II

104TH CONGRESS

1ST SESSION S. 447

To provide tax incentives to encourage production of oil and gas within

the United States, and for other purposes.

IN THE SENATE OF THE UNITED STATES

FEBRUARY 16 (legislative day, JANUARY 30), 1995

Mr. INHOFE (for himself and Mr. NICKLES) introduced the following bill;

which was read twice and referred to the Committee on Finance

A BILL

To provide tax incentives to encourage production of oil

and gas within the United States, 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 ‘‘Domestic Oil and Gas Production Tax Incentive Act’’.

6 (b) AMENDMENT OF 1986 CODE.—Except as other7 wise expressly provided, whenever in this title an amend8 ment or repeal is expressed in terms of an amendment

9 to, or repeal of, a section or other provision, the reference
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1 shall be considered to be made to a section or other provi2 sion of the Internal Revenue Code of 1986.

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

4 this Act is as follows:

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

TITLE I—PRODUCTION CREDIT

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

TITLE II—MODIFICATIONS TO PERCENTAGE DEPLETION

Sec. 201. Elimination of net income limitation on percentage depletion for oil

and gas.

Sec. 202. All marginal production eligible for percentage depletion.

Sec. 203. Allocation of depletable quantities.

Sec. 204. 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.

Sec. 303. Election for optional 5-year writeoff of intangible drilling costs.

Sec. 304. Allocation of deductions in determining net income.

5 TITLE I—PRODUCTION CREDIT

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

7 OIL AND NATURAL GAS PRODUCTION.

8 (a) CREDIT FOR PRODUCING OIL AND GAS FROM

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

10 IV of subchapter A of chapter 1 (relating to business cred11 its) is amended by adding at the end the following new

12 section:
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1 ‘‘SEC. 45C. CREDIT FOR PRODUCING OIL AND GAS FROM

2 NEW WELLS AND MARGINAL WELLS.

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

4 the new and marginal well production credit for any tax5 able year is an amount equal to the product of—

6 ‘‘(1) the credit amount, and

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

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

10 ‘‘(b) CREDIT AMOUNT.—For purposes of this sec11 tion—

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

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

14 production, and

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

16 qualified natural gas production.

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

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

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

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

24 ‘‘(i) the excess of the applicable ref25 erence price over $14 ($2.49 for qualified

26 natural gas production), bears to
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1 ‘‘(ii) $6 ($1.06 for qualified natural

2 gas production).

3 The applicable reference price for a taxable

4 year is the reference price for the calendar year

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

7 ‘‘(B) INFLATION ADJUSTMENT.—In the

8 case of any taxable year beginning in a calendar

9 year after 1995, each of the dollar amounts

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

12 amount multiplied by the inflation adjustment

13 factor for such calendar year (determined under

14 section 43(b)(3)(B) by substituting ‘1994’ for

15 ‘1990’).

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

17 this paragraph, the term ‘reference price’

18 means, with respect to any calendar year—

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

20 production, the reference price determined

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

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

23 gas production, the Secretary’s estimate of

24 the annual average wellhead price per
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1 1,000 cubic feet for all domestic natural

2 gas.

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

4 PRODUCTION.—For purposes of this section—

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

6 oil production’ and ‘qualified natural gas production’

7 mean domestic crude oil or natural gas which is pro8 duced from—

9 ‘‘(A) a marginal well, or

10 ‘‘(B) a new well.

11 ‘‘(2) LIMITATION ON AMOUNT OF PRODUCTION

12 WHICH MAY QUALIFY.—

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

14 gas produced during any taxable year from any

15 well shall not be treated as qualified crude oil

16 production or qualified natural gas production

17 to the extent production from the well during

18 the taxable year exceeds—

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

20 1,095 barrels or barrel equivalents, or

21 ‘‘(ii) in the case of a new well—

22 ‘‘(I) 5,475 barrels in the case of

23 crude oil, or

24 ‘‘(II) 109,500,000 cubic feet in

25 the case of natural gas.
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1 ‘‘(B) SPECIAL RULE WHERE WELL PRO2 DUCES BOTH.—In the case of a new well which

3 produces crude oil and natural gas, the limita4 tion for any taxable year applicable to natural

5 gas produced from the well shall be reduced by

6 the barrel equivalents (expressed in cubic feet)

7 of the crude oil produced from the well during

8 the taxable year.

9 ‘‘(C) PROPORTIONATE REDUCTIONS.—

10 ‘‘(i) SHORT TAXABLE YEARS.—In the

11 case of a short taxable year, the limitations

12 under this paragraph shall be proportion13 ately reduced to reflect the ratio which the

14 number of days in the year bears to 365.

15 ‘‘(ii) WELLS NOT IN PRODUCTION EN16 TIRE YEAR.—In the case of a well which is

17 not capable of production during each day

18 of a taxable year, the limitations under

19 this paragraph applicable to the well shall

20 be proportionately reduced to reflect the

21 ratio which the number of days of produc22 tion bears to the total number of days in

23 the taxable year.

24 ‘‘(3) DEFINITIONS.—
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1 ‘‘(A) MARGINAL WELL.—The term ‘mar2 ginal well’ means a domestic well (other than a

3 new well)—

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

5 marginal production (as defined in section

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

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

8 ‘‘(I) has average daily production

9 of not more than 25 barrel equiva10 lents, and

11 ‘‘(II) produces water at a rate

12 not less than 95 percent of total well

13 effluent.

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

15 means a domestic well drilled after December

16 31, 1994.

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

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

19 the meanings given such terms by section

20 613A(e).

21 ‘‘(D) BARREL EQUIVALENT.—The term

22 ‘barrel equivalent’ means, with respect to natu23 ral gas, a conversion ratio of 6,000 cubic feet

24 of natural gas to 1 barrel of crude oil.

25 ‘‘(d) OTHER RULES.—
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1 ‘‘(1) PRODUCTION ATTRIBUTABLE TO THE TAX2 PAYER.—In the case of a marginal well or new well

3 in which there is more than one owner of operating

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

5 production exceeds the limitation under subsection

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

7 natural gas production attributable to the taxpayer

8 shall be determined on the basis of the ratio which

9 taxpayer’s revenue interest in the production bears

10 to the aggregate of the revenue interests of all oper11 ating interest owners in the production.

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

13 credit under this section may be claimed only on

14 production which is attributable to the holder of an

15 operating interest.

16 ‘‘(3) PRODUCTION FROM NONCONVENTIONAL

17 SOURCES EXCLUDED.—In the case of production

18 from a marginal well which is eligible for the credit

19 allowed under section 29 for the taxable year, no

20 credit shall be allowable under this section unless

21 the taxpayer elects not to claim the credit under sec22 tion 29 with respect to the well.’’

23 (b) CREDIT TREATED AS BUSINESS CREDIT.—Sec24 tion 38(b) is amended by striking ‘‘plus’’ at the end of

25 paragraph (10), by striking the period at the end of para-
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1 graph (11) and inserting ‘‘, plus’’, and by adding at the

2 end the following new paragraph:

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

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

5 (c) CREDIT ALLOWED AGAINST REGULAR AND MINI6 MUM TAX.—

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

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

9 amended by redesignating paragraph (3) as para10 graph (4) and by inserting after paragraph (2) the

11 following new paragraph:

12 ‘‘(3) SPECIAL RULES FOR OIL AND GAS PRO13 DUCTION CREDIT.—

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

15 and gas production credit—

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

17 be applied separately with respect to the

18 credit, and

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

20 credit—

21 ‘‘(I) subparagraph (A) shall not

22 apply, and

23 ‘‘(II) the limitation under para24 graph (1) (as modified by subclause

25 (I)) shall be reduced by the credit al-
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1 lowed under subsection (a) for the

2 taxable year (other than the oil and

3 gas production credit).

4 ‘‘(B) OIL AND GAS PRODUCTION CRED5 IT.—For purposes of this subsection, the term

6 ‘oil and gas production credit’ means the credit

7 allowable under subsection (a) by reason of sec8 tion 45C(a).’’

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

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

11 ‘‘or the oil and gas production credit’’ after ‘‘em12 ployment credit’’.

13 (d) COORDINATION WITH SECTION 29.—Section

14 29(a) is amended by striking ‘‘There’’ and inserting ‘‘At

15 the election of the taxpayer, there’’.

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

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

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

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

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

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

21 enactment of this Act.
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1 TITLE II—MODIFICATIONS TO

2 PERCENTAGE DEPLETION

3 SEC. 201. 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, 1994.

20 SEC. 202. 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, 1994.

22 SEC. 203. 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, 1994.

7 SEC. 204. PERCENTAGE DEPLETION RATE FOR MARGINAL

8 PRODUCTION.

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

10 613A(c)(6), as amended by section 202(a), is amended to

11 read as follows:

12 ‘‘(B) APPLICABLE PERCENTAGE.—For

13 purposes of this paragraph, the term ‘applicable

14 percentage’ means the percentage (not greater

15 than 25 percent) equal to the sum of—

16 ‘‘(i) 15 percent, plus

17 ‘‘(ii) 1 percentage point for each

18 whole dollar by which $20 exceeds the ref19 erence price for crude oil for calendar year

20 1994 (determined under section

21 29(d)(2)(C)).’’

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

23 this section shall apply to taxable years beginning after

24 December 31, 1994.
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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 this

6 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, 1994.

14 SEC. 303. ELECTION FOR OPTIONAL 5-YEAR WRITEOFF OF

15 INTANGIBLE DRILLING COSTS.

16 (a) OPTIONAL ELECTION FOR MINIMUM TAX PUR17 POSES.—

18 (1) IN GENERAL.—Section 56(a) is amended by

19 adding at the end the following new paragraph:

20 ‘‘(9) INTANGIBLE DRILLING COSTS.—If the tax21 payer elects to have this paragraph apply, the tax22 payer may disregard, for purposes of computing the

23 taxpayer’s alternative minimum taxable income, an

24 election under section 59(e) with respect to any por-
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1 tion of any qualified expenditure described in section

2 59(e)(2)(C).’’

3 (2) CONFORMING AMENDMENT.—Section 59(e)

4 is amended by adding at the end the following new

5 paragraph:

6 ‘‘(7) EXCEPTION FOR INTANGIBLE DRILLING

7 COSTS.—

‘‘For election not to have this subsection apply in

computing alternative minimum taxable income, see

section 56(a)(9).’’

8 (b) TIME FOR MAKING ELECTIONS.—Subparagraph

9 (B) of section 59(e)(4) is amended to read as follows:

10 ‘‘(B) TIME FOR MAKING ELECTION.—

11 ‘‘(i) IN GENERAL.—An election under

12 this subsection may be made or revoked at

13 any time before the period for filing a

14 claim for credit or refund (determined

15 after any extension) expires.

16 ‘‘(ii) PERIOD OF LIMITATION FOR AS17 SESSMENT.—The period for assessing a

18 deficiency attributable to any election

19 under clause (i) (or any revocation thereof)

20 shall not expire before the date 1 year

21 after the date the Secretary is notified of

22 the election (or revocation).’’

23 (c) EFFECT OF ELECTION.—Paragraph (6) of section

24 59(e) is amended by adding at the end the following: ‘‘Any
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1 deductions with respect to such portion shall not be treat2 ed as directly attributable to oil and gas properties for

3 purposes of section 57(a)(2)(C).’’

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

5 this section shall apply to taxable years beginning after

6 December 31, 1994.

7 SEC. 304. ALLOCATION OF DEDUCTIONS IN DETERMINING

8 NET INCOME.

9 (a) IN GENERAL.—Clause (ii) of section 57(a)(2)(C)

10 is amended by striking ‘‘allocable’’ and inserting ‘‘directly

11 attributable’’.

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

13 this section shall apply to taxable years beginning after

14 December 31, 1994.

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