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(iv), and (v) of paragraph (1)(B) shall be treated as
transfers between unrelated parties.’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to production after December 31, 2004,
in taxable years ending after such date.
Subtitle E—Oil and Gas Provisions
SEC. 841. OIL AND GAS FROM MARGINAL WELLS.
(a) IN GENERAL.—Subpart D of part IV of subchapter
A of chapter 1 (relating to business credits), as amended
by this Act, is amended by adding at the end the following
new section:
‘‘SEC. 45O. 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 crude oil production and the
qualified natural gas production which is attributable
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
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‘‘(B) 50 cents per 1,000 cubic feet of quali-
fied 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 (determined
without regard to this paragraph) as—
‘‘(i) the excess (if any) of the applica-
ble reference price over $15 ($1.67 for quali-
fied 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 pre-
ceding the calendar year in which the taxable
year begins.
‘‘(B) INFLATION ADJUSTMENT.—
‘‘(i) IN GENERAL.—In the case of any
taxable year beginning in a calendar year
after 2005, each of the dollar amounts con-
tained in subparagraph (A) shall be in-
creased to an amount equal to such dollar
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amount multiplied by the inflation adjust-
ment factor for such calendar year.
‘‘(ii) INFLATION
ADJUSTMENT
FAC-
TOR.—For purposes of clause (i)—
‘‘(I) IN GENERAL.—The term ‘in-
flation adjustment factor’ means, with
respect to a calendar year, a fraction
the numerator of which is the GDP im-
plicit price deflator for the preceding
calendar year and the denominator of
which is the GDP implicit price
deflator for the calendar year 2004.
‘‘(II) 
GDP 
IMPLICIT
PRICE
DEFLATOR.—The term ‘GDP implicit
price deflator’ means, for any calendar
year, the most recent revision of the
implicit price deflator for the gross do-
mestic product as of June 30 of such
calendar year as computed by the De-
partment of Commerce before October 1
of such calendar year.
‘‘(C) REFERENCE PRICE.—For purposes of
this paragraph, the term ‘reference price’ means,
with respect to any calendar year—
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‘‘(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 PRO-
DUCTION.—For purposes of this section—
‘‘(1) IN GENERAL.—The terms ‘qualified crude
oil production’ and ‘qualified natural gas production’
mean domestic crude oil or domestic natural gas
which is produced 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 barrel
equivalents.
‘‘(B) PROPORTIONATE REDUCTIONS.—
‘‘(i) SHORT TAXABLE YEARS.—In the
case of a short taxable year, the limitations
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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 production
bears to the total number of days in the tax-
able year.
‘‘(3) NONCOMPLIANCE WITH POLLUTION LAWS.—
Production from any well during any period in
which such well is not in compliance with applicable
Federal pollution prevention, control, and permit re-
quirements shall not be treated as qualified crude oil
production or qualified natural gas production.
‘‘(4) DEFINITIONS.—
‘‘(A) QUALIFIED
MARGINAL
WELL.—The
term ‘qualified marginal well’ means a domestic
well—
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‘‘(i) the production from which during
the taxable year is treated as marginal pro-
duction under section 613A(c)(6), or
‘‘(ii) which, during the taxable year—
‘‘(I) has average daily production
of not more than 25 barrel equivalents,
and
‘‘(II) produces water at a rate not
less than 95 percent of total well efflu-
ent.
‘‘(B) CRUDE OIL, ETC.—The terms ‘crude
oil’, ‘natural gas’, ‘domestic’, and ‘barrel’ have
the meanings given such terms by section
613A(e).
‘‘(C) BARREL EQUIVALENT.—The term ‘bar-
rel equivalent’ means, with respect to natural
gas, a conversation ratio of 6,000 cubic feet of
natural gas to 1 barrel of crude oil.
‘‘(D) DOMESTIC NATURAL GAS.—The term
‘domestic natural gas’ does not include Alaska
natural gas (as defined in section 45Q(c)(1)).
‘‘(d) OTHER RULES.—
‘‘(1) PRODUCTION ATTRIBUTABLE TO THE TAX-
PAYER.—In the case of a qualified marginal well in
which there is more than 1 owner of operating inter-
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ests in the well and the crude oil or natural gas pro-
duction 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 aggre-
gate of the revenue interests of all operating interest
owners in the production.
‘‘(2) OPERATING
INTEREST
REQUIRED.—Any
credit under this section may be claimed only on pro-
duction which is attributable to the holder of an oper-
ating 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 29 for the taxable year,
no credit shall be allowable under this section unless
the taxpayer elects not to claim the credit under sec-
tion 29 with respect to the well.’’.
(b) CREDIT TREATED AS BUSINESS CREDIT.—Section
38(b) (relating to current year business credit), as amended
by this Act, is amended by striking ‘‘plus’’ at the end of
paragraph (25), by striking the period at the end of para-
graph (26) and inserting ‘‘, plus’’, and by adding at the
end the following new paragraph:
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‘‘(27) the marginal oil and gas well production
credit determined under section 45O(a).’’.
(c) COORDINATION WITH SECTION 29.—Section 29(a)
(relating to allowance of credit) is amended by striking
‘‘There’’ and inserting ‘‘At the election of the taxpayer,
there’’.
(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 new item:
‘‘Sec. 45O. 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 beginning
after December 31, 2004.
SEC. 842. NATURAL GAS GATHERING LINES TREATED AS 7-
YEAR PROPERTY.
(a) IN GENERAL.—Section 168(e)(3)(C) (defining 7-
year property), as amended by this Act, is amended by
striking ‘‘and’’ at the end of clause (ii), by redesignating
clause (iii) as clause (iv), and by inserting after clause (ii)
the following new clause:
‘‘(iii) any natural gas gathering line,
and’’.
(b) NATURAL GAS GATHERING LINE.—Section 168(i)
(relating to definitions and special rules), as amended by
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this Act, is amended by adding at the end the following
new paragraph:
‘‘(18) NATURAL
GAS
GATHERING
LINE.—The
term ‘natural gas gathering line’ means—
‘‘(A) 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, or
‘‘(B) any other pipe, equipment, or appur-
tenances determined to be a gathering line by the
Federal Energy Regulatory Commission.
(c) ALTERNATIVE SYSTEM.—The table contained in
section 168(g)(3)(B) (relating to special rule for certain
property assigned to classes) is amended by inserting after
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the item relating to subparagraph (C)(i) the following new
item:
‘‘(C)(iii) .............................................................................................................
14’’.
(d) EFFECTIVE DATE.—The amendments made by this
section shall apply to property placed in service after De-
cember 31, 2004, in taxable years ending after such date.
SEC. 843. EXPENSING OF CAPITAL COSTS INCURRED IN
COMPLYING WITH ENVIRONMENTAL PROTEC-
TION AGENCY SULFUR REGULATIONS.
(a) IN GENERAL.—Part VI of subchapter B of chapter
1 (relating to itemized deductions for individuals and cor-
porations), as amended by this Act, is amended by inserting
after section 179B the following new section:
‘‘SEC. 179C. DEDUCTION FOR CAPITAL COSTS INCURRED IN
COMPLYING WITH ENVIRONMENTAL PROTEC-
TION AGENCY SULFUR REGULATIONS.
‘‘(a) TREATMENT AS EXPENSES.—A small business re-
finer (as defined in section 45I(c)(1)) may elect to treat
75 percent of qualified capital costs (as defined in section
45I(c)(2)) which are paid or incurred by the taxpayer dur-
ing the taxable year as expenses which are not chargeable
to capital account. Any cost so treated shall be allowed 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 December 31, 2002, in ex-
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cess 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 bar-
rels. For purposes of calculating such average daily domes-
tic refinery runs, only refineries of the refiner or a related
person (within the meaning of section 613A(d)(3)) on April
1, 2003, shall be taken into account.
‘‘(c) BASIS REDUCTION.—
‘‘(1) IN GENERAL.—For purposes of this title, the
basis of any property shall be reduced by the portion
of the cost of such property taken into account under
subsection (a).
‘‘(2) ORDINARY INCOME RECAPTURE.—For pur-
poses of section 1245, the amount of the deduction al-
lowable under subsection (a) with respect to any
property which is of a character subject to the allow-
ance for depreciation shall be treated as a deduction
allowed for depreciation under section 167.
‘‘(d) COORDINATION WITH OTHER PROVISIONS.—Sec-
tion 280B shall not apply to amounts which are treated
as expenses under this section.’’.
(b) CONFORMING AMENDMENTS.—
(1) Section 263(a)(1), as amended by this Act, is
amended by striking ‘‘or’’ at the end of subparagraph
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(I), by striking the period at the end of subparagraph
(J) and inserting ‘‘; or’’, and by adding at the end
the following new subparagraph:
‘‘(K) expenditures for which a deduction is
allowed under section 179C.’’.
(2) Section 263A(c)(3) is amended by inserting
‘‘179C,’’ after ‘‘section’’.
(3) Section 312(k)(3)(B), as amended by this
Act, is amended by striking ‘‘or 179B’’ each place it
appears in the heading and text and inserting ‘‘179B,
or 179C’’.
(4) Section 1016(a), as amended by this Act, is
amended by striking ‘‘and’’ at the end of paragraph
(36), by striking the period at the end of paragraph
(37) and inserting ‘‘, and’’, and by adding at the end
the following new paragraph:
‘‘(38) to the extent provided in section 179C(c).’’
(5) Paragraphs (2)(C) and (3)(C) of section
1245(a), as amended by this Act, are each amended
by inserting ‘‘179C,’’ after ‘‘179B,’’.
(6) The table of sections for part VI of sub-
chapter B of chapter 1, as amended by this Act, is
amended by inserting after the item relating to sec-
tion 179B the following new item:
‘‘Sec. 179C. Deduction for capital costs incurred in complying
with Environmental Protection Agency sulfur regu-
lations.’’.
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(c) EFFECTIVE DATE.—The amendment made by this
section shall apply to expenses paid or incurred after De-
cember 31, 2002, in taxable years ending after such date.
SEC. 844. CREDIT FOR PRODUCTION OF LOW SULFUR DIE-
SEL FUEL.
(a) IN GENERAL.—Subpart D of part IV of subchapter
A of chapter 1 (relating to business-related credits), as
amended by this Act, is amended by adding at the end the
following new section:
‘‘SEC. 45P. 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 deter-
mined 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 re-
spect to such facility, reduced by
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‘‘(B) the aggregate credits determined under
this section for all prior taxable years with re-
spect to such facility.
‘‘(2) REDUCED PERCENTAGE.—In the case of a
small business refiner with average daily domestic re-
finery runs for the 1-year period ending on December
31, 2002, 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 num-
ber (before the application of this paragraph) and the
ratio of such excess to 50,000 barrels. For purposes of
calculating such average daily domestic refinery runs,
only refineries of the refiner or a related person
(within the meaning of section 613A(d)(3)) on April
1, 2003, shall be taken into account.
‘‘(c) DEFINITIONS AND SPECIAL RULE.—For purposes
of this section—
‘‘(1) SMALL
BUSINESS
REFINER.—The term
‘small business refiner’ means, with respect to any
taxable year, a refiner of crude oil—
‘‘(A) with respect to which not more than
1,500 individuals are engaged in the refinery op-
erations of the business on any day during such
taxable year, and
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‘‘(B) the average daily domestic refinery
run or average retained production of which for
all facilities of the taxpayer for the 1-year period
ending on December 31, 2002, did not exceed
205,000 barrels.
For purposes of calculating such average daily domes-
tic refinery run or retained production, only refin-
eries of the refiner or a related person (within the
meaning of section 613A(d)(3)) on April 1, 2003,
shall be taken into account.
‘‘(2) QUALIFIED
CAPITAL
COSTS.—The term
‘qualified capital costs’ means, with respect to any fa-
cility, those costs paid or incurred during the appli-
cable period for compliance with the applicable EPA
regulations with respect to such facility, including ex-
penditures for the construction of new process oper-
ation units or the dismantling and reconstruction of
existing process units to be used in the production 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 Highway
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Diesel Fuel Sulfur Control Requirements of the Envi-
ronmental Protection Agency.
‘‘(4) APPLICABLE PERIOD.—The term ‘applicable
period’ means, with respect to any facility, the period
beginning on January 1, 2003, and ending on the
earlier of the date which is 1 year after the date on
which the taxpayer must comply with the applicable
EPA regulations with respect to such facility or De-
cember 31, 2009.
‘‘(5) LOW SULFUR DIESEL FUEL.—The term ‘low
sulfur diesel fuel’ means diesel fuel with a sulfur con-
tent of 15 parts per million or less.
‘‘(6) SPECIAL RULE FOR DETERMINATION OF RE-
FINERY
RUNS.—Refinery runs shall be determined
under rules similar to the rules under section
613A(d)(4).
‘‘(d) REDUCTION IN BASIS.—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
basis of such property which would (but for this subsection)
result from such expenditure shall be reduced by the amount
of the credit so determined.
‘‘(e) CERTIFICATION.—
‘‘(1) REQUIRED.—No credit shall be allowed un-
less, not later than the date which is 30 months after
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the first day of the first taxable year in which the low
sulfur diesel fuel production credit is allowed with re-
spect to a facility, the small business refiner obtains
certification from the Secretary, after consultation
with the Administrator of the Environmental Protec-
tion Agency, that the taxpayer’s qualified capital
costs with respect to such facility will result in com-
pliance 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, after consultation
with the Administrator of the Environmental Protec-
tion Agency, to determine that such qualified capital
costs are necessary for compliance with the applicable
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 appli-
cation. In the event the Secretary does not notify the
taxpayer of the results of such certification within
such period, the taxpayer may presume the certifi-
cation to be issued until so notified.
‘‘(4) STATUTE OF LIMITATIONS.—With respect to
the credit allowed under this section—
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‘‘(A) the statutory period for the assessment
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 de-
scribed in paragraph (3) ends with respect to the
taxpayer, and
‘‘(B) such deficiency may be assessed before
the expiration of such 3-year period notwith-
standing the provisions of any other law or rule
of law which would otherwise prevent such as-
sessment.
‘‘(f) COOPERATIVE ORGANIZATIONS.—
‘‘(1) APPORTIONMENT OF CREDIT.—
‘‘(A) IN GENERAL.—In the case of a cooper-
ative organization described in section 1381(a),
any portion of the credit determined under sub-
section (a) for the taxable year may, at the elec-
tion of the organization, be apportioned among
patrons eligible to share in patronage dividends
on the basis of the quantity or value of business
done with or for such patrons for the taxable
year.
‘‘(B) FORM AND EFFECT OF ELECTION.—An
election under subparagraph (A) for any taxable
year shall be made on a timely filed return for
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such year. Such election, once made, shall be ir-
revocable for such taxable year.
‘‘(2) TREATMENT OF ORGANIZATIONS AND PA-
TRONS.—
‘‘(A) ORGANIZATIONS.—The amount of the
credit not apportioned to patrons pursuant to
paragraph (1) shall be included in the amount
determined under subsection (a) for the taxable
year of the organization.
‘‘(B) PATRONS.—The amount of the credit
apportioned to patrons pursuant to paragraph
(1) shall be included in the amount determined
under subsection (a) for the first taxable year of
each patron ending on or after the last day of
the payment period (as defined in section
1382(d)) for the taxable year of the organization
or, if earlier, for the taxable year of each patron
ending on or after the date on which the patron
receives notice from the cooperative of the appor-
tionment.
‘‘(3) SPECIAL RULE.—If for any reason the tax
imposed with respect to any patron of a cooperative
organization would, but for this paragraph, be in-
creased by any amount by reason of a credit appor-
tioned to such patron under this subsection—
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‘‘(A) the amount of such increase in tax
shall not be imposed on such patron, and
‘‘(B) the tax imposed by this chapter on
such organization shall be increased by such
amount.
The increase under subparagraph (B) shall not be
treated as tax imposed by this chapter for purposes
of determining the amount of any credit under this
chapter or for purposes of section 55.’’.
(b) CREDIT MADE PART
OF GENERAL BUSINESS
CREDIT.—Subsection (b) of section 38 (relating to general
business credit), as amended by this Act, is amended by
striking ‘‘plus’’ at the end of paragraph (26), by striking
the period at the end of paragraph (27) and inserting ‘‘,
plus’’, and by adding at the end the following new para-
graph:
‘‘(28) in the case of a small business refiner, the
low sulfur diesel fuel production credit determined
under section 45P(a).’’.
(c) DENIAL OF DOUBLE BENEFIT.—Section 280C (re-
lating to certain expenses for which credits are allowable)
is amended by adding after subsection (d) the following new
subsection:
‘‘(e) LOW SULFUR DIESEL FUEL PRODUCTION CRED-
IT.—No deduction shall be allowed for that portion of the
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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 45P(a).’’.
(d) BASIS ADJUSTMENT.—Section 1016(a) (relating to
adjustments to basis), as amended by this Act, is amended
by striking ‘‘and’’ at the end of paragraph (37), by striking
the period at the end of paragraph (38) and inserting ‘‘,
and’’, and by adding at the end the following new para-
graph:
‘‘(39) in the case of a facility with respect to
which a credit was allowed under section 45P, to the
extent provided in section 45P(d).’’.
(e) 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 new item:
‘‘Sec. 45P. 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 De-
cember 31, 2002, in taxable years ending after such date.
SEC. 845. DETERMINATION OF SMALL REFINER EXCEPTION
TO OIL DEPLETION DEDUCTION.
(a) IN GENERAL.—Paragraph (4) of section 613A(d)
(relating to limitations on application of subsection (c)) is
amended to read as follows:
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‘‘(4) CERTAIN REFINERS EXCLUDED.—If the tax-
payer or 1 or more related persons engages in the re-
fining of crude oil, subsection (c) shall not apply to
the taxpayer for a taxable year if the average daily
refinery runs of the taxpayer and such persons for the
taxable year exceed 60,000 barrels. For purposes 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 ending after December
31, 2004.
SEC. 846. MARGINAL PRODUCTION INCOME LIMIT EXTEN-
SION.
Section 613A(c)(6)(H) (relating to temporary suspen-
sion of taxable income limit with respect to marginal pro-
duction), as amended by this Act, is amended by striking
‘‘2005’’ and inserting ‘‘2007’’.
SEC. 847. 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:
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‘‘(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 during
the taxable year shall be treated as paid or incurred
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 de-
scribed in paragraph (1), no deduction shall be al-
lowed on account of such retirement or abandonment
and the amortization deduction under this subsection
shall continue with respect to such payment.
‘‘(5) DELAY RENTAL PAYMENTS.—For purposes
of this subsection, the term ‘delay rental payment’
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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 taxable
years beginning after December 31, 2004.
SEC. 848. AMORTIZATION OF GEOLOGICAL AND GEO-
PHYSICAL EXPENDITURES.
(a) IN GENERAL.—Section 167 (relating to deprecia-
tion), as amended by this Act, is amended by redesignating
subsection (i) as subsection (j) and by inserting after sub-
section (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 with-
in the United States (as defined in section 638) shall
be allowed as a deduction ratably over the 24-month
period beginning on the date that such expense was
paid or incurred.
‘‘(2) SPECIAL RULES.—For purposes of this sub-
section, rules similar to the rules of paragraphs (2),
(3), and (4) of subsection (h) shall apply.’’.
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(b) CONFORMING AMENDMENT.—Section 263A(c)(3) is
amended by inserting ‘‘167(h), 167(i),’’ after ‘‘under sec-
tion’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to costs paid or incurred in taxable
years beginning after December 31, 2004.
SEC. 849. EXTENSION AND MODIFICATION OF CREDIT FOR
PRODUCING 
FUEL 
FROM 
A 
NONCONVEN-
TIONAL SOURCE.
(a) IN GENERAL.—Section 29 (relating to credit for
producing fuel from a nonconventional source) is amended
by adding at the end the following new subsection:
‘‘(h) EXTENSION FOR OTHER FACILITIES.—
‘‘(1) OIL AND GAS.—In the case of a well or fa-
cility for producing qualified fuels described in sub-
paragraph (A) or (B) of subsection (c)(1) which was
drilled or placed in service after December 31, 2004,
and before January 1, 2007, notwithstanding sub-
section (f), this section shall apply with respect to
such fuels produced at such well or facility before the
close of the 3-year period beginning on the date that
such well is drilled or such facility is placed in serv-
ice.
‘‘(2) FACILITIES PRODUCING FUELS FROM AGRI-
CULTURAL AND ANIMAL WASTE.—
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‘‘(A) IN GENERAL.—In the case of a facility
for producing liquid, gaseous, or solid fuels from
qualified agricultural and animal wastes, in-
cluding such fuels when used as feedstocks, which
was placed in service after December 31, 2004,
and before January 1, 2007, this section shall
apply with respect to fuel produced at such facil-
ity before the close of the 3-year period beginning
on the date such facility is placed in service.
‘‘(B) QUALIFIED AGRICULTURAL AND ANI-
MAL WASTE.—For purposes of this paragraph,
the term ‘qualified agricultural and animal
waste’ means agriculture and animal waste, in-
cluding by-products, packaging, and any mate-
rials associated with the processing, feeding, sell-
ing, transporting, or disposal of agricultural or
animal products or wastes.
‘‘(3) WELLS PRODUCING VISCOUS OIL.—
‘‘(A) IN GENERAL.—In the case of a well for
producing viscous oil which was placed in serv-
ice after December 31, 2004, and before January
1, 2007, this section shall apply with respect to
fuel produced at such well before the close of the
3-year period beginning on the date such well is
placed in service.
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‘‘(B) VISCOUS OIL.—The term ‘viscous oil’
means 
heavy 
oil, 
as 
defined 
in 
section
613A(c)(6), except that—
‘‘(i) ‘22 degrees’ shall be substituted for
‘20 degrees’ in applying subparagraph (F)
thereof, and
‘‘(ii) in all cases, the oil gravity shall
be measured from the initial well-head sam-
ples, drill cuttings, or down hole samples.
‘‘(C) WAIVER OF UNRELATED PERSON RE-
QUIREMENT.—In the case of viscous oil, the re-
quirement under subsection (a)(2)(A) of a sale to
an unrelated person shall not apply to any sale
to the extent that the viscous oil is not consumed
in the immediate vicinity of the wellhead.
‘‘(4) FACILITIES PRODUCING REFINED COAL.—
‘‘(A) IN GENERAL.—In the case of a facility
described in subparagraph (C) for producing re-
fined coal which was placed in service after De-
cember 31, 2004, and before January 1, 2007,
this section shall apply with respect to fuel pro-
duced at such facility before the close of the 5-
year period beginning on the date such facility
is placed in service.
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‘‘(B) REFINED COAL.—For purposes of this
paragraph, the term ‘refined coal’ means a fuel
which is a liquid, gaseous, or solid synthetic fuel
produced from coal (including lignite) or high
carbon fly ash, including such fuel used as a
feedstock.
‘‘(C) COVERED FACILITIES.—
‘‘(i) IN
GENERAL.—A facility is de-
scribed in this subparagraph if such facility
produces refined coal using a technology
which results in—
‘‘(I) a qualified emission reduc-
tion, and
‘‘(II) a qualified enhanced value.
‘‘(ii) QUALIFIED
EMISSION
REDUC-
TION.—For purposes of this subparagraph,
the term ‘qualified emission reduction’
means a reduction of at least 20 percent of
the emissions of nitrogen oxide and either
sulfur dioxide or mercury released when
burning the refined coal (excluding any di-
lution caused by materials combined or
added during the production process), as
compared to the emissions released when
burning the feedstock coal or comparable
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coal predominantly available in the market-
place as of January 1, 2004.
‘‘(iii) QUALIFIED ENHANCED VALUE.—
For purposes of this subparagraph, the term
‘qualified enhanced value’ means an in-
crease of at least 50 percent in the market
value of the refined coal (excluding any in-
crease caused by materials combined or
added during the production process), as
compared to the value of the feedstock coal.
‘‘(iv) QUALIFYING
ADVANCED
CLEAN
COAL
TECHNOLOGY
UNITS
EXCLUDED.—A
facility described in this subparagraph shall
not include a qualifying advanced clean
coal technology unit (as defined in section
48A(b)).
‘‘(5) COALMINE GAS.—
‘‘(A) IN GENERAL.—This section shall apply
to coalmine gas—
‘‘(i) captured or extracted by the tax-
payer during the period beginning after De-
cember 31, 2004, and ending before Janu-
ary 1, 2007, and
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‘‘(ii) utilized as a fuel source or sold by
or on behalf of the taxpayer to an unrelated
person during such period.
‘‘(B) COALMINE GAS.—For purposes of this
paragraph, the term ‘coalmine gas’ means any
methane gas which is—
‘‘(i) liberated during or as a result of
coal mining operations, or
‘‘(ii) extracted up to 10 years in ad-
vance of coal mining operations as part of
a specific plan to mine a coal deposit.
‘‘(C) SPECIAL
RULE
FOR
ADVANCED
EX-
TRACTION.—In the case of coalmine gas which is
captured in advance of coal mining operations,
the credit under subsection (a) shall be allowed
only after the date the coal extraction occurs in
the immediate area where the coalmine gas was
removed.
‘‘(D) NONCOMPLIANCE
WITH
POLLUTION
LAWS.—This paragraph shall not apply to the
capture or extraction of coalmine gas from coal
mining operations with respect to any period in
which such coal mining operations are not in
compliance with applicable State and Federal
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pollution prevention, control, and permit re-
quirements.
‘‘(6) SPECIAL
RULES.—In determining the
amount of credit allowable under this section solely
by reason of this subsection—
‘‘(A) 
FUELS
TREATED
AS
QUALIFIED
FUELS.—Any fuel described in paragraph (2),
(3), (4), or (5) shall be treated as a qualified fuel
for purposes of this section.
‘‘(B) DAILY LIMIT.—The amount of quali-
fied fuels described in subparagraph (A) or
(B)(i) of subsection (c)(1) sold during any tax-
able year which may be taken into account by
reason of this subsection with respect to any
project shall not exceed an average barrel-of-oil
equivalent of 200,000 cubic feet of natural gas
per day. Days before the date the project is
placed in service shall not be taken into account
in determining such average.
‘‘(C) EXTENSION
PERIOD
TO
COMMENCE
WITH UNADJUSTED CREDIT AMOUNT AND NEW
PHASEOUT ADJUSTMENT.—For purposes of ap-
plying subsection (b)(2), in the case of fuels sold
after 2003—
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‘‘(i) paragraphs (1)(A) and (2) of sub-
section (b) shall be applied by subtituting
‘$35.00’ for ‘$23.50’, and
‘‘(ii) subparagraph (B) of subsection
(d)(2) shall be applied by substituting
‘2002’ for ‘1979’ in determining such dollar
amounts.’’.
(b) EXTENSION FOR CERTAIN FUEL PRODUCED AT EX-
ISTING FACILITIES.—
(1) EXTENSION.—Section 29(f)(2) (relating to
application of section) is amended by inserting
‘‘(January 1, 2006, in the case of any coke, coke gas,
or natural gas and byproducts produced by coal gas-
ification from lignite in a facility described in para-
graph (1)(B))’’ after ‘‘January 1, 2003’’.
(2) USE OF CREDIT AS AN OFFSET.—Section 29,
as amended by subsection (a), is amended by adding
the end the following new subsection:
‘‘(i) USE OF CREDIT AS AN OFFSET.—
‘‘(1) IN GENERAL.—Any credit allowable under
subsection (a) with respect to any natural gas and
byproducts produced by coal gasification from lignite
in a facility described in paragraph (1)(B) of sub-
section (f) owned by a person described in section
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1381(a)(2)(C) or subsidiaries of such person may be
used as provided in paragraph (2).
‘‘(2) USE OF CREDIT AS AN OFFSET.—Notwith-
standing any other provision of law, in the case of a
person described in paragraph (1), any credit to
which paragraph (1) applies may be applied by such
person—
‘‘(A) to the extent provided by the Secretary
of Agriculture, as a prepayment of any loan,
debt, or other obligation the entity has incurred
under subchapter I of chapter 31 of title 7 of the
Rural Electrification Act of 1936 (7 U.S.C. 901
et seq.), as in effect on the date of the enactment
of the Energy Tax Incentives Act of 2003, and
‘‘(B) to the extent provided by the Secretary
of Energy, as a prepayment not to exceed 50 per-
cent of any obligation the person has incurred
pursuant to an asset purchase agreement entered
into with the Secretary and dated October 7,
1988.
‘‘(3) CREDIT
NOT
INCOME.—Any use under
paragraph (2) of any credit to which paragraph (1)
applies shall not be treated as income for purposes of
this title.
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‘‘(4) TREATMENT
OF
UNRELATED
PERSONS.—
For purposes of subsection (a)(2)(A), sales of qualified
fuels among and between persons described in para-
graph (1) shall be treated as sales between unrelated
parties.’’.
(c) TREATMENT AS BUSINESS CREDIT.—
(1) CREDIT MOVED TO SUBPART RELATING TO
BUSINESS RELATED CREDITS.—The Internal Revenue
Code of 1986, as amended by this Act, is amended by
redesignating section 29, as amended by this Act, as
section 45R and by moving section 45R (as so redes-
ignated) from subpart B of part IV of subchapter A
of chapter 1 to the end of subpart D of part IV of sub-
chapter A of chapter 1.
(2) CREDIT TREATED AS BUSINESS CREDIT.—
Section 38(b), as amended by this Act, is amended by
striking ‘‘plus’’ at the end of paragraph (29), by
striking the period at the end of paragraph (30) and
inserting ‘‘, plus’’, and by adding at the end the fol-
lowing:
‘‘(31) the nonconventional source production
credit determined under section 45R(a).’’.
(3) CONFORMING AMENDMENTS.—
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(A) Section 30(b)(2)(A), as redesignated by
this Act, is amended by striking ‘‘sections 27 and
29’’ and inserting ‘‘section 27’’.
(B) Sections 43(b)(2) and 613A(c)(6)(C) are
each amended by striking ‘‘section 29(d)(2)(C)’’
and inserting ‘‘section 45R(d)(2)(C)’’.
(C) Section 45R(a), as redesignated by
paragraph (1), is amended by striking ‘‘At the
election of the taxpayer, there shall be allowed as
a credit against the tax imposed by this chapter
for the taxable year’’ and inserting ‘‘For pur-
poses of section 38, if the taxpayer elects to have
this section apply, the nonconventional source
production credit determined under this section
for the taxable year is’’.
(D) Section 45R(b), as so redesignated, is
amended by striking paragraph (6).
(E) Section 53(d)(1)(B)(iii) is amended by
striking ‘‘under section 29’’ and all that follows
through ‘‘or not allowed’’.
(F) Section 55(c)(2) is amended by striking
‘‘29(b)(6),’’.
(G) Subsection (a) of section 772, as
amended by this Act, is amended by striking
paragraph (10) and by redesignating para-
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graphs (11) and (12) as paragraphs (10) and
(11), respectively.
(H) Paragraph (5) of section 772(d) is
amended by striking ‘‘the foreign tax credit, and
the credit allowable under section 29’’ and in-
serting ‘‘and the foreign tax credit’’.
(I) The table of sections for subpart B of
part IV of subchapter A of chapter 1 is amended
by striking the item relating to section 29.
(J) The table of sections for subpart D of
part IV of subchapter A of chapter 1, as amend-
ed by this Act, is amended by inserting after the
item relating to section 45Q the following new
item:
‘‘Sec. 45R. Credit for producing fuel from a nonconventional
source.’’.
(d) STUDY OF COALBED METHANE.—
(1) IN GENERAL.—The Secretary of the Treasury
shall conduct a study regarding the effect of section
45R of the Internal Revenue Code of 1986 on the pro-
duction of coalbed methane.
(2) CONTENTS
OF
STUDY.—The study under
paragraph (1) shall estimate the total amount of cred-
its under section 45R of the Internal Revenue Code of
1986 claimed annually and in the aggregate which
are related to the production of coalbed methane since
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the date of the enactment of such section 45R. Such
study shall report the annual value of such credits al-
lowable for coalbed methane compared to the average
annual wellhead price of natural gas (per thousand
cubic feet of natural gas). Such study shall also esti-
mate the incremental increase in production of coal-
bed methane which has resulted from the enactment of
such section 45R, and the cost to the Federal Govern-
ment, in terms of the net tax benefits claimed, per
thousand cubic feet of incremental coalbed methane
produced annually and in the aggregate since such
enactment.
(e) EFFECTIVE DATES.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section shall
apply to fuel sold after December 31, 2004, in taxable
years ending after such date.
(2) EXISTING
FACILITIES.—The amendments
made by subsection (b) shall apply to fuel sold after
December 31, 2002, in taxable years ending after such
date.
(3) TREATMENT
AS
BUSINESS
CREDIT.—The
amendments made by subsection (c) shall apply to
taxable years ending after December 31, 2003.
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SEC. 850. NATURAL GAS DISTRIBUTION LINES TREATED AS
15-YEAR PROPERTY.
(a) IN GENERAL.—Section 168(e)(3)(E) (defining 15-
year property), as amended by this Act, is amended by
striking ‘‘and’’ at the end of clause (iii), by striking the
period at the end of clause (iv) and by inserting ‘‘, and’’,
and by adding at the end the following new clause:
‘‘(v) any natural gas distribution
line.’’.
(b) ALTERNATIVE SYSTEM.—The table contained in
section 168(g)(3)(B) (relating to special rule for certain
property assigned to classes), as amended by this Act, is
amended by adding after the item relating to subparagraph
(E)(iii) the following new item:
‘‘(E)(v) ...............................................................................................................
35’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to property placed in service after De-
cember 31, 2004, in taxable years ending after such date.
SEC. 851. CREDIT FOR ALASKA NATURAL GAS.
(a) IN GENERAL.—Subpart D of part IV of subchapter
A of chapter 1 (relating to business related credits), as
amended by this Act, is amended by adding at the end the
following new section:
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‘‘SEC. 45Q. ALASKA NATURAL GAS.
‘‘(a) IN GENERAL.—For purposes of section 38, the
Alaska natural gas credit for any taxable year is an
amount equal to the product of—
‘‘(1) the credit amount, and
‘‘(2) Alaska natural gas the production of which
is attributable to the taxpayer.
‘‘(b) CREDIT AMOUNT.—For purposes of this section—
‘‘(1) IN GENERAL.—The credit amount is $0.52
per 1,000,000 Btu of Alaska natural gas.
‘‘(2) REDUCTION AS GAS PRICES INCREASE.—
‘‘(A) IN
GENERAL.—The dollar amount
under paragraph (1) shall be reduced (but not
below zero) by an amount which bears the same
ratio to such amount (determined without regard
to this paragraph) as—
‘‘(i) the excess (if any) of the applica-
ble reference price over $0.83, bears to
‘‘(ii) $0.52.
‘‘(B) APPLICABLE REFERENCE PRICE.—For
purposes of this paragraph—
‘‘(i) IN GENERAL.—The applicable ref-
erence price for any calendar month in a
taxable year is the reference price for the
calendar month in which production occurs.
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‘‘(ii) REFERENCE
PRICE.—The term
‘reference price’ means, with respect to any
calendar month, a published market price
for natural gas in United States dollars per
1,000,000 Btu (reduced by any gas trans-
portation costs and gas processing costs as
determined by the appropriate national reg-
ulatory body for natural gas transpor-
tation) as determined under regulations by
the Secretary.
‘‘(C) INFLATION ADJUSTMENT.—
‘‘(i) IN GENERAL.—In the case of any
taxable year beginning in a calendar year
after 2005, each of the dollar amounts con-
tained in paragraph (1) and subparagraph
(A) of this paragraph shall be increased to
an amount equal to such dollar amount
multiplied by the inflation adjustment fac-
tor for such calendar year.
‘‘(ii) INFLATION
ADJUSTMENT
FAC-
TOR.—For purposes of clause (i)—
‘‘(I) IN GENERAL.—The term ‘in-
flation adjustment factor’ means, with
respect to a calendar year, a fraction
the numerator of which is the GDP im-
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plicit price deflator for the preceding
calendar year and the denominator of
which is the GDP implicit price
deflator for the calendar year 2004.
‘‘(II) 
GDP 
IMPLICIT
PRICE
DEFLATOR.—The term ‘GDP implicit
price deflator’ means, for any calendar
year, the most recent revision of the
implicit price deflator for the gross do-
mestic product as of June 30 of such
calendar year as computed by the De-
partment of Commerce before October 1
of such calendar year.
‘‘(c) ALASKA NATURAL GAS.—For purposes of this
section—
‘‘(1) IN
GENERAL.—The term ‘Alaska natural
gas’ means natural gas entering the Alaska natural
gas pipeline (as defined in section 168(i)(19) (deter-
mined without regard to subparagraph (B) thereof))
which is produced from a well—
‘‘(A) located in the area of the State of
Alaska lying north of 64 degrees North latitude,
determined by excluding the area of the Alaska
National Wildlife Refuge (including the conti-
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nental shelf thereof within the meaning of section
638(1)), and
‘‘(B) pursuant to the applicable State and
Federal pollution prevention, control, and permit
requirements from such area (including the con-
tinental shelf thereof within the meaning of sec-
tion 638(1)).
‘‘(2) NATURAL GAS.—The term ‘natural gas’ has
the meaning given such term by section 613A(e)(2).
‘‘(d) SPECIAL RULES.—For purposes of this section—
‘‘(1) PRODUCTION ATTRIBUTABLE TO THE TAX-
PAYER.—
‘‘(A) IN GENERAL.—In the case of a well in
which there is more than 1 person or entity—
‘‘(i) entitled to production of Alaska
natural gas, or
‘‘(ii) at the election of such person or
entity, entitled to the value of production as
either an operating interest owner or a roy-
alty interest owner,
the portion of such production attributable to
such person or entity shall be determined on the
basis of the ratio which the person’s or entity’s
interest in the production or the value of produc-
tion bears to the aggregate of the interests of all
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such persons or entities. Production otherwise at-
tributable to a United States tax-exempt person
or entity by reason of a royalty interest shall be
attributable to such person or entity with respect
to whom royalty-in-value production remains or
to whom royalty-in-kind production is sold.
‘‘(B) PARTNERSHIP
PROPERTIES.—In the
case of a partnership, for purposes of applying
subparagraph (A), production shall be attrib-
utable to its partners based on each partner’s
distributive share of Alaska natural gas which is
produced from partnership properties and attrib-
utable to the partnership or its partners under
subparagraph (A).
‘‘(2) PASS-THRU IN THE CASE OF ESTATES AND
TRUSTS.—Under regulations prescribed by the Sec-
retary, rules similar to the rules of subsection (d) of
section 52 shall apply.
‘‘(e) APPLICATION OF SECTION.—This section shall
apply to Alaska natural gas during the period—
‘‘(1) beginning with the later of—
‘‘(A) January 1, 2010, or
‘‘(B) the initial date for the interstate
transportation of such Alaska natural gas, and
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‘‘(2) ending with the date which is 25 years after
the date described in paragraph (1).’’.
(b) CREDIT TREATED AS BUSINESS CREDIT.—Section
38(b) (relating to current year business credit), as amended
by this Act, is amended by striking ‘‘plus’’ at the end of
paragraph (27), by striking the period at the end of para-
graph (28) and inserting ‘‘, plus’’, and by adding at the
end the following new paragraph:
‘‘(29) The Alaska natural gas credit determined
under section 45Q(a).’’.
(c) ALLOWING CREDIT AGAINST ENTIRE REGULAR
TAX AND MINIMUM TAX.—
(1) IN GENERAL.—Section 38(c) (relating to lim-
itation based on amount of tax), as amended by this
Act, is amended by redesignating paragraph (5) as
paragraph (6) and by inserting after paragraph (4)
the following new paragraph:
‘‘(5) SPECIAL RULES FOR ALASKA NATURAL GAS
CREDIT.—
‘‘(A) IN GENERAL.—In the case of the Alas-
ka natural gas credit—
‘‘(i) this section and section 39 shall be
applied separately with respect to the cred-
it, and
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‘‘(ii) in applying paragraph (1) to the
credit—
‘‘(I) the amounts in subpara-
graphs (A) and (B) thereof shall be
treated as being zero, and
‘‘(II) the limitation under para-
graph (1) (as modified by subclause
(I)) shall be reduced by the credit al-
lowed under subsection (a) for the tax-
able year (other than the Alaska nat-
ural gas credit).
‘‘(B) ALASKA NATURAL GAS CREDIT.—For
purposes of this subsection, the term ‘Alaska nat-
ural gas credit’ means the credit allowable under
subsection (a) by reason of section 45Q(a).’’.
(2) CONFORMING AMENDMENTS.—Subclause (II)
of section 38(c)(2)(A)(ii), as amended by this Act,
subclause (II) of section 38(c)(3)(A)(ii), as amended
by 
this 
Act, 
and 
subclause 
(II) 
of 
section
38(c)(4)(A)(ii), as added by this Act, are each amend-
ed by inserting ‘‘or the Alaska natural gas credit’’
after ‘‘specified credits’’.
(d) CLERICAL AMENDMENT.—The table of sections for
subpart D of part IV of subchapter A of chapter 1, as
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amended by this Act, is amended by adding at the end the
following new item:
‘‘Sec. 45Q. Alaska natural gas.’’.
SEC. 852. CERTAIN ALASKA NATURAL GAS PIPELINE PROP-
ERTY TREATED AS 7-YEAR PROPERTY.
(a) IN GENERAL.—Section 168(e)(3)(C) (defining 7-
year property), as amended by this Act, is amended by
striking ‘‘and’’ at the end of clause (iii), by redesignating
clause (iv) as clause (v), and by inserting after clause (iii)
the following new clause:
‘‘(iv) any Alaska natural gas pipeline,
and’’.
(b) ALASKA NATURAL GAS PIPELINE.—Section 168(i)
(relating to definitions and special rules), as amended by
this Act, is amended by adding at the end the following
new paragraph:
‘‘(19) ALASKA
NATURAL
GAS
PIPELINE.—The
term ‘Alaska natural gas pipeline’ means the natural
gas pipeline system located in the State of Alaska
which—
‘‘(A) 
has 
a 
capacity 
of 
more 
than
500,000,000,000 Btu of natural gas per day, and
‘‘(B) is—
‘‘(i) placed in service after December
31, 2012, or