[Congressional Bills 104th Congress]
[From the U.S. Government Publishing Office]
[S. 447 Introduced in Senate (IS)]

  1st Session
                                 S. 447

To provide tax incentives to encourage production of oil and gas within 
               the United States, and for other purposes.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

            February 16 (legislative day, January 30), 1995

Mr. Inhofe (for himself and Mr. Nickles) introduced the following bill; 
     which was read twice and referred to the Committee on Finance

_______________________________________________________________________

                                 A BILL


 
To provide tax incentives to encourage production of oil and gas within 
               the United States, and for other purposes.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE; TABLE OF CONTENTS.

    (a) Short Title.--This Act may be cited as the ``Domestic Oil and 
Gas Production Tax Incentive Act''.
    (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this title an amendment or repeal is expressed in 
terms of an amendment to, or repeal of, a section or other provision, 
the reference shall be considered to be made to a section or other 
provision of the Internal Revenue Code of 1986.
    (c) Table of Contents.--The table of contents for this Act is as 
follows:

Sec. 1. Short title; amendment of 1986 code; table of contents.
                       TITLE I--PRODUCTION CREDIT

Sec. 101. Tax credit for marginal and new domestic oil and natural gas 
                            production.
            TITLE II--MODIFICATIONS TO PERCENTAGE DEPLETION

Sec. 201. Elimination of net income limitation on percentage depletion 
                            for oil and gas.
Sec. 202. All marginal production eligible for percentage depletion.
Sec. 203. Allocation of depletable quantities.
Sec. 204. Percentage depletion rate for marginal production.
                      TITLE III--OTHER PROVISIONS

Sec. 301. Election to expense geological and geophysical expenditures.
Sec. 302. Enhanced oil recovery credit.
Sec. 303. Election for optional 5-year writeoff of intangible drilling 
                            costs.
Sec. 304. Allocation of deductions in determining net income.

                       TITLE I--PRODUCTION CREDIT

SEC. 101. TAX CREDIT FOR MARGINAL AND NEW DOMESTIC OIL AND NATURAL GAS 
              PRODUCTION.

    (a) Credit for Producing Oil and Gas From New Wells and Marginal 
Wells.--Subpart D of part IV of subchapter A of chapter 1 (relating to 
business credits) is amended by adding at the end the following new 
section:

``SEC. 45C. CREDIT FOR PRODUCING OIL AND GAS FROM NEW WELLS AND 
              MARGINAL WELLS.

    ``(a) General Rule.--For purposes of section 38, the new and 
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
                    ``(B) 50 cents per 1,000 cubic feet of qualified 
                natural gas production.
            ``(2) Reduction as oil and gas prices increase.--
                    ``(A) In general.--The $3 and 50 cents amounts 
                under paragraph (1) shall each 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 of the applicable 
                        reference price over $14 ($2.49 for qualified 
                        natural gas production), bears to
                            ``(ii) $6 ($1.06 for qualified natural gas 
                        production).
                The applicable reference price for a taxable year is 
                the reference price for the calendar year preceding the 
                calendar year in which the taxable year begins.
                    ``(B) Inflation adjustment.--In the case of any 
                taxable year beginning in a calendar year after 1995, 
                each of the dollar amounts contained in subparagraph 
                (A) shall be increased 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 `1994' for `1990').
                    ``(C) Reference price.--For purposes of this 
                paragraph, the term `reference price' means, with 
                respect to any calendar year--
                            ``(i) in the case of qualified crude oil 
                        production, the reference price determined 
                        under section 29(d)(2)(C), and
                            ``(ii) in the case of qualified natural gas 
                        production, the Secretary's estimate of the 
                        annual average wellhead price per 1,000 cubic 
                        feet for all domestic natural gas.
    ``(c) Qualified Crude Oil and Natural Gas Production.--For purposes 
of this section--
            ``(1) In general.--The terms `qualified crude oil 
        production' and `qualified natural gas production' mean 
        domestic crude oil or natural gas which is produced from--
                    ``(A) a marginal well, or
                    ``(B) a new 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--
                            ``(i) in the case of a marginal well, 1,095 
                        barrels or barrel equivalents, or
                            ``(ii) in the case of a new well--
                                    ``(I) 5,475 barrels in the case of 
                                crude oil, or
                                    ``(II) 109,500,000 cubic feet in 
                                the case of natural gas.
                    ``(B) Special rule where well produces both.--In 
                the case of a new well which produces crude oil and 
                natural gas, the limitation for any taxable year 
                applicable to natural gas produced from the well shall 
                be reduced by the barrel equivalents (expressed in 
                cubic feet) of the crude oil produced from the well 
                during the taxable year.
                    ``(C) Proportionate reductions.--
                            ``(i) Short taxable years.--In the case of 
                        a short taxable year, the limitations under 
                        this paragraph shall be proportionately reduced 
                        to reflect the ratio which the number of days 
                        in the year bears to 365.
                            ``(ii) Wells not in production entire 
                        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 taxable year.
            ``(3) Definitions.--
                    ``(A) Marginal well.--The term `marginal well' 
                means a domestic well (other than a new well)--
                            ``(i) which during the taxable year has 
                        marginal production (as defined in 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 
                                effluent.
                    ``(B) New well.--The term `new well' means a 
                domestic well drilled after December 31, 1994.
                    ``(C) Crude oil, etc.--The terms `crude oil', 
                `natural gas', `domestic', and `barrel' have the 
                meanings given such terms by section 613A(e).
                    ``(D) Barrel equivalent.--The term `barrel 
                equivalent' means, with respect to natural gas, a 
                conversion ratio of 6,000 cubic feet of natural gas to 
                1 barrel of crude oil.
    ``(d) Other Rules.--
            ``(1) Production attributable to the taxpayer.--In the case 
        of a marginal well or new well in which there is more than one 
        owner of operating interests 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 operating interest owners in the production.
            ``(2) Operating interest required.--Any credit under this 
        section may be claimed only on production which is attributable 
        to the holder of an operating interest.
            ``(3) Production from nonconventional sources excluded.--In 
        the case of production from a 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 section 29 with 
        respect to the well.''
    (b) Credit Treated as Business Credit.--Section 38(b) is amended by 
striking ``plus'' at the end of paragraph (10), by striking the period 
at the end of paragraph (11) and inserting ``, plus'', and by adding at 
the end the following new paragraph:
            ``(12) the new and marginal oil and gas well production 
        credit determined under section 45C(a).''
    (c) Credit Allowed Against Regular and Minimum Tax.--
            (1) In general.--Subsection (c) of section 38 (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 oil and gas production credit.--
                    ``(A) In general.--In the case of the oil and gas 
                production 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) subparagraph (A) 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 oil and 
                                gas production credit).
                    ``(B) Oil and gas production credit.--For purposes 
                of this subsection, the term `oil and gas production 
                credit' means the credit allowable under subsection (a) 
                by reason of section 45C(a).''
            (2) Conforming amendment.--Subclause (II) of section 
        38(c)(2)(A)(ii) is amended by inserting ``or the oil and gas 
        production credit'' after ``employment credit''.
    (d) Coordination With Section 29.--Section 29(a) is amended by 
striking ``There'' and inserting ``At the election of the taxpayer, 
there''.
    (e) Clerical Amendment.--The table of sections for subpart D of 
part IV of subchapter A of chapter 1 is amended by adding at the end 
the following item:

        ``45C. Credit for producing oil and gas from new wells and 
                            marginal wells.''
    (f) Effective Date.--The amendments made by this section shall 
apply to production after the date of the enactment of this Act.

            TITLE II--MODIFICATIONS TO PERCENTAGE DEPLETION

SEC. 201. ELIMINATION OF NET INCOME LIMITATION ON PERCENTAGE DEPLETION 
              FOR OIL AND GAS.

    (a) Elimination.--
            (1) In general.--Paragraph (1) of subsection (d) of section 
        613A (relating to the limitation based on taxable income for 
        percentage depletion in the case of oil and gas wells) is 
        repealed.
            (2) Other production.--The second sentence of subsection 
        (a) of section 613 (relating to percentage depletion) is 
        amended to read as follows: ``Except in the case of oil and gas 
        wells, such allowance shall not exceed 50 percent of the 
        taxpayer's taxable income from the property (computed without 
        allowance for depletion).''
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1994.

SEC. 202. ALL MARGINAL PRODUCTION ELIGIBLE FOR PERCENTAGE DEPLETION.

    (a) In General.--Paragraph (6) of section 613A(c) (relating to 
marginal production) is amended to read as follows:
            ``(6) Separate application to marginal production.--
                    ``(A) In general.--Except as provided in subsection 
                (d)--
                            ``(i) the allowance for depletion under 
                        section 611 with respect to all of a taxpayer's 
                        marginal production of domestic crude oil and 
                        domestic natural gas shall be computed in 
                        accordance with section 613, except that, for 
                        purposes of section 613(a), the applicable 
                        percentage shall be substituted for the 
                        percentage specified in section 613(b), and
                            ``(ii) such marginal production shall not 
                        be taken into account under paragraph (1), 
                        including for purposes of determining the 
                        taxpayer's average daily production of domestic 
                        crude oil or domestic natural gas eligible for 
                        application of paragraph (1).
                    ``(B) Applicable percentage.--For purposes of 
                subparagraph (A), the term `applicable percentage' 
                means the percentage (not greater than 25 percent) 
                equal to the sum of--
                            ``(i) 15 percent, plus
                            ``(ii) 1 percentage point for each whole 
                        dollar by which $20 exceeds the reference price 
                        for crude oil for the calendar year preceding 
                        the calendar year in which the taxable year 
                        begins.
                For purposes of this paragraph, the term `reference 
                price' means, with respect to any calendar year, the 
                reference price determined for such calendar year under 
                section 29(d)(2)(C).
                    ``(C) Marginal production.--The term `marginal 
                production' means domestic crude oil or domestic 
                natural gas which is produced during any taxable year 
                from a property which--
                            ``(i) is a stripper well property for the 
                        calendar year in which the taxable year begins, 
                        or
                            ``(ii) is a property substantially all of 
                        the production of which during such calendar 
                        year is heavy oil.
                    ``(D) Stripper well property.--For purposes of this 
                paragraph, the term `stripper well property' means, 
                with respect to any calendar year, any property with 
                respect to which the amount determined by dividing--
                            ``(i) the average daily production of 
                        domestic crude oil and domestic natural gas 
                        from producing wells on such property for such 
                        calendar year, by
                            ``(ii) the number of such wells,
                is 15-barrel equivalents or less.
                    ``(E) Heavy oil.--For purposes of this paragraph, 
                the term `heavy oil' means domestic crude oil produced 
                from any property if such crude oil had a weighted 
                average gravity of 20 degrees API or less (corrected to 
                60 degrees Fahrenheit).''
    (b) Conforming Amendment.--Paragraph (3) of section 613A(c) 
(defining depletable oil quantity) is amended to read as follows:
            ``(3) Depletable oil quantity.--For purposes of paragraph 
        (1), the taxpayer's depletable oil quantity is 1,000 barrels.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1994.

SEC. 203. ALLOCATION OF DEPLETABLE QUANTITIES.

    (a) In General.--Subparagraphs (A) and (B) of section 613A(c)(7) 
(relating to special rules for production in excess of depletable 
quantities) are each amended by inserting ``of such quantity allocated 
to the property by the taxpayer, or, if the taxpayer elects not to make 
the allocation, that amount'' after ``shall be that amount''.
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1994.

SEC. 204. PERCENTAGE DEPLETION RATE FOR MARGINAL PRODUCTION.

    (a) In General.--Subparagraph (B) of section 613A(c)(6), as amended 
by section 202(a), is amended to read as follows:
                    ``(B) Applicable percentage.--For purposes of this 
                paragraph, the term `applicable percentage' means the 
                percentage (not greater than 25 percent) equal to the 
                sum of--
                            ``(i) 15 percent, plus
                            ``(ii) 1 percentage point for each whole 
                        dollar by which $20 exceeds the reference price 
                        for crude oil for calendar year 1994 
                        (determined under section 29(d)(2)(C)).''
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1994.

                      TITLE III--OTHER PROVISIONS

SEC. 301. ELECTION TO EXPENSE GEOLOGICAL AND GEOPHYSICAL EXPENDITURES.

    (a) In General.--Section 263 (relating to capital expenditures) is 
amended by adding at the end the following new subsection:
    ``(j) Geological and Geophysical Expenditures for Domestic Oil and 
Gas Wells.--Notwithstanding subsection (a), a taxpayer may elect to 
treat geological and geophysical expenses incurred in connection with 
the exploration for, or development of, oil or gas within the United 
States (as defined in section 638) as expenses which are not chargeable 
to capital account. Any expenses so treated shall be allowed as a 
deduction in the taxable year in which paid or incurred.''
    (b) Conforming Amendment.--Section 263A(c)(3) is amended by 
inserting ``263(j),'' after ``263(i),''.
    (c) Effective Date.--
            (1) In general.--The amendments made by this section shall 
        apply to expenses paid or incurred after the date of the 
        enactment of this Act.
            (2) Transition rule.--In the case of any expenses described 
        in section 263(j) of the Internal Revenue Code of 1986 which 
        were paid or incurred on or before the date of the enactment of 
        this Act, the taxpayer may elect, at such time and in such 
        manner as the Secretary of the Treasury may prescribe, to 
        amortize the unamortized portion of such expenses over the 36-
        month period beginning with the month in which the date of the 
        enactment of this Act occurs. For purposes of this paragraph, 
        the unamortized portion of any expense is the amount remaining 
        unamortized as of the first day of the 36-month period.

SEC. 302. ENHANCED OIL RECOVERY CREDIT.

    (a) Expansion of Projects Eligible for Credit.--
            (1) In general.--Clause (i) of section 43(c)(2)(A) 
        (defining qualified enhanced oil recovery project) is amended 
        to read as follows:
                            ``(i) which involves the application (in 
                        accordance with sound engineering principles) 
                        of 1 or more secondary or tertiary recovery 
                        methods which can reasonably be expected to 
                        result in more than an insignificant increase 
                        in the amount of crude oil or natural gas which 
                        ultimately will be recovered,''.
            (2) Conforming amendments.--
                    (A) Subparagraph (C) of section 43(c)(1) is amended 
                to read as follows:
                    ``(C) Any cost paid or incurred (whether or not 
                chargeable to capital account) for any injectant or 
                other costs which are used as part of a qualified 
                enhanced oil recovery project, other than a recoverable 
                hydrocarbon injectant described in section 193(b)(2).''
                    (B) Section 43(c)(4) is amended to read as follows:
            ``(4) Secondary and tertiary recovery methods.--For 
        purposes of paragraph (2), secondary and tertiary recovery 
        methods shall include--
                    ``(A) tertiary recovery methods described in 
                section 193(b)(3),
                    ``(B) immiscible nonhydrocarbon gas displacement, 
                and
                    ``(C) other secondary and tertiary recovery methods 
                certified in accordance with paragraph (2)(B).''
    (b) Credit Allowable Against Minimum Tax.--
            (1) In general.--Subsection (c) of section 38 (relating to 
        limitation based on amount of tax), as amended by section 
        101(c), is amended by redesignating paragraph (4) as paragraph 
        (5) and by inserting after paragraph (3) the following new 
        paragraph:
            ``(4) Special rules for enhanced oil recovery credit.--
                    ``(A) In general.--In the case of the enhanced oil 
                recovery 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) subparagraph (A) 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 enhanced 
                                oil recovery credit).
                    ``(B) Enhanced oil recovery credit.--For purposes 
                of this subsection, the term `enhanced oil recovery 
                credit' means the credit allowable under subsection (a) 
                by reason of section 43(a).''
            (2) Conforming amendments.--
                    (A) Subclause (II) of section 38(c)(2)(A)(ii), as 
                amended by section 101(c), is amended by striking ``or 
                the oil and gas production credit'' and inserting ``, 
                the oil and gas production credit, or the enhanced oil 
                recovery credit''.
                    (B) Subclause (II) of section 38(c)(3)(A)(ii) is 
                amended by inserting ``or the enhanced oil recovery 
                credit'' after ``production credit''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1994.

SEC. 303. ELECTION FOR OPTIONAL 5-YEAR WRITEOFF OF INTANGIBLE DRILLING 
              COSTS.

    (a) Optional Election for Minimum Tax Purposes.--
            (1) In general.--Section 56(a) is amended by adding at the 
        end the following new paragraph:
            ``(9) Intangible drilling costs.--If the taxpayer elects to 
        have this paragraph apply, the taxpayer may disregard, for 
        purposes of computing the taxpayer's alternative minimum 
        taxable income, an election under section 59(e) with respect to 
        any portion of any qualified expenditure described in section 
        59(e)(2)(C).''
            (2) Conforming amendment.--Section 59(e) is amended by 
        adding at the end the following new paragraph:
            ``(7) Exception for intangible drilling costs.--

                                ``For election not to have this 
subsection apply in computing alternative minimum taxable income, see 
section 56(a)(9).''
    (b) Time for Making Elections.--Subparagraph (B) of section 
59(e)(4) is amended to read as follows:
                    ``(B) Time for making election.--
                            ``(i) In general.--An election under this 
                        subsection may be made or revoked at any time 
                        before the period for filing a claim for credit 
                        or refund (determined after any extension) 
                        expires.
                            ``(ii) Period of limitation for 
                        assessment.--The period for assessing a 
                        deficiency attributable to any election under 
                        clause (i) (or any revocation thereof) shall 
                        not expire before the date 1 year after the 
                        date the Secretary is notified of the election 
                        (or revocation).''
    (c) Effect of Election.--Paragraph (6) of section 59(e) is amended 
by adding at the end the following: ``Any deductions with respect to 
such portion shall not be treated as directly attributable to oil and 
gas properties for purposes of section 57(a)(2)(C).''
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1994.

SEC. 304. ALLOCATION OF DEDUCTIONS IN DETERMINING NET INCOME.

    (a) In General.--Clause (ii) of section 57(a)(2)(C) is amended by 
striking ``allocable'' and inserting ``directly attributable''.
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1994.
                                 <all>
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