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‘‘(4) MANUFACTURED HOMES INCLUDED.—For 
purposes of this section, the term ‘dwelling’ includes 
a manufactured home which conforms to Federal 
Manufactured Home Construction and Safety Stand-
ards (section 3280 of title 24, Code of Federal Reg-
ulations, as in effect on April 3, 2003). 
‘‘(g) BASIS ADJUSTMENT.—For purposes of this sub-
title, if a credit is allowed under this section for any ex-
penditure with respect to any property, the increase in the 
basis of such property which would (but for this sub-
section) result from such expenditure shall be reduced by 
the amount of the credit so allowed. 
‘‘(h) APPLICATION OF SECTION.—This section shall 
apply to qualified energy efficiency improvements installed 
after December 31, 2003, and before January 1, 2007.’’. 
(b) CONFORMING AMENDMENTS.—
(1) Subsection (c) of section 23 is amended by 
striking ‘‘section 1400C’’ and inserting ‘‘sections 
25E and 1400C’’. 
(2) Subsection (a) of section 1016 is amended 
by striking ‘‘and’’ at the end of paragraph (29), by 
striking the period at the end of paragraph (30) and 
inserting ‘‘, and’’, and by adding at the end the fol-
lowing new paragraph:
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‘‘(31) to the extent provided in section 25E(g), 
in the case of amounts with respect to which a credit 
has been allowed under section 25E.’’. 
(3) Subsection (d) of section 1400C is amended 
by inserting ‘‘and section 25E’’ after ‘‘this section’’. 
(4) The table of sections for subpart A of part 
IV of subchapter A of chapter 1 is amended by in-
serting after the item relating to section 25D the 
following new item:
‘‘Sec. 25E. Energy efficiency improvements to existing homes.’’.
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years ending after De-
cember 31, 2003. 
SEC. 41005. BUSINESS CREDIT FOR CONSTRUCTION OF NEW 
ENERGY EFFICIENT HOME. 
(a) IN GENERAL.—Subpart D of part IV of sub-
chapter A of chapter 1 (relating to business related cred-
its) is amended by inserting after section 45F the fol-
lowing new section: 
‘‘SEC. 45G. NEW ENERGY EFFICIENT HOME CREDIT. 
‘‘(a) IN GENERAL.—For purposes of section 38, in 
the case of an eligible contractor, the credit determined 
under this section for the taxable year is an amount equal 
to the aggregate adjusted bases of all energy efficient 
property installed in a qualified new energy efficient home 
during construction of such home.
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‘‘(b) LIMITATIONS.—
‘‘(1) MAXIMUM CREDIT.—
‘‘(A) IN GENERAL.—The credit allowed by 
this section with respect to a dwelling shall not 
exceed $2,000. 
‘‘(B) PRIOR CREDIT AMOUNTS ON SAME 
DWELLING TAKEN INTO ACCOUNT.—If a credit 
was allowed under subsection (a) with respect 
to a dwelling in 1 or more prior taxable years, 
the amount of the credit otherwise allowable for 
the taxable year with respect to that dwelling 
shall not exceed the amount of $2,000 reduced 
by the sum of the credits allowed under sub-
section (a) with respect to the dwelling for all 
prior taxable years. 
‘‘(2) COORDINATION
WITH
REHABILITATION 
AND ENERGY CREDITS.—For purposes of this sec-
tion—
‘‘(A) the basis of any property referred to 
in subsection (a) shall be reduced by that por-
tion of the basis of any property which is attrib-
utable to qualified rehabilitation expenditures 
(as defined in section 47(c)(2)) or to the energy 
percentage of energy property (as determined 
under section 48(a)), and
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‘‘(B) expenditures taken into account 
under either section 47 or 48(a) shall not be 
taken into account under this section. 
‘‘(c) DEFINITIONS.—For purposes of this section—
‘‘(1) ELIGIBLE CONTRACTOR.—The term ‘eligi-
ble contractor’ means the person who constructed 
the new energy efficient home, or in the case of a 
manufactured home which conforms to Federal 
Manufactured Home Construction and Safety Stand-
ards (section 3280 of title 24, Code of Federal Reg-
ulations, as in effect on April 3, 2003), the manufac-
tured home producer of such home. 
‘‘(2) ENERGY
EFFICIENT
PROPERTY.—The 
term ‘energy efficient property’ means any energy 
efficient building envelope component, and any en-
ergy efficient heating or cooling appliance. 
‘‘(3) QUALIFIED
NEW
ENERGY
EFFICIENT 
HOME.—The term ‘qualified new energy efficient 
home’ means a dwelling—
‘‘(A) located in the United States, 
‘‘(B) the construction of which is substan-
tially completed after December 31, 2003, 
‘‘(C) the original use of which is as a prin-
cipal residence (within the meaning of section 
121) which commences with the person who ac-
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quires such dwelling from the eligible con-
tractor, and 
‘‘(D) which is certified to have a level of 
annual heating and cooling energy consumption 
that is at least 30 percent below the annual 
level of heating and cooling energy consumption 
of a comparable dwelling constructed in accord-
ance with the standards of the 2000 Inter-
national Energy Conservation Code and to have 
building envelope component improvements ac-
count for 1⁄3 of such 30 percent. 
‘‘(4) CONSTRUCTION.—The term ‘construction’ 
includes reconstruction and rehabilitation. 
‘‘(5) ACQUIRE.—The term ‘acquire’ includes 
purchase and, in the case of reconstruction and re-
habilitation, such term includes a binding written 
contract for such reconstruction or rehabilitation. 
‘‘(6) BUILDING ENVELOPE COMPONENT.—The 
term ‘building envelope component’ means insulation 
material or system which is specifically and pri-
marily designed to reduce the heat loss or gain of a 
dwelling when installed in or on such dwelling, exte-
rior windows (including skylights) and doors, and 
metal roofs with appropriate pigmented coatings 
which are specifically and primarily designed to re-
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duce the heat gain of a dwelling when installed in 
or on such dwelling. 
‘‘(7) MANUFACTURED HOME INCLUDED.—The 
term ‘dwelling’ includes a manufactured home con-
forming to Federal Manufactured Home Construc-
tion and Safety Standards (section 3280 of title 24, 
Code of Federal Regulations, as in effect on April 3, 
2003). 
‘‘(d) CERTIFICATION.—
‘‘(1) METHOD.—A certification described in 
subsection (c)(3)(D) shall be determined on the 
basis of one of the following methods: 
‘‘(A) The technical specifications or appli-
cable ratings (including product labeling re-
quirements) for the measurement of energy effi-
ciency for the energy efficient building envelope 
component or energy efficient heating or cooling 
appliance, based upon energy use or building 
envelope component performance. 
‘‘(B) An energy performance measurement 
method that utilizes computer software ap-
proved by organizations designated by the Sec-
retary. 
‘‘(2) PROVIDER.—Such certification shall be 
provided by—
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‘‘(A) in the case of a method described in 
paragraph (1)(A), a local building regulatory 
authority, a utility, a manufactured home pro-
duction inspection primary inspection agency 
(IPIA), or an accredited home energy rating 
systems provider who is accredited by, or other-
wise authorized to use, approved energy per-
formance measurement methods by the Home 
Energy Ratings Systems Council or the Na-
tional Association of State Energy Officials, or 
‘‘(B) in the case of a method described in 
paragraph (1)(B), an individual recognized by 
an organization designated by the Secretary for 
such purposes. 
‘‘(3) FORM.—Such certification shall be made 
in writing in a manner that specifies in readily 
verifiable fashion the energy efficient building enve-
lope components and energy efficient heating or 
cooling appliances installed and their respective en-
ergy efficiency levels, and in the case of a method 
described in subparagraph (B) of paragraph (1), ac-
companied by written analysis documenting the 
proper application of a permissible energy perform-
ance measurement method to the specific cir-
cumstances of such dwelling.
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‘‘(4) REGULATIONS.—
‘‘(A) IN GENERAL.—In prescribing regula-
tions under this subsection for energy perform-
ance measurement methods, the Secretary shall 
prescribe procedures for calculating annual en-
ergy costs for heating and cooling and cost sav-
ings and for the reporting of the results. Such 
regulations shall—
‘‘(i) be based on the National Home 
Energy Rating Technical Guidelines of the 
National Association of State Energy Offi-
cials, the Home Energy Rating Guidelines 
of the Home Energy Rating Systems 
Council, or the modified 2001 California 
Residential ACM manual, 
‘‘(ii) provide that any calculation pro-
cedures be developed such that the same 
energy efficiency measures allow a home to 
qualify for the credit under this section re-
gardless of whether the house uses a gas 
or oil furnace or boiler or an electric heat 
pump, and 
‘‘(iii) require that any computer soft-
ware allow for the printing of the Federal 
tax forms necessary for the credit under
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this section and explanations for the home-
buyer of the energy efficient features that 
were used to comply with the requirements 
of this section. 
‘‘(B) PROVIDERS.—For purposes of para-
graph (2)(B), the Secretary shall establish re-
quirements for the designation of individuals 
based on the requirements for energy consult-
ants and home energy raters specified by the 
National Association of State Energy Officials. 
‘‘(e) BASIS ADJUSTMENT.—For purposes of this sub-
title, if a credit is determined under this section for any 
expenditure with respect to any property, the increase in 
the basis of such property which would (but for this sub-
section) result from such expenditure shall be reduced by 
the amount of the credit so determined. 
‘‘(f) APPLICATION OF SECTION.—Subsection (a) shall 
apply to dwellings purchased during the period beginning 
on January 1, 2004, and ending on December 31, 2006.’’. 
(b) CREDIT MADE PART OF GENERAL BUSINESS 
CREDIT.—Subsection (b) of section 38 (relating to current 
year business credit) is amended by striking ‘‘plus’’ at the 
end of paragraph (14), by striking the period at the end 
of paragraph (15) and inserting ‘‘, plus’’, and by adding 
at the end thereof the following new paragraph:
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‘‘(16) the new energy efficient home credit de-
termined under section 45G.’’. 
(c) DENIAL OF DOUBLE BENEFIT.—Section 280C 
(relating to certain expenses for which credits are allow-
able) is amended by adding at the end thereof the fol-
lowing new subsection: 
‘‘(d) NEW ENERGY EFFICIENT HOME EXPENSES.—
No deduction shall be allowed for that portion of expenses 
for a new energy efficient home otherwise allowable as a 
deduction for the taxable year which is equal to the 
amount of the credit determined for such taxable year 
under section 45G.’’. 
(d) LIMITATION ON CARRYBACK.—Subsection (d) of 
section 39 is amended by adding at the end the following 
new paragraph: 
‘‘(11) NO CARRYBACK OF NEW ENERGY EFFI-
CIENT HOME CREDIT BEFORE EFFECTIVE DATE.—
No portion of the unused business credit for any 
taxable year which is attributable to the credit deter-
mined under section 45G may be carried back to any 
taxable year ending before January 1, 2004.’’. 
(e) DEDUCTION FOR CERTAIN UNUSED BUSINESS 
CREDITS.—Subsection (c) of section 196 is amended by 
striking ‘‘and’’ at the end of paragraph (9), by striking 
the period at the end of paragraph (10) and inserting ‘‘,
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and’’, and by adding after paragraph (10) the following 
new paragraph: 
‘‘(11) the new energy efficient home credit de-
termined under section 45G.’’. 
(f) CLERICAL AMENDMENT.—The table of sections 
for subpart D of part IV of subchapter A of chapter 1 
is amended by inserting after the item relating to section 
45F the following new item:
‘‘Sec. 45G. New energy efficient home credit.’’.
(g) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years ending after De-
cember 31, 2003. 
SEC. 41006. ENERGY CREDIT FOR COMBINED HEAT AND 
POWER SYSTEM PROPERTY. 
(a) IN GENERAL.—Subparagraph (A) of section 
48(a)(3) (defining energy property) is amended by strik-
ing ‘‘or’’ at the end of clause (ii), by adding ‘‘or’’ at the 
end of clause (iii), and by inserting after clause (iii) the 
following new clause: 
‘‘(iv) combined heat and power system 
property,’’. 
(b) COMBINED HEAT AND POWER SYSTEM PROP-
ERTY.—Subsection (a) of section 48 is amended by redes-
ignating paragraphs (5) and (6) as paragraphs (6) and 
(7), respectively, and by inserting after paragraph (4) the 
following new paragraph:
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‘‘(5) COMBINED
HEAT
AND
POWER
SYSTEM 
PROPERTY.—For purposes of this subsection—
‘‘(A) COMBINED HEAT AND POWER SYS-
TEM PROPERTY.—The term ‘combined heat and 
power system property’ means property com-
prising a system—
‘‘(i) which uses the same energy 
source for the simultaneous or sequential 
generation of electrical power, mechanical 
shaft power, or both, in combination with 
the generation of steam or other forms of 
useful thermal energy (including heating 
and cooling applications), 
‘‘(ii) which has an electrical capacity 
of more than 50 kilowatts or a mechanical 
energy capacity of more than 67 horse-
power or an equivalent combination of elec-
trical and mechanical energy capacities, 
‘‘(iii) which produces—
‘‘(I) at least 20 percent of its 
total useful energy in the form of 
thermal energy, and 
‘‘(II) at least 20 percent of its 
total useful energy in the form of elec-
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trical or mechanical power (or com-
bination thereof), 
‘‘(iv) the energy efficiency percentage 
of which exceeds 60 percent (70 percent in 
the case of a system with an electrical ca-
pacity in excess of 50 megawatts or a me-
chanical energy capacity in excess of 
67,000 horsepower, or an equivalent com-
bination of electrical and mechanical en-
ergy capacities), and 
‘‘(v) which is placed in service after 
December 31, 2003, and before January 1, 
2007. 
‘‘(B) SPECIAL RULES.—
‘‘(i) ENERGY
EFFICIENCY
PERCENT-
AGE.—For 
purposes 
of 
subparagraph 
(A)(iv), the energy efficiency percentage of 
a system is the fraction—
‘‘(I) the numerator of which is 
the total useful electrical, thermal, 
and mechanical power produced by 
the system at normal operating rates, 
and
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‘‘(II) the denominator of which is 
the lower heating value of the primary 
fuel source for the system. 
‘‘(ii) DETERMINATIONS MADE ON BTU 
BASIS.—The energy efficiency percentage 
and the percentages under subparagraph 
(A)(iii) shall be determined on a Btu basis. 
‘‘(iii) INPUT AND OUTPUT PROPERTY 
NOT INCLUDED.—The term ‘combined heat 
and power system property’ does not in-
clude property used to transport the en-
ergy source to the facility or to distribute 
energy produced by the facility. 
‘‘(iv) PUBLIC UTILITY PROPERTY.—
‘‘(I) ACCOUNTING
RULE
FOR 
PUBLIC
UTILITY
PROPERTY.—If the 
combined heat and power system 
property is public utility property (as 
defined in section 168(i)(1)), the tax-
payer may only claim the credit under 
the subsection if, with respect to such 
property, the taxpayer uses a normal-
ization method of accounting. 
‘‘(II) CERTAIN
EXCEPTION
NOT 
TO APPLY.—The matter in paragraph
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(3) which follows subparagraph (D) 
shall not apply to combined heat and 
power system property. 
‘‘(C) EXTENSION
OF
DEPRECIATION
RE-
COVERY PERIOD.—If a taxpayer is allowed cred-
it under this section for combined heat and 
power system property and such property would 
(but for this subparagraph) have a class life of 
15 years or less under section 168, such prop-
erty shall be treated as having a 22-year class 
life for purposes of section 168.’’. 
(c) NO CARRYBACK OF ENERGY CREDIT BEFORE 
EFFECTIVE DATE.—Subsection (d) of section 39 is 
amended by adding at the end the following new para-
graph: 
‘‘(12) NO CARRYBACK OF ENERGY CREDIT BE-
FORE EFFECTIVE DATE.—No portion of the unused 
business credit for any taxable year which is attrib-
utable to the energy credit with respect to property 
described in section 48(a)(5) may be carried back to 
a taxable year ending before January 1, 2004.’’. 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to property placed in service after 
December 31, 2003, in taxable years ending after such 
date.
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SEC. 41007. NEW NONREFUNDABLE PERSONAL CREDITS AL-
LOWED AGAINST REGULAR AND MINIMUM 
TAXES. 
(a) IN GENERAL.—
(1) SECTION 25C.—Section 25C(b), as added 
by section 41001, is amended by adding at the end 
the following new paragraph: 
‘‘(3) LIMITATION
BASED
ON
AMOUNT
OF 
TAX.—The credit allowed under subsection (a) for 
the taxable year shall not exceed the excess of—
‘‘(A) the sum of the regular tax liability 
(as defined in section 26(b)) plus the tax im-
posed by section 55, over 
‘‘(B) the sum of the credits allowable 
under this subpart (other than this section and 
section 25D and 25E) and section 27 for the 
taxable year.’’. 
(2) SECTION 25D.—Section 25D(b), as added 
by section 103, is amended to read as follows: 
‘‘(b) LIMITATIONS.—
‘‘(1) IN GENERAL.—The credit allowed under 
subsection (a) with respect to any qualified fuel cell 
power plant for any taxable year shall not exceed—
‘‘(A) $500 for each 1⁄2 kilowatt of capacity 
of the power plant, reduced by
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‘‘(B) the aggregate energy credits allowed 
with respect to such power plant for all prior 
taxable years. 
‘‘(2) LIMITATION
BASED
ON
AMOUNT
OF 
TAX.—The credit allowed under subsection (a) for 
the taxable year shall not exceed the excess of—
‘‘(A) the sum of the regular tax liability 
(as defined in section 26(b)) plus the tax im-
posed by section 55, over 
‘‘(B) the sum of the credits allowable 
under this subpart (other than this section and 
section 25E) and section 27 for the taxable 
year.’’. 
(3) SECTION 25E.—Section 25E(b), as added 
by section 41004, is amended by adding at the end 
the following new paragraph: 
‘‘(3) LIMITATION
BASED
ON
AMOUNT
OF 
TAX.—The credit allowed under subsection (a) for 
the taxable year shall not exceed the excess of—
‘‘(A) the sum of the regular tax liability 
(as defined in section 26(b)) plus the tax im-
posed by section 55, over 
‘‘(B) the sum of the credits allowable 
under this subpart (other than this section) and 
section 27 for the taxable year.’’.
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(b) CONFORMING AMENDMENTS.—
(1) Section 23(b)(4)(B) is amended by inserting 
‘‘and sections 25C, 25D, and 25E’’ after ‘‘this sec-
tion’’. 
(2) Section 24(b)(3)(B) is amended by striking 
‘‘and 25B’’ and inserting ‘‘, 25B, 25C, 25D, and 
25E’’. 
(3) Section 25(e)(1)(C) is amended by inserting 
‘‘25C, 25D, and 25E’’ after ‘‘25B,’’. 
(4) Section 25B(g)(2) is amended by striking 
‘‘section 23’’ and inserting ‘‘sections 23, 25C, 25D, 
and 25E’’. 
(5) Section 25E(c), as added by section 41004, 
is amended by striking ‘‘section 26(a) for such tax-
able year reduced by the sum of the credits allowable 
under this subpart (other than this section)’’ and in-
serting ‘‘subsection (b)(3)’’. 
(6) Section 26(a)(1) is amended by striking 
‘‘and 25B’’ and inserting ‘‘25B, 25C, 25D, and 
25E’’. 
(7) Section 904(h) is amended by striking ‘‘and 
25B’’ and inserting ‘‘25B, 25C, 25D, and 25E’’. 
(8) Section 1400C(d) is amended by striking 
‘‘and 25B’’ and inserting ‘‘25B, 25C, 25D, and 
25E’’.
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(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2003. 
SEC. 41008. REPEAL OF 4.3-CENT MOTOR FUEL EXCISE 
TAXES ON RAILROADS AND INLAND WATER-
WAY TRANSPORTATION WHICH REMAIN IN 
GENERAL FUND. 
(a) TAXES ON TRAINS.—
(1) IN GENERAL.—Subparagraph (A) of section 
4041(a)(1) is amended by striking ‘‘or a diesel-pow-
ered train’’ each place it appears and by striking ‘‘or 
train’’. 
(2) CONFORMING AMENDMENTS.—
(A) 
Subparagraph 
(C) 
of 
section 
4041(a)(1) is amended by striking clause (ii) 
and by redesignating clause (iii) as clause (ii). 
(B) 
Subparagraph 
(C) 
of 
section 
4041(b)(1) is amended by striking all that fol-
lows ‘‘section 6421(e)(2)’’ and inserting a pe-
riod. 
(C) Subsection (d) of section 4041 is 
amended by redesignating paragraph (3) as 
paragraph (4) and by inserting after paragraph 
(2) the following new paragraph:
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‘‘(3) DIESEL FUEL USED IN TRAINS.—There is 
hereby imposed a tax of 0.1 cent per gallon on any 
liquid other than gasoline (as defined in section 
4083)—
‘‘(A) sold by any person to an owner, les-
see, or other operator of a diesel-powered train 
for use as a fuel in such train, or 
‘‘(B) used by any person as a fuel in a die-
sel-powered train unless there was a taxable 
sale of such fuel under subparagraph (A). 
No tax shall be imposed by this paragraph on the 
sale or use of any liquid if tax was imposed on such 
liquid under section 4081.’’. 
(D) Subsection (f) of section 4082 is 
amended by striking ‘‘section 4041(a)(1)’’ and 
inserting ‘‘subsections (d)(3) and (a)(1) of sec-
tion 4041, respectively’’. 
(E) Paragraph (3) of section 4083(a) is 
amended by striking ‘‘or a diesel-powered 
train’’. 
(F) Paragraph (3) of section 6421(f) is 
amended to read as follows: 
‘‘(3) GASOLINE USED IN TRAINS.—In the case 
of gasoline used as a fuel in a train, this section 
shall not apply with respect to the Leaking Under-
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ground Storage Tank Trust Fund financing rate 
under section 4081.’’. 
(G) Paragraph (3) of section 6427(l) is 
amended to read as follows: 
‘‘(3) REFUND
OF
CERTAIN
TAXES
ON
FUEL 
USED IN DIESEL-POWERED TRAINS.—For purposes 
of this subsection, the term ‘nontaxable use’ includes 
fuel used in a diesel-powered train. The preceding 
sentence shall not apply to the tax imposed by sec-
tion 4041(d) and the Leaking Underground Storage 
Tank Trust Fund financing rate under section 4081 
except with respect to fuel sold for exclusive use by 
a State or any political subdivision thereof.’’. 
(b) FUEL USED ON INLAND WATERWAYS.—
(1) IN
GENERAL.—Paragraph (1) of section 
4042(b) is amended by adding ‘‘and’’ at the end of 
subparagraph (A), by striking ‘‘, and’’ at the end of 
subparagraph (B) and inserting a period, and by 
striking subparagraph (C). 
(2) CONFORMING AMENDMENT.—Paragraph (2) 
of section 4042(b) is amended by striking subpara-
graph (C). 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall take effect on January 1, 2004.
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SEC. 41009. REDUCED MOTOR FUEL EXCISE TAX ON CER-
TAIN MIXTURES OF DIESEL FUEL. 
(a) IN GENERAL.—Paragraph (2) of section 4081(a) 
is amended by adding at the end the following: 
‘‘(C) DIESEL-WATER FUEL EMULSION.—In 
the case of diesel-water fuel emulsion at least 
14 percent of which is water and with respect 
to which the emulsion additive is registered by 
a United States manufacturer with the Envi-
ronmental Protection Agency pursuant to sec-
tion 211 of the Clean Air Act (as in effect on 
March 31, 2003), subparagraph (A)(iii) shall be 
applied by substituting ‘19.7 cents’ for ‘24.3 
cents’.’’. 
(b) SPECIAL RULES
FOR DIESEL-WATER FUEL 
EMULSIONS.—
(1) REFUNDS FOR TAX-PAID PURCHASES.—Sec-
tion 6427 is amended by redesignating subsections 
(m) through (p) as subsections (n) through (q), re-
spectively, and by inserting after subsection (l) the 
following new subsection: 
‘‘(m) DIESEL FUEL USED TO PRODUCE EMUL-
SION.—
‘‘(1) IN GENERAL.—Except as provided in sub-
section (k), if any diesel fuel on which tax was im-
posed by section 4081 at the regular tax rate is used
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tax was imposed under subsection (a) at a rate determined 
under subsection (a)(2)(C) (or with respect to which a 
credit or payment was allowed or made by reason of sec-
tion 6427), such person shall be treated as the refiner of 
such taxable fuel. The amount of tax imposed on any re-
moval of such fuel by such person shall be reduced by the 
amount of tax imposed (and not credited or refunded) on 
any prior removal or entry of such fuel.’’. 
(B) 
CONFORMING
AMENDMENT.—Sub-
section (d) of section 6416 is amended by strik-
ing ‘‘section 4081(e)’’ and inserting ‘‘section 
4081(f)’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall take effect on October 1, 2003. 
SEC. 41010. REPEAL OF PHASEOUTS FOR QUALIFIED ELEC-
TRIC VEHICLE CREDIT AND DEDUCTION FOR 
CLEAN FUEL-VEHICLES. 
(a) CREDIT FOR QUALIFIED ELECTRIC VEHICLES.—
Subsection (b) of section 30 (relating to limitations) is 
amended by striking paragraph (2) and redesignating 
paragraph (3) as paragraph (2). 
(b) DEDUCTION FOR CLEAN-FUEL VEHICLES AND 
CERTAIN REFUELING PROPERTY.—Paragraph (1) of sec-
tion 179A(b) (relating to qualified clean-fuel vehicle prop-
erty) is amended to read as follows:
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‘‘(1) QUALIFIED CLEAN-FUEL VEHICLE PROP-
ERTY.— The cost which may be taken into account 
under subsection (a)(1)(A) with respect to any 
motor vehicle shall not exceed— 
‘‘(A) in the case of a motor vehicle not de-
scribed in subparagraph (B) or (C), $2,000, 
‘‘(B) in the case of any truck or van with 
a gross vehicle weight rating greater than 
10,000 pounds but not greater than 26,000 
pounds, $5,000, or 
‘‘(C) $50,000 in the case of— 
‘‘(i) a truck or van with a gross vehi-
cle weight rating greater than 26,000 
pounds, or 
‘‘(ii) any bus which has a seating ca-
pacity of at least 20 adults (not including 
the driver).’’. 
SEC. 41011. ALTERNATIVE MOTOR VEHICLE CREDIT. 
(a) IN GENERAL.—Subpart B of part IV of sub-
chapter A of chapter 1 (relating to foreign tax credit, etc.) 
is amended by adding at the end the following: 
‘‘SEC. 30B. ALTERNATIVE MOTOR VEHICLE CREDIT. 
‘‘(a) ALLOWANCE OF CREDIT.—There shall be al-
lowed as a credit against the tax imposed by this chapter 
for the taxable year an amount equal to the sum of—
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‘‘(1) the new qualified fuel cell motor vehicle 
credit determined under subsection (b), and 
‘‘(2) the advanced lean burn technology motor 
vehicle credit determined under subsection (c). 
‘‘(b) NEW QUALIFIED FUEL CELL MOTOR VEHICLE 
CREDIT.—
‘‘(1) IN GENERAL.—For purposes of subsection 
(a), the new qualified fuel cell motor vehicle credit 
determined under this subsection with respect to a 
new qualified fuel cell motor vehicle placed in service 
by the taxpayer during the taxable year is—
‘‘(A) $4,000, if such vehicle has a gross ve-
hicle weight rating of not more than 8,500 
pounds, 
‘‘(B) $10,000, if such vehicle has a gross 
vehicle weight rating of more than 8,500 
pounds but not more than 14,000 pounds, 
‘‘(C) $20,000, if such vehicle has a gross 
vehicle weight rating of more than 14,000 
pounds but not more than 26,000 pounds, and 
‘‘(D) $40,000, if such vehicle has a gross 
vehicle weight rating of more than 26,000 
pounds. 
‘‘(2) INCREASE FOR FUEL EFFICIENCY.—
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‘‘(A) IN
GENERAL.—The amount deter-
mined under paragraph (1)(A) with respect to 
a new qualified fuel cell motor vehicle which is 
a passenger automobile or light truck shall be 
increased by—
‘‘(i) $1,000, if such vehicle achieves at 
least 150 percent but less than 175 per-
cent of the 2000 model year city fuel econ-
omy, 
‘‘(ii) $1,500, if such vehicle achieves 
at least 175 percent but less than 200 per-
cent of the 2000 model year city fuel econ-
omy, 
‘‘(iii) $2,000, if such vehicle achieves 
at least 200 percent but less than 225 per-
cent of the 2000 model year city fuel econ-
omy, 
‘‘(iv) $2,500, if such vehicle achieves 
at least 225 percent but less than 250 per-
cent of the 2000 model year city fuel econ-
omy, 
‘‘(v) $3,000, if such vehicle achieves 
at least 250 percent but less than 275 per-
cent of the 2000 model year city fuel econ-
omy,
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‘‘(vi) $3,500, if such vehicle achieves 
at least 275 percent but less than 300 per-
cent of the 2000 model year city fuel econ-
omy, and 
‘‘(vii) $4,000, if such vehicle achieves 
at least 300 percent of the 2000 model 
year city fuel economy. 
‘‘(B) 2000 MODEL YEAR CITY FUEL ECON-
OMY.—For purposes of subparagraph (A), the 
2000 model year city fuel economy with respect 
to a vehicle shall be determined in accordance 
with the following tables: 
‘‘(i) In the case of a passenger auto-
mobile:
‘‘If 
vehicle 
inertia 
weight 
class is: 
The 2000 model year city fuel 
economy is: 
1,500 or 1,750 lbs ....................................................................
43.7 mpg
2,000 lbs ..................................................................................
38.3 mpg
2,250 lbs ..................................................................................
34.1 mpg
2,500 lbs ..................................................................................
30.7 mpg
2,750 lbs ..................................................................................
27.9 mpg
3,000 lbs ..................................................................................
25.6 mpg
3,500 lbs ..................................................................................
22.0 mpg
4,000 lbs ..................................................................................
19.3 mpg
4,500 lbs ..................................................................................
17.2 mpg
5,000 lbs ..................................................................................
15.5 mpg
5,500 lbs ..................................................................................
14.1 mpg
6,000 lbs ..................................................................................
12.9 mpg
6,500 lbs ..................................................................................
11.9 mpg
7,000 or 8,500 lbs ....................................................................
11.1 mpg.
‘‘(ii) In the case of a light truck:
‘‘If 
vehicle 
inertia 
weight 
class is: 
The 2000 model year city fuel 
economy is: 
1,500 or 1,750 lbs ....................................................................
37.6 mpg
2,000 lbs ..................................................................................
33.7 mpg
2,250 lbs ..................................................................................
30.6 mpg
2,500 lbs ..................................................................................
28.0 mpg
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‘‘If 
vehicle 
inertia 
weight 
class is: 
The 2000 model year city fuel 
economy is: 
2,750 lbs ..................................................................................
25.9 mpg
3,000 lbs ..................................................................................
24.1 mpg
3,500 lbs ..................................................................................
21.3 mpg
4,000 lbs ..................................................................................
19.0 mpg
4,500 lbs ..................................................................................
17.3 mpg
5,000 lbs ..................................................................................
15.8 mpg
5,500 lbs ..................................................................................
14.6 mpg
6,000 lbs ..................................................................................
13.6 mpg
6,500 lbs ..................................................................................
12.8 mpg
7,000 or 8,500 lbs ....................................................................
12.0 mpg.
‘‘(C) VEHICLE INERTIA WEIGHT CLASS.—
For purposes of subparagraph (B), the term 
‘vehicle inertia weight class’ has the same 
meaning as when defined in regulations pre-
scribed by the Administrator of the Environ-
mental Protection Agency for purposes of the 
administration of title II of the Clean Air Act 
(42 U.S.C. 7521 et seq.). 
‘‘(3) NEW QUALIFIED FUEL CELL MOTOR VEHI-
CLE.—For purposes of this subsection, the term 
‘new qualified fuel cell motor vehicle’ means a motor 
vehicle—
‘‘(A) which is propelled by power derived 
from one or more cells which convert chemical 
energy directly into electricity by combining ox-
ygen with hydrogen fuel which is stored on 
board the vehicle in any form and may or may 
not require reformation prior to use, 
‘‘(B) which, in the case of a passenger 
automobile or light truck—
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‘‘(i) for 2004 and later model vehicles, 
has received a certificate of conformity 
under the Clean Air Act and meets or ex-
ceeds the equivalent qualifying California 
low emission vehicle standard under sec-
tion 243(e)(2) of the Clean Air Act for 
that make and model year, and 
‘‘(ii) for 2004 and later model vehi-
cles, has received a certificate that such ve-
hicle meets or exceeds the Bin 5 Tier II 
emission level established in regulations 
prescribed by the Administrator of the En-
vironmental Protection Agency under sec-
tion 202(i) of the Clean Air Act for that 
make and model year vehicle, 
‘‘(C) the original use of which commences 
with the taxpayer, 
‘‘(D) which is acquired for use or lease by 
the taxpayer and not for resale, and 
‘‘(E) which is made by a manufacturer. 
‘‘(c) ADVANCED LEAN BURN TECHNOLOGY MOTOR 
VEHICLE CREDIT.—
‘‘(1) IN GENERAL.—For purposes of subsection 
(a), the advanced lean burn technology motor vehicle 
credit determined under this subsection with respect
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to a new qualified advanced lean burn technology 
motor vehicle placed in service by the taxpayer dur-
ing the taxable year is the credit amount determined 
under paragraph (2). 
‘‘(2) CREDIT AMOUNT.—
‘‘(A) INCREASE FOR FUEL EFFICIENCY.—
The credit amount determined under this para-
graph shall be—
‘‘(i) $500, if such vehicle achieves at 
least 125 percent but less than 150 per-
cent of the 2000 model year city fuel econ-
omy, 
‘‘(ii) $1,000, if such vehicle achieves 
at least 150 percent but less than 175 per-
cent of the 2000 model year city fuel econ-
omy, 
‘‘(iii) $1,500, if such vehicle achieves 
at least 175 percent but less than 200 per-
cent of the 2000 model year city fuel econ-
omy, 
‘‘(iv) $2,000, if such vehicle achieves 
at least 200 percent but less than 225 per-
cent of the 2000 model year city fuel econ-
omy,
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‘‘(v) $2,500, if such vehicle achieves 
at least 225 percent but less than 250 per-
cent of the 2000 model year city fuel econ-
omy, and 
‘‘(vi) $3,000, if such vehicle achieves 
at least 250 percent of the 2000 model 
year city fuel economy. 
For purposes of clause (i), the 2000 model year 
city fuel economy with respect to a vehicle shall 
be determined using the tables provided in sub-
section (b)(2)(B) with respect to such vehicle. 
‘‘(B) 
CONSERVATION
CREDIT.—The 
amount determined under subparagraph (A) 
with respect to an advanced lean burn tech-
nology motor vehicle shall be increased by—
‘‘(i) $250, if such vehicle achieves a 
lifetime fuel savings of at least 1,500 gal-
lons of gasoline, and 
‘‘(ii) $500, if such vehicle achieves a 
lifetime fuel savings of at least 2,500 gal-
lons of gasoline. 
‘‘(C) OPTION TO USE LIKE VEHICLE.—At 
the option of the vehicle manufacturer, the in-
crease for fuel efficiency and conservation credit 
may be calculated by comparing the new ad-
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vanced lean-burn technology motor vehicle to a 
like vehicle. 
‘‘(3) DEFINITIONS.—For purposes of this sub-
section—
‘‘(A) ADVANCED LEAN BURN TECHNOLOGY 
MOTOR
VEHICLE.—The term ‘advanced lean 
burn technology motor vehicle’ means a motor 
vehicle with an internal combustion engine 
that—
‘‘(i) is designed to operate primarily 
using more air than is necessary for com-
plete combustion of the fuel, 
‘‘(ii) incorporates direct injection, 
‘‘(iii) achieves at least 125 percent of 
the 2000 model year city fuel economy, 
and 
‘‘(iv) for 2004 and later model vehi-
cles, has received a certificate that such ve-
hicle meets or exceeds the Bin 8 Tier II 
emission level established in regulations 
prescribed by the Administrator of the En-
vironmental Protection Agency under sec-
tion 202(i) of the Clean Air Act for that 
make and model year vehicle.
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‘‘(B) LIKE VEHICLE.—The term ‘like vehi-
cle’ for an advanced lean burn technology motor 
vehicle derived from a conventional production 
vehicle produced in the same model year means 
a model that is equivalent in the following 
areas: 
‘‘(i) Body style (2-door or 4-door). 
‘‘(ii) Transmission (automatic or man-
ual). 
‘‘(iii) Acceleration performance (± 
0.05 seconds). 
‘‘(iv) Drivetrain (2-wheel drive or 4-
wheel drive). 
‘‘(v) Certification by the Adminis-
trator of the Environmental Protection 
Agency. 
‘‘(C) LIFETIME FUEL SAVINGS.—The term 
‘lifetime fuel savings’ shall be calculated by di-
viding 120,000 by the difference between the 
2000 model year city fuel economy for the vehi-
cle inertia weight class and the city fuel econ-
omy for the new qualified hybrid motor vehicle. 
‘‘(d) LIMITATION BASED ON AMOUNT OF TAX.—The 
credit allowed under subsection (a) for the taxable year 
shall not exceed the excess of—
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‘‘(1) the sum of the regular tax liability (as de-
fined in section 26(b)) plus the tax imposed by sec-
tion 55, over 
‘‘(2) the sum of the credits allowable under sub-
part A and sections 27, 29, and 30A for the taxable 
year. 
‘‘(e) OTHER DEFINITIONS AND SPECIAL RULES.—
For purposes of this section—
‘‘(1) 
CONSUMABLE
FUEL.—The 
term 
‘consumable fuel’ means any solid, liquid, or gaseous 
matter which releases energy when consumed by an 
auxiliary power unit. 
‘‘(2) MOTOR VEHICLE.—The term ‘motor vehi-
cle’ has the meaning given such term by section 
30(c)(2). 
‘‘(3) 2000 MODEL
YEAR
CITY
FUEL
ECON-
OMY.—The 2000 model year city fuel economy with 
respect to any vehicle shall be measured under rules 
similar to the rules under section 4064(c). 
‘‘(4) OTHER TERMS.—The terms ‘automobile’, 
‘passenger automobile’, ‘light truck’, and ‘manufac-
turer’ have the meanings given such terms in regula-
tions prescribed by the Administrator of the Envi-
ronmental Protection Agency for purposes of the ad-
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ministration of title II of the Clean Air Act (42 
U.S.C. 7521 et seq.). 
‘‘(5) REDUCTION IN BASIS.—For purposes of 
this subtitle, if a credit is allowed under this section 
for any expenditure with respect to any property, the 
increase in the basis of such property which would 
(but for this paragraph) result from such expendi-
ture shall be reduced by the amount of the credit so 
allowed. 
‘‘(6) NO
DOUBLE
BENEFIT.—The amount of 
any deduction or credit allowable under this chapter 
(other than the credit allowable under this section), 
with respect to a vehicle described under subsection 
(b), shall be reduced by the amount of credit allowed 
under subsection (a) for such vehicle for the taxable 
year. 
‘‘(7) PROPERTY USED BY TAX-EXEMPT ENTI-
TIES.—In the case of a credit amount which is al-
lowable with respect to a motor vehicle which is ac-
quired by an entity exempt from tax under this 
chapter, the person which sells or leases such vehicle 
to the entity shall be treated as the taxpayer with 
respect to the vehicle for purposes of this section 
and the credit shall be allowed to such person, but 
only if the person clearly discloses to the entity in
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any sale or lease document the specific amount of 
any credit otherwise allowable to the entity under 
this section. 
‘‘(8) RECAPTURE.—The Secretary shall, by reg-
ulations, provide for recapturing the benefit of any 
credit allowable under subsection (a) with respect to 
any property which ceases to be property eligible for 
such credit (including recapture in the case of a 
lease period of less than the economic life of a vehi-
cle). 
‘‘(9) 
PROPERTY
USED
OUTSIDE
UNITED 
STATES, ETC., NOT QUALIFIED.—No credit shall be 
allowed under subsection (a) with respect to any 
property referred to in section 50(b) or with respect 
to the portion of the cost of any property taken into 
account under section 179. 
‘‘(10) ELECTION TO NOT TAKE CREDIT.—No 
credit shall be allowed under subsection (a) for any 
vehicle if the taxpayer elects to not have this section 
apply to such vehicle. 
‘‘(11) CARRYFORWARD ALLOWED.—
‘‘(A) IN GENERAL.—If the credit amount 
allowable under subsection (a) for a taxable 
year exceeds the amount of the limitation under 
subsection (d) for such taxable year (referred to
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as the ‘unused credit year’ in this paragraph), 
such excess shall be allowed as a credit 
carryforward for each of the 20 taxable years 
following the unused credit year. 
‘‘(B) RULES.—Rules similar to the rules of 
section 39 shall apply with respect to the credit 
carryforward under subparagraph (A). 
‘‘(12) INTERACTION
WITH
AIR
QUALITY
AND 
MOTOR VEHICLE SAFETY STANDARDS.—Unless oth-
erwise provided in this section, a motor vehicle shall 
not be considered eligible for a credit under this sec-
tion unless such vehicle is in compliance with—
‘‘(A) the applicable provisions of the Clean 
Air Act for the applicable make and model year 
of the vehicle (or applicable air quality provi-
sions of State law in the case of a State which 
has adopted such provision under a waiver 
under section 209(b) of the Clean Air Act), and 
‘‘(B) the motor vehicle safety provisions of 
sections 30101 through 30169 of title 49, 
United States Code. 
‘‘(f) REGULATIONS.—
‘‘(1) IN GENERAL.—The Secretary shall pro-
mulgate such regulations as necessary to carry out 
the provisions of this section.
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‘‘(2) DETERMINATION OF MOTOR VEHICLE ELI-
GIBILITY.—The Secretary, in coordination with the 
Secretary of Transportation and the Administrator 
of the Environmental Protection Agency, shall pre-
scribe such regulations as necessary to determine 
whether a motor vehicle meets the requirements to 
be eligible for a credit under this section. 
‘‘(g) TERMINATION.—This section shall not apply to 
any property placed in service after—
‘‘(1) in the case of a new qualified fuel cell 
motor vehicle (as described in subsection (b)), De-
cember 31, 2012, and 
‘‘(2) in the case of any other property, Decem-
ber 31, 2006.’’. 
(b) CONFORMING AMENDMENTS.—
(1) Section 1016(a) is amended by striking 
‘‘and’’ at the end of paragraph (30), by striking the 
period at the end of paragraph (31) and inserting ‘‘, 
and’’, and by adding at the end the following: 
‘‘(32) to the extent provided in section 
30B(e)(5).’’. 
(2) Section 6501(m) is amended by inserting 
‘‘30B(e)(10),’’ after ‘‘30(d)(4),’’. 
(3) The table of sections for subpart B of part 
IV of subchapter A of chapter 1 is amended by in-
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serting after the item relating to section 30A the fol-
lowing:
‘‘Sec. 30B. Alternative motor vehicle credit.’’.
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to property placed in service after 
December 31, 2003, in taxable years ending after such 
date. 
TITLE II—RELIABILITY 
SEC. 42001. NATURAL GAS GATHERING LINES TREATED AS 
7-YEAR PROPERTY. 
(a) IN GENERAL.—Subparagraph (C) of section 
168(e)(3) (relating to classification of certain property) is 
amended by striking ‘‘and’’ at the end of clause (i), by 
redesignating clause (ii) as clause (iii), and by inserting 
after clause (i) the following new clause: 
‘‘(ii) any natural gas gathering line, 
and’’. 
(b) NATURAL GAS GATHERING LINE.—Subsection (i) 
of section 168 is amended by adding after paragraph (15) 
the following new paragraph: 
‘‘(16) NATURAL
GAS
GATHERING
LINE.—The 
term ‘natural gas gathering line’ means—
‘‘(A) the pipe, equipment, and appur-
tenances determined to be a gathering line by 
the Federal Energy Regulatory Commission, or
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‘‘(B) the pipe, equipment, and appur-
tenances used to deliver natural gas from the 
wellhead or a commonpoint to the point at 
which such gas first reaches—
‘‘(i) a gas processing plant, 
‘‘(ii) an interconnection with a trans-
mission pipeline certificated by the Federal 
Energy Regulatory Commission as an 
interstate transmission pipeline, 
‘‘(iii) an interconnection with an 
intrastate transmission pipeline, or 
‘‘(iv) a direct interconnection with a 
local distribution company, a gas storage 
facility, or an industrial consumer.’’. 
(c) ALTERNATIVE SYSTEM.—The table contained in 
section 168(g)(3)(B) is amended by inserting after the 
item relating to subparagraph (C)(i) the following:
‘‘(C)(ii) .......................................................................................................
10’’.
(d) ALTERNATIVE MINIMUM TAX EXCEPTION.—Sub-
paragraph (B) of section 56(a)(1) is amended by inserting 
before the period the following: ‘‘, or in section 
168(e)(3)(C)(ii)’’. 
(e) EFFECTIVE DATE.—The amendments made by 
this section shall apply to property placed in service after 
the date of the enactment of this Act, in taxable years 
ending after such date.
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SEC. 42002. NATURAL GAS DISTRIBUTION LINES TREATED 
AS 15-YEAR PROPERTY. 
(a) IN GENERAL.—Subparagraph (E) of section 
168(e)(3) (relating to classification of certain property) is 
amended by striking ‘‘and’’ at the end of clause (ii), by 
striking the period at the end of clause (iii) and by insert-
ing ‘‘, and’’, and by adding at the end the following new 
clause: 
‘‘(iv) any natural gas distribution 
line.’’. 
(b) ALTERNATIVE SYSTEM.—The table contained in 
section 168(g)(3)(B) is amended by inserting after the 
item relating to subparagraph (E)(iii) the following:
‘‘(E)(iv) ......................................................................................................
20’’.
(c) ALTERNATIVE MINIMUM TAX EXCEPTION.—Sub-
paragraph (B) of section 56(a)(1) is amended by inserting 
before the period the following: ‘‘, or in section 
168(e)(3)(E)(iv)’’. 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to property placed in service after 
the date of the enactment of this Act, in taxable years 
ending after such date. 
SEC. 42003. ELECTRIC TRANSMISSION PROPERTY TREATED 
AS 15-YEAR PROPERTY. 
(a) IN GENERAL.—Subparagraph (E) of section 
168(e)(3) (relating to classification of certain property) is
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amended by striking ‘‘and’’ at the end of clause (iii), by 
striking the period at the end of clause (iv) and by insert-
ing ‘‘, and’’, and by adding at the end the following new 
clause: 
‘‘(v) any section 1245 property (as de-
fined in section 1245(a)(3)) used in the 
transmission at 69 or more kilovolts of 
electricity for sale.’’. 
(b) ALTERNATIVE SYSTEM.—The table contained in 
section 168(g)(3)(B) is amended by inserting after the 
item relating to subparagraph (E)(iv) the following:
‘‘(E)(v) .......................................................................................................
20’’.
(c) ALTERNATIVE MINIMUM TAX EXCEPTION.—Sub-
paragraph (B) of section 56(a)(1) is amended by inserting 
before the period the following: ‘‘, or in section 
168(e)(3)(E)(v)’’. 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to property placed in service after 
the date of the enactment of this Act, in taxable years 
ending after such date. 
SEC. 42004. EXPENSING OF CAPITAL COSTS INCURRED IN 
COMPLYING WITH ENVIRONMENTAL PROTEC-
TION AGENCY SULFUR REGULATIONS. 
(a) IN GENERAL.—Part VI of subchapter B of chap-
ter 1 (relating to itemized deductions for individuals and
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corporations) is amended by inserting after section 179A 
the following new section: 
‘‘SEC. 179B. DEDUCTION FOR CAPITAL COSTS INCURRED IN 
COMPLYING WITH ENVIRONMENTAL PROTEC-
TION AGENCY SULFUR REGULATIONS. 
‘‘(a) TREATMENT AS EXPENSES.—A small business 
refiner (as defined in section 45H(c)(1)) may elect to treat 
75 percent of qualified capital costs (as defined in section 
45H(c)(2)) which are paid or incurred by the taxpayer 
during the taxable year as expenses which are not charge-
able to capital account. Any cost so treated shall be al-
lowed as a deduction for the taxable year in which paid 
or incurred. 
‘‘(b) REDUCED PERCENTAGE.—In the case of a small 
business refiner with average daily domestic refinery runs 
for the 1-year period ending on March 31, 2003, in excess 
of 155,000 barrels, the number of percentage points de-
scribed in subsection (a) shall be reduced (not below zero) 
by the product of such number (before the application of 
this subsection) and the ratio of such excess to 50,000 
barrels. 
‘‘(c) BASIS REDUCTION.—
‘‘(1) IN GENERAL.—For purposes of this title, 
the basis of any property shall be reduced by the
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portion of the cost of such property taken into ac-
count under subsection (a). 
‘‘(2) ORDINARY
INCOME
RECAPTURE.—For 
purposes of section 1245, the amount of the deduc-
tion allowable under subsection (a) with respect to 
any property which is of a character subject to the 
allowance for depreciation shall be treated as a de-
duction allowed for depreciation under section 167.’’. 
(b) CONFORMING AMENDMENTS.—
(1) Section 263(a)(1) is amended by striking 
‘‘or’’ at the end of subparagraph (G), by striking the 
period at the end of subparagraph (H) and inserting 
‘‘; or’’, and by adding at the end the following new 
subparagraph: 
‘‘(I) expenditures for which a deduction is 
allowed under section 179B.’’. 
(2) Section 312(k)(3)(B) is amended—
(A) by striking ‘‘section 179 or 179A’’ 
each place it appears and inserting ‘‘section 
179, 179A, or 179B’’, and 
(B) in the heading, by striking ‘‘179 OR 
179A’’ and inserting ‘‘179, 179A, OR 179B’’. 
(3) Section 1016(a) is amended by striking 
‘‘and’’ at the end of paragraph (31), by striking the 
period at the end of paragraph (32) and inserting ‘‘,
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and’’, and by adding at the end the following new 
paragraph: 
‘‘(33) to the extent provided in section 
179B(c).’’
(4) Paragraphs (2)(C) and (3)(C) of section 
1245(a) are each amended by inserting ‘‘179B,’’ 
after ‘‘179A,’’. 
(5) The table of sections for part VI of sub-
chapter B of chapter 1 is amended by inserting after 
the item relating to section 179A the following new 
item:
‘‘Sec. 179B. Deduction for capital costs incurred in complying 
with Environmental Protection Agency sulfur regu-
lations.’’.
(c) EFFECTIVE DATE.—The amendment made by 
this section shall apply to expenses paid or incurred after 
March 31, 2003, in taxable years ending after such date. 
SEC. 42005. CREDIT FOR PRODUCTION OF LOW SULFUR 
DIESEL FUEL. 
(a) IN GENERAL.—Subpart D of part IV of sub-
chapter A of chapter 1 (relating to business-related cred-
its) is amended by adding at the end the following new 
section: 
‘‘SEC. 45H. CREDIT FOR PRODUCTION OF LOW SULFUR DIE-
SEL FUEL. 
‘‘(a) IN GENERAL.—For purposes of section 38, the 
amount of the low sulfur diesel fuel production credit de-
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termined under this section with respect to any facility 
of a small business refiner is an amount equal to 5 cents 
for each gallon of low sulfur diesel fuel produced during 
the taxable year by such small business refiner at such 
facility. 
‘‘(b) MAXIMUM CREDIT.—
‘‘(1) IN GENERAL.—The aggregate credit deter-
mined under subsection (a) for any taxable year with 
respect to any facility shall not exceed—
‘‘(A) 25 percent of the qualified capital 
costs incurred by the small business refiner 
with respect to such facility, reduced by 
‘‘(B) the aggregate credits determined 
under this section for all prior taxable years 
with respect to such facility. 
‘‘(2) REDUCED PERCENTAGE.—In the case of a 
small business refiner with average daily domestic 
refinery runs for the 1-year period ending on March 
31, 2003, in excess of 155,000 barrels, the number 
of percentage points described in paragraph (1) shall 
be reduced (not below zero) by the product of such 
number (before the application of this paragraph) 
and the ratio of such excess to 50,000 barrels. 
‘‘(c) DEFINITIONS.—For purposes of this section—
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‘‘(1) SMALL
BUSINESS
REFINER.—The term 
‘small business refiner’ means, with respect to any 
taxable year, a refiner of crude oil with respect to 
which not more than 1,500 persons are engaged in 
the refinery operations of the business on any day 
during such taxable year and whose average daily 
domestic refinery run for the 1-year period ending 
on March 31, 2003, did not exceed 205,000 barrels. 
‘‘(2) QUALIFIED
CAPITAL
COSTS.—The term 
‘qualified capital costs’ means, with respect to any 
facility, those costs paid or incurred during the ap-
plicable period for compliance with the applicable 
EPA regulations with respect to such facility, includ-
ing expenditures for the construction of new process 
operation units or the dismantling and reconstruc-
tion of existing process units to be used in the pro-
duction of low sulfur diesel fuel, associated adjacent 
or offsite equipment (including tankage, catalyst, 
and power supply), engineering, construction period 
interest, and sitework. 
‘‘(3) APPLICABLE
EPA
REGULATIONS.—The 
term ‘applicable EPA regulations’ means the High-
way Diesel Fuel Sulfur Control Requirements of the 
Environmental Protection Agency.
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‘‘(4) APPLICABLE PERIOD.—The term ‘applica-
ble period’ means, with respect to any facility, the 
period beginning on April 1, 2003, and ending with 
the date which is 1 year after the date on which the 
taxpayer must comply with the applicable EPA regu-
lations with respect to such facility. 
‘‘(5) LOW SULFUR DIESEL FUEL.—The term 
‘low sulfur diesel fuel’ means diesel fuel with a sul-
fur content of 15 parts per million or less. 
‘‘(d) REDUCTION IN BASIS.—For purposes of this 
subtitle, if a credit is determined under this section for 
any expenditure with respect to any property, the increase 
in basis of such property which would (but for this sub-
section) result from such expenditure shall be reduced by 
the amount of the credit so determined. 
‘‘(e) CERTIFICATION.—
‘‘(1) REQUIRED.—Not later than the date 
which is 30 months after the first day of the first 
taxable year in which the low sulfur diesel fuel pro-
duction credit is allowed with respect to a facility, 
the small business refiner must obtain certification 
from the Secretary, in consultation with the Admin-
istrator of the Environmental Protection Agency, 
that the taxpayer’s qualified capital costs with re-
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spect to such facility will result in compliance with 
the applicable EPA regulations. 
‘‘(2) CONTENTS OF APPLICATION.—An applica-
tion for certification shall include relevant informa-
tion regarding unit capacities and operating charac-
teristics sufficient for the Secretary, in consultation 
with the Administrator of the Environmental Protec-
tion Agency, to determine that such qualified capital 
costs are necessary for compliance with the applica-
ble EPA regulations. 
‘‘(3) REVIEW
PERIOD.—Any application shall 
be reviewed and notice of certification, if applicable, 
shall be made within 60 days of receipt of such ap-
plication. 
‘‘(4) STATUTE OF LIMITATIONS.—With respect 
to the credit allowed under this section—
‘‘(A) the statutory period for the assess-
ment of any deficiency attributable to such 
credit shall not expire before the end of the 3-
year period ending on the date that the review 
period described in paragraph (3) ends, and 
‘‘(B) such deficiency may be assessed be-
fore the expiration of such 3-year period not-
withstanding the provisions of any other law or
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rule of law which would otherwise prevent such 
assessment. 
‘‘(f) CONTROLLED GROUPS.—For purposes of this 
section, all persons treated as a single employer under sub-
section (b), (c), (m), or (o) of section 414 shall be treated 
as 1 taxpayer.’’. 
(b) CREDIT MADE PART OF GENERAL BUSINESS 
CREDIT.—Subsection (b) of section 38 (relating to general 
business credit) is amended by striking ‘‘plus’’ at the end 
of paragraph (15), by striking the period at the end of 
paragraph (16) and inserting ‘‘, plus’’, and by adding at 
the end the following new paragraph: 
‘‘(17) in the case of a small business refiner, 
the low sulfur diesel fuel production credit deter-
mined under section 45H(a).’’. 
(c) DENIAL OF DOUBLE BENEFIT.—Section 280C 
(relating to certain expenses for which credits are allow-
able) is amended by adding after subsection (d) the fol-
lowing new subsection: 
‘‘(e) LOW
SULFUR
DIESEL
FUEL
PRODUCTION 
CREDIT.—No deduction shall be allowed for that portion 
of the expenses otherwise allowable as a deduction for the 
taxable year which is equal to the amount of the credit 
determined for the taxable year under section 45H(a).’’.
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(d) BASIS ADJUSTMENT.—Section 1016(a) (relating 
to adjustments to basis) is amended by striking ‘‘and’’ at 
the end of paragraph (32), by striking the period at the 
end of paragraph (33) and inserting ‘‘, and’’, and by add-
ing at the end the following new paragraph: 
‘‘(34) in the case of a facility with respect to 
which a credit was allowed under section 45H, to 
the extent provided in section 45H(d).’’. 
(e) CLERICAL AMENDMENT.—The table of sections 
for subpart D of part IV of subchapter A of chapter 1 
is amended by adding at the end the following new item:
‘‘Sec. 45H. Credit for production of low sulfur diesel fuel.’’.
(f) EFFECTIVE DATE.—The amendments made by 
this section shall apply to expenses paid or incurred after 
March 31, 2003, in taxable years ending after such date. 
SEC. 42006. DETERMINATION OF SMALL REFINER EXCEP-
TION TO OIL DEPLETION DEDUCTION. 
(a) IN GENERAL.—Paragraph (4) of section 613A(d) 
(relating to certain refiners excluded) is amended to read 
as follows: 
‘‘(4) CERTAIN
REFINERS
EXCLUDED.—If the 
taxpayer or a related person engages in the refining 
of crude oil, subsection (c) shall not apply to the 
taxpayer for a taxable year if the average daily refin-
ery runs of the taxpayer and the related person for 
the taxable year exceed 75,000 barrels. For purposes
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of this paragraph, the average daily refinery runs for 
any taxable year shall be determined by dividing the 
aggregate refinery runs for the taxable year by the 
number of days in the taxable year.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years beginning after 
December 31, 2003.
SEC. 42007. SALES OR DISPOSITIONS TO IMPLEMENT FED-
ERAL ENERGY REGULATORY COMMISSION 
OR STATE ELECTRIC RESTRUCTURING POL-
ICY. 
(a) IN GENERAL.—Section 451 (relating to general 
rule for taxable year of inclusion) is amended by adding 
at the end the following new subsection: 
‘‘(i) SPECIAL RULE FOR SALES OR DISPOSITIONS TO 
IMPLEMENT FEDERAL ENERGY REGULATORY COMMIS-
SION OR STATE ELECTRIC RESTRUCTURING POLICY.—
‘‘(1) IN GENERAL.—In the case of any quali-
fying electric transmission transaction to which the 
taxpayer elects the application of this section, quali-
fied gain from such transaction shall be recog-
nized—
‘‘(A) in the taxable year which includes the 
date of such transaction to the extent the
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amount realized from such transaction ex-
ceeds—
‘‘(i) the cost of exempt utility property 
which is purchased by the taxpayer during 
the 4-year period beginning on such date, 
reduced (but not below zero) by 
‘‘(ii) any portion of such cost pre-
viously taken into account under this sub-
section, and 
‘‘(B) ratably over the 8-taxable year period 
beginning with the taxable year which includes 
the date of such transaction, in the case of any 
such gain not recognized under subparagraph 
(A). 
‘‘(2) QUALIFIED GAIN.—For purposes of this 
subsection, the term ‘qualified gain’ means, with re-
spect to any qualifying electric transmission trans-
action in any taxable year— 
‘‘(A) any ordinary income derived from 
such transaction which would be required to be 
recognized under section 1245 or 1250 for such 
taxable year (determined without regard to this 
subsection), and 
‘‘(B) any income derived from such trans-
action in excess of the amount described in sub-
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under the operational control of a person 
described in clause (i). 
‘‘(5) EXEMPT
UTILITY
PROPERTY.—For pur-
poses of this subsection—
‘‘(A) IN
GENERAL.—The term ‘exempt 
utility property’ means property used in the 
trade or business of—
‘‘(i) generating, transmitting, distrib-
uting, or selling electricity, or 
‘‘(ii) producing, transmitting, distrib-
uting, or selling natural gas. 
‘‘(B) NONRECOGNITION OF GAIN BY REA-
SON OF ACQUISITION OF STOCK.—Acquisition of 
control of a corporation shall be taken into ac-
count under this subsection with respect to a 
qualifying electric transmission transaction only 
if the principal trade or business of such cor-
poration is a trade or business referred to in 
subparagraph (A). 
‘‘(6) 
SPECIAL
RULE
FOR
CONSOLIDATED 
GROUPS.—In the case of a corporation which is a 
member of an affiliated group filing a consolidated 
return, any exempt utility property purchased by an-
other member of such group shall be treated as pur-
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chased by such corporation for purposes of applying 
paragraph (1)(A). 
‘‘(7) 
TIME
FOR
ASSESSMENT
OF
DEFI-
CIENCIES.—If the taxpayer has made the election 
under paragraph (1) and any gain is recognized by 
such taxpayer as provided in paragraph (1)(B), 
then—
‘‘(A) the statutory period for the assess-
ment of any deficiency, for any taxable year in 
which any part of the gain on the transaction 
is realized, attributable to such gain shall not 
expire prior to the expiration of 3 years from 
the date the Secretary is notified by the tax-
payer (in such manner as the Secretary may by 
regulations prescribe) of the purchase of exempt 
utility property or of an intention not to pur-
chase such property, and 
‘‘(B) such deficiency may be assessed be-
fore the expiration of such 3-year period not-
withstanding any law or rule of law which 
would otherwise prevent such assessment. 
‘‘(8) PURCHASE.—For purposes of this sub-
section, the taxpayer shall be considered to have 
purchased any property if the unadjusted basis of
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such property is its cost within the meaning of sec-
tion 1012. 
‘‘(9) ELECTION.—An election under paragraph 
(1) shall be made at such time and in such manner 
as the Secretary may require and, once made, shall 
be irrevocable.’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to transactions occurring after the 
date of the enactment of this Act, in taxable years ending 
after such date. 
SEC. 42008. MODIFICATIONS TO SPECIAL RULES FOR NU-
CLEAR DECOMMISSIONING COSTS. 
(a) REPEAL
OF LIMITATION
ON DEPOSITS INTO 
FUND BASED ON COST OF SERVICE; CONTRIBUTIONS 
AFTER FUNDING PERIOD.—Subsection (b) of section 
468A is amended to read as follows: 
‘‘(b) LIMITATION ON AMOUNTS PAID INTO FUND.—
‘‘(1) IN GENERAL.—The amount which a tax-
payer may pay into the Fund for any taxable year 
shall not exceed the ruling amount applicable to 
such taxable year. 
‘‘(2) CONTRIBUTIONS
AFTER
FUNDING
PE-
RIOD.—Notwithstanding any other provision of this 
section, a taxpayer may pay into the Fund in any 
taxable year after the last taxable year to which the
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ruling amount applies. Payments may not be made 
under the preceding sentence to the extent such pay-
ments would cause the assets of the Fund to exceed 
the nuclear decommissioning costs allocable to the 
taxpayer’s current or former interest in the nuclear 
power plant to which the Fund relates. The limita-
tion under the preceding sentence shall be deter-
mined by taking into account a reasonable rate of 
inflation for the nuclear decommissioning costs and 
a reasonable after-tax rate of return on the assets 
of the Fund until such assets are anticipated to be 
expended.’’. 
(b) CLARIFICATION
OF
TREATMENT
OF
FUND 
TRANSFERS.—Subsection (e) of section 468A is amended 
by adding at the end the following new paragraph: 
‘‘(8) TREATMENT OF FUND TRANSFERS.—If, in 
connection with the transfer of the taxpayer’s inter-
est in a nuclear power plant, the taxpayer transfers 
the Fund with respect to such power plant to the 
transferee of such interest and the transferee elects 
to continue the application of this section to such 
Fund—
‘‘(A) the transfer of such Fund shall not 
cause such Fund to be disqualified from the ap-
plication of this section, and
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‘‘(B) no amount shall be treated as distrib-
uted from such Fund, or be includible in gross 
income, by reason of such transfer.’’. 
(c) TREATMENT
OF CERTAIN DECOMMISSIONING 
COSTS.—
(1) IN GENERAL.—Section 468A is amended by 
redesignating subsections (f) and (g) as subsections 
(g) and (h), respectively, and by inserting after sub-
section (e) the following new subsection: 
‘‘(f) TRANSFERS INTO QUALIFIED FUNDS.—
‘‘(1) IN GENERAL.—Notwithstanding subsection 
(b), any taxpayer maintaining a Fund to which this 
section applies with respect to a nuclear power plant 
may transfer into such Fund up to an amount equal 
to the excess of the total nuclear decommissioning 
costs with respect to such nuclear power plant over 
the portion of such costs taken into account in de-
termining the ruling amount in effect immediately 
before the transfer. 
‘‘(2) 
DEDUCTION
FOR
AMOUNTS
TRANS-
FERRED.—
‘‘(A) IN GENERAL.—Except as provided in 
subparagraph (C), the deduction allowed by 
subsection (a) for any transfer permitted by 
this subsection shall be allowed ratably over the
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remaining estimated useful life (within the 
meaning of subsection (d)(2)(A)) of the nuclear 
power plant beginning with the taxable year 
during which the transfer is made. 
‘‘(B) DENIAL
OF
DEDUCTION
FOR
PRE-
VIOUSLY DEDUCTED AMOUNTS.—No deduction 
shall be allowed for any transfer under this sub-
section of an amount for which a deduction was 
previously allowed or a corresponding amount 
was not included in gross income. For purposes 
of the preceding sentence, a ratable portion of 
each transfer shall be treated as being from 
previously deducted or excluded amounts to the 
extent thereof. 
‘‘(C) TRANSFERS OF QUALIFIED FUNDS.—
If—
‘‘(i) any transfer permitted by this 
subsection is made to any Fund to which 
this section applies, and 
‘‘(ii) such Fund is transferred there-
after, 
any deduction under this subsection for taxable 
years ending after the date that such Fund is 
transferred shall be allowed to the transferor 
for the taxable year which includes such date.
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‘‘(D) SPECIAL RULES.—
‘‘(i) GAIN
OR
LOSS
NOT
RECOG-
NIZED.—No gain or loss shall be recog-
nized on any transfer permitted by this 
subsection. 
‘‘(ii) TRANSFERS
OF
APPRECIATED 
PROPERTY.—If appreciated property is 
transferred in a transfer permitted by this 
subsection, the amount of the deduction 
shall be the adjusted basis of such prop-
erty. 
‘‘(3) NEW RULING AMOUNT REQUIRED.—Para-
graph (1) shall not apply to any transfer unless the 
taxpayer requests from the Secretary a new schedule 
of ruling amounts in connection with such transfer. 
‘‘(4) NO
BASIS
IN
QUALIFIED
FUNDS.—Not-
withstanding any other provision of law, the tax-
payer’s basis in any Fund to which this section ap-
plies shall not be increased by reason of any transfer 
permitted by this subsection.’’. 
(2) NEW RULING AMOUNT TO TAKE INTO AC-
COUNT TOTAL COSTS.—Subparagraph (A) of section 
468A(d)(2) is amended to read as follows: 
‘‘(A) fund the total nuclear decommis-
sioning costs with respect to such power plant
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over the estimated useful life of such power 
plant, and’’. 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2003. 
SEC. 42009. TREATMENT OF CERTAIN INCOME OF CO-
OPERATIVES. 
(a) INCOME FROM OPEN ACCESS AND NUCLEAR DE-
COMMISSIONING TRANSACTIONS.—
(1) IN GENERAL.—Subparagraph (C) of section 
501(c)(12) is amended by striking ‘‘or’’ at the end 
of clause (i), by striking clause (ii), and by adding 
at the end the following new clauses: 
‘‘(ii) from any provision or sale of 
transmission service or ancillary services if 
such services are provided on a non-
discriminatory open access basis under an 
independent transmission provider agree-
ment approved by FERC (other than in-
come received or accrued directly or indi-
rectly from a member), 
‘‘(iii) from any nuclear decommis-
sioning transaction, or 
‘‘(iv) from any asset exchange or con-
version transaction.’’.
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(2) DEFINITIONS AND SPECIAL RULES.—Para-
graph (12) of section 501(c) is amended by adding 
at the end the following new subparagraphs: 
‘‘(E) For purposes of subparagraph (C)(ii), 
the term ‘FERC’ means the Federal Energy 
Regulatory Commission and references to such 
term shall be treated as including the Public 
Utility Commission of Texas with respect to 
any ERCOT utility (as defined in section 
212(k)(2)(B) of the Federal Power Act (16 
U.S.C. 824k(k)(2)(B))). 
‘‘(F) 
For 
purposes 
of 
subparagraph 
(C)(iii), the term ‘nuclear decommissioning 
transaction’ means—
‘‘(i) any transfer into a trust, fund, or 
instrument established to pay any nuclear 
decommissioning costs if the transfer is in 
connection with the transfer of the mutual 
or cooperative electric company’s interest 
in a nuclear power plant or nuclear power 
plant unit, 
‘‘(ii) any distribution from any trust, 
fund, or instrument established to pay any 
nuclear decommissioning costs, or
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‘‘(iii) any earnings from any trust, 
fund, or instrument established to pay any 
nuclear decommissioning costs. 
‘‘(G) 
For 
purposes 
of 
subparagraph 
(C)(iv), the term ‘asset exchange or conversion 
transaction’ means any voluntary exchange or 
involuntary conversion of any property related 
to generating, transmitting, distributing, or sell-
ing electric energy by a mutual or cooperative 
electric company, the gain from which qualifies 
for deferred recognition under section 1031 or 
1033, but only if the replacement property ac-
quired by such company pursuant to such sec-
tion constitutes property which is used, or to be 
used, for—
‘‘(i) generating, transmitting, distrib-
uting, or selling electric energy, or 
‘‘(ii) producing, transmitting, distrib-
uting, or selling natural gas.’’. 
(b) TREATMENT
OF INCOME FROM LOAD LOSS 
TRANSACTIONS, ETC.—Paragraph (12) of section 501(c), 
as amended by subsection (a)(2), is amended by adding 
after subparagraph (G) the following new subparagraph: 
‘‘(H)(i) In the case of a mutual or coopera-
tive electric company described in this para-
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graph or an organization described in section 
1381(a)(2)(C), income received or accrued from 
a load loss transaction shall be treated as an 
amount collected from members for the sole 
purpose of meeting losses and expenses. 
‘‘(ii) For purposes of clause (i), the term 
‘load loss transaction’ means any wholesale or 
retail sale of electric energy (other than to 
members) to the extent that the aggregate sales 
during the recovery period do not exceed the 
load loss mitigation sales limit for such period. 
‘‘(iii) For purposes of clause (ii), the load 
loss mitigation sales limit for the recovery pe-
riod is the sum of the annual load losses for 
each year of such period. 
‘‘(iv) For purposes of clause (iii), a mutual 
or cooperative electric company’s annual load 
loss for each year of the recovery period is the 
amount (if any) by which—
‘‘(I) the megawatt hours of electric 
energy sold during such year to members 
of such electric company are less than 
‘‘(II) the megawatt hours of electric 
energy sold during the base year to such 
members.
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‘‘(v) For purposes of clause (iv)(II), the 
term ‘base year’ means—
‘‘(I) the calendar year preceding the 
start-up year, or 
‘‘(II) at the election of the electric 
company, the second or third calendar 
years preceding the start-up year. 
‘‘(vi) For purposes of this subparagraph, 
the recovery period is the 7-year period begin-
ning with the start-up year. 
‘‘(vii) For purposes of this subparagraph, 
the start-up year is the calendar year which in-
cludes the date of the enactment of this sub-
paragraph or, if later, at the election of the mu-
tual or cooperative electric company—
‘‘(I) the first year that such electric 
company offers nondiscriminatory open ac-
cess, or 
‘‘(II) the first year in which at least 
10 percent of such electric company’s sales 
are not to members of such electric com-
pany. 
‘‘(viii) A company shall not fail to be treat-
ed as a mutual or cooperative company for pur-
poses of this paragraph or as a corporation op-
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erating on a cooperative basis for purposes of 
section 1381(a)(2)(C) by reason of the treat-
ment under clause (i). 
‘‘(ix) For purposes of subparagraph (A), in 
the case of a mutual or cooperative electric 
company, income received, or accrued, indirectly 
from a member shall be treated as an amount 
collected from members for the sole purpose of 
meeting losses and expenses.’’. 
(c) EXCEPTION FROM UNRELATED BUSINESS TAX-
ABLE INCOME.—Subsection (b) of section 512 (relating to 
modifications) is amended by adding at the end the fol-
lowing new paragraph: 
‘‘(18) TREATMENT OF MUTUAL OR COOPERA-
TIVE ELECTRIC COMPANIES.—In the case of a mu-
tual or cooperative electric company described in sec-
tion 501(c)(12), there shall be excluded income 
which is treated as member income under subpara-
graph (H) thereof.’’. 
(d) CROSS REFERENCE.—Section 1381 is amended 
by adding at the end the following new subsection:
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‘‘(c) CROSS REFERENCE.—
‘‘For treatment of income from load loss trans-
actions of organizations described in subsection 
(a)(2)(C), see section 501(c)(12)(H).’’.
(e) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
the date of the enactment of this Act. 
SEC. 42010. ARBITRAGE RULES NOT TO APPLY TO PREPAY-
MENTS FOR NATURAL GAS. 
(a) IN GENERAL.—Subsection (b) of section 148 (re-
lating to higher yielding investments) is amended by add-
ing at the end the following new paragraph: 
‘‘(4) SAFE
HARBOR
FOR
PREPAID
NATURAL 
GAS.—
‘‘(A) IN GENERAL.—The term ‘investment-
type property’ does not include a prepayment 
under a qualified natural gas supply contract. 
‘‘(B) QUALIFIED
NATURAL
GAS
SUPPLY 
CONTRACT.—For purposes of this paragraph, 
the term ‘qualified natural gas supply contract’ 
means any contract to acquire natural gas for 
resale by a utility owned by a governmental 
unit if the amount of gas permitted to be ac-
quired under the contract by the utility during 
any year does not exceed the sum of—
‘‘(i) the annual average amount dur-
ing the testing period of natural gas pur-
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chased (other than for resale) by cus-
tomers of such utility who are located 
within the service area of such utility, and 
‘‘(ii) the amount of natural gas to be 
used to transport the prepaid natural gas 
to the utility during such year. 
‘‘(C) NATURAL GAS USED TO GENERATE 
ELECTRICITY.—Natural gas used to generate 
electricity shall be taken into account in deter-
mining 
the 
average 
under 
subparagraph 
(B)(i)—
‘‘(i) only if the electricity is generated 
by a utility owned by a governmental unit, 
and 
‘‘(ii) only to the extent that the elec-
tricity is sold (other than for resale) to 
customers of such utility who are located 
within the service area of such utility. 
‘‘(D) ADJUSTMENTS
FOR
CHANGES
IN 
CUSTOMER BASE.—
‘‘(i) NEW
BUSINESS
CUSTOMERS.—
If—
‘‘(I) after the close of the testing 
period and before the date of issuance 
of the issue, the utility owned by a
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governmental unit enters into a con-
tract to supply natural gas (other 
than for resale) for a business use at 
a property within the service area of 
such utility, and 
‘‘(II) the utility did not supply 
natural gas to such property during 
the testing period or the ratable 
amount of natural gas to be supplied 
under the contract is significantly 
greater than the ratable amount of 
gas supplied to such property during 
the testing period, 
then a contract shall not fail to be treated 
as a qualified natural gas supply contract 
by reason of supplying the additional nat-
ural gas under the contract referred to in 
subclause (I). 
‘‘(ii) LOST CUSTOMERS.—The average 
under subparagraph (B)(i) shall not exceed 
the annual amount of natural gas reason-
ably expected to be purchased (other than 
for resale) by persons who are located 
within the service area of such utility and
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who, as of the date of issuance of the 
issue, are customers of such utility. 
‘‘(E) RULING REQUESTS.—The Secretary 
may increase the average under subparagraph 
(B)(i) for any period if the utility owned by the 
governmental unit establishes to the satisfaction 
of the Secretary that, based on objective evi-
dence of growth in natural gas consumption or 
population, such average would otherwise be in-
sufficient for such period. 
‘‘(F) ADJUSTMENT
FOR
NATURAL
GAS 
OTHERWISE ON HAND.—
‘‘(i) IN GENERAL.—The amount oth-
erwise permitted to be acquired under the 
contract for any period shall be reduced 
by—
‘‘(I) the applicable share of nat-
ural gas held by the utility on the 
date of issuance of the issue, and 
‘‘(II) the natural gas (not taken 
into account under subclause (I)) 
which the utility has a right to ac-
quire during such period (determined 
as of the date of issuance of the 
issue).
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‘‘(ii) APPLICABLE SHARE.—For pur-
poses of the clause (i), the term ‘applicable 
share’ means, with respect to any period, 
the natural gas allocable to such period if 
the gas were allocated ratably over the pe-
riod to which the prepayment relates. 
‘‘(G) INTENTIONAL ACTS.—Subparagraph 
(A) shall cease to apply to any issue if the util-
ity owned by the governmental unit engages in 
any intentional act to render the volume of nat-
ural gas acquired by such prepayment to be in 
excess of the sum of—
‘‘(i) the amount of natural gas needed 
(other than for resale) by customers of 
such utility who are located within the 
service area of such utility, and 
‘‘(ii) the amount of natural gas used 
to transport such natural gas to the utility. 
‘‘(H) TESTING PERIOD.—For purposes of 
this paragraph, the term ‘testing period’ means, 
with respect to an issue, the most recent 5 cal-
endar years ending before the date of issuance 
of the issue.
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‘‘(I) SERVICE AREA.—For purposes of this 
paragraph, the service area of a utility owned 
by a governmental unit shall be comprised of—
‘‘(i) any area throughout which such 
utility provided at all times during the 
testing period—
‘‘(I) in the case of a natural gas 
utility, natural gas transmission or 
distribution services, and 
‘‘(II) in the case of an electric 
utility, electricity distribution services, 
‘‘(ii) any area within a county contig-
uous to the area described in clause (i) in 
which retail customers of such utility are 
located if such area is not also served by 
another utility providing natural gas or 
electricity services, as the case may be, and 
‘‘(iii) any area recognized as the serv-
ice area of such utility under State or Fed-
eral law.’’. 
(b) PRIVATE LOAN FINANCING TEST NOT TO APPLY 
TO PREPAYMENTS FOR NATURAL GAS.—Paragraph (2) of 
section 141(c) (providing exceptions to the private loan fi-
nancing test) is amended by striking ‘‘or’’ at the end of 
subparagraph (A), by striking the period at the end of
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subparagraph (B) and inserting ‘‘, or’’, and by adding at 
the end the following new subparagraph: 
‘‘(C) is a qualified natural gas supply con-
tract (as defined in section 148(b)(4)).’’. 
(c) EFFECTIVE DATE.—The amendment made by 
this section shall apply to obligations issued after the date 
of the enactment of this Act. 
TITLE III—PRODUCTION 
SEC. 43001. OIL AND GAS FROM MARGINAL WELLS. 
(a) IN GENERAL.—Subpart D of part IV of sub-
chapter A of chapter 1 (relating to business credits) is 
amended by adding at the end the following: 
‘‘SEC. 45I. CREDIT FOR PRODUCING OIL AND GAS FROM 
MARGINAL WELLS. 
‘‘(a) GENERAL RULE.—For purposes of section 38, 
the marginal well production credit for any taxable year 
is an amount equal to the product of—
‘‘(1) the credit amount, and 
‘‘(2) the qualified credit oil production and the 
qualified natural gas production which is attrib-
utable to the taxpayer. 
‘‘(b) CREDIT AMOUNT.—For purposes of this sec-
tion—
‘‘(1) IN GENERAL.—The credit amount is—
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‘‘(A) $3 per barrel of qualified crude oil 
production, and 
‘‘(B) 50 cents per 1,000 cubic feet of 
qualified natural gas production. 
‘‘(2) REDUCTION AS OIL AND GAS PRICES IN-
CREASE.—
‘‘(A) IN GENERAL.—The $3 and 50 cents 
amounts under paragraph (1) shall each be re-
duced (but not below zero) by an amount which 
bears the same ratio to such amount (deter-
mined without regard to this paragraph) as—
‘‘(i) the excess (if any) of the applica-
ble reference price over $15 ($1.67 for 
qualified natural gas production), bears to 
‘‘(ii) $3 ($0.33 for qualified natural 
gas production). 
The applicable reference price for a taxable 
year is the reference price of the calendar year 
preceding the calendar year in which the tax-
able year begins. 
‘‘(B) INFLATION
ADJUSTMENT.—In the 
case of any taxable year beginning in a calendar 
year after 2003, each of the dollar amounts 
contained in subparagraph (A) shall be in-
creased to an amount equal to such dollar
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amount multiplied by the inflation adjustment 
factor for such calendar year (determined under 
section 43(b)(3)(B) by substituting ‘2002’ for 
‘1990’). 
‘‘(C) REFERENCE PRICE.—For purposes of 
this paragraph, the term ‘reference price’ 
means, with respect to any calendar year—
‘‘(i) in the case of qualified crude oil 
production, the reference price determined 
under section 29(d)(2)(C), and 
‘‘(ii) in the case of qualified natural 
gas production, the Secretary’s estimate of 
the annual average wellhead price per 
1,000 cubic feet for all domestic natural 
gas. 
‘‘(c) QUALIFIED CRUDE OIL
AND NATURAL GAS 
PRODUCTION.—For purposes of this section—
‘‘(1) IN GENERAL.—The terms ‘qualified crude 
oil production’ and ‘qualified natural gas production’ 
mean domestic crude oil or natural gas which is pro-
duced from a qualified marginal well. 
‘‘(2) LIMITATION ON AMOUNT OF PRODUCTION 
WHICH MAY QUALIFY.—
‘‘(A) IN GENERAL.—Crude oil or natural 
gas produced during any taxable year from any