity or natural gas or to improve the management of energy demand with 

respect to a dwelling unit (sec. 136). 

There is no present-law credit for residential solar hot water, photovoltaic, or fuel cell 

property. 

House Bill

The provision provides a personal tax credit for the purchase of qualified photovoltaic 

property and qualified solar water heating property that is used exclusively for purposes other 

than heating swimming pools and hot tubs. The credit is equal to 15 percent of qualified 

investment up to a maximum credit of $2,000 for solar water heating property and $2,000 for 

rooftop photovoltaic property. The provision also provides a 15-percent personal tax credit for 

the purchase of qualified fuel cell power plants. The credit may not exceed $500 for each 0.5 

kilowatt of capacity. The credit is nonrefundable.64 The taxpayer’s basis in the property is 

reduced by the amount of the credit. 

Qualifying solar water heating property is property that heats water for use in a dwelling 

unit if at least half of the energy used by such property for such purpose is derived from the sun. 

Qualified photovoltaic property is property that uses solar energy to generate electricity for use 

in a dwelling unit. A qualified fuel cell power plant is an integrated system comprised of a fuel 

cell stack assembly and associated balance of plant components that converts a fuel into 

electricity using electrochemical means, and which has an electricity-only generation efficiency 

of greater than 30 percent. 

To qualify for the credit, the property must be installed on or in connection with a 

dwelling unit located in the United States and used as a residence by the taxpayer. If less than 

80 percent of the use of an item is for nonbusiness purposes, only that portion of the expenditures 

for such item which is properly allocable to use for nonbusines purposes shall be taken into 

account. Certain equipment safety requirements need to be met to qualify for the credit. Special 

proration rules apply in the case of jointly owned property, condominiums, and tenantstockholders in cooperative housing corporations. 

 64 Sec. 1321 of the House bill allows the credit to offset both the regular tax and the alternative 

minimum tax. 
49

Effective date.−The credit applies to expenditures made after the date of enactment in 

taxable years ending before January 1, 2008. 

Senate Amendment

The provision provides a personal tax credit for the purchase of qualified photovoltaic 

property and qualified solar water heating property that is used exclusively for purposes other 

than heating swimming pools and hot tubs. The credit is equal to 30 percent of qualifying 

expenditures, with a maximum credit for each of these systems of property of $2,000. The 

provision also provides a 30 percent credit for the purchase of qualified fuel cell power plants. 

The credit for any fuel cell may not exceed $500 for each 0.5 kilowatt of capacity. 

Qualifying solar water heating property means an expenditure for property to heat water 

for use in a dwelling unit located in the United States and used as a residence if at least half of 

the energy used by such property for such purpose is derived from the sun. Qualified 

photovoltaic property is property that uses solar energy to generate electricity for use in a 

dwelling unit. A qualified fuel cell power plant is an integrated system comprised of a fuel cell 

stack assembly and associated balance of plant components that (1) converts a fuel into 

electricity using electrochemical means, (2) has an electricity-only generation efficiency of 

greater than 30 percent, and (3) generates at least 0.5 kilowatts of electricity. The qualified fuel 

cell power plant must be installed on or in connection with a dwelling unit located in the United 

States and used by the taxpayer as a principal residence. 

The credit is nonrefundable, and the depreciable basis of the property is reduced by the 

amount of the credit. Expenditures for labor costs allocable to onsite preparation, assembly, or 

original installation of property eligible for the credit are eligible expenditures. 

Certain equipment safety requirements need to be met to qualify for the credit. Special 

proration rules apply in the case of jointly owned property, condominiums, and tenantstockholders in cooperative housing corporations. If less than 80 percent of the property is used 

for nonbusiness purposes, only that portion of expenditures that is used for nonbusiness purposes 

is taken into account. 

Effective date.−The credit applies to property placed in service after December 31, 2005 

and prior to January 1, 2010. 

Conference Agreement

The conference agreement follows the Senate amendment, but only for property placed in 

service prior to January 1, 2008. 

Effective date.−The credit applies to property placed in service after December 31, 2005 

and prior to January 1, 2008. 
50

2. Credit for business installation of qualified fuel cells and stationary microturbine power 

plants (sec. 1528 of the Senate amendment, sec. 1336 of the conference agreement, and sec. 

48 of the Code) 

Present Law

A 10-percent business energy investment tax credit is allowed for the cost of new 

property that is equipment (1) that uses solar energy to generate electricity, to heat or cool a 

structure, or to provide solar process heat, or (2) used to produce, distribute, or use energy 

derived from a geothermal deposit, but only, in the case of electricity generated by geothermal 

power, up to the electric transmission stage. 

The business energy investment tax credit is a component of the general business credit. 

The general business credit generally may not exceed the excess of the taxpayer's net income tax 

over the greater of (1) the tentative minimum tax or (2) 25 percent of net regular tax liability in 

excess of $25,000. A general business credit in excess of the tax limitation generally may be 

carried back one year and carried forward up to 20 years. 

There is no present-law credit for fuel cell or microturbine power plant property. 

House Bill

The provision provides a 15-percent credit for the purchase of qualified fuel cell power 

plants for businesses. The credit is part of the business energy investment tax credit.65 A 

qualified fuel cell power plant is an integrated system comprised of a fuel cell stack assembly 

and associated balance of plant components that converts a fuel into electricity using 

electrochemical means, and which has an electricity-only generation efficiency of greater than 30 

percent. The credit may not exceed $500 for each 0.5 kilowatt of capacity. The taxpayer’s basis 

in the property is reduced by the amount of the credit claimed. 

Effective date.−The provision applies to property placed in service after April 11, 2005, 

and before January 1, 2008, under rules similar to rules of section 48(m) of the Internal Revenue 

Code of 1986 (as in effect on the day before the date of enactment of the Revenue Reconciliation 

Act of 1990). 

Senate Amendment

The provision provides a 30 percent business energy credit for the purchase of qualified 

fuel cell power plants for businesses. A qualified fuel cell power plant is an integrated system 

composed of a fuel cell stack assembly and associated balance of plant components that (1) 

converts a fuel into electricity using electrochemical means, (2) has an electricity-only 

 65 Section 1322 of the House bill provides that the tentative minimum tax is treated as zero for 

purposes of applying the tax limitation to the portion of the investment tax credit attributable to the credit 

for fuel cells. 
51

generation efficiency of greater than 30 percent, and (3) generates at least 0.5 kilowatts of 

electricity. The credit for any fuel cell may not exceed $500 for each 0.5 kilowatts of capacity. 

Additionally, the provision provides a 10 percent credit for the purchase of qualifying 

stationary microturbine power plants. A qualified stationary microturbine power plant is an 

integrated system comprised of a gas turbine engine, a combustor, a recuperator or regenerator, a 

generator or alternator, and associated balance of plant components that converts a fuel into 

electricity and thermal energy. Such system also includes all secondary components located 

between the existing infrastructure for fuel delivery and the existing infrastructure for power 

distribution, including equipment and controls for meeting relevant power standards, such as 

voltage, frequency and power factors. Such system must have an electricity-only generation 

efficiency of not less that 26 percent at International Standard Organization conditions and a 

capacity of less than 2,000 kilowatts. The credit is limited to the lesser of 10 percent of the basis 

of the property or $200 for each kilowatt of capacity. 

Additionally, for purposes of the fuel cell and microturbine credits, and only in the case 

of telecommunications companies, the provision removes the present-law section 48 restriction 

that would prevent telecommunication companies from claiming the new credit due to their 

status as public utilities. 

The credit is nonrefundable. The taxpayer’s basis in the property is reduced by the 

amount of the credit claimed. 

Effective date.−The credit applies to periods after December 31, 2005 and before 

January 1, 2010 (January 1, 2009 in the case of micro turbines), for property placed in service in 

taxable years ending after December 31, 2005, under rules similar to rules of section 48(m) of 

the Internal Revenue Code of 1986 (as in effect on the day before the date of enactment of the 

Revenue Reconciliation Act of 1990). 

Conference Agreement

The conference agreement follows the Senate amendment, but only for periods before 

January 1, 2008. 

Effective date.−The credit applies to periods after December 31, 2005 and before 

January 1, 2008, for property placed in service in taxable years ending after December 31, 2005, 

under rules similar to rules of section 48(m) of the Internal Revenue Code of 1986 (as in effect 

on the day before the date of enactment of the Revenue Reconciliation Act of 1990). 
52

3. Business solar investment tax credit (sec. 1529 of the Senate amendment, sec. 1337 of the 

conference agreement, and sec. 48 of the Code) 

Present Law

A nonrefundable, 10-percent business energy credit is allowed for the cost of new 

property that is equipment (1) that uses solar energy to generate electricity, to heat or cool a 

structure, or to provide solar process heat, or (2) used to produce, distribute, or use energy 

derived from a geothermal deposit, but only, in the case of electricity generated by geothermal 

power, up to the electric transmission stage. 

The business energy tax credits are components of the general business credit (sec. 

38(b)(1)). The business energy tax credits, when combined with all other components of the 

general business credit, generally may not exceed for any taxable year the excess of the 

taxpayer's net income tax over the greater of (1) 25 percent of so much of the net regular tax 

liability as exceeds $25,000 or (2) the tentative minimum tax. An unused general business credit 

generally may be carried back one year and carried forward 20 years (sec. 39). 

House Bill

No provision. 

Senate Amendment

The provision increases the 10-percent credit to 30 percent in the case of solar energy 

property. Additionally, the provision provides that equipment that uses fiber-optic distributed 

sunlight to illuminate the inside of a structure is solar energy property eligible for the 30-percent 

credit. The provision provides that property used to generate energy for the purposes of heating 

a swimming pool is not eligible solar energy property. 

Effective date.−The provision applies to periods after December 31, 2005 and before 

January 1, 2012 for property placed in service in taxable years ending after December 31, 2005, 

under rules similar to rules of section 48(m) of the Internal Revenue Code of 1986 (as in effect 

on the day before the date of enactment of the Revenue Reconciliation Act of 1990). 

Conference Agreement

The conference agreement follows the Senate amendment, but only for periods before 

January 1, 2008 with respect to the 30 percent credit and the fiber-optic distributed sunlight. The 

conference agreement makes permanent the provision that provides that property used to 

generate energy for the purposes of heating a swimming pool is not eligible solar energy 

property. 

Effective date.−The provision with respect to the heating of swimming pools applies to 

periods after December 31, 2005. The increase in the credit rate and the provision related to 

fiber-optic distributed sunlight applies to periods after December 31, 2005 and before January 1, 

2008 for property placed in service in taxable years ending after December 31, 2005, under rules 
53

similar to rules of section 48(m) of the Internal Revenue Code of 1986 (as in effect on the day 

before the date of enactment of the Revenue Reconciliation Act of 1990). 

4. Diesel-water fuel emulsion (sec. 1313 of the House bill, sec. 1343 of the conference 

agreement, and sec. 4081 of the Code) 

Present Law

A 24.3-cents-per-gallon excise tax is imposed on diesel fuel to finance the Highway Trust 

Fund.66 Gasoline and most special motor fuels are subject to tax at 18.3 cents per gallon for the 

Trust Fund.67 

The tax rate for certain special motor fuels is determined, on an energy equivalent basis, 

as follows:68

Liquefied petroleum gas (propane) 13.6 cents per gallon 

Liquefied natural gas 11.9 cents per gallon 

Methanol derived from natural gas 9.15 cents per gallon 

Compressed natural gas 48.54 cents per MCF 

No special tax rate is provided for diesel fuel blended with water to form a diesel-water 

fuel emulsion. 

House Bill

A special tax rate of 19.7 cents per gallon is provided for diesel fuel blended with water 

into a diesel-water fuel emulsion to reflect the reduced Btu content per gallon resulting from the 

water. Emulsion fuels eligible for the special rate must consist of not more than 83.1 percent 

diesel (and other minor chemical additives to enhance combustion) and at least 16.9 percent 

water. The emulsion addition must be registered by a United States manufacturer with the 

Environmental Protection Agency pursuant to section 211 of the Clean Air Act (as in effect on 

March 31, 2003). A refund of the difference between the regular rate (24.3 cents per gallon) and 

the incentive rate (19.7 cents per gallon) is available to the extent tax-paid diesel is used to 

produce a qualifying emulsion diesel fuel. Anyone who separates the diesel fuel from the dieselwater fuel emulsion on which a reduced rate of tax was imposed is treated as a refiner of the fuel 

and is liable for the difference between the amount of tax on the latest removal of the separated 

fuel and the amount of tax that was imposed upon the pre-mixture removal. 

 66 Sec. 4081(a)(2)(A)(iii). 

67 Secs. 4081(a)(2)(A)(i) and 4041(a)(2)(B)(i). 

68 See sec. 4041(a)(2)(B)(ii) and (iii), sec. 4041(a)(3) and sec. 4041(m)(1)(A). 
54 

Effective date.−The provision is effective on January 1, 2006. 

Senate Amendment

No provision. 

Conference Agreement

The conference agreement follows the House bill except the diesel-water emulsion fuels 

eligible for the special rate must consist of least 14 percent water. In addition, the person 

claiming entitlement to the special rate of tax must be registered with the Secretary. The 

conference agreement clarifies that claims for refund based on the incentive rate may be filed 

quarterly if such person can claim at least $750. If the person cannot claim at least $750 at the 

end of quarter, the amount can be carried over to the next quarter to determine if the person can 

claim at least $750. If the person cannot claim at least $750 at the end of the taxable year, the 

person must claim a credit on the person’s income tax return. 

5. Amortization of delay rental payments (sec. 1314 of the House bill) 

Present Law

Present law generally requires costs associated with inventory and property held for 

resale to be capitalized rather than currently deducted as they are incurred (sec. 263). Oil and 

gas producers typically contract for mineral production in exchange for royalty payments. If 

mineral production is delayed, these contracts provide for “delay rental payments” as a condition 

of their extension. The Internal Revenue Service has taken the position that the uniform 

capitalization rules of section 263A require delay rental payments to be capitalized. 

House Bill

The provision allows delay rental payments incurred in connection with the development 

of oil or gas within the United States to be amortized over two years. In the case of abandoned 

property, remaining basis may no longer be recovered in the year of abandonment of a property 

as all basis is recovered over the two-year amortization period. 

Effective date.−The provision applies to amounts paid or incurred in taxable years 

beginning after the date of enactment. No inference is intended from the prospective effective 

date of this provision as to the proper treatment of pre-effective date delay rental payments. 

Senate Amendment

No provision. 

Conference Agreement

The conference agreement does not include the House provision.
55

6. Amortization of geological and geophysical expenditures (sec. 1315 of the House bill, sec. 

1329 of the conference agreement, and sec. 167 of the Code) 

Present Law

In general

Geological and geophysical expenditures (“G&G costs”) are costs incurred by a taxpayer 

for the purpose of obtaining and accumulating data that will serve as the basis for the acquisition 

and retention of mineral properties by taxpayers exploring for minerals. A key issue with respect 

to the tax treatment of such expenditures is whether or not they are capital in nature. Capital 

expenditures are not currently deductible as ordinary and necessary business expenses, but are 

allocated to the cost of the property.69

Courts have held that G&G costs are capital, and therefore are allocable to the cost of the 

property70 acquired or retained.71 The costs attributable to such exploration are allocable to the 

cost of the property acquired or retained. As described further below, IRS administrative rulings 

have provided further guidance regarding the definition and proper tax treatment of G&G costs. 

Revenue Ruling 77-188

In Revenue Ruling 77-18872 (hereinafter referred to as the “1977 ruling”), the IRS 

provided guidance regarding the proper tax treatment of G&G costs. The ruling describes a 

typical geological and geophysical exploration program as containing the following elements: 

• It is customary in the search for mineral producing properties for a taxpayer to 

conduct an exploration program in one or more identifiable project areas. Each 

project area encompasses a territory that the taxpayer determines can be explored 

advantageously in a single integrated operation. This determination is made after 

 69 Under section 263, capital expenditures are defined generally as any amount paid for new 

buildings or for permanent improvements or betterments made to increase the value of any property or 

estate. Treasury regulations define capital expenditures to include amounts paid or incurred (1) to add to 

the value, or substantially prolong the useful life, of property owned by the taxpayer or (2) to adapt 

property to a new or different use. Treas. Reg. sec. 1.263(a)-1(b). 

70 “Property” means an interest in a property as defined in section 614 of the Code, and includes 

an economic interest in a tract or parcel of land notwithstanding that a mineral deposit has not been 

established or proved at the time the costs are incurred. 

71 See, e.g., Schermerhorn Oil Corporation v. Commissioner, 46 B.T.A. 151 (1942). By contrast, 

section 617 of the Code permits a taxpayer to elect to deduct certain expenditures incurred for the purpose 

of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral (but not oil 

and gas). These deductions are subject to recapture if the mine with respect to which the expenditures 

were incurred reaches the producing stage. 

72 1977-1 C.B. 76. 
56

analyzing certain variables such as (1) the size and topography of the project area to 

be explored, (2) the existing information available with respect to the project area and 

nearby areas, and (3) the quantity of equipment, the number of personnel, and the 

amount of money available to conduct a reasonable exploration program over the 

project area. 

• The taxpayer selects a specific project area from which geological and geophysical 

data are desired and conducts a reconnaissance-type survey utilizing various 

geological and geophysical exploration techniques. These techniques are designed to 

yield data that will afford a basis for identifying specific geological features with 

sufficient mineral potential to merit further exploration. 

• Each separable, noncontiguous portion of the original project area in which such a 

specific geological feature is identified is a separate “area of interest.” The original 

project area is subdivided into as many small projects as there are areas of interest 

located and identified within the original project area. If the circumstances permit a 

detailed exploratory survey to be conducted without an initial reconnaissance-type 

survey, the project area and the area of interest will be coextensive. 

• The taxpayer seeks to further define the geological features identified by the prior 

reconnaissance-type surveys by additional, more detailed, exploratory surveys 

conducted with respect to each area of interest. For this purpose, the taxpayer 

engages in more intensive geological and geophysical exploration employing 

methods that are designed to yield sufficiently accurate sub-surface data to afford a 

basis for a decision to acquire or retain properties within or adjacent to a particular 

area of interest or to abandon the entire area of interest as unworthy of development 

by mine or well. 

The 1977 ruling provides that if, on the basis of data obtained from the preliminary 

geological and geophysical exploration operations, only one area of interest is located and 

identified within the original project area, then the entire expenditure for those exploratory 

operations is to be allocated to that one area of interest and thus capitalized into the depletable 

basis of that area of interest. On the other hand, if two or more areas of interest are located and 

identified within the original project area, the entire expenditure for the exploratory operations is 

to be allocated equally among the various areas of interest. 

If no areas of interest are located and identified by the taxpayer within the original project 

area, then the 1977 ruling states that the entire amount of the G&G costs related to the 

exploration is deductible as a loss under section 165. The loss is claimed in the taxable year in 

which that particular project area is abandoned as a potential source of mineral production. 

A taxpayer may acquire or retain a property within or adjacent to an area of interest, 

based on data obtained from a detailed survey that does not relate exclusively to any discrete 

property within a particular area of interest. Generally, under the 1977 ruling, the taxpayer 

allocates the entire amount of G&G costs to the acquired or retained property as a capital cost 

under section 263(a). If more than one property is acquired, it is proper to determine the amount 
57

of the G&G costs allocable to each such property by allocating the entire amount of the costs 

among the properties on the basis of comparative acreage. 

If, however, no property is acquired or retained within or adjacent to that area of interest, 

the entire amount of the G&G costs allocable to the area of interest is deductible as a loss under 

section 165 for the taxable year in which such area of interest is abandoned as a potential source 

of mineral production. 

In 1983, the IRS issued Revenue Ruling 83-105,73 which elaborates on the positions set 

forth in the 1977 ruling by setting forth seven factual situations and applying the principles of the 

1977 ruling to those situations. In addition, Revenue Ruling 83-105 explains what constitutes 

“abandonment as a potential source of mineral production.” 

House Bill

The provision allows geological and geophysical amounts incurred in connection with oil 

and gas exploration in the United States to be amortized over two years. In the case of 

abandoned property, remaining basis may no longer be recovered in the year of abandonment of 

a property as all basis is recovered over the two-year amortization period. 

Effective date.−The provision is effective for geological and geophysical costs paid or 

incurred in taxable years beginning after the date of enactment. No inference is intended from 

the prospective effective date of this provision as to the proper treatment of pre-effective date 

geological and geophysical costs. 

Senate Amendment

No provision. 

Conference Agreement

The conference agreement follows the House bill. 

7. Alternative technology vehicle credits (sec. 1316 of the House bill, sec. 1553 of the Senate 

amendment, secs. 1341 and 1348 of the conference agreement, sec. 179A of the Code, and 

new sec. 30B of the Code) 

Present Law

Certain costs of qualified clean-fuel vehicle may be expensed and deducted when such 

property is placed in service (sec. 179A). Qualified clean-fuel vehicle property includes motor 

vehicles that use certain clean-burning fuels (natural gas, liquefied natural gas, liquefied 

petroleum gas, hydrogen, electricity and any other fuel at least 85 percent of which is methanol, 

 73 1983-2 C.B. 51. 
58

ethanol, any other alcohol or ether).74 The maximum amount of the deduction is $50,000 for a 

truck or van with a gross vehicle weight over 26,000 pounds or a bus with seating capacities of at 

least 20 adults; $5,000 in the case of a truck or van with a gross vehicle weight between 10,000 

and 26,000 pounds; and $2,000 in the case of any other motor vehicle. Qualified electric 

vehicles do not qualify for the clean-fuel vehicle deduction. The deduction is reduced to 25 

percent of the otherwise allowable deduction in 2006 and is unavailable for purchases after 

December 31, 2006. 

House Bill

The House bill provides a credit for each new qualified advanced lean-burn technology 

motor vehicle placed in service by the taxpayer during the taxable year. The amount of the credit 

for any vehicle is the sum of an amount for fuel efficiency and an amount for conservation. The 

amount for fuel efficiency is based on a comparison of the fuel efficiency of the vehicle 

compared to the Environmental Protection Agency’s 2000 model year city fuel economy for a 

vehicle in the same inertia weight class. The amount for conservation is based on the qualifying 

vehicle’s estimated lifetime fuel savings compared to the same 2000 model year standard. 

Table 2, below, shows the credit amount for fuel efficiency of a qualified advanced leanburn technology motor vehicle. 

Table 2.–Fuel Efficiency Credit Amount for Qualified Advanced Lean-Burn 

Technology Motor Vehicles 

If Fuel Economy of the Vehicle Is: 

Credit Amount at least but less than 

$500 125% of base fuel economy 150% of base fuel economy 

$1,000 150% of base fuel economy 175% of base fuel economy 

$1,500 175% of base fuel economy 200% of base fuel economy 

$2,000 200% of base fuel economy 225% of base fuel economy 

$2,500 225% of base fuel economy 250% of base fuel economy 

$3,000 250% of base fuel economy 

The credit amount for conservation of a qualified advanced lean burn technology vehicle 

is computed as follows. The vehicle is assumed to be driven 120,000 miles over its life. The 

120,000 miles of lifetime mileage is divided by the fuel economy rating of the vehicle. The 

120,000 miles of lifetime mileage also is divided by the 2000 model year city economy for a 

 74 A hybrid-electric vehicle may qualify as a clean-fuel vehicle under present law. Seven 

different automobile makes (multiple model years for some makes of automobile) qualify for the presentlaw deduction. 
59

vehicle in the same inertia weight class. The difference is the lifetime fuel savings. If the 

vehicle achieves a lifetime motor fuel savings between 1,500 and 2,500 gallons of fuel, the credit 

amount for the vehicle is $250. If the vehicle achieves a lifetime fuel savings of at least 2,500 

gallons of motor fuel, the credit amount is $500. 

The base fuel economy is the 2000 model year city fuel economy for vehicles by inertia 

weight class by vehicle type. The “vehicle inertia weight class” is that defined in regulations 

prescribed by the Environmental Protection Agency for purposes of Title II of the Clean Air Act. 

A qualifying advanced lean-burn technology motor vehicle means a motor vehicle the original 

use of which commences with the taxpayer, powered by an internal combustion engine that is 

designed to operate primarily using more air than is necessary for complete combustion of the 

fuel and incorporates direct injection, that uses only diesel fuel (as defined in section 4083(a)(3)), 

has sufficient fuel economy to qualify for the credit, and meets the Environmental Protection 

Agency’s Tier II bin 8 emissions standards. In addition, in order to qualify for a credit, a vehicle 

must be in compliance with the applicable provisions of the Clean Air Act and the motor vehicle 

safety provisions. 

In general, the credit is allowed to the vehicle owner, including the lessor of a vehicle 

subject to a lease. If the use of the vehicle is described in paragraph (3) or (4) of section 50(b) 

(relating to use by tax-exempts, governments, and foreign persons) and is not subject to a lease, 

the seller of the vehicle may claim the credit so long the seller clearly discloses to the user in a 

document the amount that is allowable as a credit. A vehicle must be used predominantly in the 

United States to qualify for the credit. 

The provision permits the credit to offset both the regular tax and the alternative 

minimum tax. Credits in excess of this limitation may be carried forward for up to 20 years; 

credits may not be carried back to earlier years. 

Effective date.−The provision is effective for property placed in service after the date of 

enactment and before January 1, 2008. 

Senate Amendment

Alternative motor vehicle credits

The Senate amendment provides a credit for each new qualified fuel cell vehicle, each 

new qualified hybrid motor vehicle, and each new qualified alternative fuel motor vehicle placed 

in service by the taxpayer during the taxable year. 

In general, the credit is allowed to the vehicle owner, including the lessor of a vehicle 

subject to a lease. If the use of the vehicle is described in paragraphs (3) or (4) of section 50(b) 

(relating to use by tax-exempts, governments, and foreign persons) and is not subject to a lease, 

the seller of the vehicle may claim the credit so long as the seller clearly discloses to the user in a 

document the amount that is allowable as a credit. A vehicle must be used predominantly in the 

United States to qualify for the credit. 

Any deduction otherwise allowable under section 179A is reduced by the amount of the 

credit allowable. 
60

The provision permits the credit to offset the excess of the regular tax (reduced by certain 

credits) over the alternative minimum tax. Credits in excess of this limitation may be carried 

back for up to three years and forward for up to 20 years; credits may not be carried back to 

taxable years beginning before the date of enactment and credits for vehicles used for personal 

use may not be carried back. 

Fuel cell vehicles

A qualifying fuel cell vehicle is a motor vehicle that is propelled by power derived from 

one or more cells which convert chemical energy directly into electricity by combining oxygen 

with hydrogen fuel which is stored on board the vehicle and may or may not require reformation 

prior to use. The amount of credit for the purchase of a fuel cell vehicle is determined by a base 

credit amount that depends upon the weight class of the vehicle and, in the case of automobiles 

or light trucks, an additional credit amount that depends upon the rated fuel economy of the 

vehicle compared to a base fuel economy. For these purposes the base fuel economy is the 2002 

model year city fuel economy rating for vehicles of various weight classes (see below). Table 3, 

below, shows the proposed base credit amounts. 

Table 3.–Base Credit Amount for Fuel Cell Vehicles 

Vehicle Gross Weight Rating in Pounds Credit Amount 

Vehicle ≤ 8,500 ................................................. $8,000 

8,500 < vehicle ≤ 14,000.................................... $10,000 

14,000 < vehicle ≤ 26,000.................................. $20,000 

26,000 < vehicle................................................. $40,000 

In the case of a fuel cell vehicle weighing less than 8,500 pounds and placed in service 

after December 31, 2009, the $8,000 amount in Table 3, above is reduced to $4,000. 

Table 4, below, shows the proposed additional credits for passenger automobiles or light 

trucks. 
61

Table 4.–Credit for Qualifying Fuel Cell Vehicles 

If Fuel Economy of the Fuel Cell Vehicle Is:

Credit 

At least but less than 

$1,000 150% of base fuel economy 175% of base fuel economy 

$1,500 175% of base fuel economy 200% of base fuel economy 

$2,000 200% of base fuel economy 225% of base fuel economy 

$2,500 225% of base fuel economy 250% of base fuel economy 

$3,000 250% of base fuel economy 275% of base fuel economy 

$3,500 275% of base fuel economy 300% of base fuel economy 

$4,000 300% of base fuel economy 

Hybrid motor vehicles

A qualifying hybrid vehicle is a motor vehicle that draws propulsion energy from onboard sources of stored energy which include both an internal combustion engine or heat engine 

using combustible fuel and a rechargeable energy storage system (e.g., batteries). A qualifying 

hybrid motor vehicle must be placed in service before January 1, 2010. 

In the case of an automobile or light truck (vehicles weighing 8,500 pounds or less), the 

amount of credit for the purchase of a hybrid vehicle varies with the rated fuel economy of the 

vehicle compared to a 2002 model year. A qualifying hybrid automobile or light truck must 

have a maximum available power from the rechargeable energy storage system of at least five 

percent.75 In addition, the vehicle must meet or exceed certain EPA emissions standards. For a 

vehicle with a gross vehicle weight rating of 8,500 pounds or less the applicable emissions 

standards are the Bin 5 Tier II emissions standards. 

 75 For vehicles weighing 8,500 pounds or less, the percentage of maximum available power is 

computed by dividing the maximum power available from the rechargeable energy storage system during 

a standard 10-second pulse power test, divided by the sum of such maximum power and the SAE net 

power of the heat (e.g., internal combustion or diesel) engine. 
62

Table 5, below, shows the fuel economy credit available to a hybrid passenger 

automobile or light truck whose fuel economy (on a gasoline gallon equivalent basis) exceeds 

that of a base fuel economy. 

Table 5.–Fuel Economy Credit 

If Fuel Economy of the Fuel Cell Vehicle Is:

Credit 

At least but less than 

$400 125% of base fuel economy 150% of base fuel economy 

$800 150% of base fuel economy 175% of base fuel economy 

$1,200 175% of base fuel economy 200% of base fuel economy 

$1,600 200% of base fuel economy 225% of base fuel economy 

$2,000 225% of base fuel economy 250% of base fuel economy 

$2,400 250% of base fuel economy 

In the case of a qualifying hybrid motor vehicle weighing more than 8,500 pounds, the 

amount of credit is determined by the estimated increase in fuel economy and the incremental 

cost of the hybrid vehicle compared to a comparable vehicle powered solely by a gasoline or 

diesel internal combustion engine and that is comparable in weight, size, and use of the vehicle. 

For a vehicle that achieves a fuel economy increase of at least 30 percent but less than 40 

percent, the credit is equal to 20 percent of the incremental cost of the hybrid vehicle. For a 

vehicle that achieves a fuel economy increase of at least 40 percent but less than 50 percent, the 

credit is equal to 30 percent of the incremental cost of the hybrid vehicle. For a vehicle that 

achieves a fuel economy increase of 50 percent or more, the credit is equal to 40 percent of the 

incremental cost of the hybrid vehicle. 

The credit is subject to certain maximum applicable incremental cost amounts. For a 

qualifying hybrid motor vehicle weighing more than 8,500 pounds but not more than 14,000 

pounds, the maximum allowable incremental cost amount is $7,500. For a qualifying hybrid 

motor vehicle weighing more than 14,000 pounds but not more than 26,000 pounds, the 

maximum allowable incremental cost amount is $15,000. For a qualifying hybrid motor vehicle 

weighing more than 26,000 pounds, the maximum allowable incremental cost amount is 

$30,000. 
63

A qualifying hybrid motor vehicle weighing more than 8,500 pounds but not more than 

14,000 pounds must have a maximum available power from the rechargeable energy storage 

system of at least 10 percent. A qualifying hybrid vehicle weighing more than 14,000 pounds 

must have a maximum available power from the rechargeable energy storage system of at least 

15 percent.76

Alternative fuel vehicle

The credit for the purchase of a new alternative fuel vehicle would be 50 percent of the 

incremental cost of such vehicle, plus an additional 30 percent if the vehicle meets certain 

emissions standards, but not more than between $4,000 and $32,000 depending upon the weight 

of the vehicle. Table 8, below, shows the maximum permitted incremental cost for the purpose 

of calculating the credit for alternative fuel vehicles by vehicle weight class. 

Table 6.–Maximum Allowable Incremental Cost for Calculation 

of Alternative Fuel Vehicle Credit 

Vehicle Gross Weight Rating in Pounds Maximum Allowable 

Incremental Cost 

Vehicle ≤ 8,500 ................................................. $5,000 

8,500 < vehicle ≤ 14,000.................................... $10,000 

14,000 < vehicle ≤ 26,000.................................. $25,000 

26,000 < vehicle................................................. $40,000 

Alternative fuels comprise compressed natural gas, liquefied natural gas, liquefied 

petroleum gas, hydrogen, and any liquid fuel that is at least 85 percent methanol. Qualifying 

alternative fuel motor vehicles are vehicles that operate only on qualifying alternative fuels and 

are incapable of operating on gasoline or diesel (except in the extent gasoline or diesel fuel is 

part of a qualified mixed fuel, described below). 

Certain mixed fuel vehicles, that is vehicles that use a combination of an alternative fuel 

and a petroleum-based fuel, are eligible for a reduced credit. If the vehicle operates on a mixed 

fuel that is at least 75 percent alternative fuel, the vehicle is eligible for 70 percent of the 

otherwise allowable alternative fuel vehicle credit. If the vehicle operates on a mixed fuel that is 

 76 In the case of such heavy-duty hybrid motor vehicles, the percentage of maximum available 

power is computed by dividing the maximum power available from the rechargeable energy storage 

system during a standard 10-second pulse power test, divided by the vehicle’s total traction power. A 

vehicle’s total traction power is the sum of the peak power from the rechargeable energy storage system 

and the heat (e.g., internal combustion or diesel) engine’s peak power. If the rechargeable energy storage 

system is the sole means by which the vehicle can be driven, then the total traction power is the peak 

power of the rechargeable energy storage system. 
64

at least 90 percent alternative fuel, the vehicle is eligible for 90 percent of the otherwise 

allowable alternative fuel vehicle credit. 

Base fuel economy

The base fuel economy is the 2002 model year city fuel economy for vehicles by inertia 

weight class by vehicle type. The “vehicle inertia weight class” is that defined in regulations 

prescribed by the Environmental Protection Agency for purposes of Title II of the Clean Air Act. 

Table 7, below, shows the 2002 model year city fuel economy for vehicles by type and by inertia 

weight class. 

Table 7.–2002 Model Year City Fuel Economy 

Vehicle Inertia

Weight Class 

(Pounds) 

Passenger Automobile 

(miles per gallon) 

Light Truck 

(miles per gallon) 

1,500 45.2 39.4 

1,750 45.2 39.4 

2,000 39.6 35.2 

2,250 35.2 31.8 

2,500 31.7 29.0 

2,750 28.8 26.8 

3,000 26.4 24.9 

3,500 22.6 21.8 

4,000 19.8 19.4 

4,500 17.6 17.6 

5,000 15.9 16.1 

5,500 14.4 14.8 

6,000 13.2 13.7 

6,500 12.2 12.8 
65

Vehicle Inertia

Weight Class 

(Pounds) 

Passenger Automobile 

(miles per gallon) 

Light Truck 

(miles per gallon) 

7,000 11.3 12.1 

8,500 11.3 12.1 

Effective date.−The provision applies to vehicles placed in service after the date of 

enactment and, in the case of qualified fuel cell motor vehicles, before January 1, 2015; in the 

case of qualified hybrid motor vehicles, before January 1, 2010; and in the case of qualified 

alternative fuel motor vehicles, before January 1, 2011. 

Conference Agreement

The conference agreement follows both the House bill and the Senate amendment with 

modifications. 

Fuel cell vehicles

The conference agreement follows the Senate amendment with respect to fuel cell 

vehicles. 

Alternate fuel vehicles

The conference agreement follows the Senate amendment with respect to alternate fuel 

vehicles. 

Hybrid vehicles and advanced lean-burn technology vehicles

Qualifying hybrid vehicle

A qualifying hybrid vehicle is a motor vehicle that draws propulsion energy from onboard sources of stored energy which include both an internal combustion engine or heat engine 

using combustible fuel and a rechargeable energy storage system (e.g., batteries). A qualifying 

hybrid motor vehicle must be placed in service before January 1, 2011 (January 1, 2010 in the 

case of a hybrid motor vehicle weighing more than 8,500 pounds). 

Hybrid vehicles that are automobiles and light trucks

In the case of an automobile or light truck (vehicles weighing 8,500 pounds or less), the 

amount of credit for the purchase of a hybrid vehicle is the sum of two components: a fuel 

economy credit amount that varies with the rated fuel economy of the vehicle compared to a 

2002 model year standard and a conservation credit based on the estimated lifetime fuel savings 

of a qualifying vehicle compared to a comparable 2002 model year vehicle. A qualifying hybrid 

automobile or light truck must have a maximum available power from the rechargeable energy 
66

storage system of at least four percent. In addition, the vehicle must meet or exceed certain EPA 

emissions standards. For a vehicle with a gross vehicle weight rating of 6,000 pounds or less the 

applicable emissions standards are the Bin 5 Tier II emissions standards. For a vehicle with a 

gross vehicle weight rating greater than 6,000 pounds and less than or equal to 8,500 pounds, the 

applicable emissions standards are the Bin 8 Tier II emissions standards. 

Table 8, below, shows the fuel economy credit available to a hybrid passenger 

automobile or light truck whose fuel economy (on a gasoline gallon equivalent basis) exceeds 

that of a base fuel economy. 

Table 8.–Fuel Economy Credit 

If Fuel Economy of the Hybrid Vehicle Is: 

Credit at least but less than 

$400 125% of base fuel economy 150% of base fuel economy 

$800 150% of base fuel economy 175% of base fuel economy 

$1,200 175% of base fuel economy 200% of base fuel economy 

$1,600 200% of base fuel economy 225% of base fuel economy 

$2,000 225% of base fuel economy 250% of base fuel economy 

$2,400 250% of base fuel economy 

Table 9, below, shows the conservation credit. 

Table 9.–Conservation Credit 

Estimated Lifetime Fuel Savings Conservation Amount 

At least 1,200 but less than 1,800 .................... $250 

At least 1,800 but less than 2,400 .................... $500 

At least 2,400 but less than 3,000 .................... $750 

At least 3,000 ................................................... $1,000 

Advanced lean-burn technology motor vehicles

The conference agreement a credit for the purchase of a new advanced lean burn 

technology motor vehicle. The amount of credit for the purchase of an advanced lean burn 

technology motor vehicle is the sum of two components: a fuel economy credit amount that 

varies with the rated fuel economy of the vehicle compared to a 2002 model year standard as 

described in Table 8, above and a conservation credit based on the estimated lifetime fuel 

savings of a qualifying vehicle compared to a comparable 2002 model year vehicle as described 

in Table 9 above. 
67

A qualifying advanced lean burn technology motor vehicle that incorporates direct 

injection, achieves at least 125 percent of the 2002 model year city fuel economy, and 2004 and 

later model vehicles meets or exceeds certain Environmental Protection Agency emissions 

standards. For a vehicle with a gross vehicle weight rating of 6,000 pounds or less the applicable 

emissions standards are the Bin 5 Tier II emissions standards. For a vehicle with a gross vehicle 

weight rating greater than 6,000 pounds and less than or equal to 8,500 pounds, the applicable 

emissions standards are the Bin 8 Tier II emissions standards. A qualifying advanced lean burn 

technology motor vehicle must be placed in service before January 1, 2011. 

Limitation on number of qualified hybrid and advanced lean-burn technology motor 

vehicles eligible for the credit

The conference agreement imposes a limitation on the number of qualified hybrid motor 

vehicles and advanced lean-burn technology motor vehicles sold by each manufacturer of such 

vehicles that are eligible for the credit. Taxpayers may claim the full amount of the allowable 

credit up to the end of the first calendar quarter after the quarter in which the manufacturer 

records its sale of the 60,000th hybrid and advanced lean-burn technology motor vehicle. 

Taxpayers may claim one half of the otherwise allowable credit during the two calendar quarters 

subsequent to the first quarter after the manufacturer has recorded its 60,000th such sale. In the 

third and fourth calendar quarters subsequent to the first quarter after the manufacturer has 

recorded its 60,000th such sale, the taxpayer may claim one quarter of the otherwise allowable 

credit. 

Thus, summing the sales of qualifying hybrid motor vehicles of all weight classes and all 

sales of qualifying advanced lean-burn technology motor vehicles, if a manufacturer records the 

sale of its 60,000th in February of 2007, taxpayers purchasing such vehicles from the 

manufacturer may claim the full amount of the credit on their purchases of qualifying vehicles 

through June 30, 2007. For the period July 1, 2007, through December 31, 2007, taxpayers may 

claim one half of the otherwise allowable credit on purchases of qualifying vehicles of the 

manufacturer. For the period January 1, 2008, through June 30, 2008, taxpayers may claim one 

quarter of the otherwise allowable credit on the purchases of qualifying vehicles of the 

manufacturer. After June 30, 2008, no credit may be claimed for purchases of hybrid motor 

vehicles or advanced lean-burn technology motor vehicles sold by the manufacturer. 

Hybrid vehicles that are medium and heavy trucks

In the case of a qualifying hybrid motor vehicle weighing more than 8,500 pounds, the 

conference agreement follows the Senate amendment. 

Other rules

The portion of the credit attributable to vehicles of a character subject to an allowance for 

depreciation is treated as a portion of the general business credit; the remainder of the credit is 

allowable to the extent of the excess of the regular tax (reduced by certain other credits) over the 

alternative minimum tax for the taxable year. 
68

Termination of Code section 179A

The conference agreement provides that section 179A sunsets after December 31, 2005. 

Effective date.−The provision applies to vehicles placed in service after December 31, 

2005, in the case of qualified fuel cell motor vehicles, before January 1, 2015; in the case of 

qualified hybrid motor vehicles that are automobiles and light trucks and in the case of advanced 

lean-burn technology vehicles, before January 1, 2011; in the case of qualified hybrid motor 

vehicles that medium and heavy trucks, before January 1, 2010; and in the case of qualified 

alternative fuel motor vehicles, before January 1, 2011. 

8. Modification and extension of credit for electric vehicles (sec. 1532 of the Senate 

amendment) 

Present Law

A 10-percent tax credit is provided for the cost of a qualified electric vehicle, up to a 

maximum credit of $4,000. A qualified electric vehicle generally is a motor vehicle that is 

powered primarily by an electric motor drawing current from rechargeable batteries, fuel cells, or 

other portable sources of electrical current. The full amount of the credit is available for 

purchases prior to 2006. The credit is reduced to 25 percent of the otherwise allowable amount 

for purchases in 2006, and is unavailable for purchases after December 31, 2006. 

House Bill

No provision. 

Senate Amendment

The provision repeals the phase out of the credit under present law. The provision also 

modifies present law to provide for a credit equal to the lesser of $1,500 or 10 percent of the 

manufacturer’s suggested retail price of certain vehicles that conform to the Motor Vehicle 

Safety Standard 500. For all other electric vehicles, Table 10, below describes the credit. 
69

Table 10.–Credit for Qualifying Battery Electric Vehicles 

Vehicle Gross Weight Rating in Pounds Credit Amount

Vehicle ≤ 8,500 $4,000 

8,500 < vehicle ≤ 14,000 $10,000 

14,000 < vehicle ≤ 26,000 $20,000 

26,000 < vehicle $40,000 

If an electric vehicle weighing not more than 8,500 pounds has an estimated driving 

range of at least 100 miles on a single charge of the vehicle’s batteries or if it is capable of a 

payload capacity of at least 1,000 pounds, then the credit amount in Table 10 is $6,000. 

In general, the credit is allowed to the vehicle owner, including the lessor of a vehicle 

subject to a lease. If the use of the vehicle is described in paragraph (3) or (4) of section 50(b) 

(relating to use by tax-exempts, governments, and foreign persons) and is not subject to a lease, 

the seller of the vehicle may claim the credit so long the seller clearly discloses to the user in a 

document the amount that is allowable as a credit. A vehicle must be used predominantly in the 

United States to qualify for the credit. 

The provision permits the credit to offset the excess of the regular tax (reduced by certain 

credits) over the alternative minimum tax. Credits in excess of this limitation may be carried 

back for up to three years and forward for up to 20 years; credits may not be carried back to 

taxable years beginning before the date of enactment and credits for vehicles used for personal 

use may not be carried back.

Effective date.−The provision is effective for property placed in service after the date of 

enactment and before January 1, 2010. 

Conference Agreement

The conference agreement does not include the Senate amendment provision. 

9. Credit for installation of alternative fuel refueling property (sec. 1533 of the Senate 

amendment, sec. 1342 of the conference agreement, and new sec. 30C of the Code) 

Present Law

Clean-fuel vehicle refueling property may be expensed and deducted when such property 

is placed in service (sec. 179A). Clean-fuel vehicle refueling property comprises property for the 
70

storage or dispensing of a clean-burning fuel, if the storage or dispensing is the point at which 

the fuel is delivered into the fuel tank of a motor vehicle. Clean-fuel vehicle refueling property 

also includes property for the recharging of electric vehicles, but only if the property is located at 

a point where the electric vehicle is recharged. Up to $100,000 of such property at each location 

owned by the taxpayer may be expensed with respect to that location. The deduction is 

unavailable for costs incurred after December 31, 2006. 

For the purpose of sec. 179A clean fuels comprise natural gas, liquefied natural gas, 

liquefied petroleum gas, hydrogen, electricity, and any other fuel at least 85 percent of which is 

methanol, ethanol, or any other alcohol or ether. 

House Bill

No provision. 

Senate Amendment

The provision permits taxpayers to claim a 50-percent credit for the cost of installing 

clean-fuel vehicle refueling property to be used in a trade or business of the taxpayer or installed 

at the principal residence of the taxpayer. In the case of retail clean-fuel vehicle refueling 

property the allowable credit may not exceed $30,000. In the case of residential clean-fuel 

vehicle refueling property the allowable credit may not exceed $1,000. 

Under the provision clean fuels are any fuel at least 85 percent of the volume of which 

consists of ethanol, natural gas, compressed natural gas, liquefied natural gas, liquefied 

petroleum gas, and hydrogen and any mixture of diesel fuel and biodiesel containing at least 20 

percent biodiesel. 

The taxpayer’s basis in the property is reduced by the amount of the credit and the 

taxpayer may not claim deductions under section 179A with respect to property for which the 

credit is claimed. In the case of refueling property installed on property owned or used by a taxexempt person, the taxpayer that installs the property may claim the credit. To be eligible for the 

credit, the property must be placed in service before January 1, 2010. The credit allowable in the 

taxable year cannot exceed the difference between the taxpayer’s regular tax (reduced by certain 

other credits) and the taxpayer’s tentative minimum tax. The taxpayer may carry forward unused 

credits for 20 years. 

Effective date.−The provision is effective for property placed in service December 31, 

2005. 

Conference Agreement

The conference agreement follows the Senate amendment with modifications. The 

conference agreement provides that the credit rate is 30 percent rather than 50 percent. 

The portion of the credit attributable to property of a character subject to an allowance for 

depreciation is treated as a portion of the general business credit; the remainder of the credit is 
71

allowable to the extent of the excess of the regular tax (reduced by certain other credits) over the 

alternative minimum tax for the taxable year. 

The conference agreement provides that the credit may not be claimed for property 

placed in service after December 31, 2007. 

Effective date.−The provision is effective for property placed in service December 31, 

2005 and before January 1, 2008. 

10. Volumetric excise tax credit for alternative fuels (sec. 1534 of the Senate amendment) 

Present Law

A 24.3-cents-per-gallon excise tax is imposed on diesel fuel to finance the Highway Trust 

Fund. Gasoline and most special motor fuels are subject to tax at 18.3 cents per gallon for the 

Trust Fund.77 The statutory rates for certain special motor fuels are determined on an energy 

equivalent basis, as follows: 

Liquefied petroleum gas (propane) 13.6 cents per gallon 

Liquefied natural gas 11.9 cents per gallon 

Methanol derived from petroleum or natural gas 9.15 cents per gallon 

Compressed natural gas 48.54 cents per MCF 

Under section 4041, tax is imposed on special motor fuels (any liquid other than gas oil, 

fuel oil or any product taxable under section 4081) when there is a taxable sale by any person to 

an owner, lessee or other operator of a motor vehicle or motorboat, for use as fuel in the motor 

vehicle or motorboat or used by any person as a fuel in a motor vehicle or motorboat unless there 

was a prior taxable sale. No excise tax credit is provided for the sale or use of those fuels. 

Liquid hydrogen is a special motor fuel for purposes of the tax on special motor fuels and 

is subject to a tax of 18.3 cents per gallon.78 Compressed hydrogen gas used or sold as a fuel is 

not subject to tax. 

 Prior to the American Jobs Creation Act of 2004, gasohol and gasoline to be blended 

into gasohol was taxed at a reduced rate based on the amount of ethanol contained in the mixture 

(e.g., 10 percent, 7.7 percent or 5.5 percent alcohol in the mixture). The Act eliminated reduced 

 77 Sec. 4041(a)(2)(A)(i). An additional 0.1 cent per gallon tax is imposed for the Leaking 

Underground Storage Tank Trust Fund on the sale or use of any liquid (other than liquefied petroleum gas 

and other than liquefied natural gas) if any tax was applicable under section 4041(a)(1) (relating to diesel 

fuel and kerosene) or 4041(a)(2) (relating to special motor fuels). See sec. 4041(d). 

78 An additional 0.1 cent per gallon is imposed by section 4041(d) for the Leaking Underground 

Storage Tank Trust Fund. 
72

rates of excise tax for most alcohol-blended fuels. In place of the reduced rates, the Act 

amended the Code to create two new excise tax credits: the alcohol fuel mixture credit and the 

biodiesel mixture credit.79 The sum of these credits may be taken against the tax imposed on 

taxable fuels (by section 4081). A person may also file a claim for payment equal to the amount 

of these credits for biodiesel or alcohol used to produce an eligible mixture.80 The credits and 

payments are paid out of the General Fund. If the alcohol is ethanol with a proof of 190 or 

greater, the credit or payment amount is 51 cents per gallon. For agri-biodiesel, the credit or 

payment amount is $1.00 per gallon; for biodiesel other than agri-biodiesel, the credit or payment 

amount is 50 cents per gallon. Under the Code's coordination rules, a claim may be taken only 

once with respect to any particular gallon of alcohol or biodiesel. 

House Bill

No provision. 

Senate Amendment

Under the Senate amendment, the liquefied petroleum gas, and P Series fuels (as defined 

by the Secretary of Energy under 42 U.S.C. sec. 13211(2)) are taxed at 18.3 cents per gallon 

under section 4041. Compressed natural gas is taxed at 18.3 cents per energy equivalent of a 

gallon of gasoline. Liquefied natural gas, any liquid fuel derived from coal (other than ethanol or 

methanol) and liquid hydrocarbons derived from biomass are taxed at 24.3 cents per gallon under 

section 4041. Under the provision, hydrogen (whether in liquid or gas form) is exempt from the 

tax imposed by section 4041; however, persons selling hydrogen as fuel are required to register 

with the Secretary. Collectively, these fuels (including hydrogen) are referred to as “alternative 

fuels.” 

In addition, the Senate amendment creates two new excise tax credits, the alternative fuel 

credit, and the alternative fuel mixture credit. The credits are allowed against section 4041 

liability. The alternative fuel credit is 50 cents per gallon of alternative fuel or gasoline gallon 

equivalents of nonliquid alternative fuel sold by the taxpayer for use as a motor fuel in a highway 

vehicle. The alternative fuel mixture credit is 50 cents per gallon of alternative fuel used in 

producing an alternative fuel mixture for sale or use in a trade or business of the taxpayer. The 

mixture must be sold by the taxpayer for use as a fuel in a highway vehicle or used by the 

taxpayer for use as a fuel in a highway vehicle. Liquid fuel derived from coal would only 

qualify for the credits if derived from the Fisher-Tropsch process. The credits generally expire 

after September 30, 2009. The provision also allows persons to file a claim for payment equal to 

the amount of the alternative fuel credit and alternative fuel mixture credits. These payment 

provisions generally also expire after September 30, 2009. With respect to hydrogen, the credit 

and payment provisions expire after December 31, 2014. Both credits and payments are made 

 79 Sec. 6426. The Act also created an income tax credit for biodiesel and biodiesel mixtures. 

Sec. 40A. 

80 Sec. 6427(e). 
73

out of the General Fund. Under coordination rules, a claim for payment or credit may only be 

taken once with respect to any particular gallon or gasoline-gallon equivalent of alternative fuel. 

Effective date.−The provision is effective for any sale, use or removal for any period after 

September 30, 2006. 

Conference Agreement

The conference agreement does not include the Senate amendment provision. 

11. Extend excise tax provisions and income tax credit for biodiesel and create similar 

incentives for renewable diesel (sec. 1535 of the Senate amendment, secs. 1344 and 1346 of 

the conference agreement, and secs. 40A, 6426 and 6427 of the Code) 

Present Law

Biodiesel income tax credit 

Overview

The Code provides an income tax credit for biodiesel and qualified biodiesel mixtures, 

the biodiesel fuels credit.81 The biodiesel fuels credit is the sum of the biodiesel mixture credit 

plus the biodiesel credit and is treated as a general business credit. The amount of the biodiesel 

fuels credit is includable in gross income. The biodiesel fuels credit is coordinated to take into 

account benefits from the biodiesel excise tax credit and payment provisions discussed below. 

The credit may not be carried back to a taxable year ending before or on December 31, 2004. 

The provision does not apply to fuel sold or used after December 31, 2006. 

Biodiesel is monoalkyl esters of long chain fatty acids derived from plant or animal 

matter that meet (1) the registration requirements established by the Environmental Protection 

Agency under section 211 of the Clean Air Act and (2) the requirements of the American Society 

of Testing and Materials D6751. Agri-biodiesel is biodiesel derived solely from virgin oils 

including oils from corn, soybeans, sunflower seeds, cottonseeds, canola, crambe, rapeseeds, 

safflowers, flaxseeds, rice bran, mustard seeds, or animal fats. 

Biodiesel may be taken into account for purposes of the credit only if the taxpayer 

obtains a certification (in such form and manner as prescribed by the Secretary) from the 

producer or importer of the biodiesel which identifies the product produced and the percentage of 

the biodiesel and agri-biodiesel in the product. 

Biodiesel mixture credit

The biodiesel mixture credit is 50 cents for each gallon of biodiesel used by the taxpayer 

in the production of a qualified biodiesel mixture. For agri-biodiesel, the credit is $1.00 per 

 81 Sec. 40A. 
74

gallon. A qualified biodiesel mixture is a mixture of biodiesel and diesel fuel that is (1) sold by 

the taxpayer producing such mixture to any person for use as a fuel, or (2) is used as a fuel by the 

taxpayer producing such mixture. The sale or use must be in the trade or business of the 

taxpayer and is to be taken into account for the taxable year in which such sale or use occurs. No 

credit is allowed with respect to any casual off-farm production of a qualified biodiesel mixture. 

Biodiesel credit

The biodiesel credit is 50 cents for each gallon of biodiesel which is not in a mixture with 

diesel fuel (100 percent biodiesel or B-100) and which during the taxable year is (1) used by the 

taxpayer as a fuel in a trade or business or (2) sold by the taxpayer at retail to a person and 

placed in the fuel tank of such person’s vehicle. For agri-biodiesel, the credit is $1.00 per gallon. 

Biodiesel mixture excise tax credit

The Code also provides an excise tax credit for biodiesel mixtures.82 The credit is 50 

cents for each gallon of biodiesel used by the taxpayer in producing a biodiesel mixture for sale 

or use in a trade or business of the taxpayer. In the case of agri-biodiesel, the credit is $1.00 per 

gallon. A biodiesel mixture is a mixture of biodiesel and diesel fuel that (1) is sold by the 

taxpayer producing such mixture to any person for use as a fuel, or (2) is used as a fuel by the 

taxpayer producing such mixture. No credit is allowed unless the taxpayer obtains a certification 

(in such form and manner as prescribed by the Secretary) from the producer of the biodiesel that 

identifies the product produced and the percentage of biodiesel and agri-biodiesel in the 

product.83 

The credit is not available for any sale or use for any period after December 31, 2006. 

This excise tax credit is coordinated with the income tax credit for biodiesel such that credit for 

the same biodiesel cannot be claimed for both income and excise tax purposes. 

Payments with respect to biodiesel fuel mixtures 

If any person produces a biodiesel fuel mixture in such person’s trade or business, the 

Secretary is to pay such person an amount equal to the biodiesel mixture credit.84 To the extent 

the biodiesel fuel mixture credit exceeds the section 4081 liability of a person, the Secretary is to 

pay such person an amount equal to the biodiesel fuel mixture credit with respect to such 

mixture.85 Thus, if the person has no section 4081 liability, the credit is refundable. The 

 82 Sec. 6426(c). 

83 Sec. 6426(c)(4). 

84 Sec. 6427(e). 

85 Sec. 6427(e)(1) and 6327(e)(2). See also, Internal Revenue Service, Notice 2005-4, 2005-2 

I.R.B. (December 15, 2004). 
75

payment provision does not apply with respect to biodiesel fuel mixtures sold or used after 

December 31, 2006. 

House Bill

No provision. 

Senate Amendment

The Senate amendment extends the income tax credit, excise tax credit, and payment 

provisions through December 31, 2010. 

Effective date.−The provision is effective on the date of enactment. 

Conference Agreement

The conference agreement extends the income tax credit, excise tax credit, and payment 

provisions through December 31, 2008. The conference agreement also creates a similar income 

tax credit, excise tax credit and payment system for renewable diesel; however, there is no credit 

for small producers of renewable diesel. Renewable diesel means diesel fuel derived from 

biomass (as defined in section 29(c)(3), thus excluding petroleum oil, natural gas, coal, or any 

product thereof) using a thermal depolymerization process.86 Renewable diesel must meet the 

requirements of the American Society of Testing and Materials D975 or D396, and meet the 

registration requirements for fuels and fuel additives established by the Environmental Protection 

Agency under section 211 of the Clean Air Act (42 USC 7545). The amount of the credit for 

renewable diesel is $1.00 per gallon. In addition, all producers of renewable diesel must be 

registered with the Secretary. 

Effective date.−The extension of incentives is effective on the date of enactment. The 

renewable diesel provisions are effective for fuel sold or used after December 31, 2005. 

12. Credit for certain nonbusiness energy property (sec. 1317 of the House bill, sec. 1524 of 

the Senate amendment, sec. 1333 of the conference agreement, and new sec. 25C of the 

Code) 

Present Law

A taxpayer may exclude from income the value of any subsidy provided by a public 

utility for the purchase or installation of an energy conservation measure. An energy 

conservation measure means any installation or modification primarily designed to reduce 

 86 Thermal depolymerization is a process for the reduction of complex organic materials (such as 

turkey offal) into light crude oil. The process uses pressure and heat to decompose long chain polymers 

of hydrogen, oxygen, and carbon into short-chain petroleum hydrocarbons with a maximum length of 

around 18 carbons. 
76

consumption of electricity or natural gas or to improve the management of energy demand with 

respect to a dwelling unit (sec. 136). 

There is no present law credit for energy efficiency improvements to existing homes. 

House Bill

The provision provides a 20-percent credit for the purchase of qualified energy efficiency 

improvements to existing homes. The maximum credit for a taxpayer with respect to the same 

dwelling for all taxable years is $2,000. A qualified energy efficiency improvement is any energy 

efficiency building envelope component that meets or exceeds the prescriptive criteria for such a 

component established by the 2000 International Energy Conservation Code as supplemented 

and as in effect on the date of enactment (or, in the case of metal roofs with appropriate 

pigmented coatings, meets the Energy Star program requirements), and (1) that is installed in or 

on a dwelling located in the United States; (2) owned and used by the taxpayer as the taxpayer’s 

principal residence; (3) the original use of which commences with the taxpayer; and (4) such 

component reasonably can be expected to remain in use for at least five years. The credit is 

nonrefundable.87

Building envelope components are: (1) insulation materials or systems which are 

specifically and primarily designed to reduce the heat loss or gain for a dwelling; (2) exterior 

windows (including skylights) and doors; and (3) metal roofs with appropriate pigmented 

coatings which are specifically and primarily designed to reduce the heat loss or gain for a 

dwelling. 

The taxpayer’s basis in the property is reduced by the amount of the credit. Special rules 

apply in the case of condominiums and tenant-stockholders in cooperative housing corporations. 

In the case of expenditures that exceed $1,000, certain certification requirements must be 

met in order to qualify for the credit. 

Effective date.−The provision is effective for qualified energy efficiency improvements 

installed after the date of enactment and before January 1, 2008. 

Senate Amendment

The provision provides a personal tax credit equal to the greater of (1) the total of the 

allowable credits for the purchase of certain property, or (2) the credit with respect to a highly 

energy-efficient principal residence. 

The allowable credit for the purchase of certain property is (1) $50 for each advanced 

main air circulating fan, (2) $150 for each qualified natural gas, propane, or oil furnace or hot 

water boiler, and (3) $300 for each item of qualified energy efficient property. 

 87 Sec. 1321 of the House bill allows the credit to offset both the regular tax and the alternative 

minimum tax. 
77

An advanced main air circulating fan is a fan used in a natural gas, propane, or oil 

furnace originally placed in service by the taxpayer during the taxable year, and which has an 

annual electricity use of no more than two percent of the total annual energy use of the furnace 

(as determined in the standard Department of Energy test procedures). 

A qualified natural gas, propane, or oil furnace or hot water boiler is a natural gas, 

propane, or oil furnace or hot water boiler with an annual fuel utilization efficiency rate of at 

least 95. 

Qualified energy-efficient property is: (1) an electric heat pump water heater which yields 

an energy factor of at least 2.0 in the standard Department of Energy test procedure, (2) an 

electric heat pump which has a heating seasonal performance factor (HSPF) of at least 9, a 

seasonal energy efficiency ratio (SEER) of at least 15, and an energy efficiency ratio (EER) of at 

least 13, (3) a geothermal heat pump which (i) in the case of a closed loop product, has an energy 

efficiency ratio (EER) of at least 14.1 and a heating coefficient of performance (COP) of at least 

3.3, (ii) in the case of an open loop product, has an energy efficiency ratio (EER) of at least 16.2 

and a heating coefficient of performance (COP) of at least 3.6, and (iii) in the case of a direct 

expansion (DX) product, has an energy efficiency ratio (EER) of at least 15 and a heating 

coefficient of performance (COP) of at least 3.5, (4) a central air conditioner which has a 

seasonal energy efficiency ratio (SEER) of at least 15 and an energy efficiency ratio (EER) of at 

least 13, and (5) a natural gas, propane, or oil water heater which has an energy factor of at least 

0.80. 

The credit with respect to a highly energy-efficient principal residence is $2,000 if the 

principal residence achieves a 50 percent reduction in energy costs relative to the original 

condition of the building. In the case of a new home, the original condition of the building is 

deemed to be a home constructed in accordance with the standards of chapter 4 of the 2003 

International Energy Conservation Code as in effect (including supplements) on the date of 

enactment, and for which and any applicable Federal minimum efficiency standards for 

equipment are met. In the case of a principal residence that achieves a reduction in energy costs 

between 20 and 50 percent, the allowable credit is $4,000 times the percentage reduction. No 

credit is allowed in the case of energy cost savings of less than 20 percent. 

The residence must be located in the United States, and, in the case of a new residence, 

not be acquired from a contractor eligible for a credit for the production of a new energy efficient 

home under Code section 45K (as added by the bill). 

If a credit is allowed under Code section 25D (as added by the bill) relating to residential 

solar, photovoltaic and fuel cell property, for the purpose of measuring energy efficiency 

improvements under this provision, the original condition of the home, or the comparable 

building in the case of a new home, is determined assuming the building contains the property 

for which the credit is allowed. Additionally, if a credit is allowed under this provision for any 

expenditure, the increase in the basis of the property that would result from such expenditure is 

reduced by the amount of the credit. 

In order to be eligible for the credit, the residence’s energy savings must be demonstrated 

by performance-based compliance and be certified according to regulations established by the 
78

Secretary that follow various rules and procedures, including the use of computer software based 

on the 2005 California Residential Alternative Calculation Method Approval Manual. The 

determination of compliance may be provided by a local building regulatory authority, a utility, a 

manufactured home production inspection primary inspection agency (IPIA), or an accredited 

home energy rating system provider. All providers shall be accredited, or otherwise authorized to 

use approved energy performance measurement methods, by the Residential Energy Services 

Network (RESNET). 

Special proration rules apply in the case of jointly owned property, condominiums, and 

tenant-stockholders in cooperative housing corporations. Certain restrictions and limitations 

apply with respect to property financed by subsidized energy financing or obtained through grant 

programs. If less than 80 percent of the property is used for nonbusiness purposes, only that 

portion of expenditures that is used for nonbusiness purposes is taken into account. If a credit is 

allowed under this provision with respect to any property, the basis of such property is reduced 

by the amount of the credit so allowed. 

Effective date.−The credit applies to property placed in service after December 31, 2005 

and prior to January 1, 2009. 

Conference Agreement

The conference agreement follows the House bill and the Senate amendment with 

modifications. The conference agreement follows the House bill with respect to energy efficient 

improvements to the building envelope, but the credit rate is reduced to 10 percent. The 

conference agreement includes the Senate amendment provisions related to (1) advanced main 

air circulating fans, (2) natural gas, propane, or oil furnace or hot water boilers and (3) qualified 

energy-efficient property, The conference agreement does not include the Senate amendment 

provision related to highly energy-efficient principal residences. The credit allowed under the 

conference agreement may not exceed $500 in total across all taxable years, and no more than 

$200 dollars of such credit may be attributable to expenditures on windows. There is no 

requirement for certification of expenditures. 

The conference agreement modifies the energy efficiency requirements for qualifying 

central air conditioners to be the highest efficiency tier established by the Consortium for Energy 

Efficiency as in effect on Jan. 1, 2006. 

The conference agreement also modifies the effective date. 

Effective date.− The credit applies to property placed in service after December 31, 2005 

and prior to January 1, 2008. 

13. Energy efficient commercial buildings deduction (sec. 1521 of the Senate amendment 

sec. 1331 of the conference agreement, and new sec. 179D of the Code) 

Present Law

No special deduction is provided for expenses incurred for energy-efficient commercial 

building property. 
79

House Bill

No provision. 

Senate Amendment

In general

The provision provides a deduction equal to energy-efficient commercial building 

property expenditures made by the taxpayer. Energy-efficient commercial building property 

expenditures is defined as property (1) which is installed on or in any building located in the 

United States that is within the scope of Standard 90.1-2001 of the American Society of Heating, 

Refrigerating, and Air Conditioning Engineers and the Illuminating Engineering Society of 

North America (“ASHRAE/IESNA”), (2) which is installed as part of (i) the interior lighting 

systems, (ii) the heating, cooling, ventilation, and hot water systems, or (iii) the building 

envelope, and (3) which is certified as being installed as part of a plan designed to reduce the 

total annual energy and power costs with respect to the interior lighting systems, heating, 

cooling, ventilation, and hot water systems of the building by 50 percent or more in comparison 

to a reference building which meets the minimum requirements of Standard 90.1-2001 (as in 

effect on April 2, 2003). The deduction is limited to an amount equal to $2.25 per square foot of 

the property for which such expenditures are made. The deduction is allowed in the year in 

which the property is placed in service. 

Certain certification requirements must be met in order to qualify for the deduction. The 

Secretary, in consultation with the Secretary of Energy, will promulgate regulations that describe 

methods of calculating and verifying energy and power costs using qualified computer software 

based on the provisions of the 2005 California Nonresidential Alternative Calculation Method 

Approval Manual or, in the case of residential property, the 2005 California Residential 

Alternative Calculation Method Approval Manual. 

The Committee intends that the methods for calculation be fuel neutral, such that the 

same energy efficiency features qualify a building for the deduction under this provision 

regardless of whether the heating source is a gas or oil furnace or boiler or an electric heat pump. 

The Committee also intends that the calculation methods provide appropriate calculated energy 

savings for design methods and technologies not otherwise credited in either Standard 90.1-2001 

or in the 2005 California Nonresidential Alternative Calculation Method Approval Manual, 

including the following: (i) Natural ventilation (ii) Evaporative cooling (iii) Automatic lighting 

controls such as occupancy sensors, photocells, and timeclocks( iv) Daylighting (v) Designs 

utilizing semi-conditioned spaces which maintain adequate comfort conditions without air 

conditioning or without heating (vi) Improved fan system efficiency, including reductions in 

static pressure (vii) Advanced unloading mechanisms for mechanical cooling, such as multiple or 

variable speed compressors (viii) On-site generation of electricity, including combined heat and 

power systems, fuel cells, and renewable energy generation such as solar energy (ix) Wiring with 

lower energy losses than wiring satisfying Standard 90.1-2001 requirements for building power 

distribution systems. The calculation methods may take into account the extent of 

commissioning in the building, and allow the taxpayer to take into account measured 

performance which exceeds typical performance 
80

The Secretary shall prescribe procedures for the inspection and testing for compliance of 

buildings that are comparable, given the difference between commercial and residential 

buildings, to the requirements in the Mortgage Industry National Accreditation Procedures for 

Home Energy Rating Systems. Individuals qualified to determine compliance shall only be those 

recognized by one or more organizations certified by the Secretary for such purposes. 

For energy-efficient commercial building property expenditures made by a public entity, 

such as public schools, the Secretary shall promulgate regulations that allow the deduction to be 

allocated to the person primarily responsible for designing the property in lieu of the public 

entity. 

If a deduction is allowed under this section, the basis of the property shall be reduced by 

the amount of the deduction. Additionally, if a deduction is allowed for business energy 

property under section 1523 of the Senate amendment, or an individual credit for nonbusiness 

energy property or principal residence is allowed under section 1524 of the Senate amendment, 

then with respect to property for which a deduction under this provision may be claimed, the 

annual energy and power costs of the reference building is to be determined assuming the 

reference building contains the property for which the deduction or credit has been allowed, and 

any cost of such property taken into account under those other provisions of the bill cannot be 

taken into account under this provision. 

Partial allowance of deduction

In the case of a building that does not meet the overall building requirement of a 50-

percent energy savings, a partial deduction is allowed with respect to each separate building 

system that comprises energy efficient property and which is certified by a qualified professional 

as meeting or exceeding the applicable system-specific savings targets established by the 

Secretary of the Treasury. The applicable system-specific savings targets to be established by 

the Secretary are those that would result in a total annual energy savings with respect to the 

whole building of 50 percent, if each of the separate systems met the system specific target. The 

separate building systems are (1) the interior lighting system, (2) the heating, cooling, ventilation 

and hot water systems, and (3) the building envelope. The maximum allowable deduction is 

$0.75 per square foot for each separate system. 

In the case of system-specific partial deductions, in general no deduction is allowed until 

the Secretary establishes system-specific targets. However, in the case of lighting system 

retrofits, until such time as the Secretary issues final regulations, the system-specific energy 

savings target for the lighting system is deemed to be met by a reduction in Lighting Power 

Density of 40 percent (50 percent in the case of a warehouse) of the minimum requirements in 

Table 9.3.1.1 or Table 9.3.1.2 of ASHRAE/IESNA Standard 90.1-2001. Also, in the case of a 

lighting system that reduces lighting power density by 25 percent, a partial deduction of 37.5 

cents per square foot is allowed. A pro-rated partial deduction is allowed in the case of a lighting 

system that reduces lighting power density between 25 percent and 40 percent. Certain lighting 

level and lighting control requirements must also be met in order to qualify for the partial 

lighting deductions. 
81

Effective date.−The provision is effective for property placed in service after the date of 

enactment and prior to January 1, 2010. 

Conference Agreement

The conference agreement follows the Senate amendment with modifications. The 

conference agreement provides that the deduction amount is reduced to $1.80 per square foot, 

and that the partial deduction for building subsystems is reduced to $0.60 per square foot. The 

conference agreement also modifies the effective date. 

Effective date.−The provision is effective for property placed in service after December 

31, 2005 and prior to January 1, 2008. 

14. Deduction for business energy property (sec. 1523 of the Senate amendment) 

Present Law

There is no special deduction provided for energy-efficient property. 

House Bill

No provision. 

Senate Amendment

The provision provides a deduction equal to the greater of (1) the total of the allowable 

deductions for the purchase of certain property, or (2) the allowable deduction with respect to 

energy-efficient residential rental building property. 

The allowable deduction for the purchase of certain property is (1) $150 for each 

advanced main air circulating fan, (2) $450 for each qualified natural gas, propane, or oil furnace 

or hot water boiler, and (3) $900 for each item of qualified energy efficient property. 

An advanced main air circulating fan is a fan used in a natural gas, propane, or oil 

furnace originally placed in service by the taxpayer during the taxable year, and which has an 

annual electricity use of no more than two percent of the total annual energy use of the furnace 

(as determined in the standard Department of Energy test procedures). 

A qualified natural gas, propane, or oil furnace or hot water boiler is a natural gas, 

propane, or oil furnace or hot water boiler with an annual fuel utilization efficiency rate of at 

least 95. 

Qualified energy-efficient property is: (1) an electric heat pump water heater which yields 

an energy factor of at least 2.0 in the standard Department of Energy test procedure, (2) an 

electric heat pump which has a heating seasonal performance factor (HSPF) of at least 9, a 

seasonal energy efficiency ratio (SEER) of at least 15, and an energy efficiency ratio (EER) of at 

least 13, (3) a geothermal heat pump which (i) in the case of a closed loop product, has an energy 

efficiency ratio (EER) of at least 14.1 and a heating coefficient of performance (COP) of at least 
82

3.3, (ii) in the case of an open loop product, has an energy efficiency ratio (EER) of at least 16.2 

and a heating coefficient of performance (COP) of at least 3.6, and (iii) in the case of a direct 

expansion (DX) product, has an energy efficiency ratio (EER) of at least 15 and a heating 

coefficient of performance (COP) of at least 3.5, (4) a central air conditioner which has a 

seasonal energy efficiency ratio (SEER) of at least 15 and an energy efficiency ratio (EER) of at 

least 13, and (5) a natural gas, propane, or oil water heater which has an energy factor of at least 

0.80. 

The allowable deduction with respect to energy-efficient residential rental building 

property is $6,000 if the building achieves a 50 percent reduction in energy costs relative to the 

original condition of the building (in the case of new construction, the original condition of the 

building is deemed to be a building built to the standards necessary for compliance with 

applicable local building construction codes). In the case of a building that achieves a reduction 

in energy costs between 20 and 50 percent, the allowable deduction is $12,000 times the 

percentage reduction. No deduction is allowed in the case of energy cost savings of less than 20 

percent. In order to be eligible for the deduction, the building’s energy savings must be certified 

according to regulations established by the Secretary that follow various rules and procedures. 

In the case of energy efficient residential rental building property which is public property, the 

Secretary shall promulgate a regulation to allow the allocation of the deduction to the person 

primarily responsible for designing the improvements to the property in lieu of the public entity 

which is the owner of such property. 

In order to be eligible for the deduction, the rental building’s energy savings must be 

demonstrated by performance-based compliance and be certified according to regulations 

established by the Secretary that follow various rules and procedures, including the use of 

computer software based on the 2005 California Residential Alternative Calculation Method 

Approval Manual. The determination of compliance may be provided by a local building 

regulatory authority, a utility, a manufactured home production inspection primary inspection 

agency (IPIA), or an accredited home energy rating system provider. All providers shall be 

accredited, or otherwise authorized to use approved energy performance measurement methods, 

by the Residential Energy Services Network (RESNET). 

For energy-efficient residential rental building property owned by a Federal Sate or local 

government or political subdivision thereof, the Secretary shall promulgate regulations that allow 

the deduction to be allocated to the person primarily responsible for designing the property in 

lieu of the public entity. 

No deduction for energy efficient residential rental property is allowed for any property 

for which a deduction is allowable under Code section 179D (as added by the bill), relating to the 

deduction for energy efficient commercial building property. 

If a deduction is allowed under this provision with respect to any property, the basis of 

such property is reduced by the amount of the deduction so allowed. 

Effective date.−The credit applies to property placed in service after the date of 

enactment and prior to January 1, 2009. 
83

Conference Agreement

The conference agreement does not include the Senate amendment provision. 

15. Energy efficient new homes (sec. 1522 of the Senate amendment, sec. 1332 of the 

conference agreement, and new sec. 45L of the Code) 

Present Law

There is no present-law credit for the construction of new energy-efficient homes. 

House Bill

No provision. 

Senate Amendment

The provision provides a credit to an eligible contractor for the construction of a qualified 

new energy-efficient home. To qualify as an energy-efficient new home, the home must be: (1) a 

dwelling located in the United States, (2) substantially completed after the date of enactment, and 

(3) certified in accordance with guidance prescribed by the Secretary to have a projected level of 

annual heating and cooling energy consumption that meets the standards for either a 30-percent 

or 50-percent reduction in energy usage, compared to a comparable dwelling constructed in 

accordance with the standards of chapter 4 of the 2003 International Energy Conservation Code 

as in effect (including supplements) on the date of enactment, and any applicable Federal 

minimum efficiency standards for equipment. With respect to homes that meet the 30-percent 

standard, one-third of such 30 percent savings must come from the building envelope, and with 

respect to homes that meet the 50-percent standard, one-fifth of such 50 percent savings must 

come from the building envelope. 

The credit equals $1,000 in the case of a new home that meets the 30 percent standard 

and $2,000 in the case of a new home that meets the 50 percent standard. 

The eligible contractor is the person who constructed the home, or in the case of a 

manufactured home, the producer of such home. The Committee intends that the building 

envelope component means insulation materials or system specifically and primarily designed to 

reduce heat loss or gain, exterior windows (including skylights), doors, and any duct sealing and 

infiltration reduction measures. 

Manufactured homes that conform to federal manufactured home construction and safety 

standards are eligible for the credit provided all the criteria for the credit are met. Manufactured 

homes certified by a method prescribed by the Administrator of the Environmental Protection 

Agency under the Energy Star Labeled Homes program are eligible for the $1,000 credit 

provided criteria (1) and (2), above, are met. 

The credit is part of the general business credit. No credits attributable to energy efficient 

homes can be carried back to any taxable year ending on or before the effective date of the 

credit. 
84

Effective date.−The credit applies to homes whose construction is substantially 

completed after the date of enactment, and which are purchased during the period beginning on 

the date of enactment and ending on December 31, 2009 (December 31, 2007 in the case of the 

$1,000 credit). 

Conference Agreement

The conference agreement follows the Senate amendment with modifications. The 

conference agreement provides that the credit related to homes meeting the 30-percent efficiency 

standard applies only to manufactured homes. The conference agreement also modifies the 

effective date. 

Effective date.−The credit applies to homes whose construction is substantially 

completed after December 31, 2005, and which are purchased after December 31, 2005 and prior 

to January 1, 2008. 

16. Energy credit for combined heat and power system property (sec. 1525 of the Senate 

amendment) 

Present Law

A nonrefundable, 10-percent business energy credit is allowed for the cost of new 

property that is equipment (1) that uses solar energy to generate electricity, to heat or cool a 

structure, or to provide solar process heat, or (2) used to produce, distribute, or use energy 

derived from a geothermal deposit, but only, in the case of electricity generated by geothermal 

power, up to the electric transmission stage. 

The business energy tax credits are components of the general business credit (sec. 

38(b)(1)). The business energy tax credits, when combined with all other components of the 

general business credit, generally may not exceed for any taxable year the excess of the 

taxpayer's net income tax over the greater of (1) 25 percent of net regular tax liability above 

$25,000 or (2) the tentative minimum tax. For credits arising in taxable years beginning after 

December 31, 1997, an unused general business credit generally may be carried back one year 

and carried forward 20 years (sec. 39). 

A taxpayer may exclude from income the value of any subsidy provided by a public 

utility for the purchase or installation of an energy conservation measure. An energy 

conservation measure means any installation or modification primarily designed to reduce 

consumption of electricity or natural gas or to improve the management of energy demand with 

respect to a dwelling unit (sec. 136). 

There is no present-law credit for combined heat and power (“CHP”) property. 

House Bill

No provision. 
85

Senate Amendment

The provision provides a 10-percent credit for the purchase of CHP property. 

CHP property is property: (1) that uses the same energy source for the simultaneous or 

sequential generation of electrical power, mechanical shaft power, or both, in combination with 

the generation of steam or other forms of useful thermal energy (including heating and cooling 

applications); (2) that has an electrical capacity of not more than 15 megawatts or a mechanical 

energy capacity of no more than 2000 horsepower or an equivalent combination of electrical and 

mechanical energy capacities; (3) that produces at least 20 percent of its total useful energy in the 

form of thermal energy that is not used to produce electrical or mechanical power, and produces 

at least 20 percent of its total useful energy in the form of electrical or mechanical power (or a 

combination thereof); and (4) the energy efficiency percentage of which exceeds 60 percent. 

CHP property does not include property used to transport the energy source to the generating 

facility or to distribute energy produced by the facility. 

Additionally, the provision provides that systems whose fuel source is at least 90 percent 

bagasse and that would qualify for the credit but for the failure to meet the efficiency standard 

are eligible for a credit that is reduced in proportion to the degree to which the system fails to 

meet the efficiency standard. For example, a system that would otherwise be required to meet 

the 60-percent efficiency standard, but which only achieves 30-percent efficiency, would be 

permitted a credit equal to one-half of the otherwise allowable credit (i.e., a 5-percent credit). 

Effective date.−The credit applies to periods after the date of enactment in taxable years 

ending after the date of enactment, for property placed in service before January 1, 2008, under 

rules similar to rules of section 48(m) of the Internal Revenue Code of 1986 (as in effect on the 

day before the date of enactment of the Revenue Reconciliation Act of 1990). 

Conference Agreement

The conference agreement does not include the Senate amendment provision. 

17. Energy efficient appliances (sec. 1526 of the Senate amendment, sec. 1334 of the 

conference agreement, and new sec. 45M of the Code) 

Present Law

There is no present-law credit for the manufacture of energy-efficient appliances. 

House Bill

No provision. 

Senate Amendment

The provision provides a credit for the eligible production of certain energy-efficient 

dishwashers, clothes washers and refrigerators. 
86

The credit for dishwashers applies to dishwashers produced in 2006 and 2007 that meet 

the Energy Star standards for 2007. The credit amount equals $3 multiplied by the percentage by 

which the efficiency of the 2007 standards (not yet known) exceeds that of the 2005 standards. 

The credit may not exceed $100 per dishwasher. 

The credit for clothes washers equals (1) $50 for clothes washers manufactured in 2005 

that have a modified energy factor (MEF) of at least 1.42, (2) $100 for clothes washers 

manufactured in 2005-2007 that meet the requirements of the Energy Star program which are in 

effect for clothes washers in 2007, or (3) the minimum of (i) $200 or (ii) $10 multiplied by the 

average of the energy and water savings percentages of the 2010 Energy Star standards relative 

to the 2007 Energy Star standards, for clothes washers manufactured in 2008-2010 that meet the 

requirements of the Energy Star program which are in effect for clothes washers in 2010. 

The credit for refrigerators is based on energy savings and year of manufacture. The 

energy savings are determined relative to the energy conservation standards promulgated by the 

Department of Energy that took effect on July 1, 2001. Refrigerators that achieve a 15 to 20 

percent energy saving and that are manufactured in 2005 or 2006 receive a $75 credit. 

Refrigerators that achieve a 20 to 25 percent energy saving receive a (i) $125 credit if 

manufactured in 2005-2007, or (ii) $100 credit if manufactured in 2008. Refrigerators that 

achieve at least a 25 percent energy saving receive a (i) $175 credit if manufactured in 2005-

2007, or (ii) $150 credit if manufactured in 2008-2010. 

Appliances eligible for the credit include only those that exceed the average amount of 

production from the 3 prior calendar years for each category of appliance. In the case of 

refrigerators, eligible production is production that exceeds 110 percent of the average amount of 

production from the 3 prior calendar years. Proration rules apply in the case of credits for 2005 

production. 

A dishwasher is any a residential dishwasher subject to the energy conservation standards 

established by the Department of Energy. A refrigerator must be an automatic defrost 

refrigerator-freezer with an internal volume of at least 16.5 cubic feet to qualify for the credit. A 

clothes washer is any residential clothes washer, including a residential style coin operated 

washer, that satisfies the relevant efficiency standard. 

The taxpayer may not claim credits in excess of $75 million for all taxable years, and 

may not claim credits in excess of $20 million with respect to clothes washers eligible for the 

$50 credit and refrigerators eligible for the $75 credit. A taxpayer may elect to increase the $20 

million limitation described above to $25 million provided that the aggregate amount of credits 

with respect to such appliances, plus refrigerators eligible for the $100 and $125 credits, is 

limited to $50 million for all taxable years. 

Additionally, the credit allowed in a taxable year for all appliances may not exceed two 

percent of the average annual gross receipts of the taxpayer for the three taxable years preceding 

the taxable year in which the credit is determined. 

The credit is part of the general business credit. 
87

Effective date.−The credit applies to appliances produced after the date of enactment and 

prior to January 1, 2011 (January 1, 2008, in the case of dishwashers). 

Conference Agreement

The conference agreement follows the Senate amendment, but only with respect to the 

provisions that cover production after December 31, 2005 and prior to January 1, 2008. 

Effective date.−The credit applies to appliances produced after December 31, 2005 and 

prior to January 1, 2008.
88

C. Alternative Minimum Tax Relief Provisions 

1. Allow nonbusiness energy credits against the alternative minimum tax (sec. 1321 of the 

House bill) 

Present Law

Present law imposes an alternative minimum tax on individuals in an amount equal to the 

excess of the tentative minimum tax over the regular tax liability. The tentative minimum tax is 

an amount equal to specified rates of tax imposed on the excess of the alternative minimum 

taxable income over an exemption amount. 

Generally, for taxable years beginning after December 31, 2005, nonrefundable personal 

credits may not exceed the excess of the regular tax liability over the tentative minimum tax. 

House Bill

The provision allows the personal energy credits added by the House bill to offset both 

the regular tax and the alternative minimum tax. 

Effective date.−The provision applies to taxable years beginning after December 31, 

2005. 

Senate Amendment

No provision. 

Conference Agreement

The conference agreement does not contain the House bill provision. 

2. Allow certain business energy credits against the alternative minimum tax (sec. 1322 of 

the House bill and sec. 1548(c) of the Senate amendment) 

Present Law

Present law imposes an alternative minimum tax on individuals and corporations in an 

amount equal to the excess of the tentative minimum tax over the regular tax liability. The 

tentative minimum tax is an amount equal to specified rates of tax imposed on the excess of the 

alternative minimum taxable income over an exemption amount. 

Generally, the general business credit may not exceed the excess of the regular tax 

liability over the tentative minimum tax (or, if greater, 25 percent of so much of the regular tax 

liability as exceeds $25,000). Amounts in excess of this limitation generally may be carried back 

one year and forward 20 years. In applying the tax limitation to certain business energy credits, 

the tentative minimum tax is treated as being zero. These credits include the alcohol fuels credit 

and the section 45 credit for electricity produced from a facility (placed in service after October 
89

22, 2004) during the first four years of production beginning on the date the facility is placed in 

service. 

House Bill

The House bill expands the list of business energy credits for which the tentative 

minimum tax is treated as being zero to include (i) the low sulfur diesel fuel production credit, 

(ii) the marginal oil and gas well production credit, (iii) the portion of the investment credit 

attributable to qualified fuel cells, and (iv) for taxable years beginning after December 31, 2005, 

and before January 1, 2008, the enhanced oil recovery credit. 

Effective date.−The provision generally applies to credits determined for taxable years 

beginning after December 31, 2005. In the case of the credit for qualified fuel cells, the 

provision applies for taxable years ending after April 11, 2005. 

Senate Amendment

The Senate amendment expands the list of business energy credits for which the tentative 

minimum tax is treated as being zero to include the credit for production of coal owned by Indian 

tribes. 

Effective date.−The provision is effective as if included in the provision allowing the 

credit. 

Conference Agreement

The conference agreement does not expand the list of business energy credits for which 

the tentative minimum tax is treated as being zero.88 

 88 However, see sec. 45(e)(10)(D) treating the credit for the production of Indian Coal as being 

on the list. 
90

D. Additional Energy Tax Incentives 

1. Ten-year recovery period for underground natural gas storage facilities and cushion gas 

(sec. 1541 of the Senate amendment) 

Present Law

Under present law, depreciation allowances for property used in a trade or business 

generally are determined under the Modified Accelerated Cost Recovery System (“MACRS”). 

Under MACRS, natural gas storage facilities and related equipment have a class life of 22 years 

and a recovery period of 15 years. 

Cushion gas is the minimum volume of natural gas necessary to provide the pressure to 

facilitate the flow of gas from a storage reservoir to a pipeline. Recoverable cushion gas will be 

available for sale or other use upon abandonment of the storage reservoir, while nonrecoverable 

cushion gas will become obsolete with that abandonment. Under present law, the tax treatment 

of cushion gas depends on whether such gas is recoverable. The quantity of cushion gas that is 

recoverable is not subject to depreciation because it is not subject to exhaustion, wear, tear, or 

obsolescence. Conversely, non-recoverable cushion gas is subject to obsolescence and is 

therefore subject to tax depreciation. The depreciable life of non-recoverable cushion gas is also 

15 years. 

House Bill

No provision. 

Senate Amendment

The Senate amendment reclassifies underground natural gas storage facilities and 

nonrecoverable cushion gas as 10-year MACRS property. The present law treatment of 

recoverable cushion gas remains unchanged. 

Effective date.−The Senate amendment provision applies to property placed in service 

after the date of enactment, the original use of which commences with the taxpayer. 

Conference Agreement

The conference agreement does not include the Senate amendment provision.

2. Modify research credit for research relating to energy (sec. 1542 of the Senate 

amendment, sec. 1351 of the conference agreement, and sec. 41 of the Code) 

Present Law

General rule

Section 41 provides for a research tax credit equal to 20 percent of the amount by which a 

taxpayer’s qualified research expenses for a taxable year exceed its base amount for that year. 
91 

The research tax credit is scheduled to expire and generally will not apply to amounts paid or 

incurred after December 31, 2005. 

A 20-percent research tax credit also applies to the excess of (1) 100 percent of corporate 

cash expenses (including grants or contributions) paid for basic research conducted by 

universities (and certain nonprofit scientific research organizations) over (2) the sum of (a) the 

greater of two minimum basic research floors plus (b) an amount reflecting any decrease in 

nonresearch giving to universities by the corporation as compared to such giving during a fixedbase period, as adjusted for inflation. This separate credit computation is commonly referred to 

as the university basic research credit (see sec. 41(e)). 

Alternative incremental research credit regime

Taxpayers are allowed to elect an alternative incremental research credit regime. If a 

taxpayer elects to be subject to this alternative regime, the taxpayer is assigned a three-tiered 

fixed-base percentage (that is lower than the fixed-base percentage otherwise applicable under 

present law) and the credit rate likewise is reduced. Under the alternative credit regime, a credit 

rate of 2.65 percent applies to the extent that a taxpayer’s current-year research expenses exceed 

a base amount computed by using a fixed-base percentage of one percent (i.e., the base amount 

equals one percent of the taxpayer’s average gross receipts for the four preceding years) but do 

not exceed a base amount computed by using a fixed-base percentage of 1.5 percent. A credit 

rate of 3.2 percent applies to the extent that a taxpayer’s current-year research expenses exceed a 

base amount computed by using a fixed-base percentage of 1.5 percent but do not exceed a base 

amount computed by using a fixed-base percentage of two percent. A credit rate of 3.75 percent 

applies to the extent that a taxpayer’s current-year research expenses exceed a base amount 

computed by using a fixed-base percentage of two percent. An election to be subject to this 

alternative incremental credit regime may be made for any taxable year beginning after June 30, 

1996, and such an election applies to that taxable year and all subsequent years unless revoked 

with the consent of the Secretary of the Treasury. 

Eligible expenses

Qualified research expenses eligible for the research tax credit consist of: (1) in-house 

expenses of the taxpayer for wages and supplies attributable to qualified research; (2) certain 

time-sharing costs for computer use in qualified research; and (3) 65 percent of amounts paid or 

incurred by the taxpayer to certain other persons for qualified research conducted on the 

taxpayer’s behalf (so-called contract research expenses). In the case of amounts paid to a 

research consortium, 75 percent of amounts paid for qualified research is treated as qualified 

research expenses eligible for the research credit (rather than 65 percent under the general rule) if 

(1) such research consortium is a tax-exempt organization that is described in section 501(c)(3) 

(other than a private foundation) or section 501(c)(6) and is organized and operated primarily to 

conduct scientific research, and (2) such qualified research is conducted by the consortium on 

behalf of the taxpayer and one or more persons not related to the taxpayer. 

To be eligible for the credit, the research must not only satisfy the requirements of 

present-law section 174 for the deduction for research expenses, but must be undertaken for the 

purpose of discovering information that is technological in nature, the application of which is 
92 

intended to be useful in the development of a new or improved business component of the 

taxpayer, and substantially all of the activities of which must constitute elements of a process of 

experimentation for functional aspects, performance, reliability, or quality of a business 

component. 

House Bill

No provision. 

Senate Amendment

The provision modifies the present-law research credit as it applies to qualified energy 

research. In particular, the provision provides that the taxpayer may claim a credit equal to 20 

percent of the taxpayer’s expenditures on qualified energy research undertaken by an energy 

research consortium. The amount of credit claimed is determined only by regard to such 

expenditures by the taxpayer within the taxable year. Unlike the general rule for the research 

credit, the 20-percent credit for research by an energy research consortium applies to all such 

expenditures, not only those in excess of a base amount however determined. An energy 

research consortium is a qualified research consortium as under present law that also is organized 

and operated primarily to conduct energy research and development in the public interest and to 

which at least five unrelated persons paid, or incurred amounts, to such organization within the 

calendar year. In addition, to be a qualified energy research consortium no single person shall 

pay or incur more than 50 percent of the total amounts received by the research consortium 

during the calendar year. 

The provision also provides that 100 percent of amounts paid or incurred by the taxpayer 

to eligible small businesses, universities, and Federal for qualified energy research would 

constitute qualified research expenses as contract research expenses, rather than 65 percent of 

qualified research expenditures allowed under present law. An eligible small business for this 

purpose is a business in which the taxpayer does not own a 50 percent or greater interest and the 

business has employed, on average, 500 or fewer employees in the two preceding calendar years. 

Qualified energy research expenditures are expenditures that would otherwise qualify for 

the research credit under present law and relate to the production, supply, and conservation of 

energy, including otherwise qualifying research expenditures related to alternative energy 

sources or the use of alternative energy sources. For example, research relating to hydrogen fuel 

cell vehicles would qualify under this provision, if the research expenditures otherwise satisfy 

the criteria of present-law sec. 41. Likewise, otherwise qualifying research undertaken to 

improve the energy-efficiency of lighting would qualify under this provision. 

Effective date.−The provision is effective for amounts paid or incurred after the date of 

enactment in taxable years ending after such date. 

Conference Agreement

The conference agreement follows the Senate amendment. 
93 

3. Small agri-biodiesel producer credit (sec. 1543 of the Senate amendment, sec. 1345 of the 

conference agreement, and sec. 40A of the Code) 

Present Law

Biodiesel income tax credit 

The Code provides an income tax credit for biodiesel and qualified biodiesel mixtures, 

the biodiesel fuels credit. The biodiesel fuels credit is the sum of the biodiesel mixture credit 

plus the biodiesel credit and is treated as a general business credit. The amount of the biodiesel 

fuels credit is includable in gross income. The biodiesel fuels credit is coordinated to take into 

account benefits from the biodiesel excise tax credit and payment provisions created by the Act. 

The credit may not be carried back to a taxable year ending before or on December 31, 2004. 

The provision does not apply to fuel sold or used after December 31, 2006. 

Biodiesel is monoalkyl esters of long chain fatty acids derived from plant or animal 

matter that meet (1) the registration requirements established by the Environmental Protection 

Agency under section 211 of the Clean Air Act and (2) the requirements of the American Society 

of Testing and Materials D6751. Agri-biodiesel is biodiesel derived solely from virgin oils 

including oils from corn, soybeans, sunflower seeds, cottonseeds, canola, crambe, rapeseeds, 

safflowers, flaxseeds, rice bran, mustard seeds, or animal fats. 

Biodiesel may be taken into account for purposes of the credit only if the taxpayer 

obtains a certification (in such form and manner as prescribed by the Secretary) from the 

producer or importer of the biodiesel which identifies the product produced and the percentage of 

the biodiesel and agri-biodiesel in the product. 

The biodiesel income tax credit does not contain any incentives for small producers. 

Small ethanol producer credit

Present law provides several tax benefits for ethanol and methanol produced from 

renewable sources that are used as a motor fuel or that are blended with other fuels (e.g., 

gasoline) for such a use. In the case of ethanol, a separate 10-cents-per-gallon credit for up to 15 

million gallons per year for small producers, defined generally as persons whose production does 

not exceed 15 million gallons per year and whose production capacity does not exceed 30 

million gallons per year. The ethanol must (1) be sold by such producer to another person (a) 

for use by such other person in the production of al qualified alcohol fuel mixture in such 

person’s trade or business (other than casual off-farm production), (b) for use by such other 

person as a fuel in a trade or business, or, (c) who sells such ethanol at retail to another person 

and places such ethanol in the fuel tank of such other person; or (2) used by the producer for any 

purpose described in (a), (b), or (c). A cooperative may pass through the small ethanol producer 

credit to its patrons. The alcohol fuels tax credits are includible in income. This credit may be 

used to offset alternative minimum tax liability. The credit is a treated as a general business 

credit, subject to the ordering rules and carryforward/carryback rules that apply to business 

credits generally. The alcohol fuels tax credit is scheduled to expire after December 31, 2010. 
94 

House Bill

No provision. 

Senate Amendment

The Senate amendment adds to the biodiesel fuels credit a small agri-biodiesel producer 

credit. The credit is a 10-cents-per-gallon credit for up to 15 million gallons of agri-biodiesel 

produced by small producers, defined generally as persons whose agri-biodiesel production 

capacity does not exceed 60 million gallons per year. The agri-biodiesel must (1) be sold by 

such producer to another person (a) for use by such other person in the production of a qualified 

biodiesel mixture in such person’s trade or business (other than casual off-farm production), (b) 

for use by such other person as a fuel in a trade or business, or, (c) who sells such agri-biodiesel 

at retail to another person and places such ethanol in the fuel tank of such other person; or (2) 

used by the producer for any purpose described in (a), (b), or (c). 

Like the small ethanol producer credit, cooperatives may elect to pass through any 

portion of the small agri-biodiesel producer credits to its patrons. The credit is apportioned pro 

rata among patrons of the cooperative on the basis of the quantity or value of the business done 

with or for such patrons for the taxable year. An election to pass through the credit is made on a 

timely filed return for the taxable year and is irrevocable for such taxable year. 

The amount of the credit not apportioned to patrons is included in the organization’s 

credit for the taxable year of the organization. The amount of the credit apportioned to patrons is 

to be included in the patron’s credit for the first taxable year of each patron ending on or after the 

last day of the payment period for the taxable year of the organization, or, if earlier, for the 

taxable year of each patron ending on or after the date on which the patron receives notice from 

the cooperative of the apportionment. 

If the amount of the cooperative's credit for a taxable year is less than the amount of the 

credit shown on the organization's tax return for such taxable year, an amount equal to the excess 

of the reduction in the credit over the amount not apportioned to patrons for the taxable year is 

treated as an increase in the cooperative’s tax. The increase is not treated as tax imposed for 

purposes of determining the amount of any tax credit or for purposes of the alternative minimum 

tax. 

The credit sunsets after December 31, 2010, along with the other biodiesel incentives as 

extended under the Senate amendment. 

Effective date.−The provision is effective for taxable years ending after the date of 

enactment. 

Conference Agreement

The conference agreement follows the Senate amendment except the credit sunsets after 

December 31, 2008.
95

4. Modifications to small ethanol producer credit (sec. 1544 of the Senate amendment, 

sec. 1347 of the conference agreement, and sec. 40 of the Code) 

Present Law

Present law provides several tax benefits for ethanol and methanol that are used as a fuel 

or that are blended with other fuels (e.g., gasoline) for such a use. For example, the Code 

provides an income tax credit for alcohol and alcohol-blended fuels. In the case of ethanol, the 

Code provides an additional 10-cents-per-gallon credit for small producers, defined generally as 

persons whose production capacity does not exceed 30 million gallons per year.89 

House Bill

No provision. 

Senate Amendment

The Senate amendment increases the limit on production capacity for small ethanol 

producers from 30 million gallons to 60 million gallons per year. 

The Senate amendment also provides that an election to pass the small ethanol producer 

credit through to cooperative patrons is not valid unless the cooperative provides patrons timely 

written notice of the apportionment of the credit. Under the Senate amendment, notice is timely 

if mailed to patrons during the payment period described in section 1382(d) of the Code. 

Effective date.−The provision is effective for taxable years ending after the date of 

enactment. 

Conference Agreement

The conference agreement follows the Senate amendment. 

5. Credit for equipment for processing or sorting materials gathered through recycling 

(sec. 1545 of the Senate amendment and sec. 1353 of the conference agreement) 

Present Law

There is no present law credit for equipment for processing or sorting materials gathered 

through recycling. 

House Bill

No provision. 

 89 Sec. 40(b)(4) and (g)(1). The alcohol fuels tax credit (which is comprised of the small ethanol 

producer credit, the alcohol mixture credit, and the alcohol credit) is scheduled to expire after December 

31, 2010 (sec. 40(e)(1)). 
96

Senate Amendment

The provision provides a 15-percent business tax credit for the cost of qualified recycling 

equipment placed in service or leased by the taxpayer. Qualified recycling equipment is 

equipment, including connecting piping, (1) that is employed in sorting or processing residential 

and commercial qualified recyclable materials (any packaging or printed material which is glass, 

paper, plastic, steel, or aluminum generated by an individual or business) for the purpose of 

converting such materials for use in manufacturing tangible consumer products, including 

packaging, or (2) whose primary purpose is the shredding and processing of any electronic 

waste, including any cathode ray tube, flat panel screen, or similar video display device with a 

screen size greater than four inches measured diagonally, or a central processing unit. 

Qualified recycling equipment does not include rolling stock or other equipment used to 

transport recyclable materials. Materials that are not packaging or printed material, such as tires 

or scrap metal from junked automobiles, are not qualified recyclable materials, and thus 

equipment used to process such materials are not qualified recycling equipment. 

For the purposes of (1), qualified recycling equipment includes equipment that is utilized 

at commercial or public venues, including recycling collection centers, where the equipment is 

utilized to sort or process qualified recyclable materials for such purpose. For the purpose of (2), 

only the cost of each piece of equipment as exceeds $400,000 is eligible for the credit. 

Effective date.−The credit applies to amounts paid or incurred during the taxable year for 

qualified recycling equipment placed in service or leased in taxable years beginning after 

December 31, 2005. 

Conference Agreement

The conference agreement does not include the Senate amendment provision. The 

conference agreement directs the Secretary of the Treasury, in consultation with the Secretary of 

Energy, to conduct a study to determine and quantify the energy savings achieved through the 

recycling of glass, paper, plastic, steel, aluminum, and electronic devices, and to identify tax 

incentives that would encourage recycling of such material. The study is to be submitted to 

Congress within one year of the date of enactment. 

Effective date.−The provision is effective on the date of enactment. 

6. Five-year carryback of net operating losses for certain electric utility companies 

(sec. 1546 of the Senate amendment, sec. 1311 of the conference agreement, and sec. 172 of 

the Code) 

Present Law

A net operating loss (“NOL”) is, generally, the amount by which a taxpayer’s allowable 

deductions exceed the taxpayer’s gross income. A carryback of an NOL generally results in the 

refund of Federal income tax for the carryback year. A carryover of an NOL reduces Federal 

income tax for the carryover year. 
97

In general, an NOL may be carried back two years and carried over 20 years to offset 

taxable income in such years.90 Under present-law ordering rules, NOLs generally are first 

applied to the earliest of the taxable years to which the loss may be carried.91 

Different rules apply with respect to NOLs arising in certain circumstances. For 

example, a three-year carryback applies with respect to NOLs (1) arising from casualty or theft 

losses of individuals, or (2) attributable to Presidentially declared disasters for taxpayers engaged 

in a farming business or a small business. A five-year carryback period applies to NOLs from a 

farming loss (regardless of whether the loss was incurred in a Presidentially declared disaster 

area). Special rules also apply to real estate investment trusts (no carryback), specified liability 

losses (10-year carryback), and excess interest losses (no carryback to any year preceding a 

corporate equity reduction transaction). 

Section 202 of the Job Creation and Worker Assistance Act of 200292 (“JCWAA”) 

provided a temporary extension of the general NOL carryback period to five years (from two 

years) for NOLs arising in taxable years ending in 2001 and 2002. In addition, the five-year 

carryback period applies to NOLs from these years that qualify under present law for a threeyear carryback period (i.e., NOLs arising from casualty or theft losses of individuals or 

attributable to certain Presidentially declared disaster areas). 

A taxpayer can elect to forgo the five-year carryback period. The election to forgo the 

five-year carryback period is made in the manner prescribed by the Secretary of the Treasury and 

must be made by the due date of the return (including extensions) for the year of the loss. The 

election is irrevocable. If a taxpayer elects to forgo the five-year carryback period, then the 

losses are subject to the rules that otherwise would apply under section 172 absent the provision. 

House Bill

No provision. 

Senate Amendment

The Senate amendment provides a temporary extension of the NOL carryback period to 

five years for NOLs of certain electric utility companies arising in taxable years ending in 2003, 

2004, and 2005 (“eligible NOLs”). Regardless of the taxable year in which an eligible NOL 

arose, refund claims resulting from the extended carryback period can be made during any 

taxable year ending after December 31, 2005, and before January 1, 2009. However, the amount 

of the refund claimed during any one taxable year may not exceed the amount of the electric 

utility company’s investment in electric transmission property and pollution control facilities 

 90 Sec. 172. 

91 Sec. 172(b)(2). 

92 Pub. Law No. 107-147. 
98

(“qualifying investment”) in the preceding taxable year.93 The present-law NOL carryover 

ordering rules apply. Taxpayers may elect to forgo the five-year carryback period provided 

under the provision if an election is filed before January 1, 2009. 

Effective date.−The Senate amendment provision is effective for refund claims resulting 

from net operating losses generated in taxable years ending in 2003, 2004, and 2005. 

Conference Agreement

The conference agreement follows the Senate amendment, with the following 

modifications. The conference agreement provides an election for certain electric utility 

companies to extend the carryback period to five years for a portion of NOLs arising in 2003, 

2004, and 2005 (“loss years”). The election may be made during any taxable year ending after 

December 31, 2005, and before January 1, 2009 (“election years”). An electing taxpayer must 

specify to which loss year the election applies. 

The portion of the loss year NOL to which the election may apply is limited to 20 percent 

of the amount of the taxpayer’s qualifying investment in the taxable year prior to the year in 

which the election is made (the “qualifying investment limitation”). Rules similar to those 

applicable to specified liability losses apply, and any remaining portion of the loss year NOL 

remains subject to the present law NOL carryover rules. Only one election may be made in any 

election year, and elections may not be made for more than one election year beginning in the 

same calendar year. Thus, for example, a taxpayer with two short taxable years beginning in 

calendar year 2006 is eligible to make an election under this provision in only one of those two 

short taxable years. Once an election has been made with respect to a loss year, no subsequent 

election is available with respect to that loss year. 

For purposes of calculating interest on overpayments, any overpayment resulting from a 

five-year NOL carryback elected under this provision is deemed not to have been made prior to 

the filing date for the taxable year in which the election is made. The statute of limitations for 

refund claims, and that for assessment of deficiencies, are also extended.

An election under this provision is made in such manner as the Secretary may prescribe. 

However, the conferees expect that the filing of a refund claim will be considered sufficient for 

making the election, provided that the taxpayer attaches to the refund claim a statement 

specifying the election year, the loss year, and the amount of qualifying investment in electric 

transmission property and pollution control facilities in the preceding taxable year. 

Under the conference agreement, an investment in electric transmission property qualifies 

if it is a capital expenditure made by the taxpayer which is attributable to electric transmission 

 93 In order to qualify, such investment must be in the form of capital expenditures; qualifying 

investment does not include currently deductible expenses. In addition, the property must be acquired for 

use by the taxpayer in the taxpayer’s trade or business. There is no requirement that the transmission 

property or pollution control facilities be placed in service in the year in which the capital expenditures 

are incurred. 
99

property used by the taxpayer in the transmission at 69 or more kilovolts of electricity for sale. 

An investment in pollution control equipment qualifies if it is a capital expenditure, made by an 

electric utility company (as defined in the Public Utility Holding Company Act as in effect on 

the day before the date of enactment of the provision), which is attributable to a facility which 

will qualify as a certified pollution control facility, generally as defined under section 169(d)(1) 

but without regard to the requirements therein that the facility be new or that it be used in 

connection with a plant or other property in operation before January 1, 1976. 

The conferees recognize that a significant amount of time may be required between the 

date of a capital expenditure for electric transmission property or pollution control equipment 

and the date the property is placed in service. Accordingly, there is no requirement that the 

transmission property or pollution control facilities be placed in service in the year in which the 

capital expenditures are incurred. However, it is intended that qualifying investment under the 

provision includes only capital expenditures to which the taxpayer is committed and with respect 

to property which the taxpayer intends to ultimately place in service in the taxpayer’s trade or 

business. Under the conference agreement, capital expenditures which, at the taxpayer’s option, 

are refundable or subject to material modification in a manner which would not meet the 

requirements of the provision, may not be taken into account. For example, if a taxpayer makes 

a cash deposit with respect to a contract for the purchase of electric transmission property, and 

the contract contains an option (or there is otherwise an understanding) under which the taxpayer 

may subsequently apply the deposit to the purchase of equipment other than electric transmission 

property, the deposit is not included in the taxpayer’s qualifying investment. This rule is 

intended as an anti-abuse rule and should be interpreted to prevent a taxpayer from taking into 

account capital expenditures to which the taxpayer is not permanently committed. 

Effective date.−The conference agreement provision is effective for elections made in 

taxable years ending after December 31, 2005, and before January 1, 2009, with respect to net 

operating losses arising in taxable years ending in 2003, 2004, and 2005. 

7. Qualifying pollution control equipment credit (sec. 1547 of the Senate amendment) 

Present Law

There is no tax credit for investment in pollution control equipment. An investment 

credit is available for investment in certain energy property. 

Senate Amendment

The Senate amendment provides an investment credit for qualifying pollution control 

equipment. The credit is an amount equal to 15 percent of the basis of qualifying pollution 

control equipment placed in service at a qualifying facility during the taxable year. Qualifying 

pollution control equipment means any technology that is installed in or on a qualifying facility 

to reduce air emissions of any pollutant regulated by the Environmental Protection Agency under 

the Clean Air Act, including thermal oxidizers, scrubber systems, vapor recovery systems, low 

nitric oxide burners, flair systems, bag houses, cyclones, and continuous emission monitoring 

systems. A qualifying facility is a facility that produces not less than 1,000,000 gallons of 
100

ethanol during the taxable year. For depreciation purposes, the basis of qualifying pollution 

control equipment is reduced by 50 percent of the amount of the credit. 

In the case of property constructed over a period of two or more years, a taxpayer may 

elect to claim the credit on the basis of qualified progress expenditures made during the period of 

construction before the property is completed and placed in service.94 

Effective date.−The credit applies to periods after the date of enactment in accordance 

with the transitional rules set forth in 48(m) (as in effect before its repeal). 

Conference Agreement

The conference agreement does not include the Senate amendment provision. 

8. Credit for production of coal owned by Indian tribes (sec. 1548 of the Senate 

amendment) 

Present Law

Present law provides two income tax incentives for businesses operating within Indian 

reservations: (1) accelerated depreciation with respect to certain non-gaming property used in a 

trade or business within an Indian reservation (sec. 168(j)); and (2) a nonrefundable income tax 

credit to employers on the first $20,000 of qualified wages and health care costs paid to certain 

members of Indian tribes (or their spouses) who work on or near an Indian reservation and who 

earn less than $30,000 per year (adjusted for inflation beginning in 1993) (sec. 45A). Both 

credits expire after December 31, 2005. 

Present law does not provide a credit for the production of coal from coal reserves owned 

by an Indian tribe. 

House Bill

No provision. 

Senate Amendment

The provision establishes a credit for “Indian coal” sold to an unrelated person. Indian 

coal is defined as coal produced from coal reserves that on June 14, 2005, were owned by a 

Federally recognized tribe of Indians or are held in trust by the United States for a tribe or its 

members. 

 94 The rules applicable to qualified progress expenditures are the rules in effect under section 

46(c)(4) and (d) (relating to the investment tax credit), as in effect before their repeal. 
101

The amount of the credit equals $1.50 per ton for coal sold in 2006 through 2009 and 

$2.00 per ton for coal sold after 2009. The credit is indexed for inflation after 2006, is part of the 

general business credit (sec. 38), and is allowed against the alternative minimum tax. 

Effective date.− The provision applies to Indian coal sold after December 31, 2005, and 

before January 1, 2013. 

Conference Agreement

The conference agreement generally follows the Senate amendment with some 

modifications. Under the conference agreement, the credit for Indian coal is added by modifying 

Code section 45, rather than by amending Code section 38 and creating new Code section 45N. 

As a result, some technical aspects of the credit are changed. These technical aspects are 

described in section A.9. of this report along with descriptions of other modifications to Code 

section 45. 

9. Replacement stoves meeting environmental standards in non-attainment areas (sec. 1549 

of the Senate amendment) 

Present Law

There is no present law tax credit relating to stoves. 

House Bill

No provision. 

Senate Amendment

The provision provides a $500 credit for the replacement of a non-compliant wood stove 

with a solid fuel burning stove that complies with the Environmental Protection Agency’s 

(“EPA”) emission performance standards. In general, a non-compliant wood stove is any wood 

stove purchased prior to June 30, 1992. Stoves produced after June 30, 1992 must comply with 

EPA’s Standards of Performance for Residential Wood Heaters. The credit is only available for 

replacements that occur in areas designated by the EPA as nonattainment areas for particulate 

matter less than 2.5 micrometers in diameter or nonattainment areas for particulate matter less 

than 10 micrometers in diameter. 

Effective date.−The credit applies to solid fuel burning stoves purchased after the date of 

enactment and before January 1, 2009. 

Conference Agreement

The conference agreement does not include the Senate amendment provision.
102

10. Exemption for bulk beds from excise tax on retail sale of heavy trucks and trailers 

(sec. 1550 of the Senate amendment) 

Present Law

The Code imposes a 12-percent excise tax on the first retail sale of heavy trucks and 

trailers (chassis and bodies).95 Under present law, the tax on the first retail sale of automobile 

truck bodies does not apply to any body primarily designed: (1) to process or prepare seed, feed, 

or fertilizer for use on farms; (2) to haul feed, seed, or fertilizer to and on farms; (3) to spread 

feed, seed, or fertilizer on farms; (4) to load or unload feed, seed, or fertilizer on farms; or (5) for 

any combination of the foregoing.96

The IRS has issued various rulings in this area. In Revenue Ruling 69-579, the IRS 

found that a truck body used primarily for hauling animal and poultry feed to and unloading it on 

farms qualified for exemption because the built-in equipment was elaborate and expensive. 

Thus, the IRS concluded that the nature of the unloading systems made it impractical to purchase 

the bodies for use other than in hauling feed, seed, or fertilizer to and unloading it on farms. 

In 1975, the IRS ruled as not exempt a dump truck designed for and used primarily in 

hauling grain and sugar beets from the field to points on or off the farm but which may also be 

used to haul feed or fertilizer from a distribution point over the highway to the farm. The ruling 

concluded that bodies that are used for the general hauling of feed, seed, or fertilizer over the 

highway are subject to the tax unless they have specific features that indicate they are primarily 

designed to haul feed, seed, or fertilizer to and on farms. In this case, although feed and fertilizer 

were among the commodities that the dump truck could be used for, it did not have specific 

features to indicate that it was primarily designed to haul feed, seed, or fertilizer to and on 

farms.97 

In 1990, the IRS issued a technical advice memorandum (“the 1990 TAM”) that 

concluded that a type of truck bought by farmers to haul seed potatoes, sugar beets, grain, and 

other farm products qualified for exemption.98 Each model had a full-length, powered conveyor 

belt that was designed to support and unload the cargo; a powered rear discharge door to control 

the discharge rate of the cargo; and a standard universal motor mount to which an electric drive 

could be mounted. In that ruling, the IRS noted the special unloading equipment was elaborate 

and expensive, added substantially to the cost and weight of each body, and limited its loadcarrying capabilities. 

 95 Sec. 4051(a). 

96 Sec. 4053(2). 

97 Rev. Rul. 75-462. 

98 Tech. Adv. Mem. 9126001, 1991 WL 778984 (1991). 
103

In 1999, the IRS revoked the 1990 TAM prospectively, noting that the exemption was not 

intended to cover truck bodies designed for general use, even if capable of hauling feed, seed, or 

fertilizer to and on farms.99 The IRS noted that the sales literature indicated that the body was 

designed to be versatile for hauling potatoes, beets, and small grains. The IRS also observed that 

unlike the bodies described in Rev. Rul. 69-579, which would not be purchased for use other 

than in hauling feed, seed, or fertilizer, the bodies at issue are designed for general hauling of 

farm cargo. Further, the IRS found that the presence of a conveyor belt was equally useful for 

unloading a crop at market as it is for unloading feed, etc. on a farm. Thus, the IRS concluded 

that the truck body was not primarily designed for an exempt purpose. 

House Bill

No provision. 

Senate Amendment

The Senate amendment exempts bulk beds used for transporting farm crops to and on 

farms from the excise tax on the retail sale of heavy trucks and trailers if sold to a person who 

certifies to the seller that such person is actively engaged in the trade or business of farming and 

the primary use of the bulk bed is to haul to and on farms farm crops grown in connection with 

such trade or business. The Senate amendment provides for the recapture of the tax from the 

purchaser upon resale of within two years of the first retail sale, or if such purchaser makes 

substantial nonexempt use of the article. 

Effective date.−The provision is effective for sales after September 30, 2005. 

Conference Agreement

The conference agreement does not include the Senate amendment provision. 

11. National Academy of Sciences study (sec. 1551 of the Senate amendment and sec. 1352 

of the conference agreement) 

Present Law

Present law does not provide for a study of the health, environmental, security, and 

infrastructure external costs that may be associated with the use and production of energy. 

House Bill

No provision. 

 99 Tech. Adv. Mem. 199904038, 1999 WL 36828 (1999). 
104

Senate Amendment

The provision requires the Secretary of Treasury to enter into an agreement, within 60 

days, with the National Academy of Sciences to conduct a study to define and evaluate the 

health, environmental, security, and infrastructure external costs and benefits associated with 

production and consumption of energy that are not or may not be fully incorporated into the price 

of such activities, or into the Federal tax or fee or other applicable revenue measure related to 

such activities. The results of the study are to be submitted to Congress within two years of the 

agreement. 

Effective date.−The provision is effective on the date of enactment. 

Conference Agreement

The conference agreement follows the Senate amendment. 

12. Income tax exclusion for certain fuel costs of rural carpoolers (sec. 1552 of the Senate 

amendment) 

Present Law

Under present law, qualified transportation benefits are excludable from gross income 

and wages for employment tax purposes. Qualified transportation benefits are: (1) transportation 

in a commuter highway vehicle if such transportation is in connection with travel between the 

employee’s residence and place of employment (“van pooling”); (2) transit passes; and (3) 

qualified parking. For purposes of the exclusion for van pooling benefits, a commuter highway 

vehicle is any highway vehicle: (1) the seating capacity of which is at least six adults (excluding 

the driver); and (2) at least 80 percent of the mileage use of which can reasonably be expected to 

be (a) for purposes of transporting employees in connection with travel between their residences 

and their place of employment and (b) on trips during which the number of employees 

transported for such purposes is at least one-half of the adult seating capacity of such vehicle (not 

including the driver). 

The maximum amount of qualified parking that is excludable from income and wages is 

$200 per month (for 2005). The maximum amount of transit passes and van pooling benefits 

that are excludable from income and wages per month is $105 (for 2005). These dollar amounts 

are indexed for inflation. 

House Bill

No provision. 

Senate Amendment

The Senate amendment establishes a new qualified transportation fringe benefit. 

Employer reimbursement for certain fuel costs (up to $50 per month) of employees who meet 

rural carpool requirements are excluded from a taxpayer’s gross income (but not wages) as a 

qualified transportation fringe benefit. To be eligible for the benefit, the employee must: (1) 
105

reside in a rural area; (2) not be eligible for transit or vanpooling benefits provided by the 

employer; (3) use the employee’s vehicle when traveling between the employee’s residence and 

place of employment; and (4) for at least 75 percent of the total mileage of such travel, be 

accompanied by one or more employees of the same employer. In addition, the premises of the 

employer must be located in an area that is not accessible by a transit system designed primarily 

to provide daily work trips within a local commuting area. 

Effective date.−The Senate amendment is effective for expenses incurred on or after the 

date of enactment and before January 1, 2007. 

Conference Agreement

The conference agreement does not include the Senate amendment provision. 

13. Three-year applicable recovery period for depreciation of qualified energy 

management devices (sec. 1553 of the Senate amendment) 

Present Law

No special recovery period is provided for depreciation of energy management devices. 

House Bill

No provision. 

Senate Amendment

The provision provides a three-year recovery period for qualified new energy 

management devices placed in service by any taxpayer who is a supplier of electric energy or is a 

provider of electric energy services. A qualified energy management device is any meter or 

metering device which is used by the taxpayer (1) to measure and record electricity usage data on 

a time-differentiated basis in at least 4 separate time segments per day, and (2) to provide such 

data on at least a monthly basis to both consumers and the taxpayer. Additionally, the original 

use of the energy management device must commence with the taxpayer, and the purchase must 

be subject to a binding contract entered into after June 23, 2005, and only if there was no written 

binding contract entered into on or before such date. 

Effective date.−The provision applies to taxable years ending after December 31, 2005, 

for property placed in service after the December 31, 2005 and prior to January 1, 2008. 

Conference Agreement

The conference agreement does not include the Senate amendment provision.
106

14. Exception from volume cap for certain cooling facilities (sec. 1554 of the Senate 

amendment) 

Present law

Tax-exempt bonds

In general

Interest on bonds issued by State and local governments generally is excluded from gross 

income for Federal income tax purposes if the proceeds of the bonds are used to finance direct 

activities of these governmental units or if the bonds are repaid with revenues of the 

governmental units. Interest on State or local bonds to finance activities of private persons 

(“private activity bonds”) is taxable unless a specific exception is contained in the Code (or in a 

non-Code provision of a revenue Act). The term “private person” generally includes the Federal 

Government and all other individuals and entities other than States or local governments. 

Qualified private activity bonds

Private activity bonds are eligible for tax-exemption if issued for certain purposes 

permitted by the Code (“qualified private activity bonds”). The definition of a qualified private 

activity bond includes an exempt facility bond, or qualified mortgage, veterans’ mortgage, small 

issue, redevelopment, 501(c)(3), or student loan bond.100 The definition of exempt facility bond 

includes bonds issued to finance local district heating and cooling facilities.101

The issuance of most qualified private activity bonds is subject (in whole or in part) to 

annual State volume limitations (“State volume cap”).102 For calendar year 2005, the State 

volume cap is the greater of $80 per resident or $239 million. Exceptions are provided for 

bonds issued to finance certain governmentally owned facilities (airports, ports, high-speed 

intercity rail, and solid waste disposal) and bonds which are subject to separate local, State, or 

national volume limits (public/private educational facilities, enterprise zone facility bonds, and 

qualified green building/sustainable design projects). 

House Bill

No provision. 

Senate Amendment

The Senate amendment provides an exception from the State volume cap for certain 

qualified private activity bonds issued to finance certain local district heating or cooling 

 100 Sec. 141(e). 

101 Sec. 142(a). 

102 Sec. 146. 
107

facilities. Specifically, State volume cap does not apply to bonds issued to finance local district 

heating or cooling facilities that are designed to access deep water cooling sources for building 

air conditionings if the aggregate face amount of bonds issued with respect to such a facility is 

not more than $75 million. 

Effective date.−The provision applies to projects placed in service after the date of 

enactment and before July 1, 2008. 

Conference Agreement

The conference agreement does not include the Senate amendment provision.
108 

E. Revenue Raising Provisions 

1. Treatment of kerosene for use in aviation (sec. 1561 of the Senate amendment) 

Present Law

In general, aviation-grade kerosene is taxed at a rate of 21.8 cents per gallon upon 

removal of such fuel from a refinery or terminal (or entry into the United States) and on the sale 

of such fuel to any unregistered person unless there was a prior taxable removal or entry of such 

fuel.103 Aviation-grade kerosene may be removed at a reduced rate, either 4.3 or zero cents per 

gallon, if the aviation fuel is removed directly into the fuel tank of an aircraft for use in 

commercial aviation104 or for a use that is exempt from the tax imposed by section 4041(c) (other 

than by reason of a prior imposition of tax),105 or is removed or entered as part of an exempt bulk 

transfer.106 These taxes are credited to the Airport and Airway Trust Fund.107 If taxed aviationgrade kerosene is used for a nontaxable use, a claim for credit or refund may be made.108 Such 

claims are paid from the Airport and Airway Trust Fund to the general fund of the Treasury.109 

All other removals and entries of kerosene used for surface transportation are taxed at the diesel 

tax rate of 24.3 cents per gallon,110 and these taxes are credited to the Highway Trust Fund.111 If 

 103 Sec. 4081(a)(2)(A)(iv). (An additional 0.1 cent is imposed on aviation-grade kerosene and 

credited to the Leaking Underground Storage Tank ("LUST" Trust Fund.) Sec. 4081(a)(2)(B). The 

LUST Trust Fund tax is set to expire after September 30, 2005. Sec. 4081(d)(3). 

104 Sec. 4081(a)(2)(C). 

105 Sec. 4082(e). Exempt uses include use in commercial aviation as supplies for vessels or 

aircraft, which includes use by certain foreign air carriers and for the international flights of domestic 

carriers, secs. 4082(e), 6427(l)(2), and 4221(d)(3). 

106 Sec. 4081(a)(1)(B). 

107 Sec. 9502(b)(1)(C). 

108 Sec. 6427(l)(1) and 6427(l)(4). Nontaxable uses include: (1) use other than as fuel in an 

aircraft (such as use in heating oil); (2) use on a farm for farming purposes; (3) use in a military aircraft 

owned by the United States or a foreign country; (4) use in a domestic air carrier engaged in foreign trade 

or trade between the United States and any of its possessions; (5) use in a foreign air carrier engaged in 

foreign trade or trade between the United States and any of its possessions (but only if the foreign 

carrier’s country of registration provides similar privileges to United States carriers); (6) exclusive use of 

a State or local government; (7) sales for export, or shipment to a United States possession; (8) exclusive 

use by a nonprofit educational organization; (9) use by an aircraft museum exclusively for the 

procurement, care, or exhibition of aircraft of the type used for combat or transport in World War II, and 

(10) use as a fuel in a helicopter or a fixed-wing aircraft for purposes of providing transportation with 

respect to which certain requirements are met. Secs. 4041(f)(2), 4041(g), 4041(h), 4041(l), and 

6427(l)(2)(B)(i). 

109 Sec. 9502(d)(2). 

110 Sec. 4081(a)(2)(iii). 
109 

aviation-grade kerosene is taxed upon removal or entry but fraudulently diverted for surface 

transportation, the taxes remain in the Airport and Airway Trust Fund, and the Highway Trust 

Fund is not credited for the taxes on such fuel. 

A special rule of present law addresses whether a removal from a refueler truck, tanker, 

or tank wagon may be treated as a removal from a terminal for purposes of determining whether 

aviation-grade kerosene is removed directly into the wing of an aircraft for use in commercial 

aviation, and so eligible for the 4.3 cents per gallon rate.112 For the special rule to apply, a 

qualifying truck, tanker, or tank wagon must be loaded with aviation-grade kerosene from a 

terminal: (1) that is located within a secured area of an airport, and (2) from which no vehicle 

licensed for highway use is loaded with aviation fuel, except in exigent circumstances identified 

by the Secretary in regulations. In order to qualify for the special rule, a refueler truck, tanker, or 

tank wagon must: (1) be loaded with fuel for delivery only into aircraft at the airport where the 

terminal is located; (2) have storage tanks, hose, and coupling equipment designed and used for 

the purposes of fueling aircraft; (3) not be registered for highway use; and (4) be operated by the 

terminal operator (who operates the terminal rack from which the fuel is unloaded) or by a 

person that makes a daily accounting to such terminal operator of each delivery of fuel from such 

truck, tanker, or tank wagon. 

House Bill

No provision. 

Senate Amendment

The Senate amendment imposes the kerosene tax rate of 24.3 cents per gallon upon the 

entry or removal of aviation-grade kerosene and on the sale of such fuel to any unregistered 

person unless there was a prior taxable removal or entry of the fuel. In general, the present law 

reduced rates for removals of aviation-grade kerosene directly into the fuel tank of an aircraft 

apply.113 In addition, under the provision, the rate of tax is 21.8 cents per gallon if kerosene is 

removed (1) directly into the fuel tank of an aircraft for use in aviation other than commercial 

aviation and (2) from refueler trucks, tankers, and tank wagons that are loaded with fuel from a 

terminal that is located in an airport, without regard to whether the terminal is located in a 

 111 Sec. 9503(b)(1)(D). 

112 Sec. 4081(a)(3). 

113 For example, for kerosene removed directly into the fuel tank of an aircraft for use in 

commercial aviation by a person registered for such use, the rate of tax is 4.3 cents per gallon. Kerosene 

removed directly into the fuel tank of an aircraft for an exempt use is not taxed. For purposes of these 

reduced rates, the Committee intends that the following airports be included on the Secretary's list of 

airports that include a secured area in which a terminal is located. The airports are listed by airport name, 

and the terminal with respect to the airport is identified by terminal control number: Los Angeles 

International Airport (T-95-CA-4812) and Federal Express Corporation Memphis Airport (T-62-TN2220). 
110 

secured area of the airport, as long as all the other requirements of the present law special rule 

related to such trucks, tankers, and wagons are met. The provision clarifies that the rate of tax 

upon removal of kerosene is zero if the removal is from a refueler truck, tanker, or tank wagon 

that meets all of the requirements of present law, including the security requirement, the 

kerosene is delivered directly into the fuel tank of an aircraft, and the kerosene is exempt from 

the tax imposed by section 4041(c) (other than by prior imposition of tax). 

The Senate amendment provides that amounts may be claimed as credits or refunds for 

kerosene that is taxed at the 24.3 cents per gallon rate and used for aviation purposes. If 

kerosene is used for noncommercial aviation, the amount is 2.5 cents; if kerosene is used for 

commercial aviation, the amount is 20 cents; if kerosene is used for a use that is exempt from tax 

(as determined under present law), the amount is 24.3 cents. Present law rules with respect to 

claims apply, except for claims with respect to kerosene used in noncommercial aviation, which 

are payable to the ultimate vendor only. To be eligible to receive a payment, a vendor must be 

registered and must show either that the price of the fuel did not include the tax and the tax was 

not collected from the purchaser, the amount of tax was repaid to the ultimate purchaser, or the 

written consent of the purchaser to the making of the claim was filed with the Secretary. 

Under the Senate amendment, all taxes collected at the 24.3 cents per gallon rate (under 

section 4081) initially are credited to the Highway Trust Fund. The provision requires the 

Secretary to transfer at least monthly from the Highway Trust Fund into the Airport and Airway 

Trust Fund amounts equivalent to 21.8 cents per gallon for claims made with respect to kerosene 

used for noncommercial aviation purposes and 4.3 cents per gallon for claims made with respect 

to kerosene used for commercial aviation purposes. The provision requires that transfers be 

made on the basis of estimates by the Secretary, with proper adjustments to be made 

subsequently to the extent prior estimates were in excess of or less than the amounts required to 

be transferred. Transfers are required to be made with respect to taxes received on or after 

October 1, 2005, and before October 1, 2011. The provision provides that the Airport and 

Airway Trust Fund does not make payments with respect to kerosene that is taxed at the 24.3 

cents per gallon rate and used for aviation purposes. 

Effective date.–The Senate amendment is effective for fuels or liquids removed, entered, 

or sold after September 30, 2005. 

Conference Agreement

The conference agreement does not include the Senate amendment provision.
111 

2. Repeal of ultimate vendor refund claims with respect to farming (sec. 1562 of the Senate 

amendment) 

Present Law

In general - ultimate purchaser refunds for nontaxable uses 

In general, the Code provides that if diesel fuel or kerosene on which tax has been 

imposed is used by any person in a nontaxable use, the Secretary is to refund (without interest) to 

the ultimate purchaser the amount of tax imposed.114 The refund is made to the ultimate 

purchaser of the taxed fuel by either income tax credit or refund payment.115 Not more than one 

claim may be filed by any person with respect to fuel used during its taxable year. However, 

there are exceptions to this rule. 

An ultimate purchaser may make a claim for a refund payment for any quarter of a 

taxable year for which the purchaser can claim at least $750.116 If the purchaser cannot claim at 

least $750 at the end of quarter, the amount can be carried over to the next quarter to determine if 

the purchaser can claim at least $750. If the purchaser cannot claim at least $750 at the end of 

the taxable year, the purchaser must claim a credit on the person’s income tax return. 

As discussed below, these ultimate purchaser refund rules do not apply to diesel fuel or 

kerosene used on a farm. The Code precludes the ultimate purchaser from claiming a refund for 

such use. Instead, the refund claims are made by registered vendors as described below. 

Special vendor rule for use on a farm for farming purposes

In the case of diesel fuel or kerosene used on a farm for farming purposes refund 

payments are paid to the ultimate, registered vendors (“registered ultimate vendor”) of such 

fuels. Thus a registered ultimate vendor that sells undyed diesel fuel or undyed kerosene to any 

of the following may make a claim for refund: (1) the owner, tenant, operator of a farm for use 

by that person on a farm for farming purposes; and (2) a person other than the owner, tenant, or 

operator of a farm for use by that person on a farm in connection with cultivating, raising or 

harvesting. The registered ultimate vendor is the only person who may make the claim with 

respect to diesel fuel or kerosene used on a farm for farming purposes. The purchaser of the fuel 

cannot make the claim for refund. 

 114 Sec. 6427(l)(1). 

115 Generally, refund payments are only made to governmental units and tax-exempt 

organizations. Sec. 6427(k). The quarterly payment claim rules for ultimate purchasers are an exception 

to this rule. 

116 Sec. 6427(i)(2). 
112 

Registered ultimate vendors may make weekly claims if the claim is at least $200 ($100 

or more in the case of kerosene).117 If not paid within 45 days (20 days for an electronic claim), 

the Secretary is to pay interest on the claim. 

House Bill

No provision. 

Senate Amendment

The Senate amendment repeals ultimate vendor refund claims in the case of diesel fuel or 

kerosene used on a farm for farming purposes. Thus, refunds for taxed diesel fuel or kerosene 

used on a farm for farming purposes would be paid to the ultimate purchaser under the rules 

applicable to nontaxable uses of diesel fuel or kerosene. 

Effective date.−The provision is effective for sales after September 30, 2005. 

Conference Agreement

The conference agreement does not include the Senate amendment provision. 

3. Refunds of excise taxes on exempt sales of taxable fuel by credit card (sec. 1563 of the 

Senate amendment) 

Present Law

Under the rules in effect prior to 2005, in the case of gasoline on which tax had been paid 

and sold to a State or local government, to a nonprofit educational organization, for supplies for 

vessels or aircraft, for export, or for the production of special fuels, the wholesale distributor that 

sold such gasoline was treated as the only person who paid the tax and thereby was the proper 

claimant for a credit or refund of the tax paid. A “wholesale distributor” included any person, 

other than an importer or producer, who sold gasoline to producers, retailers, or to users who 

purchased in bulk quantities and accepted delivery into bulk storage tanks. A wholesale 

distributor also included any person who made retail sales of gasoline at 10 or more retail motor 

fuel outlets. 

Under a special administrative exception to these rules, a sale of gasoline charged on an 

oil company credit card issued to an exempt person described above is not considered a direct 

sale by the person actually selling the gasoline to the ultimate purchaser if the seller receives a 

reimbursement of the tax from the oil company (or indirectly through an intermediate vendor). 

Thus, the person that actually paid the tax, in most cases the oil company, is treated as the only 

person eligible to make the refund claim.118

 117 Sec. 6427(i)(4)(A). 

118 Notice 89-29, 1989-1 C.B. 669. 
113 

The American Jobs Creation Act of 2004 (“AJCA”)119 modified the pre-existing statutory 

rules with respect to certain sales. Under AJCA, if a registered ultimate vendor purchases any 

gasoline on which tax has been paid and sells such gasoline to a State or local government or to a 

nonprofit educational organization, for its exclusive use, such ultimate vendor is treated as the 

only person who paid the tax and thereby is the proper claimant for a credit or refund of the tax 

paid.120 However, AJCA did not change the special administrative oil company credit card rule 

described above.121

In addition, under AJCA, refund claims made by such an ultimate vendor may be filed 

for any period of at least one week for which $200 or more is payable. Any such claim must be 

filed on or before the last day of the first quarter following the earliest quarter included in the 

claim. The Secretary must pay interest on refunds unpaid after 45 days. If the refund claim was 

filed by electronic means, and the ultimate vendor has certified to the Secretary for the most 

recent quarter of the taxable year that all ultimate purchasers of the vendor are certified for 

highway exempt use as a State or local government or a nonprofit educational organization, 

refunds unpaid after 20 days must be paid with interest.122

In the case of diesel fuel or kerosene used in a nontaxable use, the ultimate purchaser is 

generally the only person entitled to claim a refund of excise tax.123 However, in the case of 

diesel fuel or kerosene used on a farm for farming purposes or by a State or local government, 

aviation-grade kerosene, and certain nonaviation-grade kerosene, an ultimate vendor may claim 

the refund if the ultimate vendor is registered and bears the tax (or receives the written consent of 

the ultimate purchaser to claim the refund).124

House Bill

No provision. 

 119 Pub. L. No. 108-357. 

120 AJCA, sec. 865(a), effective January 1, 2005. See Code sec. 6416(a)(4)(A). 

121 In Notice 2005-4, 2005-2 I.R.B. 289, the Treasury Department confirmed that it would 

continue to apply the oil company credit card rule until March 1, 2005. On February 28, 2005, the 

Treasury Department issued Notice 2005-24, 2005-12 I.R.B. 1, modifying Notice 2005-4. Notice 2005-

24 stated that the oil company credit card rule will remain in effect until it is modified by a statutory 

change or by future guidance. 

122 Sec. 6146(a)(4)(B). 

123 Sec. 6427(l)(1). 

124 See sec. 6427(l)(4)(B), (l)(5)(B), and (l)(5)(C), and sec. 6416(a)(1)(A), (B), and (D). 
114 

Senate Amendment

The Senate amendment replaces the oil company credit card rule with a new set of rules 

applicable to certain credit card sales. The new rules apply to all taxable fuels. Under the Senate 

amendment, if a purchase of taxable fuel is made by means of a credit card issued to an ultimate 

purchaser that is either a State or local government or, in the case of gasoline, a nonprofit 

educational organization, for its exclusive use, a credit card issuer who is registered and who 

extends such credit to the ultimate purchaser with respect to such purchase shall be the only 

person entitled to apply for a credit or refund if the following two conditions are met: (1) such 

registered person has not collected the amount of the tax from the purchaser, or has obtained the 

written consent of the ultimate purchaser to the allowance of the credit or refund; and (2) such 

registered person has either repaid or agreed to repay the amount of the tax to the ultimate 

vendor, has obtained the written consent of the ultimate vendor to the allowance of the credit or 

refund, or has otherwise made arrangements that directly or indirectly provide the ultimate 

vendor with reimbursement of such tax. It is anticipated that such indirect arrangements may 

consist of the contractual undertaking of the relevant oil company to the credit card issuer that it 

will pay the amount of the tax to the ultimate vendor, and the corresponding contractual 

undertaking of the oil company to the ultimate vendor. 

If a credit card issuer is not registered, or if either condition (1) or (2) described above is 

not met (or if the ultimate purchaser is not exempt), then the credit card issuer is required to 

collect an amount equal to the tax from the ultimate purchaser and only an (exempt) ultimate 

purchaser may claim a credit or payment from the IRS.125 Thus, tax-paid fuel shall not be sold 

tax free to an exempt entity by means of a credit card unless the credit card issuer is registered. 

An unregistered credit card issuer that does not collect an amount equal to the tax from the 

exempt entity is liable for present-law penalties for failure to register.126

A credit card issuer entitled to claim a refund under the provision is responsible for 

collecting and supplying all the appropriate documentation currently required from ultimate 

vendors. The present-law refund amount and timing rules applicable to ultimate vendors, 

including the special rules for electronic claims, apply to refunds to credit card issuers under the 

provision.127

The Senate amendment also conforms present-law penalty provisions to the new rules. 

The Senate amendment does not change the present-law rules applicable to non-credit 

card purchases. 

 125 See sec. 6421(c). 

126 See secs. 6719, 7232, and 7272. 

127 See sec. 6416(a)(4)(B). Present law would continue to apply to the timing of ultimate 

purchaser claims. Under present law, claims by an ultimate purchaser are generally made on an annual 

basis. However, claims aggregating over $750 may be made quarterly. See secs. 6421(d) and 6427(i)(2). 
115 

Effective date.–The provision is effective for sales after December 31, 2005. 

Conference Agreement

The conference agreement does not include the Senate amendment provision. 

4. Recertification of exempt status (sec. 1564 of the Senate amendment) 

Present Law

If gasoline is sold to any person for an exempt use, an ultimate purchaser that has borne 

the tax is entitled to claim a refund.128 However, a registered ultimate vendor is the appropriate 

person to claim a refund of Federal excise taxes on gasoline sold to a State or local government 

or to a nonprofit educational organization.129

In general, in order to claim a refund of Federal excise taxes on gasoline (and on other 

articles subject to manufacturers excise taxes under Chapter 32 of the Code) sold to a State or 

local government or to a nonprofit educational organization, for its exclusive use, a claimant 

must submit a statement indicating that it possesses evidence of the exempt use giving rise to the 

overpayment of tax.130 Such evidence consists of a certificate executed and signed by the 

ultimate purchaser, and must identify the article, show the name and address of the ultimate 

purchaser, and state the exempt use made or to be made of the article. In the case where the 

certificate sets forth the use to be made of the article, rather than its actual use, it must show that 

the ultimate purchaser has agreed to notify the claimant if the article is not in fact used as 

specified in the certificate.131 

However, if the article to which the claim relates has passed through a chain of sales from 

the claimant to the ultimate purchaser, a certificate executed and signed by the ultimate vendor is 

sufficient to document the exempt use. The ultimate vendor certificate must contain the exempt 

sales information, and a statement that it possesses the ultimate purchaser certificates and will 

forward them to the claimant within three years from the date of the statement. An ultimate 

vendor statement may be made covering no more than 12 consecutive calendar quarters.132

 128 Sec. 6421(c). 

129 Sec. 6416(a)(4)(A). 

130 Treas. Reg. sec. 48.6416(b)(2)-3(a)(5). 

131 Treas. Reg. sec. 48.6416(b)(2)-3(b)(1)(i) and (ii). The certificate must also contain a 

statement that the ultimate purchaser understands that it and any other party may, for fraudulent use of the 

certificate, be subject under section 7201 to a fine of not more than $10,000, or imprisonment for not 

more than 5 years, or both, together with the costs of prosecution. 

132 Treas. Reg. sec. 48.6416(b)(2)-3(b)(1)(i) and (iii). 
116 

In general, an ultimate purchaser is the proper party to claim a refund of Federal excise 

tax on diesel fuel or kerosene used by any person in a nontaxable use.133 However, in the case of 

diesel or kerosene used by a State or local government, the ultimate vendor is the proper person 

if such vendor is registered and has borne the tax (or receives the written consent of the ultimate 

purchaser to claim the refund).134 A registered ultimate vendor claiming a refund under this 

provision must provide a statement that it has in its possession an unexpired exemption 

certificate of the purchaser and that the claimant has no reason to believe any information in the 

certificate is false.135

A State or local government includes any political subdivision of a State, or the District 

of Columbia.136 A nonprofit educational organization means an educational organization which 

normally maintains a regular faculty and curriculum and normally has a regularly enrolled body 

of pupils or students in attendance at the place where its educational activities are regularly 

carried on, and which either is exempt from income tax under section 501(a) or is a school 

operated as an activity of an organization described in section 501(c)(3) which is exempt from 

income tax under section 501(a).137

House Bill

No provision. 

Senate Amendment

Under the Senate amendment, additional documentation requirements are imposed with 

respect to purchases of taxable fuel and certain other articles on a nontaxable basis by State or 

local governments and nonprofit educational organizations and with respect to refunds or credits 

by any person with respect to such purchases. The Senate amendment covers Federal excise 

taxes on sales of liquids for use as a fuel (including taxable fuels), compressed natural gas 

(except if sold for use on school buses or intracity buses), heavy trucks and trailers, recreational 

equipment (bows and arrows, sport fishing equipment and firearms), and tires (except for tires 

sold for use on qualified buses). The Senate amendment does not cover Federal excise taxes on 

sales of coal and vaccines. 

 133 Sec. 6427(l)(1). In the case of diesel fuel or kerosene, a nontaxable use is any use which is 

exempt from the tax imposed by section 4041(a)(1) other than by reason of a prior imposition of tax. Sec. 

6427(l)(2). 

134 Sec. 6427(l)(5)(C). 

135 Treas. Reg. sec. 48.6427-9(e)(1)(vi). 

136 Sec. 4221(d)(4); Treas. Reg. sec. 48.6416(b)(2)-2(d). 

137 Sec. 4221(d)(5); Treas. Reg. sec. 48.6416(b)(2)-2(e). 
117 

In addition to present-law documentation requirements, in order for a State or local 

governmental entity to claim exemption from tax on sales of such covered articles, or for any 

person to claim a credit or refund based upon the State or local governmental status of the 

purchaser of such articles, the State must certify that the article is sold to a State or local 

government for the exclusive use of a State or local government. In the case of articles sold to a 

qualified volunteer fire department, as defined in section 150(e)(2),138 the State must so certify, 

and the article must be sold for the exclusive use of the qualified volunteer fire department. 

In order for a nonprofit educational organization to claim exemption from tax on such 

articles, or for any person to claim a credit or refund of tax on such articles based upon the 

nonprofit educational status of an organization, the State in which such organization is providing 

educational services must certify that such organization is in good standing. 

For purposes of this provision, an Indian tribal government is treated as a State.139 

Consequently, it is intended that the applicable Indian tribal government will provide the 

certifications under this provision. 

It is intended that the certifications required under this provision will be provided by 

exempt purchasers to the refund claimants (in addition to documentation required under present 

law), and that the IRS may require that such certifications be submitted as part of the claims. 

The Secretary may prescribe forms for such certifications. 

Effective date.–The provision is effective for all sales after December 31, 2005. 

Conference Agreement

The conference agreement does not include the Senate amendment provision. 

5. Reregistration in event of change in ownership (sec. 1565 of the Senate amendment) 

Present Law

Blenders, enterers, pipeline operators, position holders, refiners, terminal operators, and 

vessel operators are required to register with the Secretary with respect to fuels taxes imposed by 

sections 4041(a)(1) and 4081.140 An assessable penalty for failure to register is $10,000 for each 

 138 In general, as defined in section 150(e)(2), a qualified volunteer fire department is any 

organization organized and operated to provide firefighting or emergency medical services for persons in 

an area that is not provided with any other firefighting services, and which is required by written 

agreement with the political subdivision to furnish firefighting services in such area. 

139 See sec. 7871(a)(2). Section 7871(b) provides that in order for an excise tax exemption (with 

respect to chapter 31 or 32) to apply to an Indian tribal government, the transaction must involve the 

exercise of an essential governmental function of the Indian tribal government. 

140 Sec. 4101; Treas. Reg. sec. 48.4101-1(a) and (c)(1). 
118 

initial failure, plus $1,000 per day that the failure continues.141 A non-assessable penalty for 

failure to register is $10,000.142 A criminal penalty of $10,000, or imprisonment of not more 

than five years, or both, together with the costs of prosecution also applies to a failure to register 

and to certain false statements made in connection with a registration application.143 Treasury 

regulations require that a registrant notify the Secretary of any change (such as a change in 

ownership) in the information a registrant submitted in connection with its application for 

registration within 10 days of the change.144 The Secretary has the discretion to revoke the 

registration of a noncompliant registrant. 

House Bill

No provision. 

Senate Amendment

The Senate amendment requires that upon a change in ownership of a registrant, the 

registrant must reregister with the Secretary, as provided by the Secretary. A change in 

ownership means that after a transaction (or series of related transactions), more than 50 percent 

of the ownership interests in, or assets of, a registrant are held by persons other than persons (or 

persons related thereto) who held more than 50 percent of such interests or assets before the 

transaction (or series of related transactions). The provision does not apply to a company, the 

stock of which is regularly traded on an established securities market. The penalties for failure 

to reregister are the same as the present law penalties for failure to register. The provision 

applies to changes in ownership occurring prior to, on, or after the date of enactment. 

Effective date.–The Senate amendment is effective for actions or failures to act after the 

date of enactment. 

Conference Agreement

The conference agreement does not include the Senate amendment provision. 

6. Registration of operators of deep-draft vessels (sec. 1566 of the Senate amendment) 

Present Law

Blenders, enterers, pipeline operators, position holders, refiners, terminal operators, and 

vessel operators are required to register with the Secretary with respect to fuels taxes imposed by 

 141 Sec. 6719. 

142 Sec. 7272(a). 

143 Sec. 7232. 

144 Treas. Reg. sec. 48.4101-1(h)(1)(v). 
119 

sections 4041(a)(1) and 4081.145 Treasury regulations define a vessel operator as any person that 

operates a vessel within the bulk transfer/terminal system, excluding deep-draft ocean-going 

vessels.146 Accordingly, operators of deep-draft ocean-going vessels are not required to register. 

A deep-draft ocean-going vessel is a vessel that is designed primarily for use on the high seas 

that has a draft of more than 12 feet.147 

An assessable penalty for failure to register is $10,000 for each initial failure, plus $1,000 

per day that the failure continues.148 A non-assessable penalty for failure to register is 

$10,000.149 A criminal penalty of $10,000, or imprisonment of not more than five years, or both, 

together with the costs of prosecution also applies to a failure to register and to certain false 

statements made in connection with a registration application.150 

In general, gasoline, diesel fuel, and kerosene (“taxable fuel”) are taxed upon removal 

from a refinery or a terminal.151 Tax also is imposed on the entry into the United States of any 

taxable fuel for consumption, use, or warehousing. The tax does not apply to any removal or 

entry of a taxable fuel transferred in bulk (a “bulk transfer”) by pipeline or vessel to a terminal or 

refinery if the person removing or entering the taxable fuel, the operator of such pipeline or 

vessel, and the operator of such terminal or refinery are registered with the Secretary as required 

by section 4101.152 Transfer to an unregistered party subjects the transfer to tax. 

House Bill

No provision. 

Senate Amendment

Under the Senate amendment, an operator of deep-draft ocean-going vessel is required to 

register with the Secretary unless such operator uses such vessel exclusively for purposes of the 

entry of taxable fuel. If a deep-draft ocean-going vessel is used as part of a bulk transfer, the 

 145 Sec. 4101; Treas. Reg. sec. 48.4101-1(a) and (c)(1). 

146 Treas. Reg. sec. 48.4101-1(b)(8). 

147 Sec. 4042(c)(1). 

148 Sec. 6719. 

149 Sec. 7272(a). 

150 Sec. 7232. 

151 Sec. 4081(a)(1)(A). 

152 Sec. 4081(a)(1)(B). The sale of a taxable fuel to an unregistered person prior to a taxable 

removal or entry of the fuel is subject to tax. Sec. 4081(a)(1)(A). 
120 

operator of such vessel must be registered in order for the bulk transfer exemption to apply, 

except with respect to the entry of taxable fuel, in which case, registration is not required. 

Effective date.–The Senate amendment is effective on the date of enactment. 

Conference Agreement

The conference agreement does not include the Senate amendment provision. 

7. Reconciliation of on-loaded cargo to entered cargo (sec. 1567 of the Senate amendment) 

Present Law

The Trade Act of 2002 directed the Secretary to promulgate regulations pertaining to the 

electronic transmission to the Bureau of Customs and Border Patrol (“Customs”) of information 

pertaining to cargo destined for importation into the United States or exportation from the United 

States, prior to such importation or exportation.153 The Department of the Treasury issued final 

regulations on October 31, 2002. The regulations require the advance and accurate presentation 

of certain manifest information prior to lading at the foreign port and encourage the presentation 

of this information electronically. Customs must receive from the carrier the vessel’s Cargo 

Declaration (Customs Form 1302) or the electronic equivalent within 24 hours before such cargo 

is laden aboard the vessel at the foreign port. 154 

Certain carriers of bulk cargo, however, are exempt from these filing requirements. Such 

bulk cargo includes that composed of free flowing articles such as oil, grain, coal, ore and the 

like, which can be pumped or run through a chute or handled by dumping.155 Thus, taxable fuels 

are not required to file the Cargo Declaration within 24 hours before such cargo is laden aboard 

the vessel at the foreign port. Instead the Cargo Declaration must be filed within 24 hours prior 

arrival in the United States. 

House Bill

No provision. 

Senate Amendment

The Senate amendment provides that not later than one year after the date of enactment 

of this paragraph, the Secretary of Homeland Security, together with the Secretary of the 

Treasury, is to establish an electronic data interchange system through which Customs shall 

transmit to the Internal Revenue Service information pertaining to cargoes of taxable fuels (as 

defined in section 4083) that Customs has obtained electronically under its regulations adopted 

 153 Sec. 343(a) of Pub. L. No. 107-210 (2002). 

154 19 CFR sec. 4.7(b)(2). 

155 19 CFR sec. 4.7(b)(4)(i)(A). 
121 

to carry out the Trade Act of 2002 requirement. For this purpose, not later than one year after 

the date of enactment, all filers of required cargo information for such taxable fuels, as defined, 

must provide such information to Customs through its approved electronic data interchange 

system. 

Effective date.−The provision is effective upon date of enactment. 

Conference Agreement

The conference agreement does not include the Senate amendment provision. 

8. Gasoline blend stocks and kerosene (sec. 1568 of the Senate amendment) 

Present Law

In general 

A “taxable fuel” is gasoline, diesel fuel (including any liquid, other than gasoline, which 

is suitable for use as a fuel in a diesel-powered highway vehicle or train), and kerosene.156 An 

excise tax is imposed upon (1) the removal of any taxable fuel from a refinery or terminal, (2) 

the entry of any taxable fuel into the United States, or (3) the sale of any taxable fuel to any 

person who is not registered with the IRS to receive untaxed fuel, unless there was a prior 

taxable removal or entry.157 The tax does not apply to any removal or entry of taxable fuel 

transferred in bulk to a terminal or refinery if the person removing or entering the taxable fuel, 

the operator of such pipeline or vessel, and the operator of such terminal or refinery are 

registered with the Secretary.158 

Gasoline blend stocks

Definition

Under the regulations, “gasoline” includes all products commonly or commercially 

known or sold as gasoline and are suitable for use as a motor fuel, and that have an octane rating 

of 75 or more. Gasoline also includes, to the extent provided in regulations, gasoline blend 

stocks and products commonly used as additives in gasoline. By regulation, the Treasury has 

identified certain products as gasoline blend stocks, 159 however, the term “gasoline blend stocks” 

 156 Sec. 4083(a). 

157 Sec. 4081(a)(1). 

158 Sec. 4081(a)(1)(B). 

159 Treas. Reg. sec. 48.4081-1(c)(3)(ii). The term “gasoline blend stocks” means alkylate; 

butane; catalytically cracked gasoline; coker gasoline; ethyl tertiary butyl ether (ETBE); hexane; 

hydrocrackate; isomerate; methyl tertiary butyl ether (MTBE); mixed xylene (not including any separated 

isomer of xylene); natural gasoline; pentane; pentane mixture; polymer gasoline; raffinate; reformate; 

straight-run gasoline; straight-run naphtha; tertiary amyl methyl ether (TAME); tertiary butyl alcohol 
122 

does not include any product that cannot be blended into gasoline without further processing or 

fractionation (“off-spec gasoline”). 

Gasoline blend stock exemptions

If certain conditions are met, the removal, entry, or sale of gasoline blend stocks is not 

taxable. Generally, the exemption from tax applies if a gasoline blend stock (1) is not used to 

produce finished gasoline (2) is received at an approved terminal or refinery, or (3) in bulk 

transfer to an industrial user.160

Gasoline blend stocks not used to produce finished gasoline.–Pursuant to Treasury 

regulation, no tax is imposed on nonbulk removals from a terminal or refinery, or nonbulk 

entries into the United States of any gasoline blend stocks if (1) the person liable for the tax is a 

taxable fuel registrant, and (2) such person does not use the gasoline blend stocks to produce 

finished gasoline. In connection with a sale, no tax is imposed on the nonbulk removal or entry 

if (1) the person liable for the tax is a gasoline registrant and (2) at the time of sale such party has 

an unexpired certificate from the buyer, and has no reason to believe any information in the 

certificate is false.161

Any sale (or resale) of a gasoline blend stock that was not subject to tax on nonbulk 

removal or entry is taxable unless the seller has an unexpired certificate from the buyer and has 

no reason to believe that any information in the certificate is false. 

The certificate to be provided by a buyer of gasoline blend stocks contains a statement 

that the gasoline blend stocks covered by the certificate will not be used to produce finished 

gasoline, identifies the type (or types of blend stocks) covered by the certificate and provides that 

the buyer will not claim a credit or refund for any gasoline covered by the certificate. The 

certificate is signed under penalties of perjury by a person with authority to bind the buyer. The 

certificate expires on the earliest of one year from the effective date of the certificate, the date a 

new certificate is provided to the seller or the date the seller is notified by the IRS or the buyer 

that the buyer’s right to provide a certificate has been withdrawn. 

Gasoline blend stocks received at an approved terminal or refinery.–Treasury regulations 

provide that tax is not imposed on the removal or entry of gasoline blend stocks that are received 

at a terminal or refinery if the person liable for tax is a taxable fuel registrant, has an unexpired 

notification certificate from the operator of the terminal or refinery where the gasoline blend 

stocks are received; and has no reason to believe that any information in the certificate is false.162 

 

(gasoline grade) (TBA); thermally cracked gasoline; and toluene. Treas. Reg. sec. 48.4081-1(c)(3)(i). 

Effective January 1, 2005, transmix containing gasoline was removed from the definition of gasoline 

blend stocks. Internal Revenue Service, Notice 2005-4 (December 15, 2004). 

160 Treas. Reg. sec. 48.4081-4. 

161 Treas. Reg. sec. 48.4081-4(b)(1) and 48.4081-4(b)(1)(2). 

162 Treas. Reg. sec. 48.4081-4(b)(1). 
123 

A notification certificate is used to notify another person of the taxable fuel registrant’s 

registration status. 

Bulk transfer to an industrial user.–Tax is not imposed if upon removal of the gasoline 

blend stocks from a pipeline or vessel, the gasoline blend stocks are received by a taxable fuel 

registrant that is an industrial user. 163 An industrial user means any person that receives 

gasoline blend stocks by bulk transfer for its own use in the manufacture of any product other 

than finished gasoline. 

Refunds or credits for tax imposed on gasoline blend stocks not used for producing 

gasoline

If any gasoline blend stock or additive is not used by a person to produce gasoline and 

that person establishes that the ultimate use of the gasoline blend stock or additive is not used to 

produce gasoline, then the Secretary is to pay (without interest) to such person, an amount equal 

to the aggregate amount of tax imposed on such person with respect to such gasoline or blend 

stock.164

If gasoline is used in an off-highway business use, the ultimate purchaser of the gasoline 

is entitled to a credit or refund for the excise taxes imposed on the fuel. “Off-highway business 

use” means any use by a person in a trade or business of such person otherwise than as a fuel in a 

highway vehicle that meets certain requirements.165 Gasoline for this purpose includes gasoline 

blend stocks.166

The Code also provides for a refund of tax for tax-paid fuel sold to a subsequent 

manufacturer or producer if the subsequent manufacturer or producer uses the fuel, for nonfuel 

purposes, as a material in the manufacture or production of any other article manufactured or 

produced by him.167

Kerosene

Definition of kerosene

By regulation, kerosene is defined as the kerosene described in ASTM Specification D 

3699 (No. 1-K and No. 2-K), ASTM Specification D 1655 (kerosene-type jet fuel), and military 

 163 Treas. Reg. sec. 48.4081-4(d). 

164 Sec. 6427(h)(1). 

165 Sec. 6421(a) and 6421(e). 

166 Sec. 6421(e)(1) and sec. 4083(a)(2)(B). 

167 Sec. 6416(b)(3)(B). 
124 

specifications MIL-DTL-5624T (Grade JP-5) and MIL-DTL-83133E (Grade JP-8). Kerosene 

does not include any liquid that is an excluded liquid.168 

An “excluded liquid” is (1) any liquid that contains less than four percent normal 

paraffins, or (2) any liquid that has a distillation range of 125 degrees Fahrenheit or less, sulfur 

content of 10 ppm or less, and minimum color of +27 Saybolt. These liquids are commonly 

known as “mineral spirits” and are obtained by distillation of crude oil. Mineral spirits are used 

for a wide variety of purposes, such as in dry-cleaning fluids, paint thinners, varnishes, 

photocopy toners, inks, adhesives, and as general purpose cleaners and degreasers. 

Exemptions

Diesel fuel and kerosene that is to be used for a nontaxable purpose will not be taxed 

upon removal from the terminal if it is dyed to indicate its nontaxable purpose. Kerosene 

received by pipeline or vessel to satisfy a feedstock purpose is exempt from the dyeing 

requirement.169 Pursuant to Treasury regulations, nonbulk removals of kerosene for a feedstock 

purpose by a registered feedstock user also are exempt.170 The person receiving the kerosene 

must be registered with the IRS and provide a certificate noting that the kerosene will be used for 

a feedstock purpose in order for the exemption to apply. Pursuant to the Treasury regulations, 

tax also does not apply upon the removal or entry of kerosene if the person otherwise liable for 

tax is a taxable fuel registrant and such person uses the kerosene for a feedstock purpose.171 

“Feedstock purpose” means the use of kerosene for nonfuel purposes in the manufacture 

or production of any substance (other than gasoline, diesel fuel or special fuels subject to tax).172 

Thus, for example, kerosene is used for a feedstock purpose when it is used as an ingredient in 

the production of paint and is not used for a feedstock purpose when it is used to power 

machinery at a factory where paint is produced. 

Refunds and payments for nontaxable uses of kerosene

If tax-paid kerosene is used by any person in a nontaxable use, the Secretary is required 

to pay (without interest) to the ultimate purchaser of such fuel an amount equal to the aggregate 

amount of tax imposed on such fuel. For this purpose, a nontaxable use is any use which is 

exempt from the tax imposed by section 4041(a)(1) other than by reason of prior imposition of 

tax. Claims relating to kerosene used on a farm for farming purposes and by a State are made by 

 168 Treas. Reg. sec. 48.4081-1(b). 

169 Sec. 4082(d)(1). 

170 Treas. Reg. sec. 48.4082-7(c). 

171 Treas. Reg. sec. 48.4082-7(c). 

172 Treas. Reg. sec. 48.4082-7(b). 
125 

registered ultimate vendors. Claims relating to undyed kerosene sold from a blocked pump173 or 

sold for blending with heating oil to be used during periods of extreme or unseasonable cold are 

also made by registered ultimate vendors. Special rules apply with respect to aviation-grade 

kerosene. 

The Code also provides for a refund of tax for tax-paid fuel sold to a subsequent 

manufacturer or producer if the subsequent manufacturer or producer uses the fuel, for nonfuel 

purposes, as a material in the manufacture or production of any other article manufactured or 

produced by him.174

House Bill

No provision. 

Senate Amendment

Gasoline blend stocks

The Senate amendment partially repeals exemptions provided in Treas. Reg. sec. 

48.4081-4, which, under certain conditions, exempts from tax gasoline blend stocks that are not 

used to produce finished gasoline or that are received at an approved terminal or refinery. Under 

the Senate amendment, tax is imposed on all nonbulk entries and removals of gasoline blend 

stocks, regardless of whether they will be used to produce finished gasoline or received at an 

approved terminal or refinery. The Senate amendment does not change the exemption for bulk 

transfers to registered industrial users. 

Kerosene and mineral spirits

The Senate amendment requires that with respect to fuel entered or removed after 

September 30, 2005, the Secretary shall not exclude mineral spirits from the definition of 

kerosene. Thus, for entries and removals after September 30, 2005, mineral spirits are taxed and 

exempt from tax in the same manner as kerosene. 

Effective date.−The provision is effective for fuel removed or entered after September 30, 

2005. 

 173 A blocked pump is a fuel pump that is used to dispense undyed kerosene that is sold at retail 

for use by the buyer in any nontaxable use; is at a fixed location; is identified with a legible and 

conspicuous notice stating “Undyed Untaxed Kerosene, Nontaxable Use Only”; and cannot reasonably be 

used to dispense fuel directly into the fuel supply tank of a diesel-powered highway vehicle or dieselpowered train; or is locked by the vendor after each sale and unlocked only in response to a request by a 

buyer for undyed kerosene for use other than as a fuel in a diesel-powered highway vehicle or dieselpowered train. 

174 Sec. 6416(b)(3)(B). 
126 

Conference Agreement

The conference agreement does not include the Senate amendment provision. 

9. Nonapplication of export exemption to delivery of fuel to motor vehicles removed from 

United States (sec. 1569 of the Senate amendment) 

Present Law

A “taxable fuel” is gasoline, diesel fuel (including any liquid, other than gasoline, which 

is suitable for use as a fuel in a diesel-powered highway vehicle or train), and kerosene.175 An 

excise tax is imposed upon (1) the removal of any taxable fuel from a refinery or terminal, (2) 

the entry of any taxable fuel into the United States, or (3) the sale of any taxable fuel to any 

person who is not registered with the IRS to receive untaxed fuel, unless there was a prior 

taxable removal or entry.176 The tax does not apply to any removal or entry of taxable fuel 

transferred in bulk to a terminal or refinery if the person removing or entering the taxable fuel, 

the operator of such pipeline or vessel, and the operator of such terminal or refinery are 

registered with the Secretary.177 

Special provisions under the Code provide for a refund of tax to any person who sells 

gasoline to another for exportation.178 Section 6421(c) provides “If gasoline is sold to any 

person for any purpose described in paragraph (2), (3), (4), or (5) of section 4221(a), the 

Secretary shall pay (without interest) to such person an amount equal to the product of the 

number of gallons so sold multiplied by the rate at which tax was imposed on such gasoline by 

section 4081.” Section 4221 provides, in pertinent part, “Under regulations prescribed by the 

Secretary, no tax shall be imposed under this chapter. . . on the sale by the manufacturer. . . of an 

article–. . . for export, or for resale by the purchaser to a second purchaser for export. . . but only 

if such exportation or use is to occur before any other use . . ..” 

It is the IRS administrative position that the exemption from manufacturers excise tax by 

reason of exportation does not apply to the sale of motor fuel pumped into a fuel tank of a 

vehicle that is to be driven, or shipped, directly out of the United States.179

A duty-free sales facility that meets certain conditions may sell and deliver for export 

from the customs territory of the United States duty-free merchandise. Duty-free merchandise is 

merchandise sold by a duty-free sales facility on which neither Federal duty nor Federal tax has 

 175 Sec. 4083(a). 

176 Sec. 4081(a)(1). 

177 Sec. 4081(a)(1)(B). 

178 Secs. 6421(c) and 4221(a)(2). 

179 Rev. Rul. 69-150, 1969-1 C.B. 286. 
127 

been assessed pending exportation from the customs territory of the United States. The statutes 

covering duty-free facilities do not contain any limitation on what goods may qualify for dutyfree treatment. 

The issue of whether fuel sold from a duty-free facility and placed into the tank of an 

automobile that is then driven out of the country is exported fuel has been litigated in the 

courts.180 The cases involved the same operator of a duty-free facility seeking a refund of excise 

tax. The facility is near the Canadian border and is configured in such a way that anyone leaving 

the facility must depart the United States and enter into Canada. Both the Federal Circuit and the 

Sixth Circuit Court of Appeals are in accord with the IRS position and ruled that the operator of 

the duty-free facility did not have standing to pursue a claim for refund.181

House Bill

No provision. 

Senate Amendment

The Senate amendment reaffirms the long-standing IRS position taken in Rev. Rul. 69-

150 and restates present law by amending the Code definition of export to exclude the delivery 

of a taxable fuel into a fuel tank of a motor vehicle that is shipped or driven out of the United 

States. It also imposes a tax on the sale of taxable fuel at a duty-free sales enterprise unless there 

was a prior taxable removal, or entry of such fuel. 

Effective date.−The provision applies to sales or deliveries made after the date of 

enactment. 

Conference Agreement

The conference agreement does not include the Senate amendment provision. 

 180 See Ammex Inc. v. United States, 52 Fed. Cl. 303 (2002) (on cross-motions for summary 

judgment, the court found that plaintiff established standing to proceed to trial pursuant to sec. 6421(c) 

respecting its gasoline purchases only); and Ammex Inc. v. United States, 2002 U.S. Dist. LEXIS 25771 

(E.D. Mich. July 31, 2002) (granting defendant’s motion for summary judgment), reconsideration denied, 

Ammex, Inc. v. United States, 2002 U.S. Dist. LEXIS 22893 (E.D. Mich. Oct. 22, 2002). Although the 

Claims Court ruled that Ammex had standing to challenge the excise tax on gasoline, it subsequently held 

that Ammex was not entitled to a payment pursuant to sec. 6421(c) because it failed to prove at trial that it 

did not pass the tax on to its customers. Ammex Inc. v. United States, 2003 U.S. Claims LEXIS 63 (Fed. 

Cl. Mar. 26, 2003). The Claims Court finding that the plaintiff had standing was reversed on appeal. 

181 See Ammex Inc. v. United States, 384 F.3d 1368 (Fed. Cir. 2004) cert. denied 125 S.Ct. 1697 

(2005); and Ammex Inc. v. United States, 367 F.3d 530 (6th Cir. 2004) cert. denied 125 S.Ct. 1695 (2005). 
128 

10. Impose assessable penalty on dealers of adulterated fuel (sec. 1570 of the Senate 

amendment) 

Present Law

Diesel fuel, gasoline, and kerosene are taxable fuels. Diesel fuel is defined as (1) any 

liquid (other than gasoline) which is suitable for use as a fuel in a diesel-powered highway 

vehicle or a diesel powered train, (2) transmix, and (3) diesel fuel blend stocks identified by the 

Secretary.182 As a defense to Federal and State excise tax liability, some taxpayers have 

contended that certain diesel fuel mixtures or additives do not meet the requirements of (1) above 

because they are not approved as additives or mixtures by the EPA. In addition, under present 

law, untaxed fuel additives, including certain contaminants, may displace taxed diesel fuel in a 

mixture. 

The Code provides that any person who, in connection with a sale or lease (or offer for 

sale or lease) of an article, knowingly makes any false statement ascribing a particular part of the 

price of the article to a tax imposed by the United States, or intended to lead any person to 

believe that any part of the price consists of such a tax, is guilty of a misdemeanor.183 Another 

Code provision provides that any person who has in his custody or possession any article on 

which taxes are imposed by law, for the purpose of selling the article in fraud of the internal 

revenue laws or with design to avoid payment of the taxes thereon, is liable for "a penalty of 

$500 or not less than double the amount of taxes fraudulently attempted to be evaded."184

House Bill

No provision. 

Senate Amendment

The Senate amendment adds a new assessable penalty. Any person other than a retailer 

who knowingly transfers for resale, sells for resale, or holds out for resale for use in a dieselpowered highway vehicle (or train) any liquid that does not meet applicable EPA regulations (as 

defined in section 45H(c)(3)185) is subject to a penalty of $10,000 for each such transfer, sale or 

holding out for resale, in addition to the tax on such liquid, if any. Any retailer who knowingly 

holds out for sale (other than for resale) any such liquid, is subject to a $10,000 penalty for each 

such holding out for sale, in addition to the tax on such liquid, if any. 

 182 Sec. 4083(a)(3)(A). 

183 Sec. 7211. Such a violation is punishable by a fine not to exceed $1,000, or by imprisonment 

for not more than one year, or both. 

184 Sec. 7268. 

185 Sec. 45H(c)(3) refers to “the Highway Diesel Fuel Sulfur Control Requirements of the 

Environmental Protection Agency.” 
129 

The penalty is dedicated to the Highway Trust Fund. 

Effective date.–The provision is effective for any transfer, sale, or holding out for sale or 

resale occurring after the date of enactment. 

Conference Agreement

The conference agreement does not include the Senate amendment provision. 

11. Oil Spill Liability Trust Fund (sec. 1571 of the Senate amendment, sec. 1361 of the 

conference agreement, and sec. 4611 of the Code) 

Present Law

Between December 31, 1989, and January 1, 1995, a five-cent-per-barrel tax was 

imposed on crude oil received at a United States refinery and imported petroleum products 

received for consumption, use, or warehousing, and any domestically produced crude oil that is 

exported from the United States if, before exportation, no taxes were imposed on the crude oil. 

The tax was effective only if the unobligated balance in the Fund was less than $1 billion. Taxes 

received were credited to the Oil Spill Liability Trust Fund. The Oil Spill Liability Trust Fund is 

used for several purposes, including the payment of costs for responding to and removing oil 

spills.186

House Bill

No provision. 

Senate Amendment

The Senate amendment reinstates the Oil Spill Liability Trust Fund tax. The tax applies 

on April 1, 2006, or if later, the last day of any calendar quarter for which the Secretary estimates 

that, as of the close of that quarter, the unobligated balance in the Oil Spill Liability Trust Fund 

is less than $2 billion. 

The tax will be suspended during a calendar quarter if the Secretary estimates that, as of 

the close of the preceding calendar quarter, the unobligated balance in the Oil Spill Liability 

Trust Fund exceeds $3 billion. The tax terminates after December 31, 2014. 

Effective date.−The provision is effective on the date of enactment. 

Conference Agreement

The conference agreement follows the Senate amendment with the following 

modification. The tax will be suspended during a calendar quarter if the Secretary estimates that, 

 186 Sec. 9509(c)(1). 
130 

as of the close of the preceding calendar quarter, the unobligated balance in the Oil Spill 

Liability Trust Fund exceeds $2.7 billion. 

12. Leaking Underground Storage Tank Trust Fund (sec. 1562 of the Senate amendment, 

sec. 1362 of the conference agreement, secs. 4041, 4081(d), 4082, 9508, and new sec. 6430 of 

the Code) 

Present Law

The Code imposes an excise tax, generally at a rate of 0.1 cents per gallon, on gasoline, 

diesel, kerosene, and special motor fuels (other than liquefied petroleum gas and liquefied 

natural gas).187 The taxes are deposited in the Leaking Underground Storage Tank (“LUST”) 

Trust Fund. The tax expires on October 1, 2005. 

Diesel fuel and kerosene that is to be used for a nontaxable purpose will not be taxed 

upon removal from the terminal if it is dyed to indicate its nontaxable purpose. 

The Code requires the LUST Trust Fund to reimburse the General Fund for certain refund 

and credit claims related to the nontaxable use of fuel (only to the extent attributable to the 

LUST Trust fund financing rate).188

House Bill

No provision. 

Senate Amendment

Under the Senate amendment, the LUST Trust Fund tax is extended at the current rate 

through September 30, 2011. Further, all fuel, including dyed fuel, is subject to the LUST tax 

and no refund or claim for payment in the case of otherwise nontaxable use (other than exports) 

is permitted for such fuel. Under the provision, the LUST Trust Fund is no longer required to 

reimburse the General Fund for claims and credits related to the nontaxable use of fuel. 

Effective date.−The provision is generally effective for fuel entered, removed or sold 

after September 30, 2005. The extension of the trust fund tax is effective October 1, 2005. 

 187 For qualified methanol and ethanol fuel the rate is 0.05 cents per gallon (sec. 

4041(b)(2)(A)(ii)). Qualified methanol or ethanol fuel is any liquid at least 85 percent of which consists 

of methanol, ethanol or other alcohol produced from coal (including peat) (sec. 4041(b)(2)(B)). 

188 Specifically, section 9508(c)(2) requires the LUST Trust Fund to reimburse the General Fund 

from time to time for claims paid pursuant to sections 6420 (relating to amounts paid in respect of 

gasoline used on farms), section 6421 (relating to amounts paid in respect of gasoline used for certain 

nonhighway purposes or by local transit systems), and section 6427 (relating to fuels not used for taxable 

purposes) and income tax credits allowed under section 34 for the purposes previously mentioned. No 

income tax credit is allowed for any amount payable under section 6421 or 6427 if a claim for such 

amount is timely filed and is payable under such section (sec. 34(b)). 
131 

Conference Agreement

The conference agreement follows the Senate amendment. 

13. Clarification of tire excise tax (sec. 1573 of the Senate amendment, sec. 1364 of the 

conference agreement, and sec. 4072(e) of the Code) 

Present Law

The Code imposes an excise tax on highway tires with a rated load capacity exceeding 

3,500 pounds, generally at a rate of 9.45 cents per 10 pounds of excess. Biasply tires and super 

single tires are taxed at a rate of 4.725 cents for each 10 pounds of rated load capacity exceeding 

3,500 pounds. A super single tire is a single tire greater than 13 inches in cross section width 

designed to replace two tires in a dual fitment. 

House Bill

No provision. 

Senate Amendment

The Senate amendment subjects super single tires to a tax of 8 cents per 10 pounds of 

excess rated load capacity over 3,500 pounds. It redefines super single tire to be a single tire 

greater than 17.5 inches in cross section width designed to replace two tires in a dual fitment. 

Effective date.−The provision is effective for sales after September 30, 2005. 

Conference Agreement

The conference agreement clarifies that the definition of super single tire does not include 

tires designed to serve as steering tires. It is understood that steering axles are not equipped with 

a dual fitment. Therefore, tires classified as steering tires are not "designed to replace two tires 

in a dual fitment." To the extent there is any perceived ambiguity in the present law definition, 

the conferees wish to clarify that steering tires are not included within the definition of super 

single tire eligible for the special rate of tax. Under the conference agreement, a “super single 

tire” is a single tire greater than 13 inches in cross section width designed to replace two tires in 

a dual fitment, but such term does not include any tire designed for steering. 

With respect to the one-year period beginning on January 1, 2006, the IRS is required to 

report to the Congress on the amount of tax collected during such period for each class of taxable 

tire (e.g. biasply, super single, or other) and the number of tires in each such class on which tax 

is imposed during such period. The report must be submitted no later than July 1, 2007. The 

IRS is directed to revise the Form 720, Quarterly Federal Excise Tax Return, to collect the 

information necessary to prepare the report. The report is also to include total tire tax collections 

for an equivalent one-year period preceding the date of enactment of the American Jobs Creation 

Act of 2004. 
132 

Effective date.−The provision regarding the definition of a super single tire is effective as 

if included in section 869 of the American Jobs Creation Act of 2004. The study requirement is 

effective on the date of enactment. 

14. Modify recapture of section 197 amortization (sec. 1363 of the conference agreement 

and sec. 1245 of the Code) 

Present Law

Taxpayers are entitled to recover the cost of amortizable section 197 intangibles using the 

straight-line method of amortization over a uniform life of fifteen years.189 With certain 

exceptions, amortizable section 197 intangibles generally are purchased intangibles held by a 

taxpayer in the conduct of a business.190 

Gain on the sale of depreciable property must be recaptured as ordinary income to the 

extent of depreciation deductions previously claimed,191 and the recapture amount is computed 

separately for each item of property. Section 197 intangibles, because they are treated as 

property of a character subject to the allowance for depreciation,192 are subject to these recapture 

rules. 

House Bill

No provision. 

Senate Amendment

No provision. 

Conference Agreement

Under the conference agreement, if multiple section 197 intangibles are sold (or 

otherwise disposed of) in a single transaction or series of transactions, the seller must calculate 

recapture as if all of the section 197 intangibles were a single asset. Thus, any gain on the sale 

(or other disposition) of the intangibles is recaptured as ordinary income to the extent of ordinary 

depreciation deductions previously claimed on any of the section 197 intangibles. 

The following example illustrates present law and the conference agreement: 

 189 Sec. 197(a) 

190 Sec. 197(c) 

191 Sec. 1245. 

192 Sec. 197(f)(7). 
133 

Example.–In year 1, a taxpayer acquires two section 197 intangible assets for a total of 

$45. Asset A is assigned a cost basis of $15 and asset B is assigned a cost basis of $30. The 

allocation is irrelevant for amortization purposes, as the taxpayer will be entitled to a total of $3 

per year ($45 divided by 15 years). 

In year 6, the basis of A is $10 and the basis of B is $20. Taxpayer sells the assets for an 

aggregate sale price of $45, resulting in gain of $15. The character of this gain depends on the 

recapture amount, which depends in turn on the relative sales prices of the individual assets. 

Taxpayer has claimed $5 of amortization, and therefore has $5 of recapture potential, with 

respect to A. Taxpayer has claimed $10 of amortization, and therefore has $10 of recapture 

potential, with respect to B. 

Under present law, if the sale proceeds are allocated $15 to A and $30 to B, the gain on 

assets A and B will be $5 and $10, respectively. These amounts match the recapture potential 

for each asset, so the full amount of the gain will be recaptured as ordinary income. However, if 

the sale proceeds instead are allocated $25 to A and $20 to B, the full $15 gain will be 

recognized with respect to A, and only $5 (full recapture potential with respect to A) will be 

recaptured as ordinary income. The remaining $10 of gain attributable to A will be treated as 

capital gain. No gain (and thus no recapture) will be recognized with respect to Asset B, and 

only $5 of the $15 recapture potential is recognized. 

Under the conference agreement, the taxpayer calculates recapture as if assets A and B 

were a single asset. For purposes of the calculation, the proceeds are $45 and the gain is $15. 

Because a total of $15 of amortization has been claimed with respect to assets A and B, the full 

$15 gain is recaptured as ordinary income. 

Effective date.−The conference agreement is effective for dispositions of property after 

the date of enactment. 
134 

F. Tax Complexity Analysis 

Section 4022(b) of the Internal Revenue Service Reform and Restructuring Act of 1998 

(the “IRS Reform Act”) requires the Joint Committee on Taxation (in consultation with the 

Internal Revenue Service and the Department of the Treasury) to provide a tax complexity 

analysis. The complexity analysis is required for all legislation reported by the Senate 

Committee on Finance, the House Committee on Ways and Means, or any committee of 

conference if the legislation includes a provision that directly or indirectly amends the Internal 

Revenue Code (the “Code”) and has widespread applicability to individuals or small businesses. 

The staff of the Joint Committee on Taxation has determined that a complexity analysis is 

not required under section 4022(b) of the IRS Reform Act because the bill contains no provisions 

that have “widespread applicability” to individuals or small businesses.