TECHNICAL EXPLANATION OF THE REVENUE PROVISIONS 

OF H.R. 5351, 

THE RENEWABLE ENERGY AND ENERGY 

CONSERVATION TAX ACT OF 2008 

Prepared by the Staff 

of the 

JOINT COMMITTEE ON TAXATION 

 

February 27, 2008 

JCX-19-08
i 

CONTENTS 

Page

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

TITLE I − PRODUCTION INCENTIVES..................................................................................... 2 

A. Extension and Modification of the Credit for the Production of Electricity 

from Renewable Resources (secs. 101 and 102 of the bill and sec. 45 of the Code) ......... 2 

B. Extension and Modification of Energy Credit (sec. 103 of the bill and sec. 48 

of the Code)....................................................................................................................... 11 

C. New Clean Renewable Energy Bonds (sec. 104 of the bill and new sec. 54B 

of the Code)....................................................................................................................... 14 

D. Extension and Modification of Special Rule to Implement FERC and State Electric 

Restructuring Policy (sec. 105 of the bill and sec. 451(i) of the Code)............................ 18 

E. Credit for Residential Energy Efficient Property (sec. 106 of the bill and sec. 25D 

of the Code)....................................................................................................................... 20 

TITLE II − CONSERVATION .................................................................................................... 22 

A. Transportation................................................................................................................... 22 

1. Alternative motor vehicle credit and plug-in hybrid vehicle credit 

(sec. 201 of the bill and section 30B and new sec. 30D of the Code) ........................ 22 

2. Extension and modification of alternative fuel vehicle refueling property credit 

(sec. 202 of the bill and sec. 30C of the Code)........................................................... 30 

3. Modification of limitation on automobile depreciation (sec. 203 of the bill 

and sec. 280F of the Code) ......................................................................................... 31 

4. Extension of credits for biodiesel and extension and modification of 

renewable diesel credit (sec. 211 of the bill and secs. 40A, 6426, and 6427 

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

5. Clarification that credits for fuel are designed to provide an incentive for 

United States production (sec. 212 of the bill, and secs. 40, 40A, 6426 and 6427 

of the Code)................................................................................................................. 37

6. Credit for production of cellulosic alcohol (sec. 213 of the bill and sec. 40 

of the Code)................................................................................................................. 39

7. Extension of transportation fringe benefit to bicycle commuters 

(sec. 221 of the bill and sec. 132 of the Code)............................................................ 40 

8. Restructuring of New York Liberty Zone tax credits (sec. 222 of the bill 

and secs. 1400K and 1400L of the Code)................................................................... 42
ii 

B. Other Conservation Provisions ......................................................................................... 46 

1. Qualified energy conservation bonds (sec. 231 of the bill and new sec. 54C 

of the Code)................................................................................................................. 46

2. Extension and modification of energy efficient existing homes credit 

(sec. 232 of the bill and sec. 25C of the Code)........................................................... 52 

3. Energy efficient commercial buildings deduction (sec. 233 of the bill and 

sec. 179D of the Code)................................................................................................ 53 

4. Extension and modification of energy efficient appliance credit 

(sec. 234 of the bill and sec. 45M of the Code) .......................................................... 55 

5. Five-year applicable recovery period for depreciation of qualified energy 

management devices (sec. 235 of the bill and sec. 168 of the Code) ......................... 58 

TITLE III − REVENUE PROVISIONS....................................................................................... 60 

A. Limitation of Deduction for Income Attributable to Domestic Production of Oil, 

Gas, or Primary Products Thereof (sec. 301 of the bill and sec. 199 of the Code)........... 60 

B. Require Taxpayers to Use an Arm’s-Length Fair-Market Value Price for Purposes 

of Calculating FOGEI and FORI; Treat Industry-Specific Taxes as Attributable 

Solely to FOGEI (sec. 302 of the bill and sec. 907 of the Code)...................................... 65 

C. Modifications to Corporate Estimated Tax Payments (sec. 303 of the bill)..................... 71 

TITLE IV – OTHER PROVISIONS ............................................................................................ 72 

A. Studies............................................................................................................................... 72 

1. Carbon audit of provisions of the Internal Revenue Code of 1986 

(sec. 401 of the bill) .................................................................................................... 72 

2. Comprehensive study of biofuels (sec. 402 of the bill) .............................................. 73 
1 

INTRODUCTION 

This document,1

 prepared by the staff of the Joint Committee on Taxation, provides a 

technical explanation of H.R. 5351, the revenue provisions of the renewable energy and energy 

conservation tax act of 2008. 

 1

 This document may be cited as follows: Joint Committee on Taxation, Technical Explanation 

of the Revenue Provisions of H.R. 5351, the Renewable Energy and Energy Conservation Tax Act of 

2008, (JCX-19-08), February 27, 2008. This document can also be found on our website at 

www.house.gov/jct. 
2 

TITLE I − PRODUCTION INCENTIVES 

A. Extension and Modification of the Credit for the Production of Electricity 

from Renewable Resources 

(secs. 101 and 102 of the bill and sec. 45 of the Code) 

Present Law

In general

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

resources at qualified facilities.2 Qualified energy resources comprise wind, closed-loop 

biomass, open-loop biomass, geothermal energy, solar energy, small irrigation power, municipal 

solid waste, and qualified hydropower production. Qualified facilities are, generally, facilities 

that generate electricity using qualified energy resources. To be eligible for the credit, electricity 

produced from qualified energy resources at qualified facilities must be sold by the taxpayer to 

an unrelated person. 

Credit amounts and credit period

In general

The base amount of the electricity production credit is 1.5 cents per kilowatt-hour 

(indexed annually for inflation) of electricity produced. The amount of the credit was 2 cents per 

kilowatt-hour for 2007.3 A taxpayer may generally claim a credit during 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. 

Credit phaseout

The amount of credit a taxpayer may claim is phased out as the market price of electricity 

exceeds certain threshold levels. The electricity production credit is reduced over a 3 cent 

phaseout range to the extent the annual average contract price per kilowatt-hour of electricity 

sold in the prior year from the same qualified energy resource exceeds 8 cents (adjusted for 

inflation; 10.7 cents for 2007). 

Reduced credit periods and credit amounts

Generally, in the case of open-loop biomass facilities (including agricultural livestock 

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

 2

 Sec. 45. In addition to the electricity production credit, section 45 also provides income tax 

credits for the production of Indian coal and refined coal at qualified facilities. Unless otherwise stated, 

all section references are to the Internal Revenue Code of 1986, as amended (the “Code”). 

3

 The Internal Revenue Service (“IRS”) is expected to announce the 2008 inflation adjustment 

factor in the spring of 2008. 
3 

power facilities, landfill gas facilities, and trash combustion facilities placed in service before 

August 8, 2005, the 10-year credit period is reduced to five years commencing on the date the 

facility was originally placed in service. However, for qualified open-loop biomass facilities 

(other than a facility described in sec. 45(d)(3)(A)(i) that uses agricultural livestock waste 

nutrients) placed in service before October 22, 2004, the five-year 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, trash combustion facilities, and 

qualified hydropower facilities the otherwise allowable credit amount is 0.75 cent per kilowatthour, indexed for inflation measured after 1992 (1 cent per kilowatt-hour for 2007). 

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 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 and 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. 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.4

 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. 

 4

 Sec. 38(b)(8). 
4 

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, 2009. 

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. 

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

December 31, 1992, and before January 1, 2009. 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, 2009. 

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

An open-loop biomass facility is a facility that uses open-loop biomass to produce 

electricity. For purposes of the credit, open-loop biomass is defined as (1) any agricultural 

livestock waste nutrients or (2) any solid, nonhazardous, cellulosic waste material or any lignin 

material that is segregated from other waste materials and which is derived from: 

• forest-related resources, including mill and harvesting residues, precommercial 

thinnings, slash, and brush; 

• solid wood waste materials, including waste pallets, crates, dunnage, manufacturing 

and construction wood wastes, and landscape or right-of-way tree trimmings; or 

• agricultural sources, including orchard tree crops, vineyard, grain, legumes, sugar, 

and other crop by-products or residues. 

Agricultural livestock waste nutrients are defined as agricultural livestock manure and 

litter, including bedding material for the disposition of manure. Wood waste materials do not 

qualify as open-loop biomass to the extent they are pressure treated, chemically treated, or 

painted. In addition, municipal solid waste, gas derived from the biodegradation of solid waste, 

and paper which is commonly recycled do not qualify as open-loop biomass. 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. 

In the case of an open-loop biomass facility that uses agricultural livestock waste 

nutrients, a qualified facility is one that was originally placed in service after October 22, 2004, 
5 

and before January 1, 2009, and has a nameplate capacity rating which is not less than 150 

kilowatts. In the case of any other open-loop biomass facility, a qualified facility is one that was 

originally placed in service before January 1, 2009. 

Geothermal facility

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

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

consisting of natural heat that 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, 2009. 

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. 

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 at least 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, 2009. 

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, 2009. 

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, 

2009. A qualified 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. 
6 

Hydropower facility

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

hydroelectric dam) prior to August 8, 2005, at which efficiency improvements or additions to 

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

produce incremental hydropower or (2) a facility placed in service before August 8, 2005, that 

did not produce hydroelectric power (a nonhydroelectric dam) on such date, and to which 

turbines or other electricity generating equipment have been added after such date and before 

January 1, 2009. 

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

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 must be added to the facility after 

August 8, 2005 and before January 1, 2009. In addition, there must not be any enlargement of 

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

any withholding of additional water from the natural stream channel. 
7 

Summary of credit rate and credit period by facility type

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

Certain Renewable Resources 

Eligible electricity 

production activity 

Credit amount for 

2007 (cents per 

kilowatt-hour) 

Credit period for 

facilities placed 

in service on or 

before August 8, 

2005 (years from 

placed-in-service 

date) 

Credit period for 

facilities placed in 

service after 

August 8, 2005 

(years from 

placed-in-service 

date) 

Wind 2 10 10 

Closed-loop biomass 2 101 10 

Open-loop biomass 

 (including agricultural 

 livestock waste nutrient 

 facilities) 

1 52 10 

Geothermal 

Solar (pre-2006 facilities only) 

Small irrigation power 

Municipal solid waste 

 (including landfill gas 

 facilities and trash 

 combustion facilities) 

Qualified hydropower 

2 

2 

1 

1 

1 

 5 

 5 

 5 

 5 

N/A 

10 

10 

10 

10 

10 

1 In the case of certain co-firing closed-loop facilities, the credit period begins no earlier than October 22, 

2004. 

2

 For certain facilities placed in service before October 22, 2004, the five-year credit period commences 

on January 1, 2005. 

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, a cooperative that is subject to the 

cooperative tax rules of subchapter T of the Code5

 is permitted a deduction for patronage 

dividends paid only to the extent of net income that is derived from transactions with patrons 

who are members of the cooperative.6

 The availability of such deductions from taxable income 

 5

 Secs. 1381-1383. 

6

 Sec. 1382. 
8 

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. 

Eligible cooperatives may elect to pass any portion of the credit through to their patrons. 

An eligible cooperative is defined as a cooperative organization that is owned more than 50 

percent by agricultural producers or entities owned by agricultural producers. 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. 

Explanation of Provision

The provision extends and modifies the electricity production credit. 

Extension of placed-in-service date for qualifying facilities

The provision extends for three years (through 2011) the period during which qualified 

facilities producing electricity from wind, closed-loop biomass, open-loop biomass, geothermal 

energy, small irrigation power, municipal solid waste, and qualified hydropower may be placed 

in service for purposes of the electricity production credit. 

Addition of marine and hydrokinetic renewable energy as a qualified resource

The provision adds marine and hydrokinetic renewable energy as a qualified energy 

resource and marine and hydrokinetic renewable energy facilities as qualified facilities. Marine 

and hydrokinetic renewable energy is defined as energy derived from (1) waves, tides, and 

currents in oceans, estuaries, and tidal areas; (2) free flowing water in rivers, lakes, and streams; 

(3) free flowing water in an irrigation system, canal, or other man-made channel, including 

projects that utilize nonmechanical structures to accelerate the flow of water for electric power 

production purposes; or (4) differentials in ocean temperature (ocean thermal energy 

conversion). The term does not include energy derived from any source that uses a dam, 

diversionary structure (except for irrigation systems, canals, and other man-made channels), or 

impoundment for electric power production. A qualified marine and hydrokinetic renewable 

energy facility is any facility owned by the taxpayer and placed in service after the date of 

enactment and before 2012 that produces electric power from marine and hydrokinetic renewable 

energy and that has a nameplate capacity rating of at least 150 kilowatts. 

Under the provision, marine and hydrokinetic renewable energy facilities subsume small 

irrigation power facilities. The provision, therefore, terminates as a separate category of 

qualified facility small irrigation power facilities placed in service on or after the date of 

enactment. Such facilities qualify for the electricity production credit as marine and hydrokinetic 

renewable energy facilities. 

Phaseout replaced by limitation based on investment in facility

The provision replaces the electricity production credit phaseout with an annual limit on 

the total credits that may be claimed with respect to any qualified facility placed in service after 
9 

2009 based on the investment in the facility. Under the limitation, the electricity production 

credit determined for any taxable year may not exceed the eligible basis of the facility multiplied 

by a limitation percentage (the “applicable percentage”) determined by the Secretary for the 

month during which the facility is originally placed in service. The applicable percentage for 

any month is the percentage that yields over a 10-year period amounts of limitation that have a 

present value equal to 35 percent of the eligible basis of the facility. The discount rate for 

purposes of this calculation is the greater of 4.5 percent or 110 percent of the long-term Federal 

rate. 

Generally, the eligible basis of a facility is the basis of such facility at the time it is 

originally placed in service. However, certain special rules apply. Since each wind turbine 

generally qualifies as a separate facility under section 45, the basis of shared qualified property at 

a wind project composed of multiple separate wind facilities may be allocated in proportion to 

the projected generation from such facilities. For this purpose, shared qualified property is 

property that is eligible for five-year depreciation under section 168(e)(3)(B)(vi) but which is not 

part of a qualified facility. In the case of a qualified geothermal facility, the eligible basis for 

purposes of the limitation includes intangible drilling and development costs described in section 

263(c). 

At the election of the taxpayer, all qualified facilities which are part of the same project 

and which are placed in service during the same calendar year may be treated for as a single 

facility placed in service at either the mid-point of such year or the first day of the following 

calendar year. 

Special rules apply for the first and last year of a facility’s 10-year credit period to 

allocate the limitation across a taxpayer's taxable years. In addition, if a facility’s production is 

less than the limitation amount for any taxable year, the limitation with respect to such facility 

for the next taxable year is increased by the amount of the unused limitation. Similarly, if the 

electricity production credit exceeds the limitation amount for any taxable year, but falls under 

the limit the following year, the credit for the following taxable year is increased, up to that 

year’s limitation amount, by the amount of such excess, but not beyond the facility’s 10-year 

credit eligibility period. 

Clarification of the definition of trash combustion facility

The provision modifies the definition of qualified trash combustion facilities to permit 

facilities that gasify municipal solid waste and then burn such gas as part of an electricity 

generation process to qualify for the electricity production credit. 

Modification of the definitions of open-loop biomass facility and closed-loop biomass 

facility to include new units added to existing qualified facilities

The definitions of qualified open-loop biomass facility and qualified closed-loop biomass 

facility are modified to include new power generation units placed in service at existing qualified 

facilities, but only to the extent of the increased amount of electricity produced at such facilities 

by reason of such new units. 
10 

Effective Date

The extension of the electricity production credit is effective for facilities originally 

placed in service after 2008. The addition of marine and hydrokinetic renewable energy as a 

qualified energy resource is effective for electricity produced at qualified facilities and sold after 

the date of enactment in taxable years ending after such date. The repeal of the credit phaseout 

adjustment is effective for taxable years ending after 2008. The limitation based on investment 

is effective for facilities originally placed in service after 2009. The clarification of the 

definition of trash combustion facility is effective for electricity produced and sold after the date 

of enactment. The modification to the definitions of open-loop biomass facility and closed-loop 

biomass facility is effective for property placed in service after the date of enactment. 
11 

B. Extension and Modification of Energy Credit 

(sec. 103 of the bill and sec. 48 of the Code) 

Present Law

In general

A nonrefundable, 10-percent business energy credit is allowed for the cost of new 

property that is equipment that either (1) uses solar energy to generate electricity, to heat or cool 

a structure, or to provide solar process heat, or (2) 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. Property used to generate energy for the purposes of 

heating a swimming pool is not eligible solar energy property. 

The energy credit is a component of the general business credit7

 and as such is subject to 

the alternative minimum tax. An unused general business credit generally may be carried back 

one year and carried forward 20 years.8

 The taxpayer’s basis in the property is reduced by onehalf of the amount of the credit claimed9

. For projects whose construction time is expected to 

equal or exceed two years, the credit may be claimed as progress expenditures are made on the 

project, rather than during the year the property is placed in service. Similarly, the credit only 

applies to expenditures made after the effective date of the provision. 

In general, property that is public utility property is not eligible for the credit. Public 

utility property is property that is used predominantly in the trade or business of the furnishing or 

sale of (1) electrical energy, water, or sewage disposal services, (2) gas through a local 

distribution system, or (3) telephone service, domestic telegraph services, or other 

communication services (other than international telegraph services), if the rates for such 

furnishing or sale have been established or approved by a State or political subdivision thereof, 

by an agency or instrumentality of the United States, or by a public service or public utility 

commission. This rule is waived in the case of telecommunication companies’ purchases of fuel 

cell and microturbine property. 

Special rules for solar energy property 

The credit for solar energy property is increased to 30 percent in the case of periods after 

December 31, 2005 and prior to January 1, 2009. Additionally, equipment that uses fiber-optic 

distributed sunlight to illuminate the inside of a structure is solar energy property eligible for the 

30-percent credit. 

 7

 Sec. 38(b)(1). 

8

 Sec. 39. 

9

 Sec. 50(c)(3) 
12 

Fuel cells and microturbines

The business energy credit also applies for the purchase of qualified fuel cell power 

plants, but only for periods after December 31, 2005 and prior to January 1, 2009. The credit 

rate is 30 percent. 

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, and (2) has an electricity-only generation efficiency of greater than 

30 percent and a capacity of at least 0.5 kilowatt. The credit may not exceed $500 for each 0.5 

kilowatt of capacity. 

The business energy credit also applies for the purchase of qualifying stationary 

microturbine power plants, but only for periods after December 31, 2005 and prior to January 1, 

2009. The credit is limited to the lesser of 10 percent of the basis of the property or $200 for 

each kilowatt of capacity. 

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. 

Additionally, for purposes of the fuel cell and microturbine credits, and only in the case 

of telecommunications companies, the general present-law section 48 restriction that would 

otherwise prohibit telecommunication companies from claiming the new credit due to their status 

as public utilities is waived. 

Explanation of Provision

The provision extends the 30-percent credit for solar and fuel cell property for eight 

years. Additionally, the fuel cell credit cap of $500 for each 0.5 kilowatt of capacity is raised to 

$1,500 for each 0.5 kilowatt. The provision makes the energy credit allowable against the 

alternative minimum tax. 

Also, the restriction on public utility property being eligible for the credit is eliminated. 

Effective Date

The provision extending the 30-percent credit is effective on the date of enactment. 

The increase in the credit cap for fuel cells applies to periods after the date of enactment, 

in taxable years ending after such date, under rules similar to the rules of section 48(m) of the 

Code (as in effect on the day before the enactment of the Revenue Reconciliation Act of 1990). 
13 

The provision relating to the restrictions on public utility property applies to periods after 

February 13, 2008, in taxable years ending after such date, under rules similar to the rules of 

section 48(m) of the Code (as in effect on the day before the enactment of the Revenue 

Reconciliation Act of 1990). 

The allowance of the credit against the alternative minimum tax is effective for credits 

determined in taxable years beginning after the date of enactment. 
14 

C. New Clean Renewable Energy Bonds 

(sec. 104 of the bill and new sec. 54B 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. 

Activities that can be financed with these tax-exempt bonds include the financing of electric 

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

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 (or in 

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. 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 2007, the State volume cap, which 

is indexed for inflation, equals $85 per resident of the State, or $256.24 million, if greater. 

The tax exemption for State and local bonds also does not apply to any arbitrage bond.10 

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.11 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 about the bonds issued by them in 

order for that bond issue to be tax-exempt.12 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. 

 10 Sec. 103(a) and (b)(2). 

11 Sec. 148. 

12 Sec. 149(e). 
15 

Clean renewable energy bonds

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

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 qualified 

projects. “Qualified projects” are facilities that qualify for the tax credit under section 45 (other 

than Indian coal production facilities), without regard to the placed-in-service date requirements 

of that section.13 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 renewable energy bond lenders. 

The term “qualified borrower” includes a governmental body (including an Indian tribal 

government) and a mutual or cooperative electric company. A clean renewable 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. 

Unlike tax-exempt bonds, CREBs are not interest-bearing obligations. Rather, the 

taxpayer holding CREBs on a credit allowance date is 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. 

CREBs are subject to a maximum maturity limitation. 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. The discount 

rate used to determine the present value amount is the average annual interest rate of tax-exempt 

obligations having a term of 10 years or more which are issued during the month the CREBs are 

issued. In addition, the Code requires level amortization of CREBs during the period such bonds 

are outstanding. 

CREBs also are subject to the arbitrage requirements of section 148 that apply to 

traditional tax-exempt bonds. Principles under section 148 and the regulations thereunder apply 

for purposes of determining the yield restriction and arbitrage rebate requirements applicable to 

CREBs. 

In addition to the above requirements, at least 95 percent of the proceeds of CREBs must 

be spent 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 

 13 In addition, Notice 2006-7 provides that qualified projects include any facility owned by a 

qualified borrower that is functionally related and subordinate to any facility described in sections 

45(d)(1) through (d)(9) and owned by such qualified borrower. 
16 

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 bonds. The five-year spending 

period may be extended by the Secretary upon the qualified issuer’s request demonstrating that 

the failure to satisfy the five-year requirement is due to reasonable cause and the projects will 

continue to proceed with due diligence. 

Issuers of CREBs are required to report issuance to the IRS in a manner similar to the 

information returns required for tax-exempt bonds. There is a national CREB limitation of $1.2 

billion. The maximum amount of CREBs that may be allocated to qualified projects of 

governmental bodies is $750 million. CREBs must be issued before January 1, 2009. 

Explanation of Provision

The provision creates a new category of clean renewable energy bonds (“New CREBs”) 

that may be issued by qualified issuers to finance qualified renewable energy facilities. 

Qualified renewable energy facilities are facilities: (1) that qualify for the tax credit under 

section 45 (other than Indian coal and refined coal production facilities), without regard to the 

placed-in-service date requirements of that section; and (2) that are owned by a public power 

provider or cooperative electric company. The term “cooperative electric company” means a 

mutual or cooperative electric company (described in section 501(c)(12) or section 

1381(a)(2)(C)). The term “public power provider” means a State utility with a service 

obligation, as such terms are defined in section 217 of the Federal Power Act (as in effect on the 

date of the enactment of this paragraph). The term “qualified issuers” includes: (1) public 

power providers; (2) cooperative electric companies; (3) a not-for-profit electric utility that has 

received a loan or guarantee under the Rural Electrification Act; and (4) clean renewable energy 

bond lenders. A clean renewable energy bond lender means a cooperative that is owned by, or 

has outstanding loans to, 100 or more cooperative electric companies and is in existence on 

February 1, 2002. 

There is a national limitation for New CREBs of $2 billion. The provision limits the total 

allocations that may be made to projects of public power providers and projects of cooperative 

electric companies to 60 percent of the national limitation and 40 percent of the national 

limitation, respectively. Allocations to cooperative electric companies may be made in the 

manner the Secretary determines appropriate. Allocations to projects of public power providers 

shall be made, to the extent practicable, in such manner that the amount allocated to each such 

project bears the same ratio to the cost of such project as the maximum allocation limitation to 

projects of public power providers bears to the cost of all such projects. 

Under the provision, 100 percent of the available project proceeds of New CREBs must 

be used within the three-year period that begins on the date of issuance. The provision defines 

available project proceeds as proceeds from the sale of the bond issue less issuance costs (not to 

exceed two percent) and any investment earnings on such sale proceeds. To the extent less than 

100 percent of the available project proceeds are used to finance qualified projects during the 

three-year spending period, bonds will continue to qualify as New CREBs if unspent proceeds 

are used within 90 days from the end of such three-year period to redeem bonds. The three-year 

spending period may be extended by the Secretary upon the qualified issuer’s request 
17 

demonstrating that the failure to satisfy the three-year requirement is due to reasonable cause and 

the projects will continue to proceed with due diligence. 

New CREBs generally are subject to the arbitrage requirements of section 148. 

However, available project proceeds invested during the three-year spending period are not 

subject to the arbitrage restrictions (i.e., yield restriction and rebate requirements). In addition, 

amounts invested in a reserve fund are not subject to the arbitrage restrictions to the extent: (1) 

such fund is funded at a rate not more rapid than equal annual installments; (2) such fund is 

funded in a manner reasonably expected to result in an amount not greater than an amount 

necessary to repay the issue; and (3) the yield on such fund is not greater than the average annual 

interest rate of tax-exempt obligations having a term of 10 years or more that are issued during 

the month the New CREBs are issued. 

The maturity of New CREBs is the term that the Secretary estimates will result in the 

present value of the obligation to repay the principal on such bonds being equal to 50 percent of 

the face amount of such bonds, using as a discount rate the average annual interest rate of taxexempt obligations having a term of 10 years or more which are issued during the month the 

qualified energy conservation bonds are issued. 

As with present-law CREBs, the taxpayer holding New CREBs on a credit allowance 

date is entitled to a tax credit. Unlike present-law CREBs, however, the credit rate on New 

CREBs is determined by the Secretary and is to be a rate that is 70 percent of the rate that would 

permit issuance of CREBs without discount and interest cost to the issuer. The amount of the tax 

credit is determined by multiplying the bond’s credit rate by the face amount on the holder’s 

bond. The credit accrues quarterly, 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. Unused credits may be carried forward to succeeding taxable years. In 

addition, credits may be separated from the ownership of the underlying bond similar to how 

interest coupons can be stripped for interest-bearing bonds. 

Issuers of New CREBs are required to certify that the financial disclosure requirements 

that apply to State and local bonds offered for sale to the general public are satisfied with respect 

to any Federal, State, or local government official directly involved with the issuance of New 

CREBs. The provision authorizes the Secretary to impose additional financial reporting 

requirements by regulation. 

Effective Date

The provision is effective for bonds issued after the date of enactment. 
18 

D. Extension and Modification of Special Rule to Implement FERC 

and State Electric Restructuring Policy 

(sec. 105 of the bill and sec. 451(i) 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 period14 (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, 

2008. In general, an independent transmission company is defined as: (1) an independent 

transmission provider15 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, 

but not later than December 31, 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). 

 14 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. 

15 For example, a regional transmission organization, an independent system operator, or an 

independent transmission company. 
19 

Explanation of Provision

The provision extends the treatment under the present-law deferral provision to sales or 

dispositions by a qualified electric utility prior to January 1, 2010. A qualified electric utility is 

defined as an electric utility, which as of the date of the qualifying electric transmission 

transaction, is vertically integrated in that it is both (1) a transmitting utility (as defined in the 

Federal Power Act) 16 with respect to the transmission facilities to which the election applies, and 

(2) an electric utility (as defined in the Federal Power Act).17

The definition of an independent transmission company is modified for taxpayers whose 

transmission facilities are placed under the operational control of a FERC-approved independent 

transmission provider, which under the provision must take place no later than four years after 

the close of the taxable year in which the transaction occurs. 

The provision also changes the definition of exempt utility property to exclude property 

that is located outside the United States. 

Effective Date

The extension provision applies to transactions after December 31, 2007. The change in 

the definition of an independent transmission company is effective as if included in section 909 

of the American Jobs Creation Act of 2004. The exclusion for property located outside the 

United States applies to transactions after the date of enactment. 

 16 Sec. 3(23), 16 U.S.C. 796, defines “transmitting utility” as any electric utility, qualifying 

cogeneration facility, qualifying small power production facility, or Federal power marketing agency 

which owns or operates electric power transmission facilities which are used for the sale of electric 

energy at wholesale. 

17 Sec. 3(22), 16 U.S.C. 796, defines “electric utility” as any person or State agency (including 

any municipality) which sells electric energy; such term includes the Tennessee Valley Authority, but 

does not include any Federal power marketing agency. 
20 

E. Credit for Residential Energy Efficient Property

(sec. 106 of the bill and sec. 25D of the Code) 

Present Law

Code section 25D provides a personal tax credit for the purchase of qualified solar 

electric 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. Section 

25D 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 solar 

electric 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. 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. 

The credit applies to property placed in service prior to January 1, 2009. 

Explanation of Provision

The provision extends the credit for six years (through December 31, 2014) and allows 

the credit to be claimed against the alternative minimum tax. Additionally, the credit cap for 

solar electric property is raised to $4,000. 

The provision provides a new 30 percent credit for qualified small wind energy property 

expenses made by the taxpayer during the taxable year. The credit is limited to $500 with 

respect to each half kilowatt of capacity, not to exceed $4,000. Qualified small wind energy 

property expenditures are expenditures for property that uses a wind turbine to generate 

electricity for use in a dwelling unit located in the U.S. and used as a residence by the taxpayer. 

The credit for qualified small wind energy property is allowed for expenditures after December 

31, 2007, for property placed in service prior to January 1, 2015. 
21 

The provision also provides a 30 percent credit for qualified geothermal heat pump 

property expenditures, not to exceed $2,000. The term `qualified geothermal heat pump property 

expenditure' means an expenditure for qualified geothermal heat pump property installed on or in 

connection with a dwelling unit located in the United States and used as a residence by the 

taxpayer. Qualified geothermal heat pump property means any equipment which (1) uses the 

ground or ground water as a thermal energy source to heat the dwelling unit or as a thermal 

energy sink to cool such dwelling unit, and (2) meets the requirements of the Energy Star 

program which are in effect at the time that the expenditure for such equipment is made. The 

credit for qualified geothermal heat pump property is allowed for expenditures after December 

31, 2007, for property placed in service prior to January 1, 2015. 

Effective Date

The provision is effective for taxable years beginning after December 31, 2007. 
22 

TITLE II − CONSERVATION 

A. Transportation 

1. Alternative motor vehicle credit and plug-in hybrid vehicle credit (sec. 201 of the bill 

and section 30B and new sec. 30D of the Code) 

Present Law

In general

A credit is available for each new qualified fuel cell vehicle, hybrid vehicle, advanced 

lean burn technology vehicle, and alternative fuel vehicle placed in service by the taxpayer 

during the taxable year.18 In general, the credit amount varies depending upon the type of 

technology used, the weight class of the vehicle, the amount by which the vehicle exceeds 

certain fuel economy standards, and, for some vehicles, the estimated lifetime fuel savings. The 

credit generally is available for vehicles purchased after 2005. The credit terminates after 2009, 

2010, or 2014, depending on the type of vehicle. 

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-exempt organizations, 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. 

Fuel cell vehicles

A qualified fuel cell vehicle is a motor vehicle that is propelled by power derived from 

one or more cells that convert chemical energy directly into electricity by combining oxygen 

with hydrogen fuel that is stored on board the vehicle and may or may not require reformation 

prior to use. A qualified fuel cell vehicle must be purchased before January 1, 2015. 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.19 Table 2, below, shows the base credit 

amounts. 

 18 Sec. 30B. 

19 See discussion surrounding Table 7, below. 
23 

Table 2.–Base Credit Amount for Fuel Cell Vehicles 

Vehicle Gross Weight Rating (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 2, above is reduced to $4,000. 

Table 3, below, shows the additional credits for passenger automobiles or light trucks. 

Table 3.–Credit for Qualified 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 vehicles and advanced lean burn technology vehicles

Qualified hybrid vehicle

A qualified hybrid vehicle is a motor vehicle that draws propulsion energy from on-board 

sources of stored energy that include both an internal combustion engine or heat engine using 

combustible fuel and a rechargeable energy storage system (e.g., batteries). A qualified hybrid 

vehicle must be placed in service before January 1, 2011 (January 1, 2010 in the case of a hybrid 

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: (1) a fuel 
24 

economy credit amount that varies with the rated fuel economy of the vehicle compared to a 

2002 model year standard and (2) a conservation credit based on the estimated lifetime fuel 

savings of the qualified vehicle compared to a comparable 2002 model year vehicle that is 

powered solely by a gasoline or diesel internal combustion engine. A qualified hybrid 

automobile or light truck must have a maximum available power20 from the rechargeable energy 

storage system of at least four percent. In addition, the vehicle must meet or exceed certain 

Environmental Protection Agency (“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 4, 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 4.–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 

 20 For hybrid passenger vehicles and light trucks, the term “maximum available power” means 

the maximum power available from the rechargeable energy storage system, during a standard 10 second 

pulse power or equivalent test, divided by such maximum power and the SAE net power of the heat 

engine. Sec. 30B(d)(3)(C)(i). 
25 

Table 5, below, shows the conservation credit. 

Table 5.–Conservation Credit 

Estimated Lifetime Fuel Savings 

(gallons of gasoline) 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 vehicles

The amount of credit for the purchase of an advanced lean burn technology vehicle is the 

sum of two components: (1) 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 4, above, 

and (2) a conservation credit based on the estimated lifetime fuel savings of a qualified vehicle 

compared to a comparable 2002 model year vehicle as described in Table 5, above. The amounts 

of the credits are determined after an adjustment is made to account for the different BTU 

content of gasoline and the fuel utilized by the lean burn technology vehicle. 

A qualified advanced lean burn technology vehicle is a passenger automobile or a light 

truck that incorporates direct injection, achieves at least 125 percent of the 2002 model year city 

fuel economy, and for 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 

qualified advanced lean burn technology vehicle must be placed in service before January 1, 

2011.Limitation on number of qualified hybrid and advanced lean burn technology vehicles 

eligible for the credit 

There is a limitation on the number of qualified hybrid vehicles (weighing 8,500 pounds 

or less) and advanced lean burn technology 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 the 

60,000th hybrid and advanced lean burn technology vehicle sale occurring after December 31, 

2005. 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, for example, summing the sales of qualified hybrid vehicles of all weight classes 

and all sales of qualified advanced lean burn technology vehicles, if a manufacturer records the 
26 

sale of its 60,000th qualified vehicle in February of 2007, taxpayers purchasing such vehicles 

from the manufacturer may claim the full amount of the credit on their purchases of qualified 

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 qualified 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 qualified vehicles of the 

manufacturer. After June 30, 2008, no credit may be claimed for purchases of hybrid vehicles or 

advanced lean burn technology vehicles sold by the manufacturer. 

Hybrid vehicles that are medium and heavy trucks

In the case of a qualified hybrid 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 

qualified hybrid 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 qualified hybrid 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 qualified hybrid vehicle weighing more than 26,000 pounds, the 

maximum allowable incremental cost amount is $30,000. 

A qualified hybrid 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 qualified 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.21

Alternative fuel vehicle

The credit for the purchase of a new alternative fuel vehicle is 50 percent of the 

incremental cost of such vehicle, plus an additional 30 percent if the vehicle meets certain 

 21 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. 
27 

emissions standards. The incremental cost of any new qualified alternative fuel vehicle is the 

excess of the manufacturer’s suggested retail price for such vehicle over the price for a gasoline 

or diesel fuel vehicle of the same model. To be eligible for the credit, a qualified alternative fuel 

vehicle must be purchased before January 1, 2011. 

The amount of the credit varies depending on the weight of the qualified vehicle. The 

credit is subject to certain maximum applicable incremental cost amounts. Table 6, below, 

shows the maximum permitted incremental cost for the purpose of calculating the credit for 

alternative fuel vehicles by vehicle weight class as well as the maximum credit amount for such 

vehicles. 

Table 6.–Maximum Allowable Incremental Cost for Calculation 

of Alternative Fuel Vehicle Credit 

Vehicle Gross Weight Rating (pounds) Maximum Allowable 

Incremental Cost 

Maximum 

Allowable Credit 

Vehicle ≤ 8,500................................................. $5,000 $4,000 

8,500 < vehicle ≤ 14,000.................................... $10,000 $8,000 

14,000 < vehicle ≤ 26,000.................................. $25,000 $20,000 

26,000 < vehicle................................................. $40,000 $32,000 

Alternative fuels comprise compressed natural gas, liquefied natural gas, liquefied 

petroleum gas, hydrogen, and any liquid fuel that is at least 85 percent methanol. Generally, 

qualified alternative fuel vehicles are vehicles that operate only on qualified alternative fuels and 

are incapable of operating on gasoline or diesel (except to the extent gasoline or diesel fuel is 

part of a qualified mixed fuel, described below). 

Certain mixed fuel vehicles, that is vehicles weighing more than 14,000 pounds 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 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 by vehicle type and 

vehicle inertia weight class. For this purpose, “vehicle inertia weight class” has the same 

meaning as when defined in regulations prescribed by the EPA 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. 
28 

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 

7,000 11.3 12.1 

8,500 11.3 12.1 

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. 

Explanation of Provision

Treatment of alternative motor vehicle credit as a personal credit

The provision modifies the alternative motor vehicle credit by treating the nonbusiness 

portion of that credit as a personal credit. As a result, in the event Congress extends the 

provision allowing personal credits to offset the alternative minimum tax, the alternative motor 

vehicle credit will be allowable against the alternative minimum tax. 
29 

Plug-in hybrid vehicle credit

The provision allows a credit for each qualified plug-in hybrid vehicle placed in service. 

A qualified plug-in hybrid vehicle is a motor vehicle that (1) meets certain emissions standards; 

(2) is propelled to a significant extent by an electric motor that draws electricity from a battery 

that has a capacity of at least four kilowatt-hours and is capable of being recharged from an 

external source of electricity; and (3) is also propelled to a significant extent by a source other 

than an electric motor or has a significant onboard source of electricity which also recharges the 

battery which powers the electric motor. Qualified vehicles must have a gross weight of less 

than 14,000 pounds. In addition, qualified vehicles weighing less than 8,500 pounds must be 

passenger automobiles or light trucks. 

The base amount of the plug-in hybrid vehicle credit is $4,000. If the qualified vehicle 

draws propulsion from a battery with at least five kilowatt-hours of capacity, the credit amount is 

increased by $200, plus another $200 for each kilowatt-hour of battery capacity in excess of five 

kilowatt-hours, up to a maximum additional credit of $2,000. 

In general, the credit is available to the vehicle owner, including the lessor of a vehicle 

subject to lease. If the qualified vehicle is used by certain tax-exempt organizations, 

governments, or 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. 

There is a limitation on the number of qualified plug-in hybrid 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 the 60,000th plug-in hybrid vehicle sale. 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. 

The basis of any qualified vehicle is reduced by the amount of the credit. To the extent a 

vehicle is eligible for credit as a qualified plug-in hybrid vehicle, it is not eligible for credit as a 

qualified hybrid vehicle under section 30B. The portion of the credit attributable to vehicles of a 

character subject to an allowance for depreciation is treated as part of the general business credit; 

the nonbusiness portion of the credit is allowable to the extent of the excess of the regular tax 

and the alternative minimum tax (reduced by certain other credits) for the taxable year. 

Effective Date

The plug-in hybrid vehicle credit provision is effective for taxable years beginning after 

December 31, 2008. The provision treating the nonbusiness portion of the alternative motor 

vehicle credit as a personal credit is effective for taxable years beginning after December 31, 

2007. 
30 

2. Extension and modification of alternative fuel vehicle refueling property credit (sec. 202 

of the bill and sec. 30C of the Code) 

Present Law

Taxpayers may claim a 30-percent credit for the cost of installing qualified 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.22 The credit may not exceed $30,000 per taxable year, per 

location, in the case of qualified refueling property used in a trade or business and $1,000 per 

taxable year per location in the case of qualified refueling property installed on property which is 

used as a principal residence. 

Qualified refueling property is property (not including a building or its structural 

components) for the storage or dispensing of a clean-burning fuel into the fuel tank of a motor 

vehicle propelled by such fuel, but only if the storage or dispensing of the fuel is at the point 

where such fuel is delivered into the fuel tank of the motor vehicle. The use of such property 

must begin with the taxpayer. 

Clean-burning 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, or 

hydrogen. In addition, any mixture of biodiesel and diesel fuel, determined without regard to 

any use of kerosene and containing at least 20 percent biodiesel, qualifies as a clean fuel. 

Credits for qualified refueling property used in a trade or business are part of the general 

business credit and may be carried back for one year and forward for 20 years. Credits for 

residential qualified refueling property cannot exceed for any taxable year the difference between 

the taxpayer’s regular tax (reduced by certain other credits) and the taxpayer’s tentative 

minimum tax. Generally, in the case of qualified refueling property sold to a tax-exempt entity, 

the taxpayer selling the property may claim the credit. 

A taxpayer’s basis in qualified refueling property is reduced by the amount of the credit. 

In addition, no credit is available for property used outside the United States or for which an 

election to expense has been made under section 179. 

The credit is available for property placed in service after December 31, 2005, and 

(except in the case of hydrogen refueling property) before January 1, 2010. In the case of 

hydrogen refueling property, the property must be placed in service before January 1, 2015. 

 22 Sec. 30C. 
31 

Explanation of Provision

The provision extends and modifies the credit for installing alternative fuel refueling 

property. The provision extends for one year (through 2010) the credit for installing nonhydrogen alternative fuel refueling property. The provision also increases the credit amount to 

50 percent of the cost of the qualified property and raises to $50,000 per taxable year, per 

location, the limit with respect to depreciable qualified property. 

Effective Date

The provision is effective for property placed in service after the date of enactment, in 

taxable years ending after such date. 

3. Modification of limitation on automobile depreciation (sec. 203 of the bill and sec. 280F 

of the Code) 

Present Law

Limitation on depreciation

A taxpayer is allowed to recover, through annual depreciation deductions, the cost of 

certain property used in a trade or business or for the production of income. The amount of the 

depreciation deduction allowed with respect to tangible property for a taxable year is determined 

under the modified accelerated cost recovery system (“MACRS”). Under MACRS, passenger 

automobiles generally are recovered over a recovery period of five years. However, section 

280F imposes a limitation on the amount of the annual depreciation deduction for passenger 

automobiles, including certain trucks and vans. 

For passenger automobiles subject to the limitation and placed in service in 2007, the 

maximum amount of allowable depreciation is $3,060 for the year in which the vehicle is placed 

in service, $4,900 for the second year, $2,850 for the third year, and $1,775 for the fourth and 

later years. For trucks and vans subject to the limitation and placed in service in 2007, the 

maximum amount of allowable depreciation is $3,260 for the year in which the vehicle was 

placed in service, $5,200 for the second year, $3,050 for the third year, and $1,875 for the fourth 

and later years. The limitation applies to the combined amount of the depreciation deduction and 

the section 179 expensing otherwise permitted under present law for the vehicle. 

For purposes of the limitation, passenger automobiles are defined broadly to include any 

4-wheeled vehicles that are manufactured primarily for use on public streets, roads, and 

highways and which are rated at 6,000 pounds unloaded gross vehicle weight or less.23 In the 

case of a truck or a van, the depreciation limitation applies to vehicles that are rated at 6,000 

 23 Sec. 280F(d)(5)(A). Exceptions are provided for any ambulance, hearse, or any vehicle used 

by the taxpayer directly in the trade or business of transporting persons or property for compensation or 

hire. 
32 

pounds gross vehicle weight or less. Sport utility vehicles under this weight amount are 

generally treated as a truck for the purpose of applying the limitation.24

Limitation on expensing

A taxpayer that satisfies limitations on annual investment may elect under section 179 to 

deduct (or “expense”) the cost of qualifying property, rather than to recover such costs through 

depreciation deductions.25 For taxable years beginning in 2008, the maximum amount that a 

taxpayer may expense is $250,000 of the cost of qualifying property placed in service for the 

taxable year. The $250,000 amount is reduced (but not below zero) by the amount by which the 

cost of qualifying property placed in service during the taxable year exceeds $800,000. For 

taxable years beginning in 2009 and 2010, the maximum amount that a taxpayer may expense is 

$125,000 of the cost of qualifying property placed in service for the taxable year. The $125,000 

amount is reduced (but not below zero) by the amount by which the cost of qualifying property 

placed in service during the taxable year exceeds $500,000. The $125,000 and $500,000 

amounts are indexed for inflation. In general, qualifying property is defined as depreciable 

tangible personal property that is purchased for use in the active conduct of a trade or business. 

Off-the-shelf computer software placed in service in taxable years beginning before 2011 is 

treated as qualifying property. For taxable years beginning in 2011 and thereafter, other rules 

apply.26

Passenger automobiles subject to the section 280F limitation are eligible for section 179 

expensing only to the extent of the dollar limitations in section 280F. The limitation applies to 

the combined amount of the depreciation deduction and the section 179 expensing for the taxable 

year otherwise permitted under present law for the vehicle. 

For sport utility vehicles above the 6,000 pound weight rating, which are not subject to 

the limitation under section 280F, the maximum cost that may be expensed for any taxable year 

under section 179 is $25,000.27 For purposes of this provision, a sport utility vehicle is defined 

as any 4-wheeled vehicle which: (1) is primarily designed or which can be used to carry 

 24 Rev. Proc. 2007-30, 2007-18 I.R.B. 1104. 

25 Additional section 179 incentives are provided with respect to qualified property meeting 

applicable requirements that is used by a business in an empowerment zone (sec. 1397A), a renewal 

community (sec. 1400J), or the Gulf Opportunity Zone (sec. 1400N(e)). 

26 Under the rules in effect for taxable years beginning in 2011 and thereafter, a taxpayer with a 

sufficiently small amount of annual investment may elect to deduct up to $25,000 of the cost of 

qualifying property placed in service for the taxable year. The $25,000 amount is reduced (but not below 

zero) by the amount by which the cost of qualifying property placed in service during the taxable year 

exceeds $200,000. The $25,000 and $200,000 amounts are not indexed for inflation. In general, 

qualifying property is defined as depreciable tangible personal property that is purchased for use in the 

active conduct of a trade or business (not including off-the-shelf computer software). An expensing 

election may be revoked only with consent of the Commissioner (sec. 179(c)(2)). 

27 Sec. 179(b)(6). 
33 

passengers over public streets, roads, or highways; (2) is not subject to the section 280F 

limitations; and (3) is rated at not more than 14,000 pounds gross vehicle weight. Certain 

vehicles are excluded from this limitation, including any vehicle which: (1) is designed to have a 

seating capacity of more than nine persons behind the driver’s seat; (2) is equipped with a cargo 

area of at least six feet in interior length which is an open area or is designed for use as an open 

area but is enclosed by a cap and is not readily accessible directly from the passenger 

compartment; or (3) has an integral enclosure, fully enclosing the driver compartment and load 

carrying device, does not have seating rearward of the driver’s seat, and has no body section 

protruding more than 30 inches ahead of the leading edge of the windshield. 

Explanation of Provision

The provision modifies the definition of passenger automobiles subject to the section 

280F limitation on depreciation and expensing. The provision defines passenger automobiles to 

include any 4-wheeled vehicles that are designed primarily to carry passengers over public 

streets, roads, or highways and which are rated at 14,000 pounds gross vehicle weight or less. 

Thus, under the provision, sport utility vehicles with a gross vehicle weight over 6,000 through 

14,000 pounds (as well as those rated at 6,000 pounds or less gross vehicle weight) generally are 

subject to the section 280F limitation on depreciation and expensing. 

The provision contains two categories of excepted vehicles: exempt-design vehicles and 

exempt-use vehicles. Some of the exceptions included within these two categories are included 

in present law, but some of the exceptions are new under the provision. An exempt-design 

vehicle is any vehicle: (1) which, by reason of its nature or design, is not likely to be used more 

than a de minimis amount for personal purposes;28 (2) which is designed to have a seating 

capacity of more than nine persons behind the driver’s seat; (3) which is equipped with a cargo 

area of at least five feet in interior length, which is an open area or is designed for use as an open 

area but is enclosed by a cap and is not readily accessible directly from the passenger 

compartment; or (4) has an integral enclosure, fully enclosing the driver compartment and load 

carrying device, does not have seating rearward of the driver’s seat, and has no body section 

protruding more than 30 inches ahead of the leading edge of the windshield.29

An exempt-use vehicle is: (1) any ambulance, hearse, or combination ambulance-hearse 

used by the taxpayer directly in a trade or business; (2) any vehicle used by the taxpayer directly 

in the trade or business of transporting persons or property for compensation or hire; or (3) any 

truck or van if substantially all of the use of such vehicle by the taxpayer is directly in (a) a 

farming business, (b) the transportation of a substantial amount of equipment, supplies, or 

inventory, or (c) the moving or delivery of property which requires substantial cargo capacity. 

Thus, for example, a taxpayer in the business of plumbing who purchases a truck for purposes of 

 28 Examples of such vehicles include qualified nonpersonal use vehicles as defined in Treas. Reg. 

sec. 1.274-5T(k). 

29 The last three exceptions are the same as the present law exceptions to the $25,000 expensing 

limitation in section 179(b)(6), except that “cargo area of at least five feet in interior length” has been 

reduced from six feet. 
34 

transporting pipes, plumbing fixtures, and plumbing tools to a job site would not be subject to the 

limitations of section 280F as modified by the provision. Similarly, a taxpayer who purchases a 

van and equips the van to carry ice cream as part of a business of making curbside sales of ice 

cream from the van to customers would not be subject to the limitations of section 280F as 

modified by the provision. On the other hand, if a taxpayer in the trade or business of real estate 

brokerage or sale purchases a vehicle, in part to transport sales brochures and “for sale” signs, 

the purchase of a vehicle generally would be subject to the limitations under section 280F as 

modified by the provision as such sales brochures and signs do not represent a substantial 

amount of equipment or supplies to the business of brokerage. 

The provision imposes a recapture requirement in the case of any vehicle that is not a 

passenger automobile by reason of being an exempt-use vehicle to the extent the vehicle ceases 

to be an exempt-use vehicle in any taxable year after the taxable year in which the vehicle is 

placed in service. The provision also repeals the separate rule in present-law section 179(b)(6) 

relating to expensing of sport utility vehicles. 

Effective Date

The provision is effective for property placed in service after date of enactment. 

4. Extension of credits for biodiesel and extension and modification of renewable diesel 

credit (sec. 211 of the bill and secs. 40A, 6426, and 6427 of the Code) 

Present Law

Income tax credit 

Overview

The Code provides an income tax credit for biodiesel fuels (the “biodiesel fuels credit”).30 

The biodiesel fuels credit is the sum of three credits: (1) the biodiesel mixture credit, (2) the 

biodiesel credit, and (3) the small agri-biodiesel producer credit. The biodiesel fuels credit 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 does not apply to 

fuel sold or used after December 31, 2008. 

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 (“ASTM”) 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. 

 30 Sec. 40A. 
35 

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 that identifies the product produced and the percentage of 

biodiesel and agri-biodiesel in the product. 

Biodiesel mixture credit

The biodiesel mixture credit is 50 cents for each gallon of biodiesel (other than agribiodiesel) used by the taxpayer in the production of a qualified biodiesel mixture. For agribiodiesel, the credit is $1.00 per 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 that 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. 

Small agri-biodiesel producer credit

The Code provides a small agri-biodiesel producer income tax credit, in addition to the 

biodiesel and biodiesel fuel mixture credits. 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 agribiodiesel 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 agri-biodiesel in the 

fuel tank of such other person; or (2) used by the producer for any purpose described in (a), (b), 

or (c). 

Biodiesel mixture excise tax credit

The Code also provides an excise tax credit for biodiesel mixtures.31 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 

 31 Sec. 6426(c). 
36 

(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.32 

The credit is not available for any sale or use for any period after December 31, 2008. 

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.33 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.34 Thus, if the person has no section 4081 liability, the credit is refundable. The 

Secretary is not required to make payments with respect to biodiesel fuel mixtures sold or used 

after December 31, 2008. 

Renewable diesel

“Renewable diesel” is diesel fuel that (1) is derived from biomass (as defined in section 

45K(c)(3)) using a thermal depolymerization process; (2) meets the registration requirements for 

fuels and fuel additives established by the Environmental Protection Agency (“EPA”) under 

section 211 of the Clean Air Act (42 U.S.C. sec. 7545); and (3) meets the requirements of the 

ASTM D975 or D396. ASTM D975 provides standards for diesel fuel suitable for use in diesel 

engines. ASTM D396 provides standards for fuel oil intended for use in fuel-oil burning 

equipment, such as furnaces. 

For purposes of the Code, renewable diesel is generally treated the same as biodiesel. 

Like biodiesel, the incentive may be taken as an income tax credit, an excise tax credit, or as a 

payment from the Secretary.35 The incentive for renewable diesel is $1.00 per gallon. There is 

no small producer credit for renewable diesel. The incentives for renewable diesel expire after 

December 31, 2008. 

Pursuant to IRS Notice 2007-37, the Secretary provided that fuel produced as a result of 

co-processing biomass and petroleum feedstock (“co-produced fuel”) qualifies for the renewable 

diesel incentives to the extent of the fuel attributable to the biomass in the mixture. In co-

 32 Sec. 6426(c)(4). 

33 Sec. 6427(e). 

34 Sec. 6427(e)(1) and (e)(3). 

35 Secs. 40A(f), 6426(c), and 6427(e). 
37 

produced fuel, the fuel attributable to the biomass does not exist as a distinct separate quantity 

prior to mixing, sale or use. 

Explanation of Provision

The provision extends an additional two years (through December 31, 2010) the income 

tax credit, excise tax credit, and payment provisions for biodiesel (including agri-biodiesel) and 

renewable diesel. 

The provision modifies the definition of renewable diesel. The provision eliminates the 

requirement that the fuel be made using a thermal depolymerization process, and eliminates the 

ASTM D396 standard from the definition of renewable diesel. The provision also permits the 

Secretary to identify standards equivalent to ASTM D975 for renewable diesel suitable for use in 

diesel-powered highway vehicles. Thus, under the proposal, renewable diesel is liquid fuel 

derived from biomass which meets (a) the registration requirements for fuels and fuel additives 

established by the EPA under section 211 of the Clean Air Act, and (b) the requirements of the 

ASTM D975 or other equivalent standard approved by the Secretary for fuels to be used in 

diesel-powered highway vehicles. 

The provision also overrides IRS Notice 2007-37 with respect to co-produced fuel, 

providing that renewable diesel does not include any fuel derived from co-processing biomass 

with a feedstock that is not biomass. The de minimis use of catalysts, such as hydrogen, is 

permitted under the provision. 

Effective Date

The provision is generally effective for fuel produced, and sold or used, after December 

31, 2008. The provision making co-produced fuel ineligible for the renewable diesel incentives 

is effective for fuel produced, and sold or used, after February 13, 2008. 

5. Clarification that credits for fuel are designed to provide an incentive for United States 

production (sec. 212 of the bill, and secs. 40, 40A, 6426 and 6427 of the Code) 

Present Law

The Code provides per-gallon incentives relating to the following qualified fuels: alcohol 

(including ethanol), biodiesel (including agri-biodiesel), renewable diesel, and certain alternative 

fuels.36 The incentives may be taken as an income tax credit, excise tax credit or payment. The 

provisions are coordinated so that a gallon of qualified fuel is only taken into account once. If 

the qualified fuel is part of a qualified fuel mixture, the incentives apply only to the amount of 

qualified fuel in the mixture. 

For alcohol, other than ethanol, the amount of the credit is 60 cents per gallon. For 

ethanol, the credit is generally 51 cents per gallon, and an extra 10 cents per gallon is available 

 36 See secs. 40, 40A, 6426, and 6427(e). 
38 

for small ethanol producers. The alcohol incentives expire after December 31, 2010. The 

amount of the credit for biodiesel is 50 cents. For agri-biodiesel and renewable diesel, the credit 

amount is $1.00 per gallon. An extra 10 cents per gallon is available for small producers of agribiodiesel. The biodiesel, agri-biodiesel and renewable diesel incentives expire after December 

31, 2008. The credit amount for alternative fuels is 50 cents per gallon. The incentives for 

alternative fuels expire after September 30, 2009 (after September 30, 2014, in the case of 

liquefied hydrogen). 

The Code is silent as to the geographic limitations on where the fuel must be produced, 

used, or sold. For imported ethanol, there is an offsetting tariff of 54 cents per gallon. This tariff 

expires January 1, 2009. 

Explanation of Provision

The provision makes a technical correction to clarify that foreign-produced fuel that is 

used or sold for use outside of the United States is ineligible for the per-gallon tax incentives 

relating to alcohol, biodiesel, renewable diesel, and alternative fuel. 

On a prospective basis, the provision limits the per-gallon tax incentives for biodiesel 

(including agri-biodiesel), renewable diesel, and alternative fuels to fuels produced in the United 

States that are used or sold for use in the United States. For this purpose, “United States” 

includes any possession of the United States. The taxpayer must obtain a certification from the 

producer of the fuel that identifies the product produced and the location of such production. For 

example, whether part of a qualified mixture or alone, biodiesel only qualifies for the credit if the 

biodiesel is produced in the United States for consumption in the United States. Thus, foreignproduced biodiesel, although imported into the United States for consumption in the United 

States, does not qualify for the credit. Similarly, domestically produced biodiesel sold for export 

does not qualify for the credit. 

Effective Date

For foreign-produced alcohol and biodiesel used outside of the United States, the 

provision is effective as if included in section 301 of the American Jobs Creation Act of 2004; 

for foreign produced renewable diesel used outside of the United States, the provision is 

effective as if included in section 1346(c) of the Energy Policy Act of 2005; and for foreign 

produced alternative fuel used outside of the United States, the provision is effective as if 

included in section 11113 of the Safe, Accountable, Flexible, Efficient Transportation Equity 

Act: A Legacy for Users. The provision as it relates to the restriction of the payments and 

credits to fuel both produced and used in the United States is effective for fuel produced, sold or 

used after December 31, 2008. 
39 

6. Credit for production of cellulosic alcohol (sec. 213 of the bill and sec. 40 of the Code) 

Present Law

Alcohol fuels income tax credit

The alcohol fuels credit is the sum of three credits: the alcohol mixture credit, the alcohol 

credit, and the small ethanol producer credit. Generally, the alcohol fuels credit expires after 

December 31, 2010.37

Taxpayers are eligible for an income tax credit of 51 cents per gallon of ethanol (60 

cents in the case of alcohol other than ethanol) used in the production of a qualified mixture (the 

“alcohol mixture credit”). A “qualified mixture” means a mixture of alcohol and gasoline, (or of 

alcohol and a special fuel) sold by the taxpayer as fuel, or used as fuel by the taxpayer producing 

such mixture. The term “alcohol” includes methanol and ethanol but does not include 

(1) alcohol produced from petroleum, natural gas, or coal (including peat), or (2) alcohol with a 

proof of less than 150. 

Taxpayers may reduce their income taxes by 51 cents for each gallon of ethanol, which is 

not in a mixture with gasoline or other special fuel, that they sell at the retail level as vehicle fuel 

or use themselves as a fuel in their trade or business (“the alcohol credit”). For alcohol other 

than ethanol, the rate is 60 cents per gallon.38 

In the case of ethanol, the Code provides an additional 10-cents-per-gallon credit for up 

to 15 million gallons per year for small producers. Small producer is defined generally as 

persons whose production capacity does not exceed 60 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 a 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) be used by the producer for any purpose described in (1)(a), (b), or (c). 

A cooperative may pass through the small ethanol producer credit to its patrons. 

The alcohol fuels credit is includible in income and is treated as a general business credit. 

In addition, the alcohol fuels credit is allowable against the alternative minimum tax. 

 37 The alcohol fuels credit is unavailable when, for any period before January 1, 2011, the tax 

rates for gasoline and diesel fuels drop to 4.3 cents per gallon. 

38 In the case of any alcohol (other than ethanol) with a proof that is at least 150 but less than 

190, the credit is 45 cents per gallon (the “low-proof blender amount”). For ethanol with a proof that is at 

least 150 but less than 190, the low-proof blender amount is 37.78 cents. 
40 

Special allowance for cellulosic biomass ethanol plant property

For purposes of depreciation, section 168(l) allows an additional first-year deduction 

equal to 50 percent of the adjusted basis of qualified cellulosic biomass ethanol plant property. 

Qualified cellulosic biomass ethanol plant property means property used in the U.S. solely to 

produce cellulosic biomass ethanol. For this purpose, cellulosic biomass ethanol means ethanol 

produced by hydrolysis of any lignocellulosic or hemicellulosic matter that is available on a 

renewable or recurring basis. In order to qualify, the property generally must be placed in 

service before January 1, 2013.

Explanation of Provision

The provision adds a fourth component to the alcohol fuels credit. The provision 

provides an income tax credit of 50 cents per gallon for certain qualified cellulosic fuel 

production of the producer for the taxable year. Qualified cellulosic fuel production is any 

cellulosic alcohol that is produced by a cellulosic alcohol fuel producer during the taxable year 

and is (1) sold by such producer to another person (a) for use by such other person in the 

production of a 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 alcohol at retail to another person and places such alcohol in the fuel tank of 

such other person; or (2) used by the producer for any purpose described in (1)(a), (b), or (c). 

Cellulosic alcohol is alcohol that (1) is produced in the United States for consumption in 

the United States and (2) is derived from any lignocellulosic or hemicellulosic matter that is 

available on a renewable or recurring basis. Examples of such lignocellulosic or hemicellulosic 

matter include dedicated energy crops and trees, wood and wood residues, plants, grasses, 

agricultural residues, fibers, animal wastes and other waste materials, and municipal solid waste. 

“Cellulosic alcohol fuel producer” means any person who produces cellulosic alcohol in a 

trade or business and is registered with the Secretary as a cellulosic alcohol fuel producer. 

Effective Date

The provision is effective for alcohol produced after December 31, 2008. 

7. Extension of transportation fringe benefit to bicycle commuters (sec. 221 of the bill 

and sec. 132 of the Code) 

Present Law

Qualified transportation fringe benefits provided by an employer are excluded from an 

employee's gross income.39 Qualified transportation fringe benefits include parking, transit 

passes, and vanpool benefits. In addition, no amount is includible in income of an employee 

merely because the employer offers the employee a choice between cash and qualified 

 39 Code sec. 132(f). 
41 

transportation fringe benefits. Up to $220 (for 2008) per month of employer-provided parking is 

excludable from income. Up to $115 (for 2008) per month of employer-provided transit and 

vanpool benefits are excludable from gross income. These amounts are indexed annually for 

inflation, rounded to the nearest multiple of $5. 

Under present law, qualified transportation fringe benefits include a cash reimbursement 

by an employer to an employee. However, in the case of transit passes, a cash reimbursement is 

considered a qualified transportation fringe benefit only if a voucher or similar item which may 

be exchanged only for a transit pass is not readily available for direct distribution by the 

employer to the employee. 

Explanation of Provision

The provision adds a qualified bicycle commuting reimbursement fringe benefit as a 

qualified transportation fringe benefit. A qualified bicycle commuting reimbursement fringe 

benefit means, with respect to a calendar year, any employer reimbursement during the 15-month 

period beginning with the first day of such calendar year of an employee for reasonable expenses 

incurred by the employee during the calendar year for the purchase and repair of a bicycle, 

bicycle improvements, and bicycle storage, provided that the bicycle is regularly used for travel 

between the employee's residence and place of employment. 

The maximum amount that can be excluded from an employee’s gross income for a 

calendar year on account of a bicycle commuting reimbursement fringe benefit is the applicable 

annual limitation for the employee for that calendar year. The applicable annual limitation for an 

employee for a calendar year is equal to the product of $20 multiplied by the number of the 

employee’s qualified bicycle commuting months for the year. The $20 amount is not indexed for 

inflation. A qualified bicycle commuting month means with respect to an employee any month 

for which the employee does not receive any other qualified transportation fringe benefit and 

during which the employee regularly uses a bicycle for a substantial portion of travel between 

the employee’s residence and place of employment. Thus, no amount is credited towards an 

employee’s applicable annual limitation for any month in which an employee’s usage of a 

bicycle is infrequent or constitutes an insubstantial portion of the employee’s commute. 

A bicycle commuting reimbursement fringe benefit cannot be funded by an elective 

salary contribution on the part of an employee. 

Effective Date

The provision is effective for taxable years beginning after December 31, 2008. 
42 

8. Restructuring of New York Liberty Zone tax credits (sec. 222 of the bill and secs. 1400K 

and 1400L of the Code) 

Present Law

In general

Present law includes a number of incentives to invest in property located in the New 

York Liberty Zone (“NYLZ”), which is the area located on or south of Canal Street, East 

Broadway (east of its intersection with Canal Street), or Grand Street (east of its intersection with 

East Broadway) in the Borough of Manhattan in the City of New York, New York. These 

incentives were enacted following the terrorist attack in New York City on September 11, 

2001.40

Special depreciation allowance for qualified New York Liberty Zone property

Section 1400L(b) allows an additional first-year depreciation deduction equal to 30 

percent of the adjusted basis of qualified NYLZ property. 41 In order to qualify, property 

generally must be placed in service on or before December 31, 2006 (December 31, 2009 in the 

case of nonresidential real property and residential rental property). 

The additional first-year depreciation deduction is allowed for both regular tax and 

alternative minimum tax purposes for the taxable year in which the property is placed in service. 

A taxpayer is allowed to elect out of the additional first-year depreciation for any class of 

property for any taxable year. 

In order for property to qualify for the additional first-year depreciation deduction, it 

must meet all of the following requirements. First, the property must be property to which the 

general rules of the Modified Accelerated Cost Recovery System (“MACRS”)42 apply with (1) 

an applicable recovery period of 20 years or less, (2) water utility property (as defined in section 

168(e)(5)), (3) certain nonresidential real property and residential rental property, or (4) 

computer software other than computer software covered by section 197. A special rule 

precludes the additional first-year depreciation under this provision for (1) qualified NYLZ 

 40 In addition to the NYLZ provisions described above, other NYLZ incentives are provided: (1) 

$8 billion of tax-exempt private activity bond financing for certain nonresidential real property, 

residential rental property and public utility property is authorized to be issued after March 9, 2002, and 

before January 1, 2010; and (2) $9 billion of additional tax-exempt advance refunding bonds is available 

after March 9, 2002, and before January 1, 2006, with respect to certain State or local bonds outstanding 

on September 11, 2001. 

41 The amount of the additional first-year depreciation deduction is not affected by a short 

taxable year. 

42 A special rule precludes the additional first-year depreciation deduction for property that is 

required to be depreciated under the alternative depreciation system of MACRS. 
43 

leasehold improvement property43 and (2) property eligible for the additional first-year 

depreciation deduction under section 168(k) (i.e., property is eligible for only one 30 percent 

additional first-year depreciation). Second, substantially all of the use of such property must be 

in the NYLZ. Third, the original use of the property in the NYLZ must commence with the 

taxpayer on or after September 11, 2001. Finally, the property must be acquired by purchase44

by the taxpayer after September 10, 2001 and placed in service on or before December 31, 2006. 

For qualifying nonresidential real property and residential rental property the property must be 

placed in service on or before December 31, 2009 in lieu of December 31, 2006. Property will 

not qualify if a binding written contract for the acquisition of such property was in effect before 

September 11, 2001. 45

Nonresidential real property and residential rental property are eligible for the additional 

first-year depreciation only to the extent such property rehabilitates real property damaged, or 

replaces real property destroyed or condemned as a result of the terrorist attacks of September 

11, 2001. 

Property that is manufactured, constructed, or produced by the taxpayer for use by the 

taxpayer qualifies for the additional first-year depreciation deduction if the taxpayer begins the 

manufacture, construction, or production of the property after September 10, 2001, and the 

property is placed in service on or before December 31, 200646 (and all other requirements are 

met). Property that is manufactured, constructed, or produced for the taxpayer by another person 

under a contract that is entered into prior to the manufacture, construction, or production of the 

property is considered to be manufactured, constructed, or produced by the taxpayer. 

 43 Qualified NYLZ leasehold improvement property is defined in another provision. Leasehold 

improvements that do not satisfy the requirements to be treated as “qualified NYLZ leasehold 

improvement property” may be eligible for the 30 percent additional first-year depreciation deduction 

(assuming all other conditions are met). 

44 For purposes of this provision, purchase is defined as under section 179(d). 

45 Property is not precluded from qualifying for the additional first-year depreciation merely 

because a binding written contract to acquire a component of the property is in effect prior to September 

11, 2001. 

46 December 31, 2009 with respect to qualified nonresidential real property and residential rental 

property. 
44 

Explanation of Provision

Repeal of certain NYLZ incentives

The provision repeals the NYLZ incentive for the additional first-year depreciation 

allowance of 30 percent for nonresidential real property and residential rental property as of the 

date of enactment of this provision.47

Creation of New York Liberty Zone Tax Credits

The provision provides a credit against tax imposed for any payroll period by section 

3402 (related to withholding for wages paid) for which a New York Liberty Zone governmental 

unit is liable under section 3403. The credit is equal to such portion of the qualifying project 

expenditure amounts allocated to the governmental unit for the calendar year that such 

governmental unit allocates to such period. The amount of the credit allowed for any payroll 

period shall be treated as a payment to the Secretary on the day on which the wages were paid to 

the employee, but only to the extent the governmental unit actually deducted and withheld such 

wages for the applicable period. A New York Liberty Zone governmental unit is the State of 

New York, the City of New York, or any agency or instrumentality of such State or city. 

Qualifying project expenditure amount means, with respect to any calendar year, the sum 

of (1) the total expenditures paid or incurred during such calendar year by all New York Liberty 

Zone governmental units and the Port Authority of New York and New Jersey for any portion of 

qualifying projects located wholly within the City of New York, and (2) any such expenditures 

paid or incurred in any preceding calendar year beginning after the date of enactment of this 

provision and not previously allocated. 

A qualifying project is any transportation infrastructure project, including highways, 

mass transit systems, railroads, airports, ports, and waterways, in or connecting with the New 

York Liberty Zone, which is designated as a qualifying project by the Governor of the State of 

New York and the Mayor of the City of New York. 

The Governor of the State of New York and the Mayor of the City of New York are to 

jointly allocate to each New York Liberty Zone governmental unit the portion of the qualifying 

expenditure amount that may be taken into account by such governmental unit to determine the 

credit for any calendar year in the credit period. The credit period is the 12-year period 

beginning on January 1, 2008. Aggregate amounts allocated may not exceed $2 billion during 

the credit period. There is also an annual limit on allocations equal to (1) $169 million for each 

year of the credit period, plus (2) any amounts in (1) that were authorized to be allocated for 

prior calendar years in the credit period but not so allocated. 

If amounts allocated to a New York Liberty Zone governmental unit exceed the 

aggregate taxes for which such unit is liable under section 3403, the excess may be carried to the 

 47 In the case of nonresidential real property and residential rental property acquired pursuant to a 

binding contract in effect on such enactment date, the provision terminates on December 31, 2009. 
45 

succeeding calendar year and added to the allocation for that calendar year. If a New York 

Liberty Zone governmental unit does not use an amount allocated to it within the time prescribed 

by the Governor of the State of New York and the Mayor of the City of New York, such amounts 

will be treated as if never allocated, and thus they may be reallocated by the Governor and 

Mayor. 

Under the provision, any expenditure for a qualifying project taken into account for 

purposes of the credit shall be considered State and local funds for the purpose of any Federal 

program. 

The Governor of the State of New York and the Mayor of the City of New York must 

jointly submit to the Secretary an annual report that certifies the qualifying project expenditure 

amounts for the calendar year, the amount allocated to each New York Liberty Zone 

governmental unit, and any other such information as the Secretary may require. 

Effective Date

The provision is effective on the date of enactment. 
46 

B. Other Conservation Provisions 

1. Qualified energy conservation bonds (sec. 231 of the bill and new sec. 54C of the Code) 

Present law

Tax-exempt bonds

In general

Subject to certain Code restrictions, interest on bonds issued by State and local 

government generally is excluded from gross income for Federal income tax purposes. Bonds 

issued by State and local governments 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 which are repaid with governmental funds. Private activity 

bonds are bonds in which the State or local government serves as a conduit providing financing 

to nongovernmental persons. For this purpose, the term “nongovernmental person” generally 

includes the Federal Government and all other individuals and entities other than States or local 

governments. The exclusion from income for interest on State and local bonds does not apply to 

private activity bonds, unless the bonds are issued for certain permitted purposes (“qualified 

private activity bonds”) and other Code requirements are met. 

Private activity bond tests

Present law provides two tests for determining whether a State or local bond is in 

substance a private activity bond, the private business test and the private loan test.48 

Private business tests

Private business use and private payments result in State and local bonds being private 

activity bonds if both parts of the two-part private business test are satisfied– 

• More than 10 percent of the bond proceeds is to be used (directly or indirectly) by a 

private business (the “private business use test”); and 

• More than 10 percent of the debt service on the bonds is secured by an interest in 

property to be used in a private business use or to be derived from payments in 

respect of such property (the “private payment test”).49 

 48 Sec. 141(b) and (c). 

49 The 10-percent private business use and payment threshold is reduced to five percent for 

private business uses that are unrelated to a governmental purpose also being financed with proceeds of 

the bond issue. In addition, as described more fully below, the 10-percent private business use and 

private payment thresholds are phased-down for larger bond issues for the financing of certain “output” 

facilities. The term output facility includes electric generation, transmission, and distribution facilities. 
47 

Private business use generally includes any use by a business entity (including the 

Federal government), which occurs pursuant to terms not generally available to the general 

public. For example, if bond-financed property is leased to a private business (other than 

pursuant to certain short-term leases for which safe harbors are provided under Treasury 

regulations), bond proceeds used to finance the property are treated as used in a private business 

use, and rental payments are treated as securing the payment of the bonds. Private business use 

also can arise when a governmental entity contracts for the operation of a governmental facility 

by a private business under a management contract that does not satisfy Treasury regulatory safe 

harbors regarding the types of payments made to the private operator and the length of the 

contract.50 

Private loan test

The second standard for determining whether a State or local bond is a private activity 

bond is whether an amount exceeding the lesser of (1) five percent of the bond proceeds or (2) $5 

million is used (directly or indirectly) to finance loans to private persons. Private loans include 

both business and other (e.g., personal) uses and payments by private persons; however, in the 

case of business uses and payments, all private loans also constitute private business uses and 

payments subject to the private business test. Present law provides that the substance of a 

transaction governs in determining whether the transaction gives rise to a private loan. In 

general, any transaction which transfers tax ownership of property to a private person is treated 

as a loan. 

Qualified private activity bonds

As stated, interest on private activity bonds is taxable unless the bonds meet the 

requirements for qualified private activity bonds. Qualified private activity bonds permit States 

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

activities. The definition of qualified private activity bonds includes an exempt facility bond, or 

qualified mortgage, veterans’ mortgage, small issue, redevelopment, 501(c)(3), or student loan 

bond (sec. 141(e)). The definition of exempt facility bond includes bonds issued to finance 

certain transportation facilities (airports, ports, mass commuting, and high-speed intercity rail 

facilities); qualified residential rental projects; privately owned and/or operated utility facilities 

(sewage, water, solid waste disposal, and local district heating and cooling facilities, certain 

private electric and gas facilities, and hydroelectric dam enhancements); public/private 

educational facilities; qualified green building and sustainable design projects; and qualified 

highway or surface freight transfer facilities (sec. 142(a)). 

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 2007, the State volume cap, which is indexed for inflation, equals $85 

per resident of the State, or $256.24 million, if greater. 

 50 See Treas. Reg. sec. 1.141-3(b)(4) and Rev. Proc. 97-13, 1997-1 C.B. 632. 
48 

Arbitrage restrictions

The tax exemption for State and local bonds also does not apply to any arbitrage bond.51 

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.52 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. 

Indian tribal governments

Indian tribal governments are provided with a tax status similar to State and local 

governments for specified purposes under the Code.53 Among the purposes for which a tribal 

government is treated as a State is the issuance of tax-exempt bonds. However, bonds issued by 

tribal governments are subject to limitations not imposed on State and local government issuers. 

Tribal governments are authorized to issue tax-exempt bonds only if substantially all of the 

proceeds are used for essential governmental functions or certain manufacturing facilities.54 

Clean renewable energy bonds

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

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 qualified 

projects. “Qualified projects” are facilities that qualify for the tax credit under section 45 (other 

than Indian coal production facilities), without regard to the placed-in-service date requirements 

of that section.55 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 renewable energy bond lenders. 

The term “qualified borrower” includes a governmental body (including an Indian tribal 

 51 Sec. 103(a) and (b)(2). 

52 Sec. 148. 

53 Sec. 7871. 

54 Sec. 7871(c). 

55 In addition, Notice 2006-7 provides that qualified projects include any facility owned by a 

qualified borrower that is functionally related and subordinate to any facility described in section 45(d)(1) 

through (d)(9) and owned by such qualified borrower. 
49 

government) and a mutual or cooperative electric company. A clean renewable 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. 

Unlike tax-exempt bonds, CREBs are not interest-bearing obligations. Rather, the 

taxpayer holding CREBs on a credit allowance date is 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. 

CREBs are subject to a maximum maturity limitation. 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. In addition, 

the Code requires level amortization of CREBs during the period such bonds are outstanding. 

CREBs also are subject to the arbitrage requirements of section 148 that apply to 

traditional tax-exempt bonds. Principles under section 148 and the regulations thereunder apply 

for purposes of determining the yield restriction and arbitrage rebate requirements applicable to 

CREBs. 

In addition to the above requirements, at least 95 percent of the proceeds of CREBs must 

be spent 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.” The 

five-year spending period may be extended by the Secretary upon the qualified issuer’s request 

demonstrating that the failure to satisfy the five-year requirement is due to reasonable cause and 

the projects will continue to proceed with due diligence. 

Issuers of CREBs are required to report issuance to the IRS in a manner similar to the 

information returns required for tax-exempt bonds. There is a national CREB limitation of $1.2 

billion. The maximum amount of CREBs that may be allocated to qualified projects of 

governmental bodies is $750 million. CREBs must be issued before January 1, 2009. 

Explanation of Provision

The provision creates a new category of tax-credit bonds, qualified energy conservation 

bonds. Qualified energy conservation bonds may be used to finance qualified conservation 

purposes. 

The term “qualified conservation purpose” means: 

1. Capital expenditures incurred for purposes of: reducing energy consumption in 

publicly owned buildings by at least 20 percent, implementing green community 

programs, rural development involving the production of electricity from renewable 
50 

energy resources, or any qualified facility determined under section 45(d) (other than 

refined coal and Indian coal production facilities); 

2. Expenditures with respect to facilities or grants that support research in: (a) 

development of cellulosic ethanol or other nonfossil fuels; (b) technologies for the 

capture and sequestration of carbon dioxide produced through the use of fossil fuels; 

(c) increasing the efficiency of existing technologies for producing nonfossil fuels; (d) 

automobile battery technologies and other technologies to reduce fossil fuel 

consumption in transportation; and (e) technologies to reduce energy use in buildings; 

3. Mass commuting facilities and related facilities that reduce the consumption of 

energy, including expenditures to reduce pollution from vehicles used for mass 

commuting; 

4. Demonstration projects designed to promote the commercialization of: (a) green 

building technology; (b) conversion of agricultural waste for use in the production of 

fuel or otherwise; (c) advanced battery manufacturing technologies; (d) technologies 

to reduce peak-use of electricity; and (e) technologies for the capture and sequestration 

of carbon dioxide emitted from combusting fossil fuels in order to produce electricity; 

and 

5. Public education campaigns to promote energy efficiency (other than movies, 

concerts, and other events held primarily for entertainment purposes). 

There is a national limitation on qualified energy conservation bonds of $3.6 billion. 

Allocations of qualified energy conservation bonds are made to the States with sub-allocations to 

large local governments. Allocations are made to the States according to their respective 

populations, reduced by any sub-allocations to large local governments (defined below) within 

the States. Sub-allocations to large local governments shall be an amount of the national 

qualified energy conservation bond limitation that bears the same ratio to the amount of such 

limitation that otherwise would be allocated to the State in which such large local government is 

located as the population of such large local government bears to the population of such State. 

The term large local government means: any municipality or county if such municipality or 

county has a population of 100,000 or more. Indian tribal governments also are treated as large 

local governments for these purposes (without regard to population). 

Each State or large local government receiving an allocation of qualified energy 

conservation bonds may further allocate issuance authority to issuers within such State or large 

local government. However, any allocations to issuers within the State or large local government 

shall be made in a manner that results in not less than 70 percent of the allocation of qualified 

energy conservation bonds to such State or large local government being used to designate bonds 

that are not private activity bonds (i.e., the bond cannot meet the private business tests or the 

private loan test of section 141). 

Under the provision, 100 percent of the available project proceeds of qualified energy 

conservation bonds must be used for qualified conservation purposes. In the case of qualified 

conservation bonds issued as private activity bonds, 100 percent of the available project proceeds 
51 

must be used for capital expenditures. In addition, qualified energy conservation bonds only 

may be issued by Indian tribal governments to the extent such bonds are issued for purposes that 

satisfy the present law requirements for tax-exempt bonds issued by Indian tribal governments 

(i.e., essential governmental functions and certain manufacturing purposes). 

The provision requires 100 percent of the available project proceeds of qualified energy 

conservation bonds to be used within the three-year period that begins on the date of issuance. 

The provision defines available project proceeds as proceeds from the sale of the issue less 

issuance costs (not to exceed two percent) and any investment earnings on such sale proceeds. 

To the extent less than 100 percent of the available project proceeds are used to finance qualified 

conservation purposes during the three-year spending period, bonds will continue to qualify as 

qualified energy conservation bonds if unspent proceeds are used within 90 days from the end of 

such three-year period to redeem bonds. The three-year spending period may be extended by the 

Secretary upon the issuer’s request demonstrating that the failure to satisfy the three-year 

requirement is due to reasonable cause and the projects will continue to proceed with due 

diligence. 

Qualified energy conservation bonds generally are subject to the arbitrage requirements 

of section 148. However, available project proceeds invested during the three-year spending 

period are not subject to the arbitrage restrictions (i.e., yield restriction and rebate requirements). 

In addition, amounts invested in a reserve fund are not subject to the arbitrage restrictions to the 

extent: (1) such fund is funded at a rate not more rapid than equal annual installments; (2) such 

fund is funded in a manner reasonably expected to result in an amount not greater than an 

amount necessary to repay the issue; and (3) the yield on such fund is not greater than the 

average annual interest rate of tax-exempt obligations having a term of 10 years or more that are 

issued during the month the qualified energy conservation bonds are issued. 

The maturity of qualified energy conservation bonds is the term that the Secretary 

estimates will result in the present value of the obligation to repay the principal on such bonds 

being equal to 50 percent of the face amount of such bonds, using as a discount rate the average 

annual interest rate of tax-exempt obligations having a term of 10 years or more that are issued 

during the month the qualified energy conservation bonds are issued. 

As with present-law tax credit bonds, the taxpayer holding qualified energy conservation 

bonds on a credit allowance date is entitled to a tax credit. The credit rate on the bonds is 

determined by the Secretary to be a rate that permits issuance of the bonds without discount and 

interest cost to the qualified issuer. The amount of the tax credit to the holder is determined by 

multiplying the bond’s credit rate by the face amount on the holder’s bond. The credit accrues 

quarterly, 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. Unused 

credits in one year may be carried forward to succeeding taxable years. In addition, credits may 

be separated from the ownership of the underlying bond similar to how interest coupons can be 

stripped for interest-bearing bonds. 

Issuers of qualified energy conservation bonds are required to certify that the financial 

disclosure requirements that apply to State and local bonds offered for sale to the general public 

are satisfied with respect to any Federal, State, or local government official directly involved 
52 

with the issuance of such bonds. The provision authorizes the Secretary to impose additional 

financial reporting requirements by regulation. 

Effective Date

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

2. Extension and modification of energy efficient existing homes credit (sec. 232 of the bill 

and sec. 25C of the Code) 

Present Law

Code section 25C provides a 10-percent credit for the purchase of qualified energy 

efficiency improvements to existing homes. 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 August 8, 2005 (or, in the case of metal roofs with appropriate 

pigmented coatings, meets the Energy Star program requirements), if (1) such component is 

installed in or on a dwelling located in the United States and owned and used by the taxpayer as 

the taxpayer’s principal residence; (2) the original use of such component commences with the 

taxpayer; and (3) such component reasonably can be expected to remain in use for at least five 

years. The credit is nonrefundable. 

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. 

Additionally, code section 25C provides specified credits for the purchase of specific 

energy efficient property. 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. 

 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 
53 

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 with energy 

efficiency of at least the highest efficiency tier established by the Consortium for Energy 

Efficiency as in effect on Jan. 1, 2006, and (5) a natural gas, propane, or oil water heater which 

has an energy factor of at least 0.80. 

Under section 25C, the maximum credit for a taxpayer for all taxable years is $500, and 

no more than $200 of such credit may be attributable to expenditures on windows. 

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. 

The credit applies to property placed in service prior to January 1, 2008. 

Explanation of Provision

The provision extends the credit for two years, through December 31, 2009, but does not 

extend the credit for geothermal heat pump property. 

The provision adds biomass fuel property to the list of qualified energy efficient building 

property eligible for a $300 credit. Biomass fuel property is a stove that burns biomass fuel to 

heat a dwelling unit located in the United States and used as a principal residence by the 

taxpayer, or to heat water for such dwelling unit, and that has a thermal efficiency rating of at 

least 75 percent. Biomass fuel is any plant-derived fuel available on a renewable or recurring 

basis, including agricultural crops and trees, wood and wood waste and residues (including wood 

pellets), plants (including aquatic plants), grasses, residues, and fibers. 

Effective Date

The provision is effective for expenditures after December 31, 2007. 

3. Energy efficient commercial buildings deduction (sec. 233 of the bill and sec. 179D of the 

Code) 

Present Law

In general

Code section 179D provides a deduction equal to energy-efficient commercial building 

property expenditures made by the taxpayer. Energy-efficient commercial building property 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 
54 

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 $1.80 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 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. 

The deduction is effective for property placed in service after December 31, 2005 and 

prior to January 1, 2009. 

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. Under the statute, the system specific 

targets would not necessarily need to be the same for each system. Rather, Treasury is given the 

regulatory authority to establish the system-specific targets in order to take into account the 

differences in the separate systems' abilities to contribute to overall building energy power and 

cost reduction. However, as noted above, the separate system requirements must collectively 
55 

achieve a 50 percent reduction in overall building energy use if each system achieved its system 

specific target. In regulatory guidance issued thus far on this issue, IRS notice 2006-52 requires 

a 16 and 2/3 percent reduction in total energy and power costs from each of the three systems. 

The maximum allowable deduction is $0.60 per square foot for each separate system. 

Interim rules for lighting systems

In the case of system-specific partial deductions, in general no deduction is allowed until 

the Secretary establishes system-specific targets.56 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 30 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 under the interim rule. 

Explanation of Provision

The provision extends the energy efficient commercial buildings deduction for five years, 

through December 31, 2013. 

Effective Date

The provision is effective on the date of enactment. 

4. Extension and modification of energy efficient appliance credit (sec. 234 of the bill and 

sec. 45M of the Code) 

Present Law

The provision provides a credit for the eligible production of certain energy-efficient 

dishwashers, clothes washers, and refrigerators. 

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 100 times the 

“energy savings percentage,” but may not exceed $100 per dishwasher. The energy saving 

percentage is defined as the change in the energy factor (EF) required by the Energy Star 

program between 2007 and 2005 divided by the EF requirement for 2007. The EF required in 

2005 for the Energy Star program was 0.58 and it was 0.65 in 2007, for a change of 0.07. The 

 56 IRS Notice 2006-52 has set a target of a 16 2/3 percent reduction in total energy and power 

costs for each of the three subsystems. 
56 

energy saving percentage is thus 0.07 / 0.65, which when multiplied by 100 times $3 equals 

$32.31 per refrigerator. 

The credit for clothes washers equals $100 for clothes washers manufactured in 2006-

2007 that meet the requirements of the Energy Star program that are in effect for clothes washers 

in 2007. 

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 2006 receive a $75 credit. Refrigerators that 

achieve a 20 to 25 percent energy saving receive a (i) $125 credit if manufactured in 2006-2007. 

Refrigerators that achieve at least a 25 percent energy saving receive a (ii) $175 credit if 

manufactured in 2006-2007. 

Appliances eligible for the credit include only those produced in the United States and 

that exceed the average amount of U.S. production from the three prior calendar years for each 

category of appliance. In the case of refrigerators, eligible production is U.S. production that 

exceeds 110 percent of the average amount of U.S. production from the three prior calendar 

years. 

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. 

Explanation of Provision

The provision extends and modifies the energy efficient appliance credit. 

The provision provides modified credits for eligible production as follows: 
57 

Dishwashers

1. $45 in the case of a dishwasher that is manufactured in calendar year 2008 or 2009 

that uses no more than 324 kilowatt hours per year and 5.8 gallons per cycle, and 

2. $75 in the case of a dishwasher that is manufactured in calendar year 2008, 2009, or 

2010 and that uses no more than 307 kilowatt hours per year and 5.0 gallons per cycle 

(5.5 gallons per cycle for dishwashers designed for greater than 12 place settings). 

Clothes washers

1. $75 in the case of a residential top-loading clothes washer manufactured in calendar 

year 2008 that meets or exceeds a 1.72 modified energy factor and does not exceed a 

8.0 water consumption factor, and 

2. $125 in the case of a residential top-loading clothes washer manufactured in calendar 

year 2008 or 2009 that meets or exceeds a 1.8 modified energy factor and does not 

exceed a 7.5 water consumption factor, 

3. $150 in the case of a residential or commercial clothes washer manufactured in 

calendar year 2008, 2009 or 2010 that meets or exceeds a 2.0 modified energy factor 

and does not exceed a 6.0 water consumption factor, and 

4. $250 in the case of a residential or commercial clothes washer manufactured in 

calendar year 2008, 2009, or 2010 that meets or exceeds a 2.2 modified energy factor 

and does not exceed a 4.5 water consumption factor. 

Refrigerators

1. $50 in the case of a refrigerator manufactured in calendar year 2008 that consumes at 

least 20 percent but not more than 22.9 percent less kilowatt hours per year than the 

2001 energy conservation standards, 

2. $75 in the case of a refrigerator that is manufactured in calendar year 2008 or 2009 

that consumes at least 23 percent but no more than 24.9 percent less kilowatt hours per 

year than the 2001 energy conservation standards, 

3. $100 in the case of a refrigerator that is manufactured in calendar year 2008, 2009 or 

2010 that consumes at least 25 percent but not more than 29.9 percent less kilowatt 

hours per year than the 2001 energy conservation standards, and 

4. $200 in the case of a refrigerator manufactured in calendar year 2008, 2009 or 2010 

that consumes at least 30 percent less energy than the 2001 energy conservation 

standards. 

Appliances eligible for the credit include only those that exceed the average amount of 

production from the two prior calendar years for each category of appliance, rather than the 
58 

present law three prior calendar years. Additionally, the special rule with respect to refrigerators 

is eliminated. 

The aggregate credit amount allowed with respect to a taxpayer for all taxable years 

beginning after December 31, 2007 may not exceed $75 million, with the exception that the $200 

refrigerator credit and the $250 clothes washer credit are not limited. 

The term “modified energy factor” means the modified energy factor established by the 

Department of Energy for compliance with the Federal energy conservation standard. 

The term “gallons per cycle” means, with respect to a dishwasher, the amount of water, 

expressed in gallons, required to complete a normal cycle of a dishwasher. 

The term “water consumption factor” means, with respect to a clothes washer, the 

quotient of the total weighted per-cycle water consumption divided by the cubic foot (or liter) 

capacity of the clothes washer. 

Effective Date

The provision applies to appliances produced after December 31, 2007. 

5. Five-year applicable recovery period for depreciation of qualified energy management 

devices (sec. 235 of the bill and sec. 168 of the Code) 

Present Law

A taxpayer generally must capitalize the cost of property used in a trade or business and 

recover such cost over time through annual deductions for depreciation or amortization. 

Tangible property generally is depreciated under the modified accelerated cost recovery system 

(“MACRS”), which determines depreciation by applying specific recovery periods, placed-inservice conventions, and depreciation methods to the cost of various types of depreciable 

property.57 The class lives of assets placed in service after 1986 are generally set forth in 

Revenue Procedure 87-56.58 Assets included in class 49.14, describing assets used in the 

transmission and distribution of electricity for sale and related land improvements, are assigned a 

class life of 30 years and a recovery period of 20 years. 

Explanation of Provision

The provision provides a five-year recovery period for any qualified energy management 

device. For purposes of the provision, a qualified energy management device means any energy 

management device which: (1) is installed on real property of a customer of the taxpayer; and 

(2) is placed in service by a taxpayer who is a supplier of electric energy or a provider of electric 

 57 Sec. 168. 

58 1987-2 C.B. 674 (as clarified and modified by Rev. Proc. 88-22, 1988-1 C.B. 785). 
59 

energy services that provides all commercial and residential customers with net metering upon 

the customer’s request. For purposes of the provision, net metering means allowing customers a 

credit for providing electricity to the supplier or provider. 

An energy management device is any time-based meter and related communication 

equipment which is capable of being used by the taxpayer as part of a system that: (1) measures 

and records electricity usage data on a time-differentiated basis in at least 24 separate time 

segments per day; (2) provides for the exchange of information between the supplier or provider 

and the customer’s energy management device in support of time-based rates or other forms of 

demand response; and (3) provides data to such supplier or provider so that the supplier or 

provider can provide energy usage information to customers electronically. 

Effective Date

The provision is effective for property placed in service after the date of enactment. 
60 

TITLE III − REVENUE PROVISIONS 

A. Limitation of Deduction for Income Attributable to Domestic Production 

of Oil, Gas, or Primary Products Thereof 

(sec. 301 of the bill and sec. 199 of the Code) 

Present Law

In general

Section 199 of the Code provides a deduction from taxable income (or, in the case of an 

individual, adjusted gross income) that is equal to a portion of the taxpayer’s qualified 

production activities income. For taxable years beginning after 2009, the deduction is nine 

percent of such income. For taxable years beginning in 2005 and 2006, the deduction is three 

percent of income and, for taxable years beginning in 2007, 2008 and 2009, the deduction is six 

percent of income. However, the deduction for a taxable year is limited to 50 percent of the 

wages properly allocable to domestic production gross receipts paid by the taxpayer during the 

calendar year that ends in such taxable year.59

Qualified production activities income

In general, “qualified production activities income” is equal to domestic production gross 

receipts (defined by section 199(c)(4)), reduced by the sum of: (1) the costs of goods sold that 

are allocable to such receipts; (2) other expenses, losses, or deductions which are properly 

allocable to such receipts. 

Domestic production gross receipts

“Domestic production gross receipts” generally are gross receipts of a taxpayer that are 

derived from: (1) any sale, exchange or other disposition, or any lease, rental or license, of 

qualifying production property (“QPP”) that was manufactured, produced, grown or extracted 

(“MPGE”) by the taxpayer in whole or in significant part within the United States;60 (2) any sale, 

exchange or other disposition, or any lease, rental or license, of qualified film produced by the 

taxpayer; (3) any sale, exchange or other disposition of electricity, natural gas, or potable water 

 59 For purposes of the provision, “wages” include the sum of the amounts of wages as defined in 

section 3401(a) and elective deferrals that the taxpayer properly reports to the Social Security 

Administration with respect to the employment of employees of the taxpayer during the calendar year 

ending during the taxpayer’s taxable year. Elective deferrals include elective deferrals as defined in 

section 402(g)(3), amounts deferred under section 457, and, for taxable years beginning after December 

31, 2005, designated Roth contributions (as defined in section 402A). 

60 Domestic production gross receipts include gross receipts of a taxpayer derived from any sale, 

exchange or other disposition of agricultural products with respect to which the taxpayer performs 

storage, handling or other processing activities (other than transportation activities) within the United 

States, provided such products are consumed in connection with, or incorporated into, the manufacturing, 

production, growth or extraction of qualifying production property (whether or not by the taxpayer).
61 

produced by the taxpayer in the United States; (4) construction activities performed in the United 

States;61 or (5) engineering or architectural services performed in the United States for 

construction projects located in the United States. 

Congress granted Treasury broad authority to “prescribe such regulations as are 

necessary to carry out the purposes” of section 199.62 In defining MPGE for purposes of section 

199, Treasury described the following as MPGE activities: manufacturing, producing, growing, 

extracting, installing, developing, improving, and creating QPP; making QPP out of scrap, 

salvage, or junk material as well as from new or raw material by processing, manipulating, 

refining, or changing the form of an article, or by combining or assembling two or more articles; 

cultivating soil, raising livestock, fishing, and mining minerals.63

The regulations specifically cite an example of oil refining activities in describing the “in 

whole or in significant part” test in determining domestic production gross receipts. QPP is 

generally considered to be MPGE in significant part by the taxpayer within the United States if 

such activities are substantial in nature taking into account all of the facts and circumstances, 

including the relative value added by, and relative cost of, the taxpayer’s MPGE activity within 

the United States, the nature of the QPP, and the nature of the MPGE activity that the taxpayer 

performs within the United States.64 The following example is provided in the regulations to 

illustrate this “substantial in nature” standard: 

X purchases from Y, an unrelated person, unrefined oil extracted outside the 

United States. X refines the oil in the United States. The refining of the oil by X 

is an MPGE activity that is substantial in nature.65

Electricity or natural gas transmission or distribution

Although domestic production gross receipts include the gross receipts from the 

production in the United States of electricity and gas, the provision excludes gross receipts from 

the transmission or distribution of electricity and gas. Thus, in the case of a taxpayer who owns 

a facility for the production of electricity (either as part of a regulated utility or an independent 

power facility), the taxpayer’s gross receipts from the production of electricity at that facility are 

qualified domestic production gross receipts. However, to the extent that the taxpayer is an 

 61 For this purpose, construction activities include activities that are directly related to the 

erection or substantial renovation of residential and commercial buildings and infrastructure. Substantial 

renovation would include structural improvements, but not mere cosmetic changes, such as painting, that 

is not performed in connection with activities that otherwise constitute substantial renovation. 

62 Sec. 199(d)(9). 

63 Treas. Reg. sec. 1.199-3(e)(1). 

64 Treas. Reg. sec. 1.199-3(g)(2). 

65 Treas. Reg. sec. 1.199-3(g)(5), Example 1. 
62 

integrated producer that generates electricity and delivers electricity to end users, any gross 

receipts properly attributable to the transmission of electricity from the generating facility to a 

point of local distribution and any gross receipts properly attributable to the distribution of 

electricity to final customers are not qualified domestic production gross receipts. 

For example, taxpayer A owns a wind turbine that generates electricity and taxpayer B 

owns a high-voltage transmission line that passes near taxpayer A’s wind turbine and ends near 

the system of local distribution lines of taxpayer C.66 Taxpayer A sells the electricity produced 

at the wind turbine to taxpayer C and contracts with taxpayer B to transmit the electricity 

produced at the wind turbine to taxpayer C who sells the electricity to his or her customers using 

taxpayer C’s distribution network. The gross receipts received by taxpayer A for the sale of 

electricity produced at the wind turbine constitute qualifying domestic production gross receipts. 

The gross receipts of taxpayer B from transporting taxpayer A’s electricity to taxpayer C are not 

qualifying domestic production gross receipts. Likewise, the gross receipts of taxpayer C from 

distributing the electricity are not qualifying domestic production gross receipts. Also, if 

taxpayer A made direct sales of electricity to customers in taxpayer C’s service area and taxpayer 

C received remuneration for the distribution of electricity, the gross receipts of taxpayer C are 

not qualifying domestic production gross receipts. If taxpayers A, B, and C are all related 

taxpayers, then taxpayers A, B, and C must allocate gross receipts to production activities, 

transmission activities, and distribution activities in a manner consistent with the preceding 

example. 

The same principles apply in the case of the natural gas industry. In the case of natural 

gas, production activities generally are all activities involved in extracting natural gas from the 

ground and processing the gas into pipeline quality gas. Such activities would produce 

qualifying domestic production gross receipts. However, gross receipts of a taxpayer attributable 

to transmission of pipeline quality gas from a natural gas field (or from a natural gas processing 

plant) to a local distribution company’s citygate (or to another customer) are not qualified 

domestic production gross receipts. Likewise, gas purchased by a local gas distribution company 

and distributed from the citygate to the local customers does not give rise to domestic production 

gross receipts.67

Drilling oil or gas wells

The Treasury regulations provide that qualifying construction activities performed in the 

United States include activities relating to drilling an oil or gas well.68 Under the regulations, 

activities the cost of which are intangible drilling and development costs within the meaning of 

 66 H.R. Rep. No. 108-755 (conference report for the American Jobs Creation Act of 2004), 

footnote 28 at 272. 

67 Id. 

68 Treas. Reg. sec. 1.199-3(m)(1)(i). 
63 

Treas. Reg. sec. 1.612-4 are considered to be activities constituting construction for purposes of 

determining domestic production gross receipts.69

Qualifying in-kind partnerships

In general, an owner of a pass-thru entity is not treated as conducting the qualified 

production activities of the pass-thru entity, and vice versa. However, the Treasury regulations 

provide a special rule for “qualifying in-kind partnerships,” which are defined as partnerships 

engaged solely in the extraction, refining, or processing of oil, natural gas, petrochemicals, or 

products derived from oil, natural gas, or petrochemicals in whole or in significant part within 

the United States, or the production or generation of electricity in the United States.70 In the case 

of a qualifying in-kind partnership, each partner is treated as MPGE or producing the property 

MPGE or produced by the partnership that is distributed to that partner.71 If a partner of a 

qualifying in-kind partnership derives gross receipts from the lease, rental, license, sale, 

exchange, or other disposition of the property that was MPGE or produced by the qualifying inkind partnership, then, provided such partner is a partner of the qualifying in-kind partnership at 

the time the partner disposes of the property, the partner is treated as conducting the MPGE or 

production activities previously conducted by the qualifying in-kind partnership with respect to 

that property.72

Alternative minimum tax

The deduction for domestic production activities is allowed for purposes of computing 

alternative minimum taxable income (including adjusted current earnings). The deduction in 

computing alternative minimum taxable income is determined by reference to the lesser of the 

qualified production activities income (as determined for the regular tax) or the alternative 

minimum taxable income (in the case of an individual, adjusted gross income as determined for 

the regular tax) without regard to this deduction. 

Explanation of Provision

The provision excludes gross receipts of any major integrated oil company (as defined in 

section 167(h)(5)(B)) derived from the production, refining, processing, transportation, or 

distribution of oil, gas, or any primary product thereof from the term “domestic production gross 

receipts” for purposes of section 199. The term “primary product” has the same meaning as 

when used in section 927(a)(2)(C), as in effect before its repeal. The Treasury regulations define 

the term “primary product from oil” to mean crude oil and all products derived from the 

destructive distillation of crude oil, including volatile products, light oils such as motor fuel and 

 69 Treas. Reg. sec. 1.199-3(m)(2)(iii). 

70 Treas. Reg. sec. 1.199-9(i)(2). 

71 Treas. Reg. sec. 1.199-9(i)(1). 

72 Id. 
64 

kerosene, distillates such as naphtha, lubricating oils, greases and waxes, and residues such as 

fuel oil.73 Additionally, a product or commodity derived from shale oil which would be a 

primary product from oil if derived from crude oil is considered a primary product from oil.74 

The term “primary product from gas” is defined as all gas and associated hydrocarbon 

components from gas wells or oil wells, whether recovered at the lease or upon further 

processing, including natural gas, condensates, liquefied petroleum gases such as ethane, 

propane, and butane, and liquid products such as natural gasoline.75 These primary products and 

processes are not intended to represent either the only primary products from oil or gas or the 

only processes from which primary products may be derived under existing and future 

technologies.76 Examples of nonprimary products include, but are not limited to, petrochemicals, 

medicinal products, insecticides, and alcohols.77

The provision also reduces the section 199 deduction for taxpayers, other than major 

integrated oil companies, that have oil related qualified production activities income for any 

taxable year beginning after 2009 by three percent of the least of (1) oil related qualified 

production activities income for the taxable year, (2) qualified production activities income for 

the taxable year, or (3) taxable income (determined without regard to the section 199 deduction). 

The term “oil related qualified production activities income” is defined as the qualified 

production activities income which is attributable to the production, refining, processing, 

transportation, or distribution of oil, gas, or any primary product thereof during such taxable 

year. 

Effective Date

The provision is effective for taxable years beginning after December 31, 2008. 

 73 Treas. Reg. sec. 1.927(a)-1T(g)(2)(i). 

74 Id. 

75 Treas. Reg. sec. 1.927(a)-1T(g)(2)(ii). 

76 Treas. Reg. sec. 1.927(a)-1T(g)(2)(iii). 

77 Treas. Reg. sec. 1.927(a)-1T(g)(2)(iv). 
65 

B. Require Taxpayers to Use an Arm’s-Length Fair-Market Value Price 

for Purposes of Calculating FOGEI and FORI; Treat 

Industry-Specific Taxes as Attributable Solely to FOGEI 

(sec. 302 of the bill and sec. 907 of the Code) 

Present Law

In general

Foreign tax credit

The United States taxes its citizens and residents (including U.S. corporations) on their 

worldwide income. Because the countries in which income is earned also may assert their 

jurisdiction to tax the same income on the basis of source, foreign-source income earned by U.S. 

persons may be subject to double taxation. In order to mitigate this possibility, the United States 

generally provides a credit against U.S. tax liability for foreign income taxes paid or accrued.78 

In the case of foreign income taxes paid or accrued by a foreign subsidiary, a U.S. parent 

corporation is generally entitled to an indirect (also referred to as a deemed paid) credit for those 

taxes when it receives an actual or deemed distribution of the underlying earnings from the 

foreign subsidiary.79 

Foreign tax credit limitations

The foreign tax credit generally is limited to the U.S. tax liability on a taxpayer’s foreignsource income. This general limitation is intended to ensure that the credit serves its purpose of 

mitigating double taxation of foreign-source income without offsetting the U.S. tax on U.S.-

source income.80 

In addition, this limitation is calculated separately for various categories of income, 

generally referred to as “separate limitation categories.” The total amount of the foreign tax 

credit used to offset the U.S. tax on income in each separate limitation category may not exceed 

the proportion of the taxpayer’s U.S. tax which the taxpayer’s foreign-source taxable income in 

that category bears to its worldwide taxable income in that category. The separate limitation 

rules are intended to reduce the extent to which excess foreign taxes paid in a high-tax foreign 

jurisdiction can be “cross-credited” against the residual U.S. tax on low-taxed foreign-source 

income.81 

 78 Sec. 901. 

79 Secs. 902 and 960. 

80 Sec. 904(a). 

81 Sec. 904(d). For taxable years beginning prior to January 1, 2007, section 904(d) provides 

eight separate baskets as a general matter, and effectively many more in situations in which various 

special rules apply. The American Jobs Creation Act of 2004 reduced the number of baskets from nine to 
66 

Special limitation on credits for foreign extraction taxes and taxes on foreign oil 

related income 

In addition to the foreign tax credit limitations that apply to all foreign tax credits, a 

special limitation is placed on foreign income taxes on foreign oil and gas extraction income 

(“FOGEI”).82 Under this special limitation, amounts claimed as taxes paid on FOGEI of a U.S. 

corporation qualify as creditable taxes (if they otherwise so qualify) only to the extent they do 

not exceed the product of the highest marginal U.S. tax rate on corporations (presently 35 

percent) multiplied by such extraction income. Foreign taxes paid in excess of that amount on 

such income are, in general, neither creditable nor deductible. The amount of any such taxes 

paid or accrued (or deemed paid) in any taxable year which exceeds the FOGEI limitation may 

be carried back to the immediately preceding taxable year and carried forward 10 taxable years 

and credited (not deducted) to the extent that the taxpayer otherwise has excess FOGEI limitation 

for those years.83 

A similar special limitation applies, in theory, to foreign taxes paid on foreign oil related 

income (“FORI”) in certain cases where the foreign law imposing such amount of tax is 

structured, or in fact operates, so that the amount of tax imposed with respect to foreign oil 

related income will generally be “materially greater,” over a “reasonable period of time,” than 

the amount generally imposed on income that is neither FORI nor FOGEI.84 Under the FORI 

rules, if this theoretical limitation were to apply, then the portion of the foreign taxes on FORI so 

disallowed would be recharacterized as a (non-creditable) deductible expense.85

As a general matter, the FOGEI and FORI rules of section 907 are informed by two 

related but distinct concerns. First, as described by the Staff of the Joint Committee on Taxation 

in 1982, the rules were designed to address the perceived problem of “disguised royalties” being 

improperly treated as creditable foreign taxes: 

When U.S. oil companies began operations in a number of major oil exporting countries, 

they paid only a royalty for the oil extracted since there was generally no applicable income tax 

in those countries. However, in part because of the benefit to the oil companies of imposing an 

income tax, as opposed to a royalty, those countries have adopted taxes applicable to extraction 

income and have labeled them income taxes. Moreover, because of this relative advantage to the 

 

eight for taxable years beginning after December 31, 2002, and further reduced the number of baskets to 

two (i.e., “general” and “passive”) for taxable years beginning after December 31, 2006. Pub. L. No. 

108-357, sec. 404 (2004). 

82 Sec. 907(a). 

83 Sec. 907(f). These carryback and carryforward rules are similar to the general foreign tax 

credit carryback and carryforward rules of section 904(c). 

84 Sec. 907(b). 

85 Treas. Reg. sec. 1.907(a)-0(d). 
67 

oil companies of paying income taxes rather than royalties, many oil-producing nations in the 

post-World II era have tended to increase their revenues from oil extraction by increasing their 

taxes on U.S. oil companies.86 

In addition, the section 907 rules have also been described as intended to prevent the 

crediting of high foreign taxes on FOGEI and FORI against the residual U.S. tax on other types 

of lower-taxed foreign source income.87 Consistent with this concern, between 1975 and 1982 

the foreign tax credit rules provided a separate limitation category (or “basket”) under the 

general section 904 limitation for foreign oil income (broadly defined to include both FORI and 

FOGEI within the meaning of present law section 907); this separate basket for foreign oil 

income was eliminated when the present law FORI rules were added and other changes were 

made by the Tax Equity and Reform Act of 1982.88 

Determination of FOGEI and FORI

In general

Determination of a taxpayer’s FOGEI and FORI is highly specific to the taxpayer’s 

relevant facts and circumstances. Under section 907(c)(1), FOGEI is defined as taxable income 

derived from sources outside the United States and its possessions from the extraction (by the 

taxpayer or any other person) of minerals from oil or gas wells located outside the United States 

and its possessions or from the sale or exchange of assets used by the taxpayer in the trade or 

business of extracting those minerals.89 The regulations provide that “gross income from 

extraction is determined by reference to the fair market value of the minerals in the immediate 

vicinity of the well.”90

The regulations do not provide specific methods for determining the fair market value of 

the extracted oil or gas in the immediate vicinity of the well, but simply provide that all the facts 

and circumstances that exist in the particular case must be considered, including (but not limited 

to) facts and circumstances pertaining to the independent market value (if any) in the immediate 

vicinity of the well, the fair market value at the port of the foreign county, and the relationships 

between the taxpayer and the foreign government.91

 86 Joint Committee on Taxation, Explanation of the Revenue Provisions of the Tax Equity and 

Fiscal Responsibility Act of 1982, (JCS-38-82), December 31, 1982, sec. IV.A.7.a, footnote 63. 

87 H.R. Conf. Rep. No. 103-213, at 646 (1993). 

88 Pub. L. No. 97-248, sec. 211(c) (1982). 

89 Sec. 907(c)(1). 

90 Treas. Reg. sec. 1.907(c)-1(b)(2). 

91 Treas. Reg. sec. 1.907(c)-1(b)(6). 
68 

Section 907(c)(2) defines FORI to include taxable income from the processing of oil and 

gas into their primary products, from the transportation or distribution and sale of oil and gas and 

their primary products, from the disposition of assets used in these activities, and from the 

performance of any other related service.92

As a result of these separate rules governing FOGEI and FORI and the interaction 

between them, a taxpayer’s determination of the amounts of FOGEI and FORI, as well as the 

allocation of foreign taxes to each class of income, can have a significant impact on the 

taxpayer’s overall U.S. tax liability. 

IRS field directive

An October 12, 2004, IRS field directive (the “2004 Field Directive”) sets forth guidance 

to international examiners and specialists on the application of what it describes as the two most 

commonly used methods for determining FOGEI and FORI when there is no ascertainable 

market price for the oil and gas in the immediate vicinity of the well, namely the residual (rate of 

return) method and the proportionate profits method. 

Under the residual (rate of return) method, the taxpayer first calculates FORI by applying 

an assumed after-tax rate of return to the cost of its fixed “FORI assets.” Then, because income 

from the production and sale of oil and gas product is equal to the sum of FORI and FOGEI, 

FOGEI is determined by subtracting FORI (as calculated) from the taxpayer’s total foreign 

income from the production and sale of oil and gas product. 

Under the proportionate profits method, the taxpayer allocates total income from the 

production and sale of the oil or gas product between FOGEI and FORI based on the relative 

costs of the FOGEI and FORI activities. 

Under either method, the taxpayer must determine its total income from the production 

and sale of oil and gas product, and must distinguish between costs and assets classified as 

relating to FOGEI and those relating to FORI. Under the residual (rate of return) method, the 

taxpayer must also determine appropriate rates of return for FORI assets. The 2004 Field 

Directive sets forth examples of FOGEI assets93 and FORI assets,94 and further provides that 

assets that support both FOGEI and FORI may be allocated by any reasonable method.95

 92 Sec. 907(c)(1); Treas. Reg. sec. 1.907(c)-1(d). 

93 Memorandum for Industry Directors (“Field Directive on IRC §907 Evaluating Taxpayer 

Methods of Determining Foreign Oil and Gas Extraction Income (FOGEI) and Foreign Oil Related 

Income (FORI)”), October 12, 2004 (Tax Analysts Doc 2004-23010; 2004 TNT 233-8). By its terms, the 

2004 Field Directive “is not an official pronouncement of the law or the Service’s position and cannot be 

used, cited, or relied upon as such.” 

94 Examples of FOGEI assets include wells, wellheads, and pumping equipment; slug catchers, 

separators, treaters, emulsion breakers and stock tanks needed to obtain marketable crude (for oil 

production); primary separation and dehydration equipment needed to arrive at a gaseous stream in which 
69 

Apportionment of foreign taxes between FOGEI and FORI

Under the Code, foreign taxes will be treated as oil and gas extraction taxes (and thus 

subject to the FOGEI limitation) to the extent they are paid or accrued during the taxable year 

with respect to FOGEI.96 Treasury Regulations generally provide that, if a relevant foreign 

country imposes and collects foreign taxes on a single tax base that consists partly of amounts 

classified as FOGEI and partly of amounts classified as FORI, then such foreign taxes shall be 

allocated in proportion to such amounts of FORI and FOGEI. For instance, suppose that a 

foreign country (“County X”) has a corporate income tax system which taxes, at an aggregate 

rate of 40 percent, all Country X-source oil and gas income (broadly defined, so that all of the 

taxpayer’s Country X-source income will be subject to this tax rate); suppose further that the 

taxpayer’s total Country X taxable income (which is assumed here to be calculated identically 

for U.S. and Country X tax purposes) is $4,000, resulting in a Country X tax of $1,600. This 

$1,600 of tax will be apportioned between FOGEI and FORI in proportion to the relevant 

amounts of the taxpayer’s Country X FOGEI and FORI. 

Explanation of Provision

Under the provision, taxpayers are no longer permitted to calculate FOGEI and FORI 

using the methods described in the 2004 Field Directive; instead, taxpayers must identify the first 

point in time at which the oil or gas has a fair market value which can be determined on the basis 

of either (i) a transfer, in an arm’s-length transaction, of such oil or gas to an unrelated third 

party by the taxpayer, or (ii) the arrival of such oil or gas at a location at which the fair market 

value is readily ascertainable by reason of transactions among unrelated third parties with respect 

to oil or gas that is substantially identical to such oil or gas (taking into account source, location, 

quality, and chemical composition). Thus, for example, where a taxpayer extracts crude oil at an 

offshore platform (and no readily ascertainable fair market value can be determined based upon 

comparable arm’s-length sales in the immediate vicinity of the wellhead) and transports the 

crude oil via underwater pipelines (owned by the taxpayer) to a port facility (where other 

unrelated parties are engaged in arm’s-length purchase and sale transactions involving 

substantially identical crude oil), the taxpayer is required to use the independent fair market 

value of the crude oil at the port facility for purposes of calculating FOGEI. In such 

circumstances, the taxpayer is permitted to deduct the cost of transporting the crude oil to the 

port facility (as measured by its operating expenses attributable to the transportation activity, 

 

hydrocarbons may be recovered (for gas production); lines interconnecting the above; the infrastructuretype equipment to provide for the operation of the above; and structures to physically support the above 

(such as offshore platforms). 

95 Examples of FORI assets include lines that carry natural gas beyond the primary separator and 

dehydration equipment and towards its sales point, and compressors needed to transport through these 

lines; lines that carry marketable crude oil from the premises, as well as pumps needed to transport crude 

oil through these lines; and assets used to process crude oil and natural gas. 

96 Sec. 907(c)(5). 
70 

including depreciation of the pipeline) from its gross income (calculated with reference to the 

relevant independent fair market value so determined) to determine overall FOGEI. 

In addition, the provision also requires that, where a foreign country collects taxes that 

are limited in their application to taxpayers engaged in oil or gas activities, such a taxpayer is 

required to treat the entire amount of such taxes as oil and gas extraction taxes subject to the 

FOGEI limitation (rather than apportioning such taxes between FOGEI and FORI). In such a 

case, the taxpayer treats the entire amount of income on which such taxes are imposed as 

FOGEI. 

Effective Date

The provision is effective for taxable years beginning after date of enactment. 
71 

C. Modifications to Corporate Estimated Tax Payments 

(sec. 303 of the bill) 

Present Law

In general, corporations are required to make quarterly estimated tax payments of their 

income tax liability. For a corporation whose taxable year is a calendar year, these estimated tax 

payments must be made by April 15, June 15, September 15, and December 15. 

Under present law, in the case of a corporation with assets of at least $1 billion, the 

payments due in July, August, and September, 2013, shall be increased to 100.75 percent of the 

payment otherwise due and the next required payment shall be reduced accordingly. 

Explanation of Provision 

The provision increases the otherwise applicable percentage by three percentage points. 

Effective Date

The proposal is effective on the date of enactment. 
72 

TITLE IV – OTHER PROVISIONS 

A. Studies 

1. Carbon audit of provisions of the Internal Revenue Code of 1986 (sec. 401 of the bill) 

Present Law

Present law does not require a review of the Code for provisions that affect carbon 

emissions and climate. The National Research Council is part of the National Academies. The 

National Academy of Sciences serves to investigate, examine, experiment and report upon any 

subject of science whenever called upon to do so by any department of the government. The 

National Research Council was organized by the National Academy of Sciences in 1916 and is 

its principal operating agency for conducting science policy and technical work. 

Explanation of Provision

The provision directs the Secretary to request that the National Academy of Sciences 

undertake a comprehensive review of the Code to identify the types of and specific tax 

provisions that have the largest effects on carbon and other greenhouse gas emissions and to 

generally estimate the magnitude of those effects.97 The report should identify the provisions of 

the Code that are most likely to have significant effects on carbon emissions and discuss the 

importance of controlling carbon and greenhouse gas emissions as part of a comprehensive 

national strategy for reducing U.S. contributions to global climate change.98 The report will 

describe the processes by which the tax provisions affect emissions (both directly and indirectly), 

assess the relative influence of the identified provisions, and evaluate the potential for changes in 

the Code to reduce carbon emissions. The report also will identify other provisions of the Code 

that may have significant influence on other factors affecting climate change. 

The Secretary is to submit to Congress a report containing the results of the National 

Academy of Sciences review within two years of the date of enactment. The provision 

authorizes the appropriation of $1,500,000 to carry out the review. 

Effective Date

The provision is effective on the date of enactment. 

 97 A detailed quantitative analysis is not required. It is envisioned that the review will catalogue 

and provide a general analysis of the effect of each identified provision. 

98 “Greenhouse gas emissions” include, but are not limited to, methane, nitrous oxide, ozone, and 

fluorinated hydrocarbons. 
73 

2. Comprehensive study of biofuels (sec. 402 of the bill) 

Present Law

The National Academy of Sciences serves to investigate, examine, experiment and report 

upon any subject of science whenever called upon to do so by any department of the 

government. The National Research Council is part of the National Academies. The National 

Research Council was organized by the National Academy of Sciences in 1916 and is its 

principal operating agency for conducting science policy and technical work. 

Explanation of Provision

The provision requires the Secretary, in consultation with the Department of Energy and 

the Department of Agriculture and the Environmental Protection Agency, to enter into an 

agreement with the National Academy of Sciences to produce an analysis of current scientific 

findings to determine: 

• Current biofuels production, as well as projections for future production; 

• The maximum amount of biofuels production capable on U.S. farmland; 

• The domestic effects of a dramatic increase in biofuels production on, for example, 

(a) the price of fuel, (b) the price of land in rural and suburban communities, (c) crop 

acreage and other land use, (d) the environment, due to changes in crop acreage, 

fertilizer use, runoff, water use, emissions from vehicles utilizing biofuels, and other 

factors, (e) the price of feed, (f) the selling price of grain crops, (g) exports and 

imports of grains, (h) taxpayers, through cost or savings to commodity crop 

payments, and (i) the expansion of refinery capacity; 

• The ability to convert corn ethanol plants for other uses, such as cellulosic ethanol or 

biodiesel; 

• A comparative analysis of corn ethanol versus other biofuels and renewable energy 

sources, considering cost, energy output, and ease of implementation; and 

• The need for additional scientific inquiry, and specific areas of interest for future 

research. 

The National Academy of Sciences shall issue an initial report of its findings to the 

Congress not later than three months after the date of enactment, and a final report not later than 

six months after the date of enactment. 

Effective Date

The provision is effective on the date of enactment.