906
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-
907
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
908
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.
‘‘(10) 
NONAPPLICATION
OF
INSTALLMENT
SALES TREATMENT.—Section 453 shall not apply to
any qualifying electric transmission transaction with
respect to which an election to apply this subsection
is made.’’.
(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. 1328. 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 (relating to special rules for nuclear decommis-
sioning costs) 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
909
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
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.—Section 468A(e) (relating to Nuclear De-
commissioning Reserve Fund) is amended by adding at
the end the following new paragraph:
‘‘(8) TREATMENT OF FUND TRANSFERS.—
‘‘(A) IN GENERAL.—If, in connection with
the transfer of the taxpayer’s interest in a nu-
910
clear 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—
‘‘(i) the transfer of such Fund shall
not cause such Fund to be disqualified
from the application of this section, and
‘‘(ii) no amount shall be treated as
distributed from such Fund, or be includ-
able in gross income, by reason of such
transfer.
‘‘(B) SPECIAL RULES IF TRANSFEROR IS
TAX-EXEMPT ENTITY.—
‘‘(i) IN GENERAL.—If—
‘‘(I) a person exempt from tax-
ation under this title transfers an in-
terest in a nuclear power plant,
‘‘(II) such person has set aside
amounts for nuclear decommissioning
which are transferred to the trans-
feree of the interest, and
‘‘(III) the transferee elects the
application of this subparagraph no
later than the due date (including ex-
911
tensions) of its return of tax for the
taxable year in which the transfer oc-
curs,
the amounts so set aside shall be treated
as if contributed by such person to a Fund
immediately before the transfer and then
transferred in the Fund to the transferee.
‘‘(ii) LIMITATION.—The amount treat-
ed as transferred to a Fund under clause
(i) shall not exceed the amount which
bears the same ratio to the present value
of the nuclear decommissioning costs of
the transferor with respect to the nuclear
power plant as the number of years the
nuclear power plant has been in service
bears to the estimated useful life of such
power plant.
‘‘(iii) BASIS.—The transferee’s basis
in any asset treated as transferred in the
Fund shall be the same as the adjusted
basis of such asset in the hands of the
transferor.
‘‘(iv) RULING AMOUNT REQUIRED.—
This subparagraph shall not apply to any
transfer unless the transferee requests
912
from the Secretary a schedule of ruling
amounts.
‘‘(v) ELECTION
DISREGARDED.—An
election under this subparagraph shall be
disregarded in determining the Federal in-
come tax of the transferor.’’.
(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 not more than an
amount equal to the present value of the portion of
the total nuclear decommissioning costs with respect
to such nuclear power plant previously excluded for
such nuclear power plant under subsection (d)(2)(A)
as in effect immediately before the date of the enact-
ment of the Energy Tax Policy Act of 2004.
‘‘(2) 
DEDUCTION
FOR
AMOUNTS
TRANS-
FERRED.—
913
‘‘(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
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 to the taxpayer (or a prede-
cessor) or a corresponding amount was not in-
cluded in gross income of the taxpayer (or a
predecessor). For purposes of the preceding
sentence, a ratable portion of each transfer
shall be treated as being from previously de-
ducted or excluded amounts to the extent there-
of.
‘‘(C) TRANSFERS OF QUALIFIED FUNDS.—
If—
‘‘(i) any transfer permitted by this
subsection is made to any Fund to which
this section applies, and
914
‘‘(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.
‘‘(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 not exceed the adjusted basis of such
property.
‘‘(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-
915
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) (defining ruling amount) is amended to
read as follows:
‘‘(A) fund the total nuclear decommis-
sioning costs with respect to such power plant
over the estimated useful life of such power
plant, and’’.
(d) TECHNICAL AMENDMENTS.—Section 468A(e)(2)
(relating to taxation of Fund) is amended—
(1) by striking ‘‘rate set forth in subparagraph
(B)’’ in subparagraph (A) and inserting ‘‘rate of 20
percent’’,
(2) by striking subparagraph (B), and
(3) by redesignating subparagraphs (C) and
(D) as subparagraphs (B) and (C), respectively.
(e) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 2003.
SEC. 1329. TREATMENT OF CERTAIN INCOME OF COOPERA-
TIVES.
(a) INCOME FROM OPEN ACCESS AND NUCLEAR DE-
COMMISSIONING TRANSACTIONS.—
916
(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
electric energy transmission services or an-
cillary services if such services are provided
on a nondiscriminatory open access basis
under an open access transmission tariff
approved or accepted by FERC or under
an 
independent 
transmission 
provider
agreement approved or accepted by FERC
(other than income received or accrued di-
rectly or indirectly from a member),
‘‘(iii) from the provision or sale of
electric energy distribution services or an-
cillary services if such services are provided
on a nondiscriminatory open access basis
to distribute electric energy not owned by
the 
mutual 
or 
electric 
cooperative
company—
‘‘(I) to end-users who are served
by distribution facilities not owned by
such company or any of its members
(other than income received or ac-
917
crued directly or indirectly from a
member), or
‘‘(II) generated by a generation
facility not owned or leased by such
company or any of its members and
which is directly connected to dis-
tribution facilities owned by such com-
pany or any of its members (other
than income received or accrued di-
rectly or indirectly from a member),
‘‘(iv) from any nuclear decommis-
sioning transaction, or
‘‘(v) from any asset exchange or con-
version transaction.’’.
(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))).
918
‘‘(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
‘‘(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-
919
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-
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.
920
‘‘(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.
‘‘(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 mutual or
cooperative 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.
921
‘‘(vii) For purposes of this subparagraph,
the start-up year is the first year that the mu-
tual or cooperative electric company offers non-
discriminatory open access or the calendar year
which includes the date of the enactment of this
subparagraph, if later, at the election of such
company.
‘‘(viii) A company shall not fail to be treat-
ed as a mutual or cooperative electric company
for purposes of this paragraph or as a corpora-
tion operating on a cooperative basis for pur-
poses of section 1381(a)(2)(C) by reason of the
treatment 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-
922
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:
‘‘(c) CROSS REFERENCE.—For treatment of income
from load loss transactions 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. 1330. 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’
923
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-
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.
924
‘‘(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
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).
925
‘‘(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
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
926
‘‘(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).
‘‘(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.
927
‘‘(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.
‘‘(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.’’.
928
(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
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) EXCEPTION FOR QUALIFIED ELECTRIC AND NAT-
URAL
GAS
SUPPLY
CONTRACTS.—Section 141(d) is
amended by adding at the end the following new para-
graph:
‘‘(7) EXCEPTION
FOR
QUALIFIED
ELECTRIC
AND NATURAL GAS SUPPLY CONTRACTS.—The term
‘nongovernmental output property’ shall not include
any contract for the prepayment of electricity or nat-
ural gas which is not investment property under sec-
tion 148(b)(2).’’.
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to obligations issued after the date
of the enactment of this Act.
929
Subtitle C—Production
PART I—OIL AND GAS PROVISIONS
SEC. 1341. 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), as
amended by this Act, is amended by adding at the end
the following:
‘‘SEC. 45J. 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
section—
‘‘(1) IN GENERAL.—The credit amount is—
‘‘(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.—
930
‘‘(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
amount multiplied by the inflation adjustment
factor for such calendar year (determined under
section 43(b)(3)(B) by substituting ‘2002’ for
‘1990’).
931
‘‘(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 45K(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
well shall not be treated as qualified crude oil
production or qualified natural gas production
to the extent production from the well during
the taxable year exceeds 1,095 barrels or bar-
932
rel-of-oil equivalents (as defined in section
45K(d)(5)).
‘‘(B) PROPORTIONATE REDUCTIONS.—
‘‘(i) SHORT TAXABLE YEARS.—In the
case of a short taxable year, the limitations
under this paragraph shall be proportion-
ately reduced to reflect the ratio which the
number of days in such taxable year bears
to 365.
‘‘(ii) WELLS NOT IN PRODUCTION EN-
TIRE YEAR.—In the case of a well which is
not capable of production during each day
of a taxable year, the limitations under
this paragraph applicable to the well shall
be proportionately reduced to reflect the
ratio which the number of days of produc-
tion bears to the total number of days in
the taxable year.
‘‘(3) DEFINITIONS.—
‘‘(A) QUALIFIED
MARGINAL
WELL.—The
term ‘qualified marginal well’ means a domestic
well—
‘‘(i) the production from which during
the taxable year is treated as marginal
production under section 613A(c)(6), or
933
‘‘(ii) which, during the taxable year—
‘‘(I) has average daily production
of not more than 25 barrel-of-oil
equivalents (as so defined), and
‘‘(II) produces water at a rate
not less than 95 percent of total well
effluent.
‘‘(B) CRUDE OIL, ETC.—The terms ‘crude
oil’, ‘natural gas’, ‘domestic’, and ‘barrel’ have
the meanings given such terms by section
613A(e).
‘‘(d) OTHER RULES.—
‘‘(1) PRODUCTION ATTRIBUTABLE TO THE TAX-
PAYER.—In the case of a qualified marginal well in
which there is more than one owner of operating in-
terests in the well and the crude oil or natural gas
production exceeds the limitation under subsection
(c)(2), qualifying crude oil production or qualifying
natural gas production attributable to the taxpayer
shall be determined on the basis of the ratio which
taxpayer’s revenue interest in the production bears
to the aggregate of the revenue interests of all oper-
ating interest owners in the production.
‘‘(2) OPERATING
INTEREST
REQUIRED.—Any
credit under this section may be claimed only on
934
production which is attributable to the holder of an
operating interest.
‘‘(3) PRODUCTION
FROM
NONCONVENTIONAL
SOURCES
EXCLUDED.—In the case of production
from a qualified marginal well which is eligible for
the credit allowed under section 45K for the taxable
year, no credit shall be allowable under this section
unless the taxpayer elects not to claim the credit
under section 45K with respect to the well.’’.
(b) CREDIT TREATED AS BUSINESS CREDIT.—Sec-
tion 38(b), as amended by this Act, is amended by striking
‘‘plus’’ at the end of paragraph (18), by striking the period
at the end of paragraph (19) and inserting ‘‘, plus’’, and
by adding at the end the following:
‘‘(20) the marginal oil and gas well production
credit determined under section 45J(a).’’.
(c) CARRYBACK.—Subsection (a) of section 39 (relat-
ing to carryback and carryforward of unused credits gen-
erally) is amended by adding at the end the following:
‘‘(3) 5-YEAR
CARRYBACK
FOR
MARGINAL
OIL
AND
GAS
WELL
PRODUCTION
CREDIT.—Notwith-
standing subsection (d), in the case of the marginal
oil and gas well production credit—
935
‘‘(A) this section shall be applied sepa-
rately from the business credit (other than the
marginal oil and gas well production credit),
‘‘(B) paragraph (1) shall be applied by
substituting ‘5 taxable years’ for ‘1 taxable
years’ in subparagraph (A) thereof, and
‘‘(C) paragraph (2) shall be applied—
‘‘(i) by substituting ‘25 taxable years’
for ‘21 taxable years’ in subparagraph (A)
thereof, and
‘‘(ii) by substituting ‘24 taxable years’
for ‘20 taxable years’ in subparagraph (B)
thereof.’’.
(d) CLERICAL AMENDMENT.—The table of sections
for subpart D of part IV of subchapter A of chapter 1,
as amended by this Act, is amended by adding at the end
the following:
‘‘Sec. 45J. Credit for producing oil and gas from marginal wells.’’.
(e) EFFECTIVE DATE.—The amendments made by
this section shall apply to production in taxable years be-
ginning after December 31, 2003.
936
SEC. 
1342. 
TEMPORARY 
SUSPENSION 
OF 
LIMITATION
BASED ON 65 PERCENT OF TAXABLE INCOME
AND EXTENSION OF SUSPENSION OF TAX-
ABLE INCOME LIMIT WITH RESPECT TO MAR-
GINAL PRODUCTION.
(a) LIMITATION BASED ON 65 PERCENT OF TAX-
ABLE INCOME.—Subsection (d) of section 613A (relating
to limitation on percentage depletion in case of oil and
gas wells) is amended by adding at the end the following
new paragraph:
‘‘(6) TEMPORARY SUSPENSION OF TAXABLE IN-
COME LIMIT.—Paragraph (1) shall not apply to tax-
able years beginning after December 31, 2003, and
before January 1, 2005, including with respect to
amounts carried under the second sentence of para-
graph (1) to such taxable years.’’.
(b) EXTENSION OF SUSPENSION OF TAXABLE IN-
COME LIMIT WITH RESPECT
TO MARGINAL PRODUC-
TION.—Subparagraph (H) of section 613A(c)(6) (relating
to temporary suspension of taxable income limit with re-
spect to marginal production) is amended by striking
‘‘2004’’ and inserting ‘‘2005’’.
(c) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to taxable years beginning after
December 31, 2003.
937
SEC. 1343. AMORTIZATION OF DELAY RENTAL PAYMENTS.
(a) IN GENERAL.—Section 167 (relating to deprecia-
tion) is amended by redesignating subsection (h) as sub-
section (i) and by inserting after subsection (g) the fol-
lowing new subsection:
‘‘(h) AMORTIZATION OF DELAY RENTAL PAYMENTS
FOR DOMESTIC OIL AND GAS WELLS.—
‘‘(1) IN GENERAL.—Any delay rental payment
paid or incurred in connection with the development
of oil or gas wells within the United States (as de-
fined in section 638) shall be allowed as a deduction
ratably over the 24-month period beginning on the
date that such payment was paid or incurred.
‘‘(2) HALF-YEAR CONVENTION.—For purposes
of paragraph (1), any payment paid or incurred dur-
ing the taxable year shall be treated as paid or in-
curred on the mid-point of such taxable year.
‘‘(3) EXCLUSIVE METHOD.—Except as provided
in this subsection, no depreciation or amortization
deduction shall be allowed with respect to such pay-
ments.
‘‘(4) TREATMENT
UPON
ABANDONMENT.—If
any property to which a delay rental payment relates
is retired or abandoned during the 24-month period
described in paragraph (1), no deduction shall be al-
lowed on account of such retirement or abandon-
938
ment and the amortization deduction under this sub-
section shall continue with respect to such payment.
‘‘(5) DELAY RENTAL PAYMENTS.—For purposes
of this subsection, the term ‘delay rental payment’
means an amount paid for the privilege of deferring
development of an oil or gas well under an oil or gas
lease.’’.
(b) EFFECTIVE DATE.—The amendments made by
this section shall apply to amounts paid or incurred in tax-
able years beginning after the date of the enactment of
this Act.
SEC. 1344. AMORTIZATION OF GEOLOGICAL AND GEO-
PHYSICAL EXPENDITURES.
(a) IN GENERAL.—Section 167 (relating to deprecia-
tion), as amended by this Act, is amended by redesig-
nating subsection (i) as subsection (j) and by inserting
after subsection (h) the following new subsection:
‘‘(i) AMORTIZATION
OF GEOLOGICAL
AND GEO-
PHYSICAL EXPENDITURES.—
‘‘(1) IN
GENERAL.—Any geological and geo-
physical expenses paid or incurred in connection
with the exploration for, or development of, oil or
gas within the United States (as defined in section
638) shall be allowed as a deduction ratably over the