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‘‘(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-
paragraph (A) which is required to be included
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in gross income for such taxable year (deter-
mined without regard to this subsection). 
‘‘(3) QUALIFYING
ELECTRIC
TRANSMISSION 
TRANSACTION.—For purposes of this subsection, the 
term ‘qualifying electric transmission transaction’ 
means any sale or other disposition before January 
1, 2007, of— 
‘‘(A) property used in the trade or business 
of providing electric transmission services, or 
‘‘(B) any stock or partnership interest in a 
corporation or partnership, as the case may be, 
whose principal trade or business consists of 
providing electric transmission services, 
but only if such sale or disposition is to an inde-
pendent transmission company. 
‘‘(4) 
INDEPENDENT
TRANSMISSION
COM-
PANY.—For purposes of this subsection, the term 
‘independent transmission company’ means— 
‘‘(A) an independent transmission provider 
approved by the Federal Energy Regulatory 
Commission, 
‘‘(B) a person— 
‘‘(i) who the Federal Energy Regu-
latory Commission determines in its au-
thorization of the transaction under section
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203 of the Federal Power Act (16 U.S.C. 
824b) or by declaratory order is not a 
market participant within the meaning of 
such Commission’s rules applicable to inde-
pendent transmission providers, and 
‘‘(ii) whose transmission facilities to 
which the election under this subsection 
applies are under the operational control of 
a Federal Energy Regulatory Commission- 
approved independent transmission pro-
vider before the close of the period speci-
fied in such authorization, but not later 
than the close of the period applicable 
under subsection (a)(2)(B) as extended 
under paragraph (2), or 
‘‘(C) in the case of facilities subject to the 
jurisdiction of the Public Utility Commission of 
Texas— 
‘‘(i) a person which is approved by 
that Commission as consistent with Texas 
State law regarding an independent trans-
mission provider, or 
‘‘(ii) a political subdivision or affiliate 
thereof whose transmission facilities are
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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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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-
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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-
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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
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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.—
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‘‘(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
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‘‘(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-
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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.—
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(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 com-
pany— 
‘‘(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-
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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))).
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‘‘(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-
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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.
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‘‘(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.
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‘‘(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-
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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’
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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.
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‘‘(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).
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‘‘(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
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HR 4503 RDS 
‘‘(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.
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‘‘(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.’’.
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(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.
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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 sec-
tion— 
‘‘(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.—
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‘‘(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’).
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‘‘(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-
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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
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‘‘(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
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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—
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‘‘(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.
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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.
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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-
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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
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(2) DETERMINATIONS
UNDER
NATURAL
GAS 
POLICY ACT OF 1978.—The amendments made by 
subsection (c) shall apply as if included in the provi-
sions repealing section 503 of the Natural Gas Pol-
icy Act of 1978. 
PART II—ALTERNATIVE MINIMUM TAX 
PROVISIONS 
SEC. 1346. NEW NONREFUNDABLE PERSONAL CREDITS AL-
LOWED AGAINST REGULAR AND MINIMUM 
TAXES. 
(a) IN GENERAL.— 
(1) SECTION 25C.—Section 25C(b), as added by 
section 1301 of this Act, 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 section 27 for the taxable 
year.’’.