I

104TH CONGRESS

2D SESSION H. R. 3410

To amend the Internal Revenue Code of 1986 to encourage production of

oil and gas within the United States, to ease regulatory burdens, and

for other purposes.

IN THE HOUSE OF REPRESENTATIVES

MAY 7, 1996

Mr. THORNBERRY introduced the following bill; which was referred to the

Committee on Ways and Means, and in addition to the Committee on Resources, for a period to be subsequently determined by the Speaker, in

each case for consideration of such provisions as fall within the jurisdiction of the committee concerned

A BILL

To amend the Internal Revenue Code of 1986 to encourage

production of oil and gas within the United States, to

ease regulatory burdens, and for other purposes.

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

3 SECTION 1. SHORT TITLE; TABLE OF CONTENTS.

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

5 ‘‘Energy Independence Act of 1996’’.

6 (b) AMENDMENT OF 1986 CODE.—Except as other7 wise expressly provided, whenever in this Act an amend8 ment or repeal is expressed in terms of an amendment
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1 to, or repeal of, a section or other provision, the reference

2 shall be considered to be made to a section or other provi3 sion of the Internal Revenue Code of 1986.

4 (c) TABLE OF CONTENTS.—

Sec. 1. Short title; table of contents.

TITLE I—TAX INCENTIVES FOR OIL AND GAS PRODUCTION

Subtitle A—Production Credit

Sec. 101. Tax credit for marginal and new domestic oil and natural gas production.

Subtitle B—Modifications to Percentage Depletion

Sec. 111. Elimination of net income limitation on percentage depletion for oil

and gas.

Sec. 112. All marginal production eligible for percentage depletion.

Sec. 113. Allocation of depletable quantities.

TITLE II—PERCENTAGE DEPLETION RATE FOR MARGINAL

PRODUCTION

Sec. 201. Percentage depletion rate for marginal production.

TITLE III—OTHER PROVISIONS

Sec. 301. Election to expense geological and geophysical expenditures.

Sec. 302. Enhanced oil recovery credit.

TITLE IV—6-YEAR PERIOD OF LIMITATION FOR COLLECTION OF

OIL AND GAS ROYALTIES

Sec. 401. Period of limitation for collection of oil and gas royalties.

5 TITLE I—TAX INCENTIVES FOR

6 OIL AND GAS PRODUCTION

7 Subtitle A—Production Credit

8 SEC. 101. TAX CREDIT FOR MARGINAL AND NEW DOMESTIC

9 OIL AND NATURAL GAS PRODUCTION.

10 (a) CREDIT FOR PRODUCING OIL AND GAS FROM

11 NEW WELLS AND MARGINAL WELLS.—Subpart D of part

12 IV of subchapter A of chapter 1 (relating to business cred-
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1 its) is amended by adding at the end the following new

2 section:

3 ‘‘SEC. 45C. CREDIT FOR PRODUCING OIL AND GAS FROM

4 NEW WELLS AND MARGINAL WELLS.

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

6 the new and marginal well production credit for any tax7 able year is an amount equal to the product of—

8 ‘‘(1) the credit amount, and

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

10 qualified natural gas production which is attrib11 utable to the taxpayer.

12 ‘‘(b) CREDIT AMOUNT.—For purposes of this sec13 tion—

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

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

16 production, and

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

18 qualified natural gas production.

19 ‘‘(2) REDUCTION AS OIL AND GAS PRICES IN20 CREASE.—

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

22 amounts under paragraph (1) shall each be re23 duced (but not below zero) by an amount which

24 bears the same ratio to such amount (deter25 mined without regard to this paragraph) as—
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1 ‘‘(i) the excess of the applicable ref2 erence price over $14 ($2.49 for qualified

3 natural gas production), bears to

4 ‘‘(ii) $6 ($1.06 for qualified natural

5 gas production).

6 The applicable reference price for a taxable

7 year is the reference price for the calendar year

8 preceding the calendar year in which the tax9 able year begins.

10 ‘‘(B) INFLATION ADJUSTMENT.—In the

11 case of any taxable year beginning in a calendar

12 year after 1996, each of the dollar amounts

13 contained in subparagraph (A) shall be in14 creased to an amount equal to such dollar

15 amount multiplied by the inflation adjustment

16 factor for such calendar year (determined under

17 section 43(b)(3)(B) by substituting ‘1995’ for

18 ‘1990’).

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

20 this paragraph, the term ‘reference price’

21 means, with respect to any calendar year—

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

23 production, the reference price determined

24 under section 29(d)(2)(C), and
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1 ‘‘(ii) in the case of qualified natural

2 gas production, the Secretary’s estimate of

3 the annual average wellhead price per

4 1,000 cubic feet for all domestic natural

5 gas.

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

7 PRODUCTION.—For purposes of this section—

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

9 oil production’ and ‘qualified natural gas production’

10 mean domestic crude oil or natural gas which is pro11 duced from—

12 ‘‘(A) a marginal well, or

13 ‘‘(B) a new well.

14 ‘‘(2) LIMITATION ON AMOUNT OF PRODUCTION

15 WHICH MAY QUALIFY.—

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

17 gas produced during any taxable year from any

18 well shall not be treated as qualified crude oil

19 production or qualified natural gas production

20 to the extent production from the well during

21 the taxable year exceeds—

22 ‘‘(i) in the case of a marginal well,

23 1,095 barrels or barrel equivalents, or

24 ‘‘(ii) in the case of a new well—
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1 ‘‘(I) 5,475 barrels in the case of

2 crude oil, or

3 ‘‘(II) 32.85 MCF in the case of

4 natural gas.

5 ‘‘(B) SPECIAL RULE WHERE WELL PRO6 DUCES BOTH.—In the case of a new well which

7 produces crude oil and natural gas, the limita8 tion for any taxable year applicable to natural

9 gas produced from the well shall be reduced by

10 the barrel equivalents (expressed in cubic feet)

11 of the crude oil produced from the well during

12 the taxable year.

13 ‘‘(C) PROPORTIONATE REDUCTIONS.—

14 ‘‘(i) SHORT TAXABLE YEARS.—In the

15 case of a short taxable year, the limitations

16 under this paragraph shall be proportion17 ately reduced to reflect the ratio which the

18 number of days in the year bears to 365.

19 ‘‘(ii) WELLS NOT IN PRODUCTION EN20 TIRE YEAR.—In the case of a well which is

21 not capable of production during each day

22 of a taxable year, the limitations under

23 this paragraph applicable to the well shall

24 be proportionately reduced to reflect the

25 ratio which the number of days of produc-
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1 tion bears to the total number of days in

2 the taxable year.

3 ‘‘(3) DEFINITIONS.—

4 ‘‘(A) MARGINAL WELL.—The term ‘mar5 ginal well’ means a domestic well (other than a

6 new well)—

7 ‘‘(i) which during the taxable year has

8 marginal production (as defined in section

9 613A(c)(6)), or

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

11 ‘‘(I) has average daily production

12 of not more than 25 barrel equiva13 lents, and

14 ‘‘(II) produces water at a rate

15 not less than 95 percent of total well

16 effluent.

17 ‘‘(B) NEW WELL.—The term ‘new well’

18 means a domestic well drilled after December

19 31, 1995.

20 ‘‘(C) CRUDE OIL, ETC.—The terms ‘crude

21 oil’, ‘natural gas’, ‘domestic’, and ‘barrel’ have

22 the meanings given such terms by section

23 613A(e).

24 ‘‘(D) BARREL EQUIVALENT.—The term

25 ‘barrel equivalent’ means, with respect to natu-
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1 ral gas, a conversion ratio of 6,000 cubic feet

2 of natural gas to 1 barrel of crude oil.

3 ‘‘(d) OTHER RULES.—

4 ‘‘(1) PRODUCTION ATTRIBUTABLE TO THE TAX5 PAYER.—In the case of a marginal well or new well

6 in which there is more than one owner of operating

7 interests in the well and the crude oil or natural gas

8 production exceeds the limitation under subsection

9 (c)(2), qualifying crude oil production or qualifying

10 natural gas production attributable to the taxpayer

11 shall be determined on the basis of the ratio which

12 taxpayer’s revenue interest in the production bears

13 to the aggregate of the revenue interests of all oper14 ating interest owners in the production.

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

16 credit under this section may be claimed only on

17 production which is attributable to the holder of an

18 operating interest.

19 ‘‘(3) PRODUCTION FROM NONCONVENTIONAL

20 SOURCES EXCLUDED.—In the case of production

21 from a marginal well which is eligible for the credit

22 allowed under section 29 for the taxable year, no

23 credit shall be allowable under this section unless

24 the taxpayer elects not to claim the credit under sec25 tion 29 with respect to the well.’’
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1 (b) CREDIT TREATED AS BUSINESS CREDIT.—Sec2 tion 38(b) is amended by striking ‘‘plus’’ at the end of

3 paragraph (10), by striking the period at the end of para4 graph (11) and inserting ‘‘, plus’’, and by adding at the

5 end the following new paragraph:

6 ‘‘(12) the new and marginal oil and gas well

7 production credit determined under section 45C(a).’’

8 (c) CREDIT ALLOWED AGAINST REGULAR AND MINI9 MUM TAX.—

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

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

12 amended by redesignating paragraph (3) as para13 graph (4) and by inserting after paragraph (2) the

14 following new paragraph:

15 ‘‘(3) SPECIAL RULES FOR OIL AND GAS PRO16 DUCTION CREDIT.—

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

18 and gas production credit—

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

20 be applied separately with respect to the

21 credit, and

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

23 credit—

24 ‘‘(I) subparagraph (A) shall not

25 apply, and
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1 ‘‘(II) the limitation under para2 graph (1) (as modified by subclause

3 (I)) shall be reduced by the credit al4 lowed under subsection (a) for the

5 taxable year (other than the oil and

6 gas production credit).

7 ‘‘(B) OIL AND GAS PRODUCTION CRED8 IT.—For purposes of this subsection, the term

9 ‘oil and gas production credit’ means the credit

10 allowable under subsection (a) by reason of sec11 tion 45C(a).’’

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

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

14 ‘‘or the oil and gas production credit’’ after ‘‘em15 ployment credit’’.

16 (d) COORDINATION WITH SECTION 29.—Section

17 29(a) is amended by striking ‘‘There’’ and inserting ‘‘At

18 the election of the taxpayer, there’’.

19 (e) CLERICAL AMENDMENT.—The table of sections

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

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

‘‘Sec. 45C. Credit for producing oil and gas from new wells and marginal

wells.’’

22 (f) EFFECTIVE DATE.—The amendments made by

23 this section shall apply to production after the date of the

24 enactment of this Act.
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1 Subtitle B—Modifications to

2 Percentage Depletion

3 SEC. 111. ELIMINATION OF NET INCOME LIMITATION ON

4 PERCENTAGE DEPLETION FOR OIL AND GAS.

5 (a) ELIMINATION.—

6 (1) IN GENERAL.—Paragraph (1) of subsection

7 (d) of section 613A (relating to the limitation based

8 on taxable income for percentage depletion in the

9 case of oil and gas wells) is repealed.

10 (2) OTHER PRODUCTION.—The second sentence

11 of subsection (a) of section 613 (relating to percent12 age depletion) is amended to read as follows: ‘‘Ex13 cept in the case of oil and gas wells, such allowance

14 shall not exceed 50 percent of the taxpayer’s taxable

15 income from the property (computed without allow16 ance for depletion).’’

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

18 this section shall apply to taxable years beginning after

19 December 31, 1995.

20 SEC. 112. ALL MARGINAL PRODUCTION ELIGIBLE FOR PER21 CENTAGE DEPLETION.

22 (a) IN GENERAL.—Paragraph (6) of section 613A(c)

23 (relating to marginal production) is amended to read as

24 follows:
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1 ‘‘(6) SEPARATE APPLICATION TO MARGINAL

2 PRODUCTION.—

3 ‘‘(A) IN GENERAL.—Except as provided in

4 subsection (d)—

5 ‘‘(i) the allowance for depletion under

6 section 611 with respect to all of a tax7 payer’s marginal production of domestic

8 crude oil and domestic natural gas shall be

9 computed in accordance with section 613,

10 except that, for purposes of section 613(a),

11 the applicable percentage shall be sub12 stituted for the percentage specified in sec13 tion 613(b), and

14 ‘‘(ii) such marginal production shall

15 not be taken into account under paragraph

16 (1), including for purposes of determining

17 the taxpayer’s average daily production of

18 domestic crude oil or domestic natural gas

19 eligible for application of paragraph (1).

20 ‘‘(B) APPLICABLE PERCENTAGE.—For

21 purposes of subparagraph (A), the term ‘appli22 cable percentage’ means the percentage (not

23 greater than 25 percent) equal to the sum of—

24 ‘‘(i) 15 percent, plus
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1 ‘‘(ii) 1 percentage point for each

2 whole dollar by which $20 exceeds the ref3 erence price for crude oil for the calendar

4 year preceding the calendar year in which

5 the taxable year begins.

6 For purposes of this paragraph, the term ‘ref7 erence price’ means, with respect to any cal8 endar year, the reference price determined for

9 such calendar year under section 29(d)(2)(C).

10 ‘‘(C) MARGINAL PRODUCTION.—The term

11 ‘marginal production’ means domestic crude oil

12 or domestic natural gas which is produced dur13 ing any taxable year from a property which—

14 ‘‘(i) is a stripper well property for the

15 calendar year in which the taxable year be16 gins, or

17 ‘‘(ii) is a property substantially all of

18 the production of which during such cal19 endar year is heavy oil.

20 ‘‘(D) STRIPPER WELL PROPERTY.—For

21 purposes of this paragraph, the term ‘stripper

22 well property’ means, with respect to any cal23 endar year, any property with respect to which

24 the amount determined by dividing—
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1 ‘‘(i) the average daily production of

2 domestic crude oil and domestic natural

3 gas from producing wells on such property

4 for such calendar year, by

5 ‘‘(ii) the number of such wells,

6 is 15-barrel equivalents or less.

7 ‘‘(E) HEAVY OIL.—For purposes of this

8 paragraph, the term ‘heavy oil’ means domestic

9 crude oil produced from any property if such

10 crude oil had a weighted average gravity of 20

11 degrees API or less (corrected to 60 degrees

12 Fahrenheit).’’

13 (b) CONFORMING AMENDMENT.—Paragraph (3) of

14 section 613A(c) (defining depletable oil quantity) is

15 amended to read as follows:

16 ‘‘(3) DEPLETABLE OIL QUANTITY.—For pur17 poses of paragraph (1), the taxpayer’s depletable oil

18 quantity is 1,000 barrels.’’

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

20 this section shall apply to taxable years beginning after

21 December 31, 1995.

22 SEC. 113. ALLOCATION OF DEPLETABLE QUANTITIES.

23 (a) IN GENERAL.—Subparagraphs (A) and (B) of

24 section 613A(c)(7) (relating to special rules for production

25 in excess of depletable quantities) are each amended by
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1 inserting ‘‘of such quantity allocated to the property by

2 the taxpayer, or, if the taxpayer elects not to make the

3 allocation, that amount’’ after ‘‘shall be that amount’’.

4 (b) EFFECTIVE DATE.—The amendments made by

5 this section shall apply to taxable years beginning after

6 December 31, 1995.

7 TITLE II—PERCENTAGE DEPLE8 TION RATE FOR MARGINAL

9 PRODUCTION

10 SEC. 201. PERCENTAGE DEPLETION RATE FOR MARGINAL

11 PRODUCTION.

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

13 613A(c)(6), as amended by section 112(a), is amended to

14 read as follows:

15 ‘‘(B) APPLICABLE PERCENTAGE.—For

16 purposes of this paragraph, the term ‘applicable

17 percentage’ means 21 percent.’’.

18 (b) EFFECTIVE DATE.—The amendments made by

19 this section shall apply to taxable years beginning after

20 December 31, 1995.
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1 TITLE III—OTHER PROVISIONS

2 SEC. 301. ELECTION TO EXPENSE GEOLOGICAL AND GEO3 PHYSICAL EXPENDITURES.

4 (a) IN GENERAL.—Section 263 (relating to capital

5 expenditures) is amended by adding at the end the follow6 ing new subsection:

7 ‘‘(j) GEOLOGICAL AND GEOPHYSICAL EXPENDI8 TURES FOR DOMESTIC OIL AND GAS WELLS.—Notwith9 standing subsection (a), a taxpayer may elect to treat geo10 logical and geophysical expenses incurred in connection

11 with the exploration for, or development of, oil or gas with12 in the United States (as defined in section 638) as ex13 penses which are not chargeable to capital account. Any

14 expenses so treated shall be allowed as a deduction in the

15 taxable year in which paid or incurred.’’

16 (b) CONFORMING AMENDMENT.—Section 263A(c)(3)

17 is amended by inserting ‘‘263(j),’’ after ‘‘263(i),’’.

18 (c) EFFECTIVE DATE.—

19 (1) IN GENERAL.—The amendments made by

20 this section shall apply to expenses paid or incurred

21 after the date of the enactment of this Act.

22 (2) TRANSITION RULE.—In the case of any ex23 penses described in section 263(j) of the Internal

24 Revenue Code of 1986 which were paid or incurred

25 on or before the date of the enactment of this Act,
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1 the taxpayer may elect, at such time and in such

2 manner as the Secretary of the Treasury may pre3 scribe, to amortize the unamortized portion of such

4 expenses over the 36-month period beginning with

5 the month in which the date of the enactment of

6 this Act occurs. For purposes of this paragraph, the

7 unamortized portion of any expense is the amount

8 remaining unamortized as of the first day of the 36-

9 month period.

10 SEC. 302. ENHANCED OIL RECOVERY CREDIT.

11 (a) EXPANSION OF PROJECTS ELIGIBLE FOR CRED12 IT.—

13 (1) IN GENERAL.—Clause (i) of section

14 43(c)(2)(A) (defining qualified enhanced oil recovery

15 project) is amended to read as follows:

16 ‘‘(i) which involves the application (in

17 accordance with sound engineering prin18 ciples) of 1 or more secondary or tertiary

19 recovery methods which can reasonably be

20 expected to result in more than an insig21 nificant increase in the amount of crude oil

22 or natural gas which ultimately will be re23 covered,’’.

24 (2) CONFORMING AMENDMENTS.—
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1 (A) Subparagraph (C) of section 43(c)(1)

2 is amended to read as follows:

3 ‘‘(C) Any cost paid or incurred (whether or

4 not chargeable to capital account) for any

5 injectant or other costs which are used as part

6 of a qualified enhanced oil recovery project,

7 other than a recoverable hydrocarbon injectant

8 described in section 193(b)(2).’’

9 (B) Section 43(c)(4) is amended to read as

10 follows:

11 ‘‘(4) SECONDARY AND TERTIARY RECOVERY

12 METHODS.—For purposes of paragraph (2), second13 ary and tertiary recovery methods shall include—

14 ‘‘(A) tertiary recovery methods described

15 in section 193(b)(3),

16 ‘‘(B) immiscible nonhydrocarbon gas dis17 placement, and

18 ‘‘(C) other secondary and tertiary recovery

19 methods certified in accordance with paragraph

20 (2)(B).’’

21 (b) CREDIT ALLOWABLE AGAINST MINIMUM TAX.—

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

23 (relating to limitation based on amount of tax), as

24 amended by section 101(c), is amended by redesig25 nating paragraph (4) as paragraph (5) and by in-
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1 serting after paragraph (3) the following new para2 graph:

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

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

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

8 be applied separately with respect to the

9 credit, and

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

11 credit—

12 ‘‘(I) subparagraph (A) shall not

13 apply, and

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

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

18 taxable year (other than the enhanced

19 oil recovery credit).

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

22 ‘enhanced oil recovery credit’ means the credit

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

25 (2) CONFORMING AMENDMENTS.—
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1 (A) Subclause (II) of section

2 38(c)(2)(A)(ii), as amended by section 101(c),

3 is amended by striking ‘‘or the oil and gas pro4 duction credit’’ and inserting ‘‘, the oil and gas

5 production credit, or the enhanced oil recovery

6 credit’’.

7 (B) Subclause (II) of section

8 38(c)(3)(A)(ii) is amended by inserting ‘‘or the

9 enhanced oil recovery credit’’ after ‘‘production

10 credit’’.

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

12 this section shall apply to taxable years beginning after

13 December 31, 1995.

14 TITLE IV—6-YEAR PERIOD OF

15 LIMITATION FOR COLLEC16 TION OF OIL AND GAS ROYAL17 TIES

18 SEC. 401. PERIOD OF LIMITATION FOR COLLECTION OF OIL

19 AND GAS ROYALTIES.

20 (a) IN GENERAL.—Except as provided in subsection

21 (b), no administrative proceeding or court action may be

22 commenced by the United States for recovery of a royalty

23 due under an oil or gas lease entered into under the Act

24 entitled ‘‘An Act to promote the mining of coal, phosphate,

25 oil, oil shale, gas, and sodium on the public domain’’, ap-
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1 proved February 25, 1920 (commonly known as the Min2 eral Lands Leasing Act) (30 U.S.C. 181 et seq.), the

3 Outer Continental Shelf Lands Act (43 U.S.C. 1331 et

4 seq.), or any other law, after the date that is 6 years after

5 the date on which payment of the royalty becomes due.

6 (b) FALSE OR FRAUDULENT STATEMENTS.—If the

7 lessee under a lease described in subsection (a) makes a

8 false or fraudulent statement to an officer or employee of

9 the United States with intent to evade, in whole or in part,

10 the payment of a royalty, payment of the royalty shall be

11 deemed to become due, for the purpose of subsection (a),

12 on the date on which the United States discovers that the

13 statement was false or fraudulent.

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