II

107TH CONGRESS

1ST SESSION S. 1199

To amend the Internal Revenue Code of 1986 to allow a tax credit for

marginal domestic oil and natural gas well production and an election

to expense geological and geophysical expenditures and delay rental payments.

IN THE SENATE OF THE UNITED STATES

JULY 19, 2001

Mrs. HUTCHISON (for herself, Mr. BREAUX, Ms. COLLINS, Mr. BAUCUS, Mr.

CHAFEE, Ms. LANDRIEU, Mr. LOTT, Mr. CONRAD, Mr. MURKOWSKI, Mr.

ALLARD, Mr. BROWNBACK, Mr. COCHRAN, Mr. DOMENICI, Mr. GRAMM,

Mr. ENZI, Mr. HELMS, Mr. HUTCHINSON, Mr. INHOFE, Mr. NICKLES,

Mr. STEVENS, and Mr. THOMAS) introduced the following bill; which was

read twice and referred to the Committee on Finance

A BILL

To amend the Internal Revenue Code of 1986 to allow a

tax credit for marginal domestic oil and natural gas

well production and an election to expense geological

and geophysical expenditures and delay rental payments.

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

3 SECTION 1. TAX CREDIT FOR MARGINAL DOMESTIC OIL

4 AND NATURAL GAS WELL PRODUCTION.

5 (a) PURPOSE.—The purpose of this section is to pre6 vent the abandonment of marginal oil and gas wells re-
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1 sponsible for half of the domestic production of oil and

2 gas in the United States.

3 (b) CREDIT FOR PRODUCING OIL AND GAS FROM

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

5 A of chapter 1 of the Internal Revenue Code of 1986 (re6 lating to business credits) is amended by adding at the

7 end the following new section:

8 ‘‘SEC. 45G. CREDIT FOR PRODUCING OIL AND GAS FROM

9 MARGINAL WELLS.

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

11 the marginal well production credit for any taxable year

12 is an amount equal to the product of—

13 ‘‘(1) the credit amount, and

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

15 qualified natural gas production which is attrib16 utable to the taxpayer.

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

18 section—

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

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

21 production, and

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

23 qualified natural gas production.

24 ‘‘(2) REDUCTION AS OIL AND GAS PRICES IN25 CREASE.—
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1 ‘‘(A) IN GENERAL.—The $3 and 50 cents

2 amounts under paragraph (1) shall each be re3 duced (but not below zero) by an amount which

4 bears the same ratio to such amount (deter5 mined without regard to this paragraph) as—

6 ‘‘(i) the excess (if any) of the applica7 ble reference price over $15 ($1.67 for

8 qualified natural gas production), bears to

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

10 gas production).

11 The applicable reference price for a taxable

12 year is the reference price for the calendar year

13 preceding the calendar year in which the tax14 able year begins.

15 ‘‘(B) INFLATION ADJUSTMENT.—In the

16 case of any taxable year beginning in a calendar

17 year after 2002, each of the dollar amounts

18 contained in subparagraph (A) shall be in19 creased to an amount equal to such dollar

20 amount multiplied by the inflation adjustment

21 factor for such calendar year (determined under

22 section 43(b)(3)(B) by substituting ‘2001’ for

23 ‘1990’).
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1 ‘‘(C) REFERENCE PRICE.—For purposes of

2 this paragraph, the term ‘reference price’

3 means, with respect to any calendar year—

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

5 production, the reference price determined

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

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

8 gas production, the Secretary’s estimate of

9 the annual average wellhead price per

10 1,000 cubic feet for all domestic natural

11 gas.

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

13 PRODUCTION.—For purposes of this section—

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

15 oil production’ and ‘qualified natural gas production’

16 mean domestic crude oil or natural gas which is pro17 duced from a marginal well.

18 ‘‘(2) LIMITATION ON AMOUNT OF PRODUCTION

19 WHICH MAY QUALIFY.—

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

21 gas produced during any taxable year from any

22 well shall not be treated as qualified crude oil

23 production or qualified natural gas production

24 to the extent production from the well during
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1 the taxable year exceeds 1,095 barrels or barrel

2 equivalents.

3 ‘‘(B) PROPORTIONATE REDUCTIONS.—

4 ‘‘(i) SHORT TAXABLE YEARS.—In the

5 case of a short taxable year, the limitations

6 under this paragraph shall be proportion7 ately reduced to reflect the ratio which the

8 number of days in such taxable year bears

9 to 365.

10 ‘‘(ii) WELLS NOT IN PRODUCTION EN11 TIRE YEAR.—In the case of a well which is

12 not capable of production during each day

13 of a taxable year, the limitations under

14 this paragraph applicable to the well shall

15 be proportionately reduced to reflect the

16 ratio which the number of days of produc17 tion bears to the total number of days in

18 the taxable year.

19 ‘‘(3) DEFINITIONS.—

20 ‘‘(A) MARGINAL WELL.—The term ‘mar21 ginal well’ means a domestic well—

22 ‘‘(i) the production from which during

23 the taxable year is treated as marginal

24 production under section 613A(c)(6), ex25 cept that ‘22 degrees’ shall be substituted
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1 for ‘20 degrees’ in applying subparagraph

2 (F) thereof, or

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

4 ‘‘(I) has average daily production

5 of not more than 25 barrel equiva6 lents, and

7 ‘‘(II) produces water at a rate

8 not less than 95 percent of total well

9 effluent.

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

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

12 the meanings given such terms by section

13 613A(e).

14 ‘‘(C) BARREL EQUIVALENT.—The term

15 ‘barrel equivalent’ means, with respect to nat16 ural gas, a conversion ratio of 6,000 cubic feet

17 of natural gas to 1 barrel of crude oil.

18 ‘‘(d) OTHER RULES.—

19 ‘‘(1) PRODUCTION ATTRIBUTABLE TO THE TAX20 PAYER.—In the case of a marginal well in which

21 there is more than one owner of operating interests

22 in the well and the crude oil or natural gas produc23 tion exceeds the limitation under subsection (c)(2),

24 qualifying crude oil production or qualifying natural

25 gas production attributable to the taxpayer shall be
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1 determined on the basis of the ratio which the tax2 payer’s revenue interest in the production bears to

3 the aggregate of the revenue interests of all oper4 ating interest owners in the production.

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

6 credit under this section may be claimed only on

7 production which is attributable to the holder of an

8 operating interest.

9 ‘‘(3) PRODUCTION FROM NONCONVENTIONAL

10 SOURCES EXCLUDED.—In the case of production

11 from a marginal well which is eligible for the credit

12 allowed under section 29 for the taxable year, no

13 credit shall be allowable under this section unless

14 the taxpayer elects not to claim the credit under sec15 tion 29 with respect to the well.’’.

16 (c) CREDIT TREATED AS BUSINESS CREDIT.—Sec17 tion 38(b) of the Internal Revenue Code of 1986 is amend18 ed by striking ‘‘plus’’ at the end of paragraph (14), by

19 striking the period at the end of paragraph (15) and in20 serting ‘‘, plus’’, and by adding at the end the following

21 new paragraph:

22 ‘‘(16) the marginal oil and gas well production

23 credit determined under section 45G(a).’’.

24 (d) CREDIT ALLOWED AGAINST REGULAR AND MIN25 IMUM TAX.—
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1 (1) IN GENERAL.—Subsection (c) of section 38

2 of the Internal Revenue Code of 1986 (relating to

3 limitation based on amount of tax) is amended by

4 redesignating paragraph (3) as paragraph (4) and

5 by inserting after paragraph (2) the following new

6 paragraph:

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

8 GAS WELL PRODUCTION CREDIT.—

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

10 marginal oil and gas well production credit—

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

12 be applied separately with respect to the

13 credit, and

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

15 credit—

16 ‘‘(I) subparagraphs (A) and (B)

17 thereof shall not apply, and

18 ‘‘(II) the limitation under para19 graph (1) (as modified by subclause

20 (I)) shall be reduced by the credit al21 lowed under subsection (a) for the

22 taxable year (other than the marginal

23 oil and gas well production credit).

24 ‘‘(B) MARGINAL OIL AND GAS WELL PRO25 DUCTION CREDIT.—For purposes of this sub-
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1 section, the term ‘marginal oil and gas well pro2 duction credit’ means the credit allowable under

3 subsection (a) by reason of section 45G(a).’’.

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

5 of section 38(c)(2)(A)(ii) of such Code is amended

6 by inserting ‘‘or the marginal oil and gas well pro7 duction credit’’ after ‘‘employment credit’’.

8 (e) CARRYBACK.—Subsection (a) of section 39 of the

9 Internal Revenue Code of 1986 (relating to carryback and

10 carryforward of unused credits generally) is amended by

11 adding at the end the following new paragraph:

12 ‘‘(3) 10-YEAR CARRYBACK FOR MARGINAL OIL

13 AND GAS WELL PRODUCTION CREDIT.—In the case

14 of the marginal oil and gas well production credit

15 (as defined in section 38(c)(3))—

16 ‘‘(A) this section shall be applied sepa17 rately from the business credit (other than the

18 marginal oil and gas well production credit),

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

20 substituting ‘10 taxable years’ for ‘1 taxable

21 years’ in subparagraph (A) thereof, and

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

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

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

25 thereof, and
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1 ‘‘(ii) by substituting ‘30 taxable years’

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

3 thereof.’’.

4 (f) COORDINATION WITH SECTION 29.—Section

5 29(a) of the Internal Revenue Code of 1986 is amended

6 by striking ‘‘There’’ and inserting ‘‘At the election of the

7 taxpayer, there’’.

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

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

10 of the Internal Revenue Code of 1986 is amended by add11 ing at the end the following item:

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

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

13 this section shall apply to production in taxable years be14 ginning after December 31, 2001.

15 SEC. 2. ELECTION TO EXPENSE GEOLOGICAL AND GEO16 PHYSICAL EXPENDITURES AND DELAY RENT17 AL PAYMENTS.

18 (a) PURPOSE.—The purpose of this section is to rec19 ognize that geological and geophysical expenditures and

20 delay rentals are ordinary and necessary business expenses

21 that should be deducted in the year the expense is in22 curred.

23 (b) ELECTION TO EXPENSE GEOLOGICAL AND GEO24 PHYSICAL EXPENDITURES.—
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1 (1) IN GENERAL.—Section 263 of the Internal

2 Revenue Code of 1986 (relating to capital expendi3 tures) is amended by adding at the end the following

4 new subsection:

5 ‘‘(j) GEOLOGICAL AND GEOPHYSICAL EXPENDI6 TURES FOR DOMESTIC OIL AND GAS WELLS.—Notwith7 standing subsection (a), a taxpayer may elect to treat geo8 logical and geophysical expenses incurred in connection

9 with the exploration for, or development of, oil or gas with10 in the United States (as defined in section 638) as ex11 penses which are not chargeable to capital account. Any

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

13 taxable year in which paid or incurred.’’.

14 (2) CONFORMING AMENDMENT.—Section

15 263A(c)(3) of such Code is amended by inserting

16 ‘‘263(j),’’ after ‘‘263(i),’’.

17 (3) EFFECTIVE DATE.—

18 (A) IN GENERAL.—The amendments made

19 by this subsection shall apply to expenses paid

20 or incurred after the date of the enactment of

21 this Act.

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

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

24 Internal Revenue Code of 1986, as added by

25 this subsection, which were paid or incurred on
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1 or before the date of the enactment of this Act,

2 the taxpayer may elect, at such time and in

3 such manner as the Secretary of the Treasury

4 may prescribe, to amortize the suspended por5 tion of such expenses over the 36-month period

6 beginning with the month in which the date of

7 the enactment of this Act occurs. For purposes

8 of this subparagraph, the suspended portion of

9 any expense is that portion of such expense

10 which, as of the first day of the 36-month pe11 riod, has not been included in the cost of a

12 property or otherwise deducted.

13 (c) ELECTION TO EXPENSE DELAY RENTAL PAY14 MENTS.—

15 (1) IN GENERAL.—Section 263 of the Internal

16 Revenue Code of 1986 (relating to capital expendi17 tures), as amended by subsection (b)(1), is amended

18 by adding at the end the following new subsection:

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

20 AND GAS WELLS.—

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

22 (a), a taxpayer may elect to treat delay rental pay23 ments incurred in connection with the development

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

25 section 638) as payments which are not chargeable
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1 to capital account. Any payments so treated shall be

2 allowed as a deduction in the taxable year in which

3 paid or incurred.

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

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

6 means an amount paid for the privilege of deferring

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

8 lease.’’.

9 (2) CONFORMING AMENDMENT.—Section

10 263A(c)(3) of such Code, as amended by subsection

11 (b)(2), is amended by inserting ‘‘263(k),’’ after

12 ‘‘263(j),’’.

13 (3) EFFECTIVE DATE.—

14 (A) IN GENERAL.—The amendments made

15 by this subsection shall apply to payments made

16 or incurred after the date of the enactment of

17 this Act.

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

19 any expenses described in section 263(k) of the

20 Internal Revenue Code of 1986, as added by

21 this subsection, which were paid or incurred on

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

23 the taxpayer may elect, at such time and in

24 such manner as the Secretary of the Treasury

25 may prescribe, to amortize the suspended por-
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1 tion of such expenses over the 36-month period

2 beginning with the month in which the date of

3 the enactment of this Act occurs. For purposes

4 of this subparagraph, the suspended portion of

5 any expense is that portion of such expense

6 which, as of the first day of the 36-month pe7 riod, has not been included in the cost of a

8 property or otherwise deducted.

Æ