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SECTION 1. SMALL ETHANOL PRODUCER CREDIT.

(a) Allocation of Alcohol Fuels Credit to Patrons of a
Cooperative.--Section 40(g) of the Internal Revenue Code of 1986
(relating to alcohol used as fuel) is amended by adding at the end the
following new paragraph:
''(6) Allocation of small ethanol producer credit to
patrons of cooperative.--
''(A) Election to allocate.--
''(i) In general.--In the case of a
cooperative organization described in section
1381(a), any portion of the credit determined
under subsection (a)(3) for the taxable year
may, at the election of the organization, be
apportioned pro rata among patrons of the
organization on the basis of the quantity or
value of business done with or for such patrons
for the taxable year.
''(ii) Form and effect of election.--An
election under clause (i) for any taxable year
shall be made on a timely filed return for such
year. Such election, once made, shall be
irrevocable for such taxable year.
''(B) Treatment of organizations and patrons.--The
amount of the credit apportioned to patrons under
subparagraph (A)--
''(i) shall not be included in the amount
determined under subsection (a) with respect to
the organization for the taxable year,
''(ii) shall be included in the amount
determined under subsection (a) for the taxable
year of each patron for which the patronage
dividends for the taxable year described in
subparagraph (A) are included in gross income,
and
''(iii) shall be included in gross income
of such patrons for the taxable year in the
manner and to the extent provided in section
87.
''(C) Special rules for decrease in credits for
taxable year.--If the amount of the credit of a
cooperative organization determined under subsection
(a)(3) for a taxable year is less than the amount of
such credit shown on the return of the cooperative
organization for such year, an amount equal to the
excess of--
''(i) such reduction, over
''(ii) the amount not apportioned to such
patrons under subparagraph (A) for the taxable
year,
shall be treated as an increase in tax imposed by this
chapter on the organization. Such increase shall not be
treated as tax imposed by this chapter for purposes of
determining the amount of any credit under this subpart
or subpart A, B, E, or G.''.
(b) Improvements to Small Ethanol Producer Credit.--
(1) Definition of small ethanol producer.--Section 40(g) of
the Internal Revenue Code of 1986 (relating to definitions and
special rules for eligible small ethanol producer credit) is
amended by striking ''30,000,000'' each place it appears and
inserting ''60,000,000''.
(2) Small ethanol producer credit not a passive activity
credit.--Clause (i) of section 469(d)(2)(A) of such Code is
amended by striking ''subpart D'' and inserting ''subpart D,
other than section 40(a)(3),''.
(3) Allowing credit against minimum tax.--
(A) In general.--Subsection (c) of section 38 of
such Code (relating to limitation based on amount of
tax) is amended by redesignating paragraph (3) as
paragraph (4) and by inserting after paragraph (2) the
following new paragraph:
''(3) Special rules for small ethanol producer credit.--
''(A) In general.--In the case of the small ethanol
producer credit--
''(i) this section and section 39 shall be
applied separately with respect to the credit,
and
''(ii) in applying paragraph (1) to the
credit--
''(I) subparagraphs (A) and (B)
thereof shall not apply, and
''(II) the limitation under
paragraph (1) (as modified by subclause
(I)) shall be reduced by the credit
allowed under subsection (a) for the
taxable year (other than the small
ethanol producer credit).
''(B) Small ethanol producer credit.--For purposes
of this subsection, the term 'small ethanol producer
credit' means the credit allowable under subsection (a)
by reason of section 40(a)(3).''.
(B) Conforming amendment.--Subclause (II) of
section 38(c)(2)(A)(ii) of such Code is amended by
striking ''(other'' and all that follows through
''credit)'' and inserting ''(other than the empowerment
zone employment credit or the small ethanol producer
credit)''.
(4) Small ethanol producer credit not added back to income
under section 87.--Section 87 of such Code (relating to income
inclusion of alcohol fuel credit) is amended to read as
follows:

''SEC. 87. ALCOHOL FUEL CREDIT.

''Gross income includes an amount equal to the sum of--
''(1) the amount of the alcohol mixture credit determined
with respect to the taxpayer for the taxable year under section
40(a)(1), and
''(2) the alcohol credit determined with respect to the
taxpayer for the taxable year under section 40(a)(2).''.
(c) Conforming Amendment.--Section 1388 of such Code (relating to
definitions and special rules for cooperative organizations) is amended
by adding at the end the following new subsection:
''(k) Cross Reference.--For provisions relating to the
apportionment of the alcohol fuels credit between cooperative
organizations and their patrons, see section 40(g)(6).''.
(d) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after the date of the enactment of
this Act.
Output:
Amends the Internal Revenue Code respecting the small ethanol producer credit to: (1) authorize credit allocation among a cooperative's patrons; (2) increase the gallon capacity for eligible producers; (3) make the credit a non-passive income credit; and (4) remove the credit from the alcohol fuel credit gross income inclusion.