[Congressional Record Volume 149, Number 116 (Thursday, July 31, 2003)]
[Senate]
[Pages S10533-S10569]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                      ENERGY TAX INCENTIVES--S. 14

  Mr. BAUCUS. Mr. President, we are about to vote on the comprehensive 
Energy legislation. While the Senate has debated numerous aspects of 
this legislation, there has been a little discussion--not very much, I 
might add--

[[Page S10534]]

of the tax provisions in this bill. Yesterday, Senator Grassley, 
Senator Bingaman, Senator Domenici and I filed the Energy Tax 
Incentives Act of 2003 as an amendment to S. 14.
  I ask unanimous consent to have printed in the Record a revenue table 
and the committee report at the conclusion of my remarks.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  (See exhibit 1.)
  Mr. BAUCUS. Mr. President, this amendment reflects the energy tax 
incentives reported out by the Finance Committee in April. The 
incentives in this amendment enjoy broad support, across the political 
spectrum.
  These tax incentives are also very similar to those in last year's 
energy tax bill. In April of last year, they won overwhelming support 
on the Senate floor.
  I was disappointed that the conferees did not reach an agreement on 
the larger energy package last year. I am hopeful that this year, we 
will see these provisions signed into law.
  Before explaining the specific incentives proposed in this amendment, 
let me first take a few moments to address the nature of the energy 
challenge facing the nation.
  The last few years have seen energy crises, characterized by energy 
supply shortages and price spikes. We saw rolling blackouts in the 
State of California. Energy price jolts affected nearly all Americans. 
Energy-related disruptions were widespread and severe.
  Folks back in my home state of Montana have been particularly hard 
hit. Many people in Montana have to drive great distances just to get 
to work. And high gas and energy prices raise the costs of doing 
business for small businesses, farmers, and ranchers, alike.
  Today, we face continued uncertainty in world energy markets. Earlier 
this year, energy prices soared to record levels. This was due, in 
part, to uncertainty over the war in Iraq. And it was also due, in 
part, to the colder-than-average winter.
  Natural gas markets raise growing concerns. This May, Federal Reserve 
Chairman Alan Greenspan predicted that growing demand for natural gas 
and limited supplies would continue to raise natural gas prices. 
Chairman Greenspan warned that this situation could put American 
companies at a disadvantage relative to their overseas competitors.
  Since then, natural gas prices have continued to climb. Today, 
natural gas prices are nearly double last year's levels. A year ago, 
natural gas prices across the nation averaged about $3 per thousand 
cubic feet. This year, during the last three days of June, trading on 
the New York Mercantile Exchange pushed prices up to an average of 
$5.98 per thousand cubic feet.
  Natural gas is a key input and cost of doing business in the 
manufacturing sector. Manufacturing is very energy-intensive. 
Manufacturers use energy to heat factories, to heat boilers to make 
steam and produce electricity to run machines. Manufacturing accounts 
for nearly one-half of the nation's natural gas use.
  Higher gas prices place additional competitive pressures on these 
businesses. The National Association of Manufacturers reports that 
rising energy costs are causing many companies to close their 
operations.
  Slowing in the manufacturing sector accounts for much of the current 
weakening in our economy. And this means that hard-working Americans 
are losing jobs--high-paying jobs--jobs that often move overseas.
  Rising natural gas prices also affect American consumers. The 
Department of Energy predicts that household bills will be about 20 
percent higher this winter than last year.
  Gasoline prices have also raised concerns. Last year at this time, 
the national average retail price for regular gasoline was about $1.40 
per gallon. Earlier this year, prices peaked at almost $1.70 per 
gallon. Last week's average price was $1.52 per gallon. The Department 
of Energy expects prices to remain at this higher level throughout the 
year. This volatility in U.S. gas prices has a sharp economic effect, 
disrupting businesses and lives.
  The average U.S. household uses about 1,100 gallons of gasoline a 
year in their cars. Thus the increase in gas prices over last year 
means that an average household is paying $132 more a year just for 
their car's gasoline. And because gas prices peaked at almost $1.70 per 
gallon earlier this year, the actual increase in household spending on 
gasoline was much greater.
  Such a cost difference can have severe effects on businesses. 
Consider a business that relies primarily on trucking services for 
shipping its products. For these companies, even modest price 
volatility can break the business.
  The outlook for both the gasoline and natural gas markets is not 
promising. The Department of Energy projects that during the next 20 
years, world oil demand will increase by more than 50 percent, from 76 
million barrels per day in 2000 to nearly 120 million barrels per day 
in 2020.
  The more reliant we are on petroleum products, the more that oil 
price fluctuations will affect us. And continued political uncertainly 
and the treat of terrorism will worsen this vulnerability.
  To address these energy challenges, the Energy Committee has designed 
the underlying bill. And to contribute to these efforts, earlier this 
year, the Finance Committee marked up a bill providing tax incentives 
to support these broader energy policy objectives. Those incentives are 
reflected in the pending amendment.
  The Finance Committee amendment consists of a balanced package of 
targeted incentives directed to alternative energy, traditional energy 
production, and energy efficiency.
  The amendment would accomplish its goals in three main ways:
  First, it would encourage new energy production, especially 
production from renewable sources.
  Second, it would encourage the development of new technology.
  And third, it would encourage energy conservation.
  Production, technology, and conservation. Let me explain each in 
turn.
  First, new production is critical. The level of U.S. energy 
production directly affects our dependence on foreign sources of 
energy. If we can increase U.S. energy production faster than demand, 
we can become less reliant on foreign energy. The opposite, however, is 
taking place.
  As this chart shows, through 2020, America's energy use is increasing 
more rapidly than domestic energy production. As a result, our reliance 
on foreign sources of energy is increasing.
  Here is how we address the problem: Through targeted incentives, this 
amendment would encourage the development of both traditional and 
alternative sources of production, thereby boosting our overall energy 
resources. This will help promote American energy independence, which 
will contribute to both greater economic growth and national security.
  The use of tax incentives to promote energy development stretches 
back to the enactment of the income tax in 1916, with tax incentives 
for the production of oil and gas. And in 1978, we created tax 
incentives for renewable fuels and for conservation.
  This amendment would provide tax incentives for the development of 
renewable resources and alternative fuels. Renewables provide cleaner, 
safer alternatives to more drilling and more nuclear facilities.
  This amendment would extend the wind and biomass credit for an 
additional 5 years. And the amendment would qualify many more sources--
geothermal, solar, plant life, and others--as renewable fuel sources.
  At the same time, we recognize that the U.S. will continue to rely on 
oil, gas, and coal production. To further boost production, the 
amendment would create a new credit for oil and gas production from 
marginal wells. And the amendment would simplify cost recovery of 
geological and geophysical expenditures. The amendment would also 
include several tax incentives to help the oil and gas industry to 
bring supply to market.
  While this amendment would thus support exploration and production of 
more traditional resources, it would also encourage cleaner use of 
these fuels.
  For example, the amendment includes several incentives to encourage 
electric utilities to invest in technologies that will make their coal-
fired power plants cleaner-burning and more efficient. This will help 
make coal a more environmentally-friendly energy source into the 
future, even as we look for alternatives.

[[Page S10535]]

  Energy sector activities are often front and center in environmental 
debates. Congress needs to consider environmental concerns when 
crafting its energy legislation. By carefully targeting our tax 
incentives, we can encourage more environmentally-friendly activities, 
such as the use of renewable resources and the transition towards 
cleaner, more-efficient technologies.
  Let me turn to the second key element of the amendment: new 
technology.
  New technology can be the cornerstone of energy independence and 
cleaner energy. In the future, electricity, new and alternative fuels, 
and fuel cells will power our cars.
  But to get there, we will need substantial investments to create the 
building blocks for future technologies. Why? Because today's 
transportation sector is 97 percent reliant on petroleum based fuel. 
That's right. 97 percent.
  We need a lot of change to make the transportation sector cleaner and 
more fuel-efficient. We need to make significant investments to bring 
about this change.
  In addition, we need to promote the use of cleaner, more-efficient 
technologies throughout the energy sector. Such state-of-the-art 
technologies are often more expensive than more-traditional 
technologies. Tax incentives help to bridge the gap in cost between 
these cleaner technologies and traditional technologies.
  Here is what we do.
  We create tax credits for the purchase of new technology vehicles. 
These vehicles of the future will be powered by alternative fuels, fuel 
cells, and by electric batteries.
  We also provide tax credits for the purchase of hybrid vehicles, 
which run partly on electricity and partly on gasoline.
  What is so great about these vehicles? Well for starters, fuel cell 
and electric vehicles are zero-emissions vehicles. And hybrid and 
alternative fuel vehicles can speed us toward the development of these 
zero-emissions vehicles.
  And each of these vehicle types can significantly improve fuel 
economy and energy independence. To make sure, we provide certain tax 
credits only if the vehicle achieves large improvements in fuel 
economy.
  Many new vehicle technologies require new fuels and infrastructure to 
deliver those fuels. Therefore, the amendment provides tax incentives 
for the installation of new-technology refueling stations and for the 
purchase of alternative fuels.
  We also have developed a number of incentives to promote the use of 
cleaner-burning, state-of-the-art technologies throughout the energy 
sector.
  We create incentives for clean coal. Under the amendment, if you 
retrofit to use currently available clean coal technology, you are 
eligible for a production tax credit. If you use advanced technology, 
you are eligible for both an investment credit and a production credit.
  Investing in these cleaner-burning technologies in the coal and 
transportation sectors will have positive long-term environmental 
effects, particularly for air quality.
  Other incentives will promote the development of renewable energy 
technology. These and other tax incentives will help advance further 
technological development. This will have a long-term stimulative 
effect on America's economy.
  The third key element of the amendment is conservation. Just as much 
as new production, conservation promotes energy independence. It also 
helps reduce pollution and thereby improve our health and the 
environment in the longer term.
  In crafting these incentives, we have struck a balance between 
production and conservation. Increasing conservation--reducing energy 
consumption--will help reduce our reliance on foreign sources of 
energy.
  And tax incentives can be effective means of encouraging 
conservation. A couple of years back, Economist Kevin Hassett told the 
Committee that ``a 10 percentage point credit would likely increase the 
probability of investing--in conservation--by about 24 percent.''
  The amendment includes several incentives to encourage businesses and 
homeowners to use energy-efficient equipment, building materials, and 
appliances. These tax incentives can make the difference, as such 
products tend to be more expensive than more-traditional products and 
materials.
  As Energy Secretary Abraham said during a tour of the National 
Renewable Energy Laboratory in Golden, Colorado, earlier this month: 
Americans can help mitigate an expected natural-gas shortage during the 
coming year by reducing energy use and adopting efficiency measures for 
heating and cooling homes and offices.
  The amendment would give a tax credit to reduce the cost of the 
energy-efficient technology, enabling individuals to purchase energy-
efficient refrigerators and other appliances.
  The amendment would also empower individuals with more complete 
energy consumption information by encouraging metering devices. These 
types of metering devices allow people to make more-informed decisions 
about the use of energy and thereby save energy in their homes.
  Over time, the benefits of tax investments in energy conservation 
will reduce monthly energy bills. These cost savings can have the same 
economic effect as a tax cut--more dollars in the hands of American 
families.
  Those are the three key elements of the amendment. New production, 
new technology, and conservation.
  The amendment includes other important provisions. One in particular 
is electric utility restructuring. This is important for investor-owned 
utilities, municipal utilities, and cooperatives, like those back in 
Montana.
  Other provisions address nuclear decommissioning funds and the 
treatment of cooperatives.
  Finally, these tax provisions address market inefficiencies by 
providing a real economic benefit for engaging in more environmentally-
sensitive activities. In short, this amendment is good environmental 
policy and good energy policy.
  This is a good amendment. It is a package of tax incentives that are 
important in their own right and that will complement the broader 
energy bill. It will provide a key component of our emerging 
environmental and energy policies.
  I support Chairman Grassley's position that this amendment generally 
should represent the position of the Finance Committee and the Senate 
during conference negotiations of the Energy Bill.

                             ESTIMATED REVENUE EFFECTS OF MODIFICATIONS TO S. 1149, THE ``ENERGY TAX INCENTIVES ACT OF 2003,'' FOR CONSIDERATION ON THE SENATE FLOOR
                                                                        [Fiscal years 2004-2013, in millions of dollars]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
               Provision                           Effective              2004      2005      2006      2007      2008      2009      2010      2011      2012      2013     2004-08    2004-13
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Extension and Modification of           esfqfa DOE....................      -111      -205      -298      -387      -384      -354      -326      -303      -287      -277     -1,381     -2,928
 Renewable Electricity Production Tax
 Credit--Extend (property placed in
 service before 1/1/07 (1/1/05 in the
 case of open-loop)) and modify the
 section 45 credit for producing
 electricity from certain sources
 (credit is equal to 1.8 cents per
 kilowatt hour for production from
 post-enactment facilities after 12/31/
 03).

[[Page S10536]]

 
Alternative Motor Vehicles and Fuel
 Incentives:
  1. Credits for purchase of            ppisa DOE.....................      -151      -428      -649      -550       -17        38       -19        -2       -11       -19     -1,795     -1,767
   alternative motor vehicles,
   modifications to credit for
   electric vehicles, and extension of
   deduction for qualified clean fuel
   vehicles and property (deduction
   for property placed in service
   before 1/1/08 (1/1/12 in the case
   of hydrogen fuel); credit for
   alternative and electric vehicles
   purchased before 1/1/07 (1/1/12 in
   the case of hydrogen).
  2. Credit for installation of         ppisa DOE.....................        -2        -3        -3        -3        -1     (\1\)     (\1\)     (\1\)     (\1\)     (\1\)        -11        -10
   alternative fueling stations credit
   for property placed in service
   before 1/1/08 (1/1/12 in the case
   of hydrogen).
  3. Credit for retail sale of          DOE...........................       -83      -169      -215       -90        -1        -1        -1        -1  ........  ........       -558       -563
   alternative fuels (30 cents/gallon
   in 2003, 40 cents in 2004, 50 cents
   in 2005 and 2006).
  4. Modifications to small ethanol     tyba DOE......................       -16       -34       -34       -34       -41       -49       -50       -29        -3  ........       -159       -290
   producer credit and extension of
   section 40 credit (through 12/31/
   10).
  5. Tax incentives for biodiesel       fsa DOE.......................       -20       -29        -8  ........  ........  ........  ........  ........  ........  ........        -57        -57
   (sunset 12/31/05 \3\ \4\.
  6. Alcohol fuel and biodiesel         fsa 9/30/03...................        31        46        49        48        45        43        40        36        33        30        221        402
   mixtures excise tax credit \4\.
  7. Sale of gasoline and diesel fuel   DOE...........................                                                      No Revenue Effect
   at duty-free sales enterprises.
                                                                       -------------------------------------------------------------------------------------------------------------------------
    Total of Alternative Motor          ..............................      -241      -617      -860      -629       -15        29         8         8        19        11     -2,359     -2,285
     Vehicles and Fuel Incentives.
                                                                       =========================================================================================================================
Conservation and Energy Efficiency
 Provisions:
  1. Business credit for construction   ppb DOE & 12/31/07............       -63      -102       -98      -108       -68       -21        -4  ........  ........  ........       -440       -465
   of new energy efficient homes.
  2. Credit for energy efficient        apb DOE & 12/31/07............       -58       -82       -68       -46       -23        -8        -2     (\2\)  ........  ........       -277       -288
   appliances.
  3. Credit for residential fuel cell,  ppb 1/1/04 & 12/31/07.........       -30       -54       -61       -71       -62  ........  ........  ........  ........  ........       -278       -278
   solar, and other energy efficient
   property.
  4. Business tax incentives for        ppisb DOE & 12/31/07..........        -5        -9       -14        -9        -4        -3        -1     (\5\)     (\5\)     (\5\)        -43        -46
   qualifying fuel cells and
   microturbines (sunset 12/31/06).
  5. Allowance of deduction for         tyba DOE & ccb 1/1/10.........       -28       -51       -74      -101      -130      -139       -41        10         9         8       -385       -537
   certain energy efficient commercial
   building property.
  6. Three-year applicable recovery
   period for qualified energy
   management de- .
      vices (excluding ancillary
 equipment):
    a. Electric devices (sunset for     ppsia DOE.....................        -9       -20       -42       -70       -61       -13        16        26        22        14       -202       -137
     property placed in service after
     12/31/07).
    b. Water submetering devices        ppisa DOE.....................        -4       -11       -21       -31       -24        -1        12        15        11         5        -91        -49
     (sunset for property placed in
     service after 12/31/07).
  7. Energy credit for combined heat    ppisa DOE & ppisb 1/1/07......       -68       -79       -78       -51       -24       -11        -1         4         6         6       -300       -296
   and power system property.
  8. Credit for energy efficiency       tyba DOE & tybb 1/1/07........       -55       -78       -78       -63       -62  ........  ........  ........  ........  ........       -274       -274
   improvements to existing homes.
                                                                       -------------------------------------------------------------------------------------------------------------------------
    Total of Conservation and Energy    ..............................      -320      -486      -534      -550      -396      -196       -21        55        48        33     -2,290     -2,370
     Efficiency Provisions.
                                                                       =========================================================================================================================
Clean Coal Incentives--Investment and
 Production Credits for Clean Coal
 Technology:
  1. Credit for production from         pa DOE........................       -31       -58       -70       -80       -87       -90       -92       -94       -97       -97       -326       -797
   qualifying clean coal technology
   units.
  2. Credit for investment in           ppsia DOE.....................       -20       -47       -49       -41       -27      -111       -94       -39       -28       -18       -184       -475
   qualifying advanced clean coal
   technology (for property placed in
   service after the date of enactment
   and before 1/1/17 (1/1/13 in the
   case of advanced pulverized coal or
   atmospheric fluidized bed)).
  3. Credit for production of           pa DOE........................        -4       -17       -36       -55       -70       -96      -132      -153      -162      -168       -183       -895
   electricity from qualifying
   advanced clean coal technology
   units.
                                                                       -------------------------------------------------------------------------------------------------------------------------
    Total of Clean Coal Incentives--    ..............................       -55      -122      -155      -176      -184      -297      -318      -286      -287      -283       -693     -2,167
     Investment and Production Credit
     for Clean Coal Technology.
                                                                       =========================================================================================================================
Oil and Gas Provisions:
  1. Credit for marginal domestic oil   DOE...........................                                                      No Revenue Effect
   and natural gas well production.
  2. Natural gas gathering pipelines    ppsia DOE.....................        -3        -5        -8       -12       -41       -49       -58       -66       -77       -88        -69       -407
   treated as 7-year property.
  3. Expensing of capital costs         epoia 1/1/03..................        -9        -7        -8       -12       -27       -52       -21         3         4         5        -63       -125
   incurred and credit for production
   in complying with Environmental
   Protection Agency sulfur
   regulations for small refiners.
  4. Determination of small refiner     tyea DOE......................        -6        -7        -8        -8        -8        -8        -8        -8        -9        -9        -37        -81
   exception to oil depletion
   deduction--modify definition of
   independent refiner from daily
   maximum run less than 50,000
   barrels to average daily run less
   than 60,000 barrels.
  5. Extension of suspension of 100%    DOE...........................       -22       -35       -36       -13  ........  ........  ........  ........  ........  ........       -106       -106
   of taxable income limit with
   respect to marginal production
   (through 12/31/06).
  6. Amortize all geological and        cpoii tyba DOE................       234      -212      -449      -428      -320      -261      -226      -194      -188      -194     -1,175     -2,238
   geophysical (``G&G'') expenditures
   over 2 years.
  7. Amortize all delay rental          apoii tyba DOE................        85        11       -64       -62       -35        -9        -1        -1        -1        -1        -65        -77
   payments over 2 years.

[[Page S10537]]

 
  8. Extension and modification of      DOE...........................      -189      -134      -509      -601      -469      -230       -50    -(\2\)  ........  ........     -2,083     -2,363
   section 27 credit for facilities
   placed in service after the date of
   enactment and before 1/1//07,
   including viscous oil, coalmine
   gas, agricultural and animal waste,
   and refined coal; extension and
   modification of section 29 credit
   certain coal gasification and coke
   production from 1/1/02 through 12/
   31/05; clarification of definition
   of landfill gas facility; study of
   coal bed methane; for new
   facilities described in section 29
   (c)(1)(A) & (B), credit rate is
   equal to $3.00 Barrel of Oil
   Equivalent; and 200,000 cubic feet
   per day limit \6\.
  9. Natural gas distribution lines     ppisa DOE.....................       -16       -38       -60       -90      -119      -145      -171      -200      -228      -242       -323     -1,309
   treated as 15-year property.
  10. Provisions Relating to Alaska
   Nat- .
      ural Gas:
    a. Credit for Alaska Natural Gas:.  (\7\).........................                                                      No Revenue Effect
    b. Treat certain Alaska pipeline    generally.....................  ........  ........  ........  ........  ........  ........  ........  ........  ........      -150  .........       -150
     property as 7-year property.       ppisa 12/31/12................
  11. Exempt certain prepayments for    oia DOE.......................     (\2\)        -1        -1        -2        -3        -3        -4        -5        -5        -6         -7        -31
   natural gas from tax-exempt
   arbitrage rules.
                                                                       -------------------------------------------------------------------------------------------------------------------------
    Total of Oil and Gas Provisions...  ..............................        74      -608    -1,143    -1,228    -1,022      -757      -539      -472      -504      -685     -3,928     -6,887
                                                                       =========================================================================================================================
Electric Utility Restructuring
 Provisions:
  1. Modification to special rules for  tyba DOE......................       -47       -69       -76       -85       -94      -103      -113      -125      -137      -151       -371     -1,000
   nuclear decommissioning costs--
   transfer of non-qualified funds
   (buyer gets deduction over live of
   plant); eliminate cost of service
   requirement; and clarify treatment
   of fund transfers.
  2. Treatment of certain income of     tyba DOE......................        -8       -18       -21       -23       -25       -27       -30       -33       -35       -38        -95       -258
   electric cooperatives.
  3. Sales or dispositions to           ta DOE........................    -1,321    -1,183    -1,273      -817       476     1,013     1,033     1,012       818       580     -4,118        338
   Implement Federal Energy Regulatory
   Commission or State electric
   restructuring policy prior to 1/1/
   08.
                                                                       -------------------------------------------------------------------------------------------------------------------------
    Total of Electric Utility           ..............................    -1,376    -1,270    -1,370      -925       357       883       890       854       646       391     -4,584       -920
     Restructuring Provisions.
                                                                       =========================================================================================================================
Additional Provisions:
  1. Extension of accelerated           DOE...........................         2      -172      -290      -104        21        72       113        92        50         6       -543       -210
   depreciation and wage credit
   benefits for businesses on Indian
   reservations (through 12/31/05).
  2. Study of effectiveness of certain  DOE...........................                                                      No Revenue Effect
   provisions by GAO.
  3. Repeal of the 4.3 cent tax on      1/1/04........................      -107      -156      -161      -166      -171      -176      -182      -187      -192      -197       -761     -1,695
   rail and barge diesel \8\.
  4. Modify research credit with        ea DOE........................        -3        -7        -4        -2        -1        -1     (\2\)  ........  ........  ........        -18        -18
   respect to energy research.
                                                                       -------------------------------------------------------------------------------------------------------------------------
    Total of Additional Provisions....  ..............................      -108      -335      -455      -272      -151      -105       -69       -95      -142      -191     -1,322     -1,932
                                                                       =========================================================================================================================
Revenue Provisions:
  1. Provisions relating to reportable  various dates after DOE \9\...        92       115       119       120       124       131       139       150       164       179        570      1,333
   transactions and tax shelters.
  2. Provisions to Discourage
   Corporate.
      Expatriation:
    a. Tax treatment of inversion       (\10\)........................       193       117       140       168       202       242       290       348       418       493        820      2,611
     transactions.
    b. Excise tax on stock              generally 7/11/02.............        35        10        10        10        10        10        10        10        10        10         75        125
     compensation of insiders in
     inverted corporations.
    c. Reinsurance agreements.........  rra 4/11/02...................     (\1\)     (\1\)     (\1\)     (\1\)     (\1\)     (\1\)     (\1\)     (\1\)     (\1\)     (\1\)          2          5
  3. Extend IRS User Fee (through 9/30/ DOE...........................        33        34        35        36        38        39        41        42        44        45        176        386
   13) \11\.
    4. Add Hepatitis A to the list of   (\12\)........................         8         9         9         9         9         9         9         9         9         9         44         89
     taxable vaccines (including
     outlay effects).
    5. Modification of the tax          (\13\)........................        19        18        21        24        28        32        37        43        49        56        100        328
     treatment of individual
     expatriation and residency
     termination.
                                                                       -------------------------------------------------------------------------------------------------------------------------
    Total of Revenue Provisions.......  ..............................       380       303       334       367       411       463       526       602       694       792      1,797      4,877
                                                                       =========================================================================================================================
    Net total.........................  ..............................    -1,757    -3,340    -4,481    -3,800    -1,384      -334       151       363       187      -209    -14,760    -14,603
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Gain of less than $1 million.
\2\ Loss of less than $500,000.
\3\ This provision may also have indirect effects on Federal outlays for certain farm programs. Outlay effects will be estimated by the Congressional Budget Office.
\4\ This is a preliminary estimate of the revenue effects of this provision. This preliminary estimate assumes that all of the ethanol and biodiesel subsidies would be provided through excise
  tax credits and refunds and income tax credits. If a portion of the subsidies is obtained in the form of outlay payments, the overall budget effect could be significantly greater than this
  preliminary estimate of revenue effects. The outlay effects of this provision will be estimated by the Congressional Budget Office.
\5\ Gain of less than $500,000.
\6\ Qualified facilities would be given credit for three years of production (five years in the case of refined coal).
\7\ Effective the later of January 1, 2010, or initial date of interstate transportation of qualifying gas.
\8\ Estimate assumes that the rail diesel LUST tax of 0.1 cents per gallon would be retained.
\9\ Effective dates for provisions relating to reportable transactions and tax shelters: the penalty for failure to disclose reportable transactions is effective for returns and statements the
  due date of which is after the date of enactment; the modification to the accuracy-related penalty for listed or reportable transactions is effective for taxable years ending after the date
  of enactment; the tax shelter exception to confidentiality privileges is effective for communications made on or after the date of enactment; the material advisor disclosure provision
  applies to transactions with respect to which material aid, assistance or advice is provided after the date of enactment; the investor list provision applies to transactions with respect to
  which material aid, assistance or advice is provided after the date of enactment, and the penalty on promoters of tax shelters is effective for activities after the date of enactment.
\10\ Effective for certain transactions completed after March h20, 2002, and would also affect certain taxpayers who completed transactions before March 21, 2002.
\11\ Estimate provided by the Congressional Budget Office.
\12\ Effective for vaccines sold beginning on the first day of the first month beginning more than four weeks after the date of enactment.
\13\ Effective for individuals who expatriate or terminate long-term residency after February 27, 2003.
 
Legend for ``Effective'' column: apoii=amounts paid or incurred in; apb=appliances produced between; ccb=construction completed by; cpoii=costs paid or incurred in; DOE=date of enactment;
  ea=expenditure after; epoia=expenses paid or incurred after; esfqfa=electricity sold from qualifying facilities after; fsa=fuel sold after; oia=obligation issued after; pa=production after;
  ppb=property purchased between; ppisa=property placed in service after; ppisb=property placed in service between; rra=risk reinsured after; ta=transactions after; tyba=taxable years
  beginning after; tybb=taxable years beginning before.
 
Note.--Details may not add to totals due to rounding. Date of enactment is assumed to be November 1, 2003.


[[Page S10538]]

                               Exhibit 2


                           [Committee Print]

     TECHNICAL EXPLANATION OF THE ENERGY TAX INCENTIVES ACT OF 2003

                       I. LEGISLATIVE BACKGROUND

       The Senate Committee on Finance Marked up an original bill, 
     S. ____(the ``Energy Tax Incentives Act of 2003''), on April 
     2, 2003, and, with a quorum present, ordered the bill 
     favorably reported by a voice vote on that date.
       NOTE: This bill was converted into Senate Amendment 1424.

          TITLE I--RENEWABLE ELECTRICITY PRODUCTION TAX CREDIT

A. Extension and Modification of the Section 45 Electricity Production 
                                 Credit

     (Sec. 101 of the bill and sec. 45 of the Code)


                              Present Law

       An income tax credit is allowed for the production of 
     electricity from either qualified wind energy, qualified 
     ``closed-loop'' biomass, or qualified poultry waste 
     facilities (sec. 45). The amount of the credit is 1.5 cents 
     per kilowatt hour (indexed for inflation) of electricity 
     produced. The amount of the credit was 1.8 cents per kilowatt 
     hour for 2002. The credit is reduced for grants, tax-exempt 
     bonds, subsidized energy financing, and other credits.
       The credit applies to electricity produced by a wind energy 
     facility placed in service after December 31, 1993, and 
     before January 1, 2004, to electricity produced by a closed-
     loop biomass facility placed in service after December 31, 
     1992, and before January 1, 2004, and to a poultry waste 
     facility placed in service after December 31, 1999, and 
     before January 1, 2004. The credit is allowable for 
     production during the 10-year period after a facility is 
     originally placed in service. In order to claim the credit, a 
     taxpayer must own the facility and sell the electricity 
     produced by the facility to an unrelated party. In the case 
     of a poultry waste facility, the taxpayer may claim the 
     credit as a lessee/operator of a facility owned by a 
     governmental unit.
       Closed-loop biomass is plant matter, where the plants are 
     grown for the sole purpose of being used to generate 
     electricity. It does not include waste materials (including, 
     but not limited to, scrap wood, manure, and municipal or 
     agricultural waste). The credit also is not available to 
     taxpayers who use standing timber to produce electricity. 
     Poultry waste means poultry manure and litter, including wood 
     shavings, straw, rice hulls, and other bedding material for 
     the disposition of manure.
       The credit for electricity produced from wind, closed-loop 
     biomass, or poultry waste is a component of the general 
     business credit (sec. 38(b)(8)). The credit, when combined 
     with all other components of the general business credit, 
     generally may not exceed for any taxable year the excess of 
     the taxpayer's net income tax over the greater of (1) 25 
     percent of net regular tax liability above $25,000, or (2) 
     the tentative minimum tax. For credits arising in taxable 
     years beginning after December 31, 1997, an unused general 
     business credit generally may be carried back one year and 
     carried forward 20 years (sec. 39). To coordinate the 
     carryback with the period of application for this credit, the 
     credit for electricity produced from closed-loop biomass 
     facilities may not be carried back to a tax year ending 
     before 1993 and the credit for electricity produced from wind 
     energy may not be carried back to a tax year ending before 
     1994 (sec. 39).


                           Reasons for Change

       The Committee recognizes that the section 45 production 
     credit has fostered additional electricity generation 
     capacity in the form of non-polluting wind power. The 
     Committee believes it is important to continue this tax 
     credit by extending the placed in service date for such 
     facilities to bring more wind energy to the United States 
     electric grid. The Committee also believes it is important to 
     extend the placed in service date for closed-loop biomass 
     facilities to give those potential fuel sources an 
     opportunity in the market place. The Committee also believes 
     it is appropriate to include in qualifying facilities those 
     facilities that co-fire closed-loop biomass fuels with coal, 
     with other biomass, or with coal and other biomass.
       Based on the success of the section 45 credit in the 
     development of wind power as an alternative source of 
     electricity generation, the committee further believes the 
     country will benefit from the expansion of the production 
     credit to certain other ``environmentally friendly'' sources 
     of electricity generation such as open loop biomass and 
     agricultural waste nutrients, geothermal power, solar power, 
     biosolids and sludge, small irrigation systems, and trash 
     combustion. While not all of these additional facilities are 
     pollution free, they do address environmental concerns 
     related to waste disposal. In addition, these potential power 
     sources further diversify the nation's energy supply.
       In the current electricity market, the Committee believes 
     that a subsidy via a tax credit of 1.8 cents per kilowatt-
     hour should provide sufficient incentive to investors to 
     enter the market with alternative sources of electricity. 
     Therefore the Committee believes indexing of the credit 
     amounts for years after 2003 is unwarranted.
       Because tax-exempt persons such as public power systems and 
     cooperatives provide a significant percentage of electricity 
     in the United States, the Committee believes it is important 
     to provide the incentive for production from renewable 
     resources to these persons in addition to taxable persons.
       Lastly, the Committee believes that certain pre-existing 
     facilities should qualify for the section 45 production 
     credit, albeit at a reduced rate. These facilities previously 
     received explicit subsidies, or implicit subsidies provided 
     through rate regulation. In a deregulated electricity market, 
     these facilities, and the environmental benefits they yield, 
     may be uneconomic without additional economic incentive. The 
     Committee believes the benefits provided by such existing 
     facilities warrant their inclusion in the section 45 
     production credit.


                        Explanation of Provision

       The provision extends the placed in service date for wind 
     facilities, and closed loop biomass facilities to facilities 
     placed in service after December 31, 1993 (December 31, 1992 
     in the case of closed-loop biomass) and before January 1, 
     2007.
       The provision provides that, for facilities placed in 
     service after the date of enactment, the amount of the credit 
     will be 1.8 cents per kilowatt hour with no adjustment for 
     inflation for production in years after 2003.
       The provision also defines six new qualifying energy 
     resources: biomass (including agricultural livestock waste 
     nutrients), geothermal energy, solar energy, small irrigation 
     power, biosolids and sludge, and municipal solid waste.
       Qualifying biomass facilities are facilities using biomass 
     to produce electricity that are placed in service prior to 
     January 1, 2005. Qualifying agricultural livestock waste 
     nutrient facilities are facilities using agricultural 
     livestock waste nutrients to produce electricity that are 
     placed in service after the date of enactment and before 
     January 1, 2007.
       For a facility placed in service after the date of 
     enactment, the ten-year credit period commences when the 
     facility is placed in service. In the case of a biomass 
     facility originally placed in service before the date of 
     enactment, the ten-year credit period is reduced to a five-
     year period and commences after December 31, 2003 and the 
     otherwise allowable 1.8 cent-per-kilowatt-hour credit is 
     reduced to a 1.2 cent-per-kilowatt-hour credit.
       The provision modifies present law to provide that 
     qualifying closed-loop biomass facilities include any 
     facility originally placed in service before December 31, 
     1992 and modified to use closed-loop biomass to co-fire with 
     coal, to co-fire with other biomass, or to co-fire with coal 
     and other biomass, before January 1, 2007. The taxpayer may 
     claim credit for electricity produced at such qualifying 
     facilities with the credit amount equal to the otherwise 
     allowable credit multiplied by the ratio of the thermal 
     content of the closed loop biomass fuel burned in the 
     facility to the thermal content of all fuels burned in the 
     facility.
       Qualifying geothermal energy facilities are facilities 
     using geothermal deposits to produce electricity that are 
     placed in service after the date of enactment and before 
     January 1, 2007. Qualifying solar energy facilities are 
     facilities using solar energy to generate electricity that 
     are placed in service after the date of enactment and before 
     January 1, 2007. In the case of qualifying geothermal energy 
     facilities and qualifying solar energy facilities, taxpayers 
     may claim the otherwise allowable credit for the five-year 
     period commencing when the facility is placed in service.
       A qualified small irrigation power facility is a facility 
     originally placed in service after the date of enactment and 
     before January 1, 2007. A small irrigation power facility is 
     a facility that generates electric power through an 
     irrigation system canal or ditch without any dam or 
     impoundment of water. The installed capacity of a qualified 
     facility is less than five megawatts.
       A qualified biosolids and sludge facility is a facility 
     originally placed in service after the date of enactment and 
     before January 1, 2007. A biosolids and sludge facility is a 
     facility that uses the waste heat from the incineration of 
     biosolids and sludge to produce electricity. For example, if 
     the taxpayer conveys biosolids and sludge into a glass 
     furnace for the purpose of stabilizing the inorganic contents 
     of the biosolids and sludge in an amorphous glass matrix (and 
     potentially selling the resulting glass aggregates), and the 
     taxpayer uses the waste heat from the glass furnace to 
     generate steam to power a turbine and produce electricity, 
     the electricity produced would be from a qualified biosolids 
     and sludge facility. In addition, a qualifying biosolids and 
     sludge facility is a facility for which the taxpayer has not 
     claimed credit as a combined heat and power system property 
     as defined elsewhere in this bill.
       Municipal solid waste facilities (or units) are facilities 
     (or units) that burn municipal solid waste (garbage) to 
     produce steam to drive a turbine for the production of 
     electricity. Qualifying municipal solid waste facilities (or 
     units) include facilities (or units) placed in service after 
     the date of enactment and before January 1, 2007. In the case 
     of qualifying municipal solid waste facilities (or units), 
     taxpayers may claim the otherwise allowable credit for the 
     five-year period commencing when the facility (or unit) is 
     placed in service.
       Biomass is defined as any solid, nonhazardous, cellulosic 
     waste material which is segregated from other waste materials 
     and which is derived from any of forest-related

[[Page S10539]]

     resources, solid wood waste materials, or agricultural 
     sources. Eligible forest-related resources are mill and 
     harvesting residues, precommercial thinnings, slash, and 
     brush. Solid wood waste materials include waste pallets, 
     crates, dunnage, manufacturing and construction wood wastes 
     (other than pressure-treated, chemically-treated, or painted 
     wood wastes), and landscape or right-of-way tree trimmings. 
     Agricultural sources include orchard tree crops, vineyard, 
     grain, legumes, sugar, and other crop by-products or 
     residues. However, qualifying biomass for purposes of this 
     provision does not include municipal solid waste (garbage), 
     gas derived from biodegradation of solid waste, or paper that 
     is commonly recycled. Agricultural waste nutrients are 
     defined as livestock manure and litter, including bedding 
     material for the disposition of manure. Agricultural 
     livestock comprise bovine, swine, poultry, and sheep among 
     others.
       Geothermal energy is energy derived from a geothermal 
     deposit which is a geothermal reservoir consisting of natural 
     heat which is stored in rocks or in an aqueous liquid or 
     vapor (whether or not under pressure).
       Biosolids and sludge are the residue or solids removed 
     during the treatment of commercial, industrial, or municipal 
     wastewater.
       Municipal solid waste is ``solid waste'' as defined in 
     section 2(27) of the Solid Waste Disposal Act.
       The provision provides that certain persons (public power 
     systems, electric cooperatives, rural electric cooperatives, 
     and Indian tribes) may sell, trade, or assign to any taxpayer 
     any credits that would otherwise be allowable to that person, 
     if that person were a taxpayer, for production of electricity 
     from a qualified facility owned by such person. However, any 
     credit sold, traded, or assigned may only be sold, traded, or 
     assigned once. Subsequent transfers are not permitted. In 
     addition, any credits that would otherwise be allowable to 
     such person, to the extent provided by the Administrator of 
     the Rural Electrification Administration, may be applied as a 
     prepayment to certain loans or obligations undertaken by such 
     person under the Rural Electrification Act of 1936.
       In the case of qualifying open-loop biomass facilities, 
     qualifying closed-loop biomass facilities modified to use 
     closed-loop biomass to co-fire with coal, with other biomass, 
     or with coal and other biomass, and qualifying municipal 
     solid waste facilities, the provision permits a lessee or 
     operator to claim the credit in lieu of the owner of the 
     facilities.
       Lastly, the provision repeals the present-law reduction in 
     allowable credit for facilities financed with tax-exempt 
     bonds or with certain loans received under the Rural 
     Electrification Act of 1936. In the case of qualifying 
     closed-loop biomass facilities modified to use closed-loop 
     biomass to co-fire with coal, with other biomass, or with 
     coal and other biomass, the provision repeals the present-law 
     reduction in allowable credit for facilities that receive any 
     subsidy.


                             Effective Date

       The provision generally is effective for electricity 
     produced and sold from qualifying facilities after the date 
     of enactment. For electricity produced from qualifying open-
     loop biomass facilities originally placed in service prior to 
     the date of enactment, the provision is effective January 1, 
     2004.

        TITLE II--ALTERNATIVE MOTOR VEHICLES AND FUEL INCENTIVES

  A. Modifications and Extensions of Provisions Relating to Electric 
    Vehicles, Clean Fuel Vehicles, and Clean-Fuel Vehicle Refueling 
                                Property

     (Secs. 201, 202, 203, and 204 of the bill and secs. 30 and 
         179A and new secs. 30B, 30C, and 40A of the Code)


                              Present Law

     Electric vehicles
       A 10-percent tax credit is provided for the cost of a 
     qualified electric vehicle, up to a maximum credit of $4,000 
     (sec. 30). A qualified electric vehicle is a motor vehicle 
     that is powered primarily by an electric motor drawing 
     current from rechargeable batteries, fuel cells, or other 
     portable sources of electrical current, the original use of 
     which commences with the taxpayer, and that is acquired for 
     the use by the taxpayer and not for resale. The full amount 
     of the credit is available for purchases prior to 2002. The 
     credit phases down in the years 2004 through 2006, and is 
     unavailable for purchases after December 31, 2006.
     Clean-fuel vehicles
       Certain costs of qualified clean-fuel vehicles may be 
     expensed and deducted when such property is placed in service 
     (sec. 179A). Qualified clean fuel vehicle property includes 
     motor vehicles that use certain clean-burning fuels (natural 
     gas, liquefied natural gas, liquefied petroleum gas, 
     hydrogen, electricity and any other fuel at least 85 percent 
     of which is methanol, ethanol, any other alcohol or ether). 
     The maximum amount of the deduction is $50,000 for a truck or 
     van with a gross vehicle weight over 26,000 pounds or a bus 
     with seating capacities of at least 20 adults; $5,000 in the 
     case of a truck or van with a gross vehicle weight between 
     10,000 and 26,000 pounds; and $2,000 in the case of any other 
     motor vehicle. Qualified electric vehicles do not qualify for 
     the clean-fuel vehicle deduction. The deduction phases down 
     in the years 2004 through 2006, and is unavailable for 
     purchases after December 31, 2006.
     Clean-fuel vehicle refueling property
       Clean-fuel vehicle refueling property may be expensed and 
     deducted when such property is placed in service (sec. 179A). 
     Clean-fuel vehicle refueling property comprises property for 
     the storage or dispensing of a clean-burning fuel, if the 
     storage or dispensing is the point at which the fuel is 
     delivered into the fuel tank of a motor vehicle. Clean-fuel 
     vehicle refueling property also includes property for the 
     recharging of electric vehicles, but only if the property is 
     located at a point where the electric vehicle is recharged. 
     Up to $100,000 of such property at each location owned by the 
     taxpayer may be expensed with respect to that location. The 
     deduction is unavailable for costs incurred after December 
     31, 2006.


                           Reasons for Change

       The Committee believes that further investments in 
     alternative fuel and advanced technology vehicles are 
     necessary to transform automotive transportation in the 
     United States to be cleaner, more fuel efficient, and less 
     reliant on petroleum fuels.
       Tax benefits provided directly to the consumer to lower the 
     cost of new technology and alternative-fueled vehicles can 
     help lower consumer resistance to these technologies by 
     making the vehicles more price competitive with purely 
     petroleum-based fuel vehicles and creating increased demand 
     for manufacturers to produce the technologies. The eventual 
     goal is mass production and mass-market acceptance of new 
     technology vehicles. The Committee recognizes that creating a 
     number of different credits tailored to each different 
     automotive technology adds complexity to the Internal Revenue 
     Code, but no one technology has established that it alone 
     provides the solution. Therefore, it is appropriate to 
     provide tax benefits tailored to specific vehicle 
     technologies, as long as the vehicle's engine technology 
     directly replaces gasoline and diesel fuel with an 
     alternative energy source.
       The Committee expects that hybrid motor vehicles and 
     dedicated alternative fuel vehicles are the near-term 
     technological advancement that will replace gasoline- and 
     diesel-burning engines with alternative-powered engines, and 
     electrical and fuel cell vehicles will be the longterm 
     technological advancement.
       Applying these technologies to medium and heavy-duty trucks 
     and buses is also important for transforming the 
     transportation sector to a cleaner, more fuel-efficient 
     sector less reliant on petroleum-based fuels. Therefore, it 
     is appropriate to use tax incentives to encourage the 
     introduction of advanced vehicle technologies in large trucks 
     and buses.
       In addition, because new vehicle technologies require new 
     fuels and infrastructure to deliver those fuels, investments 
     in new technology automobiles alone are not sufficient to 
     transform the market to accept these vehicles. Therefore, 
     substantial investments in new refueling stations and new 
     fuels are also necessary to make alternative vehicle 
     technologies feasible.


                        Explanation of Provision

     Alternative motor vehicle credits
       The bill provides a credit for the purchase of a new 
     qualified fuel cell motor vehicle, a new qualified hybrid 
     motor vehicle, and a new qualified alternative fuel motor 
     vehicle. In general the provision provides that the buyer 
     claims the credit, unless the buyer is a tax-exempt entity in 
     which case the seller or lessor of the vehicle may claim the 
     credit. The taxpayer may carry forward unused credits for 20 
     years or carry unused credits back for three years (but not 
     to any taxable year beginning before the date of enactment). 
     Qualified vehicles are vehicles placed in service before 2007 
     (2012 in the case of fuel cell vehicles). Any deduction 
     otherwise allowable under sec. 179A is reduced by the amount 
     of credit allowable.
       Fuel cell vehicles
       A qualifying fuel cell vehicle is a motor vehicle that is 
     propelled by power derived from one or more cells which 
     convert chemical energy directly into electricity by 
     combining oxygen with hydrogen fuel which is stored on board 
     the vehicle and may or may not require reformation prior to 
     use. The amount of credit for the purchase of a fuel cell 
     vehicle is determined by a base credit amount that depends 
     upon the weight class of the vehicle and, in the case of 
     automobiles or light trucks, an additional credit amount that 
     depends upon the rated fuel economy of the vehicle compared 
     to a base fuel economy. For these purposes the base fuel 
     economy is the 2002 model year city fuel economy rating for 
     vehicles of various weight classes (see below). Table 1 
     below, shows the base credit amounts.

           TABLE 1.--BASE CREDIT AMOUNT FOR FUEL CELL VEHICLES
------------------------------------------------------------------------
                                                                 Credit
            Vehicle Gross Weight Rating in Pounds                Amount
------------------------------------------------------------------------
Vehicle = 8,500..............................................     $4,000
8,500 < vehicle = 14,000.....................................     10,000
14,000 < vehicle = 26,000....................................     20,000
26,000 < vehicle.............................................     40,000
------------------------------------------------------------------------

       Table 2, below, shows the additional credits for passenger 
     automobiles or light trucks.

[[Page S10540]]


           TABLE 2.--CREDIT FOR QUALIFYING FUEL CELL VEHICLES
------------------------------------------------------------------------
If Fuel Economy of                         Credit
   the Fuel Cell   -----------------------------------------------------
    Vehicle Is:              At least                But less than
------------------------------------------------------------------------
$1,000............  150% of base fuel economy  175% of base fuel
                                                economy.
$1,500............  175% of base fuel economy  200% of base fuel
                                                economy.
$2,000............  200% of base fuel economy  225% of base fuel
                                                economy.
$2,500............  225% of base fuel economy  250% of base fuel
                                                economy.
$3,000............  250% of base fuel economy  275% of base fuel
                                                economy.
$3,500............  275% of base fuel economy  300% of base fuel
                                                economy.
$4,000............                300% of base fuel economy.
------------------------------------------------------------------------

       Hybrid vehicles
       A qualifying hybrid vehicle is a motor vehicle that draws 
     propulsion energy from on-board sources of stored energy 
     which include both an internal combustion engine or heat 
     engine using combustible fuel and a rechargeable energy 
     storage system (e.g., batteries). The amount of credit for 
     the purchase of a hybrid vehicle is the sum of two 
     components. In the case of an automobile or light truck, the 
     amount of credit is the sum of a base credit amount that 
     varies with the amount of power available from the 
     rechargeable storage system and a fuel economy credit amount 
     that varies with the rated fuel economy of the vehicle 
     compared to a 2002 model year standard. In addition, the 
     vehicle must meet or exceed the EPA Tier II, bin 5 emissions 
     standards. In the case of a heavy duty hybrid motor vehicle 
     (a vehicle weighing more than 8,500 pounds), the amount of 
     credit is the sum of a base credit amount that varies, by 
     vehicle weight class, with the amount of power available from 
     the rechargeable storage system and an additional credit for 
     early adoption of the technology that varies with the model 
     year of the vehicle purchased.
       For these purposes, a vehicle's power available from its 
     rechargeable energy storage system as a percentage of maximum 
     available power is calculated as the maximum value available 
     from the battery or other energy storage device during a 
     standard power test, divided by the sum of the battery or 
     other energy storage device and the SAE net power of the heat 
     engine.
       Table 3, below, shows the base credit amounts for 
     automobiles and light trucks.

  TABLE 3.--HYBRID VEHICLE BASE CREDIT AMOUNT FOR AUTOMOBILES AND LIGHT
 TRUCKS, DEPENDENT UPON THE POWER AVAILABLE FROM THE RECHARGEABLE ENERGY
 STORAGE SYSTEM AS A PERCENTAGE OF THE VEHICLES MAXIMUM AVAILABLE POWER
------------------------------------------------------------------------
                       If Rechargeable Energy Storage System Provides:
Base Credit Amount -----------------------------------------------------
                             At least                But less than
------------------------------------------------------------------------
$250..............  4% of maximum available    10% of maximum available
                     power.                     power.
$500..............  10% of maximum available   20% of maximum available
                     power.                     power.
$750..............  20% of maximum available   30% of maximum available
                     power.                     power.
$1,000............             30% of maximum available power.
------------------------------------------------------------------------

       Table 4, below, shows the additional fuel economy credit 
     available to a hybrid passenger automobile or light truck 
     whose fuel economy (on a gasoline gallon equivalent basis) 
     exceeds that of a base fuel economy. For these purposes the 
     base fuel economy is the 2002 model year city fuel economy 
     rating for vehicles of various weight classes (see below).

      TABLE 4.--ADDITIONAL FUEL ECONOMY CREDIT FOR HYBRID VEHICLES
------------------------------------------------------------------------
                                  If Fuel Economy of       at least
             Credit               the Hybrid Vehicle -------------------
                                          Is:            but less than
------------------------------------------------------------------------
$500............................  125% of base fuel   150% of base fuel
                                   economy.            economy.
$1,000..........................  150% of base fuel   175% of base fuel
                                   economy.            economy.
$1,500..........................  175% of base fuel   200% of base fuel
                                   economy.            economy.
$2,000..........................  200% of base fuel   225% of base fuel
                                   economy.            economy.
$2,500..........................  225% of base fuel   250% of base fuel
                                   economy.            economy.
$3,000..........................         250% of base fuel economy
------------------------------------------------------------------------

       Table 5 below, shows the base credit amounts for heavy duty 
     hybrid vehicles weighing 14,000 pounds or less.

   TABLE 5.--HYBRID VEHICLE BASE CREDIT AMOUNT FOR HEAVY DUTY VEHICLES
                  WEIGHING NOT MORE THAN 14,000 POUNDS
------------------------------------------------------------------------
                                   If Rechargeable Energy Storage System
                                                 Provides:
       Base Credit Amount        ---------------------------------------
                                       At least          But less than
------------------------------------------------------------------------
$1,000..........................  20% of maximum      30% of maximum
                                   available power.    available power.
$1,750..........................  30% of maximum      40% of maximum
                                   available power.    available power.
$2,000..........................  40% of maximum      50% of maximum
                                   available power.    available power.
$2,250..........................  50% of maximum      60% of maximum
                                   available power.    available power.
$2,500..........................       60% of maximum available power
------------------------------------------------------------------------

       In the case of heavy duty hybrid vehicles weighing not more 
     than 14,000 pounds, the additional credit amount for early 
     adoption of the 2007 enission standards technology is $3,000 
     for model year 2003 vehicles, $2,500 for model year 2004 
     vehicles, $2,000 for model year 2005 vehicles, and $1,500 or 
     model year 2006 vehicles.
       Table 6, below, shows the base credit amounts for heavy 
     duty hybrid vehicles weighing more than 14,000 pounds but not 
     more than 26,000 pounds.

    TABLE 6.--HYBRID VEHICLE BASE CREDIT AMOUNT FOR HEAVY DUTY HYBRID
   VEHICLES WEIGHING MORE THAN 14,000 POUNDS, BUT NOT MORE THAN 26,000
                                 POUNDS
------------------------------------------------------------------------
                       If Rechargeable Energy Storage System Provides:
Base Credit Amount -----------------------------------------------------
                             At least                But less than
------------------------------------------------------------------------
$4,000............  20% of maximum available   30% of maximum available
                     power.                     power.
$4,500............  30% of maximum available   40% of maximum available
                     power.                     power.
$5,000............  40% of maximum available   50% of maximum available
                     power.                     power.
$5,500............  50% of maximum available   60% of maximum available
                     power.                     power.
$6,000............              60% of maximum available power
------------------------------------------------------------------------

       In the case of heavy duty hybrid vehicles weighing more 
     than 14,000 pounds but not more than 26,000 pounds, the 
     additional credit amount for early adoption of the 2007 
     emission standards technology is $7,750 for model year 2003 
     vehicles, $6,500 for model year 2004 vehicles, $5,250 for 
     model year 2005 vehicles, and $4,000 for model year 2006 
     vehicles.
       Table 7, below, shows the base credit amounts for heavy 
     duty hybrid vehicles weighing more than 26,000 pounds.

    TABLE 7.--HYBRID VEHICLE BASE CREDIT AMOUNT FOR HEAVY DUTY HYBRID
                VEHICLES WEIGHING MORE THAN 26,000 POUNDS
------------------------------------------------------------------------
                       If Rechargeable Energy Storage System Provides:
Base Credit Amount -----------------------------------------------------
                             At least                But less than
------------------------------------------------------------------------
$6,000............  20% of maximum available   30% of maximum available
                     power.                     power.
$7,000............  30% of maximum available   40% of maximum available
                     power.                     power.
$8,000............  40% of maximum available   50% of maximum available
                     power.                     power.
$9,000............  50% of maximum available   60% of maximum available
                     power.                     power.
$10,000...........              60% of maximum available power
------------------------------------------------------------------------

       In the case of heavy duty hybrid vehicles weighing more 
     than 26,000 pounds, the additional credit amount for early 
     adoption of the 2007 emission standards technology is $12,000 
     for model year 2003 vehicles, $10,000 for model year 2004 
     vehicles, $8,000 for model year 2005 vehicles, and $6,000 for 
     model year 2006 vehicles.
       Alternative fuel vehicle
       The credit for the purchase of a new alternative fuel 
     vehicle is 40 percent of the incremental cost of such 
     vehicle, plus an additional 30 percent if the vehicle meets 
     certain emissions standards, but not more than between $5,000 
     and $40,000 depending upon the weight of the vehicle. 
     Table 8, below, shows the maximum permitted incremental 
     cost for the purpose of calculating the credit for 
     alternative fuel vehicles by vehicle weight class.

     TABLE 8.--MAXIMUM ALLOWABLE INCREMENTAL COST FOR CALCULATION OF
                     ALTERNATIVE FUEL VEHICLE CREDIT
------------------------------------------------------------------------
                                                               Maximum
                                                              Allowable
           Vehicle Gross Weight Rating in Pounds             Incremental
                                                                 Cost
------------------------------------------------------------------------
Vehicle = 8,500............................................       $5,000
8,500 < vehicle = 14,000...................................       10,000
14,000 < vehicle = 26,000..................................       25,000
26,000 < vehicle...........................................       40,000
------------------------------------------------------------------------

       Alternative fuels comprise compressed natural gas, 
     liquefied natural gas, liquefied petroleum gas, hydrogen, and 
     any liquid fuel that is at least 85 percent methanol. 
     Qualifying alternative fuel motor vehicles are vehicles that 
     operate only on qualifying alternative fuels and are 
     incapable of operating on gasoline or diesel (except in the 
     extent gasoline or diesel fuel is part of a qualified mixed 
     fuel, described below).
       Certain mixed fuel vehicles, that is vehicles that use a 
     conbination of an alternative fuel and a petroleum-based 
     fuel, are eligible for a reduced credit. If the vehicle 
     operates on a mixed fuel that is at least 75 percent 
     alternative fuel, the vehicle is eligible for 70 percent of 
     the otherwise allowable alternative fuel vehicle credit. If 
     the vehicle operates on a mixed fuel that is at least 90 
     percent alternative fuel, the vehicle is eligible for 90 
     percent of the otherwise allowable alternative fuel vehicle 
     credit.
       Base fuel economy
       The base fuel economy is the Environmental Protection 
     Agency's unadjusted 2002 model year city fuel economy for 
     vehicles by inertia weight class by vehicle type. The 
     ``vehicle inertia weight class'' is that defined in 
     regulations prescribed by the Environmental Protection Agency 
     for purposes of Title lI of the Clean Air Act. Table 9, 
     below, shows the 2002 model year city fuel economy for 
     vehicles by type and by inertia weight class.

               TABLE 9.--2002 MODEL YEAR CITY FUEL ECONOMY
------------------------------------------------------------------------
                                                 Passenger
                                                 Automobile  Light Truck
     Vehicle Inertia Weight Class (pounds)       (miles per   (miles per
                                                  gallon)      gallon)
------------------------------------------------------------------------
1,500.........................................         45.2         39.4
1,750.........................................         45.2         39.4
2,000.........................................         39.6         35.2
2,250.........................................         35.2         31.8
2,500.........................................         31.7         29.0
2,750.........................................         28.8         26.8
3,000.........................................         26.4         24.9
3,500.........................................         22.6         21.8
4,000.........................................         19.8         19.4
4,500.........................................         17.6         17.6
5,000.........................................         15.9         16.1
5,500.........................................         14.4         14.8
6,000.........................................         13.2         13.7
6,500.........................................         12.2         12.8
7,000.........................................         11.3         12.1
8,500.........................................         11.3         12.1
------------------------------------------------------------------------


[[Page S10541]]

     Modification of credit for qualified electric vehicles
       The bill repeals the phaseout of the credit for electric 
     vehicles under present law. The provision also modifies 
     present law to provide for a credit equal to the lesser of 
     $1,500 or 10 percent of the manufacturer's suggested retail 
     price of certain vehicles that conform to the Motor Vehicle 
     Safety Standard 500. For all other electric vehicles, Table 
     10, below describes the credit.

       TABLE 10.--CREDIT FOR QUALIFYING BATTERY ELECTRIC VEHICLES
------------------------------------------------------------------------
                                                                 Credit
            Vehicle Gross Weight Rating in Pounds                Amount
------------------------------------------------------------------------
Vehicle = 8,500..............................................     $3,500
8,500 < vehicle = 14,000.....................................     10,000
14,000 < vehicle = 26,000....................................     20,000
26,000 < vehicle.............................................     40,000
------------------------------------------------------------------------

       If an electric vehicle weighing not more than 8,500 pounds 
     has an estimated driving range of at least 100 miles on a 
     single charge of the vehicle's batteries or if it is capable 
     of a payload capacity of at least 1,000 pounds, then the 
     credit amount in Table 10 is $6,000.
       In the case of property purchased by tax-exempt persons, 
     the seller may claim the credit. The provision allows 
     taxpayers to carry forward unused credits for 20 years or 
     carry unused credits back for three (but not to any taxable 
     year before the date of enactment).
     Extension of present-law section 179A
       The bill extends the sunset date of the present law 
     deduction for costs of qualified clean-fuel vehicle and 
     clean-fuel vehicle refueling property through December 31, 
     2007 (December 31, 2011 in the case of property relating to 
     hydrogen). The provision modifies the definition of refueling 
     property in the case of property relating to hydrogen to 
     include property for the production of hydrogen.
       The phase-down of present law for clean fuel vehicles is 
     modified such that the taxpayer may claim 75 percent of the 
     otherwise allowable deductible in 2004 and 2005 (2004 through 
     2009 in the case of property relating to hydrogen), 50 
     percent of the otherwise allowable deduction in 2006 (2010 in 
     the case of property relating to hydrogen), and 25 percent of 
     the otherwise allowable deduction in 2007 (2011 in the case 
     of property relating to hydrogen).
     Credit for installation of alternative fueling stations
       The bill permits taxpayers to claim a 50-percent credit for 
     the cost of installing clean-fuel vehicle refueling property 
     to be used in a trade or business of the taxpayer or 
     installed at the principal residence of the taxpayer. In the 
     case of retail clean-fuel vehicle refueling property the 
     allowable credit may not exceed $30,000. In the case of 
     residential clean-fuel vehicle refueling property the 
     allowable credit may not exceed $1,000. The taxpayer's basis 
     in the property is reduced by the amount of the credit and 
     the taxpayer may not claim deductions under section 179A with 
     respect to property for which the credit is claimed. In the 
     case of refueling property installed on property owned or 
     used by a tax-exempt person, the taxpayer that installs the 
     property may claim the credit. To be eligible for the credit, 
     the property must be placed in service before January 1, 2008 
     (January 1, 2012 in the case of hydrogen). The credit 
     allowable in the taxable year cannot exceed the difference 
     between the taxpayer's regular tax (reduced by certain other 
     credits) and the taxpayer's tentative minimum tax. The 
     taxpayer may carry forward unused credits for 20 years.
     Credit for retail sale of alternative fuels
       The bill permits taxpayers to claim a credit equal to the 
     gasoline gallon equivalent of 30 cents per gallon of 
     alternative fuel sold in 2003, 40 cents per gallon in 2004, 
     50 cents per gallon in 2005, and 50 cents per gallon in 2006. 
     Qualifying alternative fuels are compressed natural gas, 
     liquefied natural gas, liquefied petroleum gas, hydrogen, and 
     any liquid mixture consisting of at least 85 percent methanol 
     or ethanol. The gasoline gallon equivalency of any 
     alternative fuel is determined by reference to the British 
     thermal unit content of the alternative fuel compared to a 
     gallon of gasoline. The credit may be claimed for sales prior 
     to January 1, 2007. Under the provision, the credit is part 
     of the general business credit.


                             effective date

       The provisions relating to the credit for new fuel cell 
     motor vehicles, hybrid motor vehicles, and alternative fuel 
     motor vehicles, the credit for battery electric vehicles, the 
     credit for alternative fuel vehicle refueling property, and 
     deductions for clean fuel vehicles and clean fuel refueling 
     property are effective for property placed in service after 
     the date of enactment, in taxable years ending after the date 
     of enactment. The credit for retail sales of alternative 
     fuels is effective for sales of fuels after the date of 
     enactment, in taxable years ending after the date of 
     enactment.

           B. Modifications to Small Producer Ethanol Credit

     (Sec. 205 of the bill and secs. 38, 40, 87, and 469 of the 
         Code)


                              present law

     Small producer credit
       Present law provides several tax benefits for ethanol and 
     methanol produced from renewable sources (e.g., biomass) that 
     are used as a motor fuel or that are blended with other fuels 
     (e.g., gasoline) for such a use. In the case of ethanol, a 
     separate 10-cents-per-gallon credit for small producers, 
     defined generally as persons whose production does not exceed 
     15 million gallons per year and whose production capacity 
     does not exceed 30 million gallons per year. The alcohol 
     fuels tax credits are includible in income. This credit, like 
     tax credits generally, may not be used to offset alternative 
     minimum tax liability. The credit is treated as a general 
     business credit, subject to the ordering rules and 
     carryforward/carryback rules that apply to business credits 
     generally. The alcohol fuels tax credit is scheduled to 
     expire after December 31, 2007.
     Taxation of cooperatives and their patrons
       Under present law, cooperatives in essence are treated as 
     pass-through entities in that the cooperative is not subject 
     to corporate income tax to the extent the cooperative timely 
     pays patronage dividends. Under present law, the only excess 
     credits that may be flowed-through to cooperative patrons are 
     the rehabilitation credit (sec. 47), the energy property 
     credit (sec. 48(a)), and the reforestation credit (sec. 
     48(b)).


                           reasons for change

       The Committee believes provisions allowing greater 
     flexibility in utilizing the benefits of the small ethanol 
     producer credit are consistent with the objective of the bill 
     to increase availability of alternative fuels.


                        explanation of provision

       The provision makes several modifications to the rules 
     governing the small producer ethanol credit. First, the 
     provision liberalizes the definition of an eligible small 
     producer to include persons whose production capacity does 
     not exceed 60 million gallons. Second, the provision allows 
     cooperatives to elect to pass-through the small ethanol 
     producer credits to its patrons. The credit allowed to a 
     particular patron is that proportion of the credit that the 
     cooperative elects to pass-through for that year as the 
     amount of patronage of that patron for that year bears to 
     total patronage of all patrons for that year.
       Third, the provision repeals the rule that includes the 
     small producer credit in income of taxpayers claiming it and 
     liberalizes the ordering and carryforward/carryback rules for 
     the small producer ethanol credit. Fourth, the provision 
     allows the small producer credit to be claimed against the 
     alternative minimum tax. Finally, the provision provides that 
     the small producer ethanol credit is not treated as derived 
     from a passive activity under the Code rules restricting 
     credits and deductions attributable to such activities.


                             effective date

       The provision is effective for taxable years beginning 
     after date of enactment.

      C. Increased Flexibility in Alcohol Fuels Income Tax Credit

     (Sec. 206 of the bill and sec. 40 of the Code)


                              present law

       An 18.4 cents-per-gallon excise tax is imposed on gasoline. 
     The tax is imposed when the fuel is removed from a refinery 
     unless the removal is to a bulk transportation facility 
     (e.g., removal by pipeline or barge to a registered 
     terminal). In the case gasoline removed in bulk by registered 
     parties, tax is imposed when the gasoline is removed from the 
     terminal facility, typically by truck (i.e., ``breaks 
     bulk''). If gasoline is sold to an unregistered party before 
     it is removed from a terminal, tax is imposed on that sale. 
     When the gasoline subsequently breaks bulk, a second tax is 
     imposed. The payor of the second tax may file a refund claim 
     if it can prove payment of the first tax. The party liable 
     for payment of the gasoline excise tax is called a ``position 
     holder,'' defined as the owner of record inside the refinery 
     or terminal facility.
       A 52-cents-per-gallon income tax credit is allowed for 
     ethanol used as a motor fuel (the ``alcohol fuels credit''). 
     The benefit of the alcohol fuels tax credit may be claimed as 
     a reduction in excise tax payments when the ethanol is 
     blended with gasoline (``gasohol''). The reduction is based 
     on the amount of ethanol contained in the gasohol. The excise 
     tax benefits apply to gasohol blends of 90 percent gasoline/ 
     10 percent ethanol, 92.3 percent gasoline/7.7 percent 
     ethanol, or 94.3 percent gasoline/5.7 percent ethanol. The 
     income tax credit is based on the amount of alcohol contained 
     in the blended fuel.
       Ethyl tertiary butyl ether (``ETBE'') is an ether that is 
     manufactured using ethanol. Unlike ethanol, ETBE can be 
     blended with gasoline before the gasoline enters a pipeline 
     because ETBE does not result in contamination of fuel with 
     water while in transport. Treasury Department regulations 
     provide that gasohol blenders may claim the income tax credit 
     and excise tax rate reductions for ethanol used in the 
     production of ETBE. The regulations also provide a special 
     election allowing refiners to claim the benefit of the excise 
     tax rate reduction even though the fuel being removed from 
     terminals does not contain the requisite percentages of 
     ethanol for claiming the excise tax rate reduction.


                           reasons for change

       The Committee believes the tax benefits currently available 
     to ethanol used in the production of ETBE should be clarified 
     statutorily. In addition, the Committee believes it 
     appropriate to increase the flexibility by which the alcohol 
     fuels credit may be claimed for alcohol used in the 
     production of ETBE.

[[Page S10542]]

                        explanation of provision

       The provision permits a taxpayer to transfer the alcohol 
     fuels credit with respect to alcohol used in the production 
     of ETBE to any registered position holder liable for excise 
     taxes imposed under section 4081. Such position holder also 
     must obtain from the transferor taxpayer a certificate that 
     identifies the amount of alcohol used in the production of 
     ETBE. The Secretary is to prescribe regulations as necessary 
     to ensure that the credit is claimed once and not reassigned 
     by the position holder.


                             effective date

       The provision is effective date of enactment.

            D. Income Tax Credit for Biodiesel Fuel Mixtures

     (Sec. 207 of the bill and new sec. 40B of the Code)


                              present law

       No income tax credit or excise tax rate reduction is 
     provided for biodiesel fuels under present law. However, a 
     52-cents-per-gallon income tax credit (the ``alcohol fuels 
     credit'') is allowed for ethanol and methanol (derived from 
     renewable sources) when the alcohol is used as a highway 
     motor fuel. The benefit of this income tax credit may be 
     claimed through reductions in excise taxes paid on alcohol 
     fuels. In the case of alcohol blended with other fuels (e.g., 
     gasoline), the excise tax rate reductions are allowable only 
     for blends of 90 percent gasoline/ 10 percent alcohol, 92.3 
     percent gasoline/7.7 percent alcohol, or 94.3 percent 
     gasoline/5.7 percent alcohol. These present law provisions 
     are scheduled to expire in 2007.


                           reasons for change

       The Committee believes that providing a new income tax 
     credit for biodiesel fuel will promote energy self-
     sufficiency and also is consistent with the environmental 
     objectives of the bill.


                        explanation of provision

       The provision provides a new income tax credit for 
     qualified biodiesel mixtures. A qualified biodiesel mixture 
     is a mixture of diesel fuel and biodiesel that (1) is sold by 
     the taxpayer producing such mixture to any person for use as 
     a fuel, or (2) is used as a fuel by the taxpayer producing 
     such mixture. Biodiesel is monoalkyl esters of long chain 
     fatty acids for use in diesel-powered engines and which meet 
     the registration requirements of the Environmental Protection 
     Agency under section 211 of the Clean Air Act (42 U.S.C. sec. 
     7545) and the American Society of Testing and Materials 
     D6751. Agri-biodiesel means biodiesel derived solely from 
     virgin oils, including esters derived from corn, soybeans, 
     sunflower seeds, cottonseeds, canola, crambe, rapeseeds, 
     safflowers, flaxseeds, rice bran, mustard seeds, or animal 
     fats. Recycled biodiesel is biodiesel derived from nonvirgin 
     vegetable oils or nonvirgin animal fats. Virgin vegetable 
     oils or animal fats mixed with recycled biodiesel will be 
     treated as recycled biodiesel.
       The biodiesel mixture credit is the sum of the products of 
     the biodiesel mixture rate for each qualified biodiesel 
     mixture and the number of gallons of such mixture of the 
     taxpayer for the taxable year. The per gallon biodiesel 
     mixture rate for agri-biodiesel equals one cent for each 
     percentage point of biodiesel in the qualified biodiesel 
     mixture, subject to a maximum credit of 20 cents per blended 
     gallon of fuel. Agri-biodiesel used in the production of a 
     qualified biodiesel mixture is taken into account only if a 
     certification from the producer of the agribiodiesel which 
     identifies the product produced is obtained. The per gallon 
     biodiesel mixture rate for recycled biodiesel equals 0.5 cent 
     for each percentage point of biodiesel in the qualified 
     biodiesel mixture, subject to a maximum credit of 10 cents 
     per blended gallon of fuel.
       The amount of the biodiesel mixture credit is includible in 
     income. The credit may not be carried back to a taxable year 
     beginning before date of enactment.


                             effective date

       The biodiesel mixture credit is effective for biodiesel 
     fuel sold after date of enactment, and before January 1, 
     2006.

        E. Alcohol Fuel and Biodiesel Mixtures Excise Tax Credit

     (Sec. 208 of the bill, secs. 40, 4081, 6427, 9503, and new 
         sec. 6426 of the Code)


                              present law

     Alcohol fuels income tax credit
       The alcohol fuels credit is the sum of three credits: the 
     alcohol mixture credit, the alcohol credit and the small 
     ethanol producer credit. Generally, the alcohol fuels credit 
     expires after December 31, 2007.
       A taxpayer (generally a petroleum refiner, distributor, or 
     marketer) who mixes ethanol with gasoline (or a special fuel) 
     is an ``ethanol blender.'' Ethanol blenders are eligible for 
     an income tax credit of 52 cents per gallon of ethanol used 
     in the production of a qualified mixture (the ``alcohol 
     mixture credit''). A qualified mixture means a mixture of 
     alcohol and gasoline, (or of alcohol and a special fuel) sold 
     by the blender as fuel, or used as fuel by the blender in 
     producing the mixture. The term alcohol includes methanol and 
     ethanol but does not include (1) alcohol produced from 
     petroleum, natural gas, or coal (including peat), or (2) 
     alcohol with a proof of less than 150. Businesses also may 
     reduce their income taxes by 52 cents for each gallon of 
     ethanol (not mixed with gasoline or other special fuel) that 
     they sell at the retail level as vehicle fuel or use 
     themselves as a fuel in their trade or business (``the 
     alcohol credit''). The 52-cents-per-gallon income tax credit 
     rate is scheduled to decline to 51 cents per gallon during 
     the period 2005 through 2007. For blenders using an alcohol 
     other than ethanol, the rate is 60 cents per gallon.
       A separate income tax credit is available for small ethanol 
     producers (the ``small ethanol producer credit''). A small 
     ethanol producer is defined as a person whose ethanol 
     production capacity does not exceed 30 million gallons per 
     year. The small ethanol producer credit is 10 cents per 
     gallon of ethanol produced during the taxable year for up to 
     a maximum of 15 million gallons.
       The credits that comprise alcohol fuels tax credit are 
     includible in income. The credit may not be used to offset 
     alternative minimum tax liability. The credit is treated as a 
     general business credit, subject to the ordering rules and 
     carryforward/carryback rules that apply to business 
     credits generally.
     Excise tax reductions for alcohol mixture fuels
       Generally, motor fuels tax rates are as follows:

------------------------------------------------------------------------
 
------------------------------------------------------------------------
Gasoline...............................  18.4 cents per gallon.
Diesel fuel and kerosene...............  24.4 cents per gallon.
Special motor fuels....................  18.4 cents per gallon
                                          generally.
------------------------------------------------------------------------

       Alcohol-blended fuels are subject to a reduced rate of tax. 
     The benefits provided by the alcohol fuels income tax credit 
     and the excise tax reduction are integrated such that the 
     alcohol fuels credit is reduced to take into account the 
     benefit of any excise tax reduction.
       Gasohol
       Registered ethanol blenders may forgo the full income tax 
     credit and instead pay reduced rates of excise tax on 
     gasoline that they purchase for blending with ethanol. Most 
     of the benefit of the alcohol fuels credit is claimed through 
     the excise tax system.
       The reduced excise tax rates apply to gasohol upon its 
     removal or entry. Gasohol is defined as a gasoline/ethanol 
     blend that contains 5.7 percent ethanol, 7.7 percent ethanol, 
     or 10 percent ethanol. The Federal excise tax on gasoline is 
     18.4 cents per gallon. For the calendar year 2003, the 
     following reduced rates apply to gasohol:

------------------------------------------------------------------------
 
------------------------------------------------------------------------
5.7 percent ethanol....................  15.436 cents per gallon.
7.7 percent ethanol....................  14.396 cents per gallon.
10.0 percent ethanol...................  13.200 cents per gallon.
------------------------------------------------------------------------

       Reduced excise tax rates also apply when gasoline is being 
     purchased for the production of ``gasohol.'' When gasoline is 
     purchased for blending into gasohol, the rates above are 
     multiplied by a fraction (e.g., 10/9 for 10-percent gasohol) 
     so that the increased volume of motor fuel will be subject to 
     tax. The reduced tax rates apply if the person liable for the 
     tax is registered with the IRS and (1) produces gasohol with 
     gasoline within 24 hours of removing or entering the gasoline 
     or (2) gasoline is sold upon its removal or entry and such 
     person has an unexpired certificate from the buyer and has no 
     reason to believe the certificate is false.
       Qualified methanol and ethanol fuels
       Alcohol produced from a substance other than petroleum or 
           natural gas
       Qualified methanol or ethanol fuel is any liquid that 
     contains at least 85 percent methanol or ethanol or other 
     alcohol produced from a substance other than petroleum or 
     natural gas. These fuels are taxed at reduced rates. The rate 
     of tax on qualified methanol is 12.35 cents per gallon. The 
     rate on qualified ethanol in 2003 and 2004 is 13.15 cents. 
     From January 1, 2005 through September 30, 2007, the rate of 
     tax on qualified ethanol is 13.25 cents.
       Alcohol produced from natural gas
       A mixture of methanol, ethanol, or other alcohol produced 
     from natural gas that consists of at least 85 percent alcohol 
     is also taxed at reduced rates. For mixtures not containing 
     ethanol, the applicable rate of tax is 9.25 cents per gallon 
     before October 1, 2005. In all other cases, the rate is 11.4 
     cents per gallon. After September 31, 2005, the rate is 
     reduced to 2.15 cents per gallon when the mixture does not 
     contain ethanol and 4.3 cents per gallon in all other cases.
       Blends of alcohol and diesel fuel or special motor fuels
       A reduced rate of tax applies to diesel fuel or kerosene 
     that is combined with alcohol as long as at least 10 percent 
     of the finished mixture is alcohol. If none of the alcohol in 
     the mixture is ethanol, the rate of tax is 18.4 cents per 
     gallon. For alcohol mixtures containing ethanol, the rate of 
     tax in 2003 and 2004 is 19.2 cents per gallon and for 2005 
     through September 30, 2007, the rate for ethanol mixtures is 
     19.3 cents per gallon. Fuel removed or entered for use in 
     producing a 10 percent diesel-alcohol fuel mixture (without 
     ethanol), is subject to a tax of 20.44 cents. The rate of tax 
     for fuel removed or entered to produce a 10 percent diesel-
     ethanol fuel mixture is 21.333 cents per gallon for 2003 and 
     2004 and 21.444 cents per gallon for the period January 1, 
     2005 through September 30, 2007.
       Special motor fuel (nongasoline) mixtures with alcohol also 
     are taxed at reduced rates.
       Aviation fuel
       Noncommercial aviation fuel is subject to a tax of 21.9 
     cents per gallon. Fuel mixtures containing at least 10 
     percent alcohol are taxed at lower rates. In the case of 10 
     percent ethanol mixtures, any sale or use during 2003 and 
     2004, the 21.9 cents is reduced by 13.2

[[Page S10543]]

     cents (for a tax of 8.7 cents per gallon), for 2005, 2006, 
     and 2007 the reduction is 13.1 cents (for a tax of 8.8 cents 
     per gallon) and is reduced by 13.4 cents in the case of any 
     sale during 2008 or thereafter. For mixtures not containing 
     ethanol, the 21.9 cents is reduced by 14 cents for a tax of 
     7.9 cents. These reduced rates expire after September 30, 
     2007.
       When aviation fuel is purchased for blending with alcohol, 
     the rates above are multiplied by a fraction (10/9) so that 
     the increased volume of aviation fuel will be subject to tax.
     Refunds and payments
       If fully taxed gasoline (or other taxable fuel) is used to 
     produce a qualified alcohol mixture, the Code permits the 
     blender to file a claim for a quick excise tax refund. The 
     refund is equal to the difference between the gasoline (or 
     other taxable fuel) excise tax that was paid and the tax that 
     would have been paid by a registered blender on the alcohol 
     fuel mixture being produced. Generally, the IRS pays these 
     quick refunds within 20 days. Interest accrues if the refund 
     is paid more than 20 days after filing. A claim may be filed 
     by any person with respect to gasoline, diesel fuel, or 
     kerosene used to produce a qualified alcohol fuel mixture for 
     any period for which $200 or more is payable and which is not 
     less than one week.
     Ethyl tertiary--butyl ether (ETBE)
       Ethyl tertiary butyl ether (``ETBE'') is an ether that is 
     manufactured using ethanol. Unlike ethanol, ETBE can be 
     blended with gasoline before the gasoline enters a pipeline 
     because ETBE does not result in contamination of fuel with 
     water while in transport. Treasury Department regulations 
     provide that gasohol blenders may claim the income tax credit 
     and excise tax rate reductions for ethanol used in the 
     production of ETBE. The regulations also provide a special 
     election allowing refiners to claim the benefit of the excise 
     tax rate reduction even though the fuel being removed from 
     terminals does not contain the requisite percentages of 
     ethanol for claiming the excise tax rate reduction.
     Highway Trust Fund
       With certain exceptions, the taxes imposed by section 4041 
     (relating to retail taxes on diesel fuels and special motor 
     fuels) and section 4081 (relating to tax on gasoline, diesel 
     fuel and kerosene) are credited to the Highway Trust Fund. In 
     the case of alcohol fuels, 2.5 cents per gallon of the tax 
     imposed is retained in the General Fund. In the case of a 
     taxable fuel taxed at a reduced rate upon removal or entry 
     prior to mixing with alcohol, 2.8 cents of the reduced rate 
     is retained in the General Fund.
     Biodiesel
       If biodiesel is used in the production of blended taxable 
     fuel, the Code imposes tax on the removal or sale of the 
     blended taxable fuel. In addition, the Code imposes tax on 
     any liquid other than gasoline sold for use or used as a fuel 
     in a diesel-powered highway vehicle or diesel powered train 
     unless tax was previously imposed and not refunded or 
     credited. If biodiesel that was not previously taxed or 
     exempt is sold for use or used as a fuel in a diesel-powered 
     highway vehicle or a diesel-powered train, tax is imposed. 
     There are no reduced excise tax rates for biodiesel.


                           Reasons for Change

       The United States seeks to reduce its dependence on foreign 
     oil through, among other means, the use of alternative fuels. 
     The Committee believes that the goal of promoting the use of 
     alternative fuels can be achieved without decreasing the 
     revenues available for improving the nation's highway and 
     bridge network. As a result, the Committee believes that it 
     is appropriate that the entire amount of alcohol fuel taxes 
     be devoted to the Highway Trust Fund. Highway vehicles using 
     alcohol-blended fuels contribute to the wear and tear of the 
     same highway system used by gasoline or diesel vehicles. 
     Therefore, the Committee believes that alcohol-blended fuels 
     should be taxed at rates equal to gasoline or diesel.


                        Explanation of Provision

     Overview
       The provision eliminates reduced rates of excise tax for 
     most alcohol-blended fuels. In place of reduced rates, the 
     provision creates two new credits: the alcohol fuel mixture 
     credit and the biodiesel mixture credit. The sum of these 
     credits may be taken against the tax imposed on taxable fuels 
     (by section 4081). Alternatively, in lieu of a credit against 
     tax, the provision allows taxpayers to file a claim for 
     payment equal to the amount of these credits. The provision 
     also eliminates the General Fund retention of certain taxes 
     on alcohol fuels, and credits these taxes to the Highway 
     Trust Fund and extends the present-law alcohol fuels credit 
     through December 31, 2010.
     Alcohol fuel mixture excise tax credit
       The provision eliminates the reduced rates of excise tax 
     for most alcohol-blended fuels. Under the provision, the full 
     rate of tax for taxable fuels is imposed on both alcohol fuel 
     mixtures and the taxable fuel used to produce an alcohol fuel 
     mixture.
       In lieu of the reduced excise tax rates, the provision 
     provides for an excise tax credit, the alcohol fuel mixture 
     credit. The alcohol fuel mixture credit is 52 cents for each 
     gallon of alcohol used by a person in producing an alcohol 
     fuel mixture. The credit declines to 51 cents per gallon 
     after calendar year 2004. For mixtures not containing ethanol 
     (renewable source methanol), the credit is 60 cents per 
     gallon. Equivalent amounts of these credits are to be 
     credited to the Highway Trust Fund.
       For purposes of the alcohol fuel mixture credit, an 
     ``alcohol fuel mixture'' is (1) a mixture of alcohol and a 
     taxable fuel and (2) sold for use or used as a fuel by the 
     taxpayer producing the mixture. Alcohol for this purpose 
     includes methanol, ethanol, and alcohol gallon equivalents of 
     ETBE or other ethers produced from such alcohol. It does not 
     include alcohol produced from petroleum, natural gas or coal 
     (including peat), or alcohol with a proof of less than 190 
     (determined without regard to any added denaturants). Taxable 
     fuel is gasoline, diesel and kerosene.
       The excise tax credit is coordinated with the alcohol fuels 
     income tax credit and is available through December 31, 2010.
     Biodiesel mixture excise tax credit
       The provision provides an excise tax credit for agri-
     biodiesel mixtures. The credit is one dollar for the first 
     gallon of agri-biodiesel used by the taxpayer in producing at 
     least five gallons of qualified biodiesel mixture. The credit 
     is not available for any sale or use for any period after 
     December 31, 2005. This excise tax credit is coordinated with 
     income tax credit for biodiesel such that credit for the same 
     biodiesel cannot be claimed for both income and excise tax 
     purposes.
     Payments with respect to tax-paid fuel used to produce 
         qualified mixtures
       When tax paid fuel is used to produce an alcohol fuel 
     mixture or qualified biodiesel mixture that is sold or used 
     in the trade or business of the person who makes such a 
     mixture, a payment in an amount equal to the alcohol fuel 
     mixture credit or biodiesel mixture credit is available. This 
     refund provision is available to persons using gasoline, 
     diesel fuel or kerosene to make an alcohol fuel mixture or 
     qualified biodiesel mixture. Specifically, if any gasoline, 
     diesel fuel, or kerosene on which tax was imposed by section 
     4081 is used by any person in producing an alcohol fuel 
     mixture or qualified biodiesel mixture which is sold or used 
     in such person's trade or business, the Secretary is to pay 
     to such person an amount equal to the alcohol fuel mixture 
     credit or the biodiesel mixture credit with respect to such 
     gasoline, diesel fuel or kerosene.
       If such claims are not paid within 45 days, the claim is to 
     be paid with interest. The provision also provides that in 
     the case of an electronic claim, if such claim is not paid 
     within 20 days, the claim is to be paid with interest. The 
     refund provision is coordinated with other refund provisions 
     and the excise tax credits for alcohol fuel mixtures and 
     biodiesel mixtures. The provision does not apply with respect 
     to alcohol fuel mixtures sold or used after December 31, 2010 
     or qualified biodiesel mixtures sold or used after December 
     31, 2005.
     Highway Trust Fund
       The provision eliminates the requirement that 2.5 and 2.8 
     cents per gallon of excise taxes be retained in the General 
     Fund so that the full amount of tax on alcohol fuels is 
     credited to the Highway Trust Fund. The provision also 
     authorizes the full amount of fuel taxes to be appropriated 
     to the Highway Trust Fund without reduction for amounts 
     equivalent to the excise tax credits allowed for alcohol fuel 
     mixtures and biodiesel mixtures.
     Alcohol fuels income tax credit
       The provision extends the alcohol fuels credit (sec. 40) 
     through December 31, 2010.


                             Effective Date

       The provision is effective for fuel sold or used after 
     September 30, 2003.

   F. Sale of Gasoline and Diesel Fuel at Duty-Free Sales Enterprises

     (Sec. 209 of the bill)


                              Present Law

       A duty-free sales enterprise that meets certain conditions 
     may sell and deliver for export from the customs territory of 
     the United States duty-free merchandise. Duty-free 
     merchandise is merchandise sold by a duty-free sales 
     enterprise on which neither federal duty nor federal tax has 
     been assessed pending exportation from the customs territory 
     of the United States. Conditions for qualifying as a duty-
     free enterprise include (but are limited to) locations within 
     a specified distance from a port of entry, establishment of 
     procedures for ensuring that merchandize is exported from the 
     United States, and prominent posting of rules concerning 
     duty-free treatment of merchandise. The duty-free statute 
     does not contain any limitation on what goods may qualify for 
     duty-free treatment.


                           Reasons for Change

       The Committee understands that in some circumstances 
     individuals purchase motor fuels at a duty free facility that 
     is located in the United States, drive briefly outside of the 
     United States, and return to the United States. The Committee 
     believes that motor fuel sold at duty-free enterprises should 
     support the financing of the U.S. highway system as do other 
     motor fuel sales in the United States.


                        Explanation of Provision

       The provision amends Section 555(b) of the Tariff Act of 
     1930 (19 U.S.C. 1555(b)) to provide that gasoline or diesel 
     fuel sold at duty-free enterprises shall be considered to 
     entered for consumption into the United States and thus 
     ineligible for classification as duty-free merchandise.


                             Effective Date

       The provision is effective on the date of enactment.

[[Page S10544]]

        TITLE III--CONSERVATION AND ENERGY EFFICIENCY PROVISIONS

        A. Credit for Construction of New Energy-Efficient Home

     (Sec. 301 of the bill and new sec. 45G of the Code)


                              Present Law

       A nonrefundable, 10-percent business energy credit is 
     allowed for the cost of new property that is equipment (1) 
     that uses solar energy to generate electricity, to heat or 
     cool a structure, or to provide solar process heat, or (2) 
     used to produce, distribute, or use energy derived from a 
     geothermal deposit, but only, in the case of electricity 
     generated by geothermal power, up to the electric 
     transmission stage.
       The business energy tax credits are components of the 
     general business credit (sec. 38(b)(1)). The business energy 
     tax credits, when combined with all other components of the 
     general business credit, generally may not exceed for any 
     taxable year the excess of the taxpayer's net income tax over 
     the greater of (1) 25 percent of net regular tax liability 
     above $25,000 or (2) the tentative minimum tax. For credits 
     arising in taxable years beginning after December 31, 1997, 
     an unused general business credit generally may be carried 
     back one year and carried forward 20 years (sec. 39).
       A taxpayer may exclude from income the value of any subsidy 
     provided by a public utility for the purchase or installation 
     of an energy conservation measure. An energy conservation 
     measure means any installation or modification primarily 
     designed to reduce consumption of electricity or natural gas 
     or to improve the management of energy demand with respect to 
     a dwelling unit (sec. 136).
       There is no present-law credit for the construction of new 
     energy-efficient homes.


                           Reasons for change

       The Committee recognizes that residential energy use for 
     heating and cooling represents a large share of national 
     energy consumption, and accordingly believes that measures to 
     reduce heating and cooling energy requirements have the 
     potential to substantially reduce national energy 
     consumption. The Committee further recognizes that the most 
     cost-effective time to properly insulate a home is when it is 
     under construction and that the most effective mechanism to 
     encourage the utilization of energy-efficient components in 
     the construction of new homes is through an incentive to the 
     builder. Accordingly, the Committee believes that a tax 
     credit for the use of energy-efficiency components in a 
     home's envelope (exterior windows (including skylights) and 
     doors and insulation) or heating and cooling appliances will 
     encourage contractors to produce highly energy-efficient 
     homes, which in turn will reduce national energy consumption. 
     Reduced energy consumption will in turn reduce reliance on 
     foreign suppliers of oil and will reduce pollution in 
     general.


                        Explanation of Provision

       The provision provides a credit to an eligible contractor 
     of an amount equal to the aggregate adjusted bases of all 
     energy-efficient property installed in a qualified new 
     energy-efficient home during construction. The credit cannot 
     exceed $1,000 ($2,000) in the case of a new home that has a 
     projected level of annual heating and cooling costs that is 
     30 percent (50 percent) less than a comparable dwelling 
     constructed in accordance with Chapter 4 of the 2000 
     International Energy Conservation Code.
       The eligible contractor is the person who constructed the 
     home, or in the case of a manufactured home, the producer of 
     such home. Energy efficiency property is any energy-efficient 
     building envelope component (insulation materials or system 
     designed to reduce heat loss or gain, and exterior windows, 
     including skylights, and doors) and any energy-efficient 
     heating or cooling appliance that can, individually or in 
     combination with other components, meet the standards for the 
     home.
       To qualify as an energy-efficient new home, the home must 
     be: (1) a dwelling located in the United States; (2) the 
     principal residence of the person who acquires the dwelling 
     from the eligible contractor, and (3) certified to have a 
     projected level of annual heating and cooling energy 
     consumption that meets the standards for either the 30-
     percent or 50-percent reduction in energy usage. The home may 
     be certified according to a component-based method or an 
     energy performance based method. Additionally, manufactured 
     homes certified by the Environmental Protection Agency's 
     Energy Star Labeled Homes program are eligible for the $1,000 
     credit provided criteria (1) and (2) are met.
       The component-based method of certification shall be based 
     on applicable energy-efficiency specifications or ratings, 
     including current product labeling requirements. The 
     Secretary shall develop component-based packages that are 
     equivalent in energy performance to properties that qualify 
     for the credit. The standard for certifying homes through the 
     component based method shall be based on the same standards 
     for plan check and physical inspections as are used for 
     energy code compliance. The certification shall be provided 
     by a local building regulatory authority, a utility, a 
     manufactured home primary inspection agency, or a home energy 
     rating organization. Such provider of the certification must 
     be financially independent of the eligible contractor.
       The performance-based method of certification shall be 
     based on an evaluation of the home in reference to a home 
     which uses the same energy source and system heating type, 
     and is constructed in accordance with the Chapter 4 of the 
     2000 International Energy Conservation Code. The 
     certification shall be provided by an individual recognized 
     by the Secretary for such purposes.
       The certification process requires that energy savings to 
     the consumer be measured in terms of energy costs. To ensure 
     consistent and reasonable energy cost analyses, the 
     Department of Energy shall include in its rulemaking related 
     to this bill specific reference data to be used for 
     qualification for the credit.
       In the case of manufactured homes, certification shall be 
     by the Energy Star Labeled Homes program.
       The credit will be part of the general business credit. No 
     credits attributable to energy efficient homes may be carried 
     back to any taxable year ending on or before the effective 
     date of the credit.


                             Effective Date

       The credit applies to homes whose construction is 
     substantially completed after the date of enactment and which 
     are purchased during the period beginning on the date of 
     enactment and ending on December 31, 2007 (December 31, 2005 
     in the case of the $1,000 credit).

               B. Credit for Energy-Efficient Appliances

     (Sec. 302 of the bill and new sec. 45H of the Code)


                              Present Law

       A nonrefundable, 10-percent business energy credit is 
     allowed for the cost of new property that is equipment: (1) 
     that uses solar energy to generate electricity, to heat or 
     cool a structure, or to provide solar process heat; or (2) 
     used to produce, distribute, or use energy derived from a 
     geothermal deposit, but only, in the case of electricity 
     generated by geothermal power, up to the electric 
     transmission stage.
       The business energy tax credits are components of the 
     general business credit (sec. 38(b)(1)). The business energy 
     tax credits, when combined with all other components of the 
     general business credit, generally may not exceed for any 
     taxable year the excess of the taxpayer's net income tax over 
     the greater of: (1) 25 percent of net regular tax liability 
     above $25,000 or (2) the tentative minimum tax. For credits 
     arising in taxable years beginning after December 31, 1997, 
     an unused general business credit generally may be carried 
     back one year and carried forward 20 years (sec. 39).
       A taxpayer may exclude from income the value of any subsidy 
     provided by a public utility for the purchase or installation 
     of an energy conservation measure. An energy conservation 
     measure means any installation or modification primarily 
     designed to reduce consumption of electricity or natural gas 
     or to improve the management of energy demand with respect to 
     a dwelling unit (sec. 136).
       There is no present-law credit for the manufacture of 
     energy-efficient appliances.


                           Reasons for change

       The Committee believes that providing a tax credit for the 
     production of energy-efficient clothes washers and 
     refrigerators will encourage manufacturers to produce such 
     products currently and to invest in technologies to achieve 
     higher energy-efficiency standards for the future. In 
     addition, the Committee intends to encourage those 
     manufacturers already producing energy-efficient clothes 
     washers and refrigerators to accelerate production.


                        Explanation of Provision

       The provision provides a credit for the production of 
     certain energy-efficient clothes washers and refrigerators. 
     The credit would equal $50 per appliance for energy-efficient 
     clothes washers produced with a modified energy factor 
     (``MEF'') of 1.42 MEF or greater for washers produced before 
     2007 and for refrigerators produced before 2005 that consume 
     10 percent less kilowatt-hours per year than the energy 
     conservation standards promulgated by the Department of 
     Energy that took effect on July 1, 2001. The credit equals 
     $100 for energy-efficient clothes washers produced with a MEF 
     of 1.5 or greater and for refrigerators produced that consume 
     at least 15 percent less kilowatt-hours per year (at least 20 
     percent less for production in 2007) than the energy 
     conservation standards promulgated by the Department of 
     Energy that took effect on July 1, 2001. The credit is $150 
     in the case of a refrigerator that consumes at least 20 
     percent less kilowatt-hours per year than such standards and 
     is produced before 2007. A refrigerator must be an automatic 
     defrost refrigerator-freezer with an internal volume of at 
     least 16.5 cubic feet to qualify for the credit. A clothes 
     washer is any residential clothes washer, including a 
     residential style coin operated washer, that satisfies the 
     relevant efficiency standard.
       For each category of appliances (e.g., washers that meet 
     the lower MEF standard, washers that meet the higher MEF 
     standard, refrigerators that meet the 10 percent standard, 
     refrigerators that meet the 15 percent standard), only 
     production in excess of average production for each such 
     category during calendar years 2000-2002 would be eligible 
     for the credit. For 2003, only production after the date of 
     enactment is eligible for the credit, and special rules apply 
     to determine if production exceeds the average of the base 
     period. The taxpayer may not claim credits in excess of $60 
     million for all taxable years,

[[Page S10545]]

     and may not claim credits in excess of $30 million with 
     respect to appliances that only qualify for the $50 credit. 
     Additionally, the credit allowed for all appliances may not 
     exceed two percent of the average annual gross receipts of 
     the taxpayer for the three taxable years preceding the 
     taxable year in which the credit is determined.
       The credit will be part of the general business credit. No 
     credits attributable to energy-efficient appliances may be 
     carried back to taxable years ending before January 1, 2003.


                             Effective Date

       The credit applies to appliances produced after the date of 
     enactment and prior to January 1, 2008.

          C. Credit for Residential Energy Efficient Property

     (Sec. 303 of the bill and new sec. 25C of the Code)


                              Present Law

       A taxpayer may exclude from income the value of any subsidy 
     provided by a public utility for the purchase or installation 
     of an energy conservation measure. An energy conservation 
     measure means any installation or modification primarily 
     designed to reduce consumption of electricity or natural gas 
     or to improve the management of energy demand with respect to 
     a dwelling unit (sec. 136).
       There is no present-law personal tax credit for energy 
     efficient residential property.


                           Reasons for chance

       The Committee believes that allowing a credit for the 
     purchase of certain energy efficient appliances and systems 
     that generate electricity through renewable and 
     pollution=free alternative energy sources will encourage the 
     purchase of these products. The Committee believes that the 
     use of these products will help reduce reliance on 
     conventional energy sources and reduce atmospheric 
     pollutants. The Committee believes that the on-site 
     generation of electricity and solar hot water will reduce 
     reliance on the United States' electricity grid and on 
     natural gas pipelines. Furthermore, the Committee believes 
     that the use of highly efficient residential equipment will 
     lead to decreased energy consumption in households, resulting 
     in significant energy savings.


                        Explanation of Provision

       The provision provides a personal tax credit for the 
     purchase of qualified wind energy property, qualified 
     photovoltaic property, and qualified solar water heating 
     property that is used exclusively for purposes other than 
     heating swimming pools and hot tubs. The credit is equal to 
     15 percent for solar water heating property and photovoltaic 
     property, and 30 percent for wind energy property. The 
     maximum credit for each of these systems of property is 
     $2,000. The provision also provides a 30 percent credit for 
     the purchase of qualified fuel cell power plants. The credit 
     for any fuel cell may not exceed $500 for each 0.5 kilowatt 
     of capacity.
       Qualifying solar water heating property means an 
     expenditure for property to heat water for use in a dwelling 
     unit located in the United States and used as a residence if 
     at least half of the energy used by such property for such 
     purpose is derived from the sun. Qualified photovoltaic 
     property is property that uses solar energy to generate 
     electricity for use in a dwelling unit. Solar panels are 
     treated as qualified photovoltaic property. Qualified wind 
     energy property is property that uses wind energy to generate 
     electricity for use in a dwelling unit. A qualified fuel cell 
     power plant is an integrated system comprised of a fuel cell 
     stack assembly and associated balance of plant components 
     that converts a fuel into electricity using electrochemical 
     means, and which has an electricity-only generation 
     efficiency of greater than 30 percent and that generates at 
     least 0.5 kilowatts of electricity. The qualified fuel cell 
     power plant must be installed on or in connection with a 
     dwelling unit located in the United States and used by the 
     taxpayer as a principal residence.
       The provision also provides a credit for the purchase of 
     other qualified energy efficient property, as described 
     below:
       Electric heat pump hot water heaters with an Energy Factor 
     of at least 1.7. The maximum credit is $75 per unit.
       Electric heat pumps with a heating efficiency of at least 9 
     HSPF (Heating Seasonal Performance Factor) and a cooling 
     efficiency of at least 15 SEER (Seasonal Energy Efficiency 
     Rating) and an energy efficiency ratio (EER) of 12.5 or 
     greater. The maximum credit is $250 per unit.
       Natural gas, oil, or propane furnace which achieves 95 
     percent annual fuel utilization efficiency. The maximum 
     credit is $250 per unit.
       Central air conditioners with an efficiency of at least 15 
     SEER and an EER of 12.5 or greater. The maximum credit is 
     $250 per unit.
       Natural gas, oil, or propane water heaters with an Energy 
     Factor of at least 0.8. The maximum credit is $75 per unit.
       Geothermal heat pumps which have an EER of at least 21. The 
     maximum credit is $250 per unit.
       The credit is nonrefundable, and the depreciable basis of 
     the property is reduced by the amount of the credit. 
     Expenditures for labor costs allocable to onsite preparation, 
     assembly, or original installation of property eligible for 
     the credit are eligible expenditures. The credit is allowed 
     against the regular and alternative minimum tax.
       Certain equipment safety requirements need to be met to 
     qualify for the credit. Special proration rules apply in the 
     case of jointly owned property, condominiums, and tenant-
     stockholders in cooperative housing corporations. With the 
     exception of wind energy property, if less than 80 percent of 
     the property is used for nonbusiness purposes, only that 
     portion of expenditures that is used for nonbusiness purposes 
     is taken into account.


                             Effective Date

       The credit applies to purchases after the date of enactment 
     and before January 1, 2008.

    D. Credit for Business Installation of Qualified Fuel Cells and 
                  Stationary Microturbine Power Plants

     (Sec. 304 of the bill and sec. 48 of the Code)


                              Present Law

       A nonrefundable, 10-percent business energy credit is 
     allowed for the cost of new property that is equipment (1) 
     that uses solar energy to generate electricity, to heat or 
     cool a structure, or to provide solar process heat, or (2) 
     used to produce, distribute, or use energy derived from a 
     geothermal deposit, but only, in the case of electricity 
     generated by geothermal power, up to the electric 
     transmission stage.
       The business energy tax credits are components of the 
     general business credit (sec. 38(b)(1)). The business energy 
     tax credits, when combined with all other components of the 
     general business credit, generally may not exceed for any 
     taxable year the excess of the taxpayer's net income tax over 
     the greater of (1) 25 percent of net regular tax liability 
     above $25,000 or (2) the tentative minimum tax. An unused 
     general business credit generally may be carried back one 
     year and carried forward 20 years (sec. 39).
       A taxpayer may exclude from income the value of any subsidy 
     provided by a public utility for the purchase or installation 
     of an energy conservation measure. An energy conservation 
     measure means any installation or modification primarily 
     designed to reduce consumption of electricity or natural gas 
     or to improve the management of energy demand with respect to 
     a dwelling unit (sec. 136).
       There is no present-law credit for fuel cell power plant or 
     microturbine property.


                           Reasons for change

       The Committee believes that investments in qualified fuel 
     cell power plants represent a promising means to produce 
     electricity through non-polluting means and from 
     nonconventional energy sources. Furthermore, the on-site 
     generation of electricity provided by fuel cell power plants, 
     as well as that by microturbines, will reduce reliance on the 
     United States' electricity grid. The Committee believes that 
     providing a tax credit for investment in qualified fuel cell 
     and microturbine power plants will encourage investments in 
     such systems.


                        Explanation of Provision

       The provision provides a 30 percent business energy credit 
     for the purchase of qualified fuel cell power plants for 
     businesses. A qualified fuel cell power plant is an 
     integrated system comprised of a fuel cell stack assembly and 
     associated balance of plant components that converts a fuel 
     into electricity using electrochemical means, and which has 
     an electricity-only generation efficiency of greater than 30 
     percent and generates at least 0.5 kilowatts of electricity 
     using an electrochemical process. The credit for any fuel 
     cell may not exceed $500 for each 0.5 kilowatts of capacity.
       Additionally, the provision provides a 10 percent credit 
     for the purchase of qualifying stationary microturbine power 
     plants. A qualified stationary microturbine power plant is an 
     integrated system comprised of a gas turbine engine, a 
     combustor, a recuperator or regenerator, a generator or 
     alternator, and associated balance of plant components which 
     converts a fuel into electricity and thermal energy. Such 
     system also includes all secondary components located between 
     the existing infrastructure for fuel delivery and the 
     existing infrastructure for power distribution, including 
     equipment and controls for meeting relevant power standards, 
     such as voltage, frequency and power factors. Such system 
     must have an electricity-only generation efficiency of not 
     less that 26 percent at International Standard Organization 
     conditions and a capacity of less than 2,000 kilowatts. The 
     credit is limited to the lesser of 10 percent of the basis of 
     the property or $200 for each kilowatt of capacity.
       The credit is nonrefundable. The taxpayer's basis in the 
     property is reduced by the amount of the credit claimed.


                             Effective Date

       The credit for businesses applies to property placed in 
     service after the date of enactment and before January 1, 
     2008 (January 1, 2007 in the case of microturbines), under 
     rules similar to rules of section 48(m) of the Internal 
     Revenue Code of 1986 (as in effect on the day before the date 
     of enactment of the Revenue Reconciliation Act of 1990).

           E. Energy-Efficient Commercial Buildings Deduction

     (Sec. 305 of the bill and new sec. 179B of the Code)


                              Present Law

       No special deduction is currently provided for expenses 
     incurred for energy-efficient commercial building property.

[[Page S10546]]

                           Reasons for change

       The Committee recognizes that commercial buildings consume 
     a significant amount of energy resources and that reductions 
     in commercial energy use have the potential to significantly 
     reduce national energy consumption. Accordingly, the 
     Committee believes that a special deduction for commercial 
     building property (lighting, heating, cooling, ventilation, 
     and hot water supply systems) that meets a high energy-
     efficiency standard will encourage construction of buildings 
     that are significantly more energy efficient than the norm. 
     The Committee further believes that the special deduction 
     will encourage innovation to reduce the costs of meeting the 
     energy-efficiency standard.


                        Explanation of Provision

       The provision provides a deduction equal to energy-
     efficient commercial building property expenditures made by 
     the taxpayer. Energy-efficient commercial building property 
     expenditures are defined as amounts paid or incurred for 
     energy-efficient property installed in connection with the 
     new construction or reconstruction of property: (1) which is 
     depreciable property; (2) which is located in the United 
     States, and (3) which is the type of structure to which the 
     Standard 90.1-2001 of the American Society of Heating, 
     Refrigerating, and Air Conditioning Engineers and the 
     Illuminating Engineering Society of North America (``ASHRAE/
     IESNA'') is applicable. The deduction is limited to an amount 
     equal to $2.25 per square foot of the property for which such 
     expenditures are made. The deduction is allowed in the year 
     in which the property is placed in service.
       Energy-efficient commercial building property generally 
     means any property that reduces total annual energy and power 
     costs with respect to the lighting, heating, cooling, 
     ventilation, and hot water supply systems of the building by 
     50 percent or more in comparison to a building which 
     minimally meets the requirements of Standard 90.1-2001 of 
     ASHRAE/IESNA. Because of the requirement that in order to 
     qualify, a building must fall within the scope of the ASHRAE/
     IESNA Standard 90.1-2001, residential rental property that is 
     less than four stories does not qualify.
       Certain certification requirements must be met in order to 
     qualify for the deduction. The Secretary, in consultation 
     with the Secretary of Energy, will promulgate regulations 
     that describe methods of calculating and verifying energy and 
     power costs. The methods for calculation shall be fuel 
     neutral, such that the same energy efficiency features shall 
     qualify a building for the deduction under this subsection 
     regardless of whether the heating source is a gas or oil 
     furnace or an electric heat pump. To allow proper 
     calculations of cost, the Secretary shall prescribe the costs 
     per unit of energy and power, such as kilowatt hour, 
     kilowatt, gallon of fuel oil, and cubic foot or Btu of 
     natural gas, which may be dependent on time of usage. If a 
     State has developed annual energy usage and cost reduction 
     procedures based on time of usage costs for use in the 
     performance standards of the State's building energy code 
     before the effective date of this section, the Secretary may 
     allow taxpayers in that State to use those annual energy 
     usage and cost reduction procedures in lieu of those adopted 
     by the Secretary.
       The Secretary shall promulgate procedures for the 
     inspection and testing for compliance of buildings that are 
     comparable, given the difference between commercial and 
     residential buildings, to the requirements in the Mortgage 
     Industry National Home Energy Rating Standards. Individuals 
     qualified to determine compliance shall only be those 
     recognized by one or more organizations certified by the 
     Secretary for such purposes. In order that the deduction is 
     available immediately, it is expected that the Secretary will 
     promptly issue interim guidance with respect to the methods 
     of calculating and verifying energy and power costs that 
     relies on provisions of ASHRAE/IESNA Standard 90.1-2001 and 
     of the 2001 California Nonresidential Alternative Calculation 
     Method Approval Manual or the 2001 California Residential 
     Alternative Calculation Method Approval Manual. The methods 
     for calculation need not comply fully with section 11 of 
     ASHRAE/IESNA Standard 90.1-2001. Such interim guidance will 
     include interim guidance as to the qualified computer 
     software and qualified individuals necessary to certify 
     eligibility for the deduction.
       When final regulations are adopted, such regulations 
     additionally may, with respect to methods of calculating and 
     verifying energy and power costs, take into consideration 
     appropriate energy savings from design methodologies and 
     technologies not otherwise credited in ASHRAE/IESNA Standard 
     90.1-2001, the 2001 California Nonresidential Alternative 
     Calculation Method Approval Manual, or the 2001 California 
     Residential Alternative Calculation Method Approval Manual, 
     including the following: (1) natural ventilation, (2) 
     evaporative cooling, (3) automatic lighting controls such as 
     occupancy sensors, photocells, and timeclocks, (4) 
     daylighting, (5) designs utilizing semi-conditioned spaces 
     which maintain adequate comfort conditions without air 
     conditioning or without heating, (6) improved fan system 
     efficiency, including reductions in static pressure, and (7) 
     advanced unloading mechanisms for mechanical cooling, such as 
     multiple or variable speed compressors. Additionally, the 
     calculation methods may take into account the extent of 
     commissioning in the building, and allow the taxpayer to take 
     into account measured performance which exceeds typical 
     performance.
       For energy-efficient commercial building property public 
     property expenditures made by a public entity, such as public 
     schools, the interim guidance, as well as final regulations, 
     will allow the value of the deduction (determined without 
     regard to the tax-exempt status of such entity) to be 
     allocated to the person primarily responsible for designing 
     the property in lieu of the public entity.


                             Effective Date

       The provision is effective for taxable years beginning 
     after the date of enactment for expenditures in connection 
     with a building whose construction is completed on or before 
     December 31, 2009.

F. Three-Year Applicable Recovery Period for Depreciation of Qualified 
                       Energy Management Devices

     (Sec. 306 of the bill and sec. 168 of the Code)


                              Present Law

       No special recovery period is currently provided for 
     depreciation of qualified energy management devices.


                           Reasons for Change

       The Committee believes that consumers could better manage 
     their electricity use if they had better information 
     concerning their usage habits by time of day. In the case of 
     electricity, if time-of-day pricing is used, energy 
     management devices that provide information to consumers 
     regarding their peak electrical use could encourage consumers 
     to defer certain electrical use, such as use of a washing 
     machine, to periods of the day when electricity prices are 
     lower. In addition to potentially reducing consumers' 
     electricity bill, spreading the demand for electricity more 
     evenly throughout the day will reduce the need for utility 
     investments in generation capacity to satisfy peak demand 
     periods.
       The Committee believes that providing a 3-year recovery 
     period for qualified energy management devices will provide 
     sufficient incentive for utilities to establish time-of-day 
     pricing options that will encourage consumers to adjust their 
     electricity usage in such a manner to dampen utilities' peak 
     load capacity needs and thus reduce the need for investment 
     in new capacity to meet peak load demand.


                        Explanation of Provision

       The provision provides a three-year recovery period for 
     qualified new energy management devices placed in service by 
     any taxpayer who is a supplier of electric energy or is a 
     provider of electric energy services. A qualified energy 
     management device is any meter or metering device eligible 
     for accelerated depreciation under code section 168 and which 
     is used by the taxpayer
       (1) to measure and record electricity usage data on a time-
     differentiated basis in at least 4 separate time segments per 
     day, and
       (2) to provide such data on at least a monthly basis to 
     both consumers and the taxpayer.


                             Effective Date

       The provision is effective for any qualified energy 
     management device placed in service after the date of 
     enactment of the Act and before January 1, 2008.

G. Three-Year Applicable Recovery Period for Depreciation of Qualified 
                       Water Submetering Devices

     (Sec. 307 of the bill and sec. 168 of the Code)


                              Present Law

       No special recovery period is currently provided for 
     depreciation of qualified water submetering devices.


                           Reasons for Change

       The Committee believes that consumers would better manage 
     their water use if they paid for water in proportion to the 
     water that they actually used. In many cases in multi-unit 
     properties, there is not unit by unit metering of water use. 
     Rather, the landlord's average per-unit costs for water are 
     reflected in rental rates. Thus, individual units have 
     virtually no financial incentive to conserve on water use, as 
     the cost of any individual's increased water usage is borne 
     by all dwellers. The Committee believes that a tax incentive 
     for the installation of submeters to enable unit by unit 
     charges that reflect water usage will rationalize water use 
     and help to conserve water resources.


                        Explanation of Provision

       The provision provides a three-year recovery period for 
     qualified new water submetering devices placed in service by 
     any taxpayer who is an eligible resupplier. An eligible 
     resupplier is any taxpayer who purchases and installs 
     qualified water submetering devices in every unit in any 
     multi-unit property. A qualified water submetering device is 
     anywater submetering device eligible for accelerated 
     depreciation under code section 168 and which is used by the 
     taxpayer
       (1) to measure and record water usage data, and
       (2) to provide such data on at least a monthly basis to 
     both consumers and the taxpayer.


                             Effective Date

       The provision is effective for any qualified water 
     submetering device placed in service after the date of 
     enactment of the Act and before January 1, 2008.

      H. Energy Credit for Combined Heat and Power System Property

     (Sec. 308 of the bill and Sec. 48 of the Code)


                              Present Law

       A nonrefundable, 10-percent business energy credit is 
     allowed for the cost of new

[[Page S10547]]

     property that is equipment (1) that uses solar energy to 
     generate electricity, to heat or cool a structure, or to 
     provide solar process heat, or (2) used to produce, 
     distribute, or use energy derived from a geothermal deposit, 
     but only, in the case of electricity generated by geothermal 
     power, up to the electric transmission stage.
       The business energy tax credits are components of the 
     general business credit (sec. 38(b)(1)). The business energy 
     tax credits, when combined with all other components of the 
     general business credit, generally may not exceed for any 
     taxable year the excess of the taxpayer's net income tax over 
     the greater of (1) 25 percent of net regular tax liability 
     above $25,000 or (2) the tentative minimum tax. For credits 
     arising in taxable years beginning after December 31, 1997, 
     an unused general business credit generally may be carried 
     back one year and carried forward 20 years (sec. 39).
       A taxpayer may exclude from income the value of any subsidy 
     provided by a public utility for the purchase or installation 
     of an energy conservation measure. An energy conservation 
     measure means any installation or modification primarily 
     designed to reduce consumption of electricity or natural gas 
     or to improve the management of energy demand with respect to 
     a dwelling unit (sec. 136).
       There is no present-law credit for combined heat and power 
     (``CHP'') property.


                           Reasons for change

       The Committee believes that investments in combined heat 
     and power systems represent a promising means to achieve 
     greater national energy efficiency by encouraging the dual 
     use of the energy from the burning of fossil fuels. 
     Furthermore, the on-site generation of electricity provided 
     by CHP systems will reduce reliance on the United States' 
     electricity grid. The Committee believes that providing a tax 
     credit for investment in combined heat and power property 
     will encourage investments in such systems.


                        Explanation of Provision

       The provision provides a 10-percent credit for the purchase 
     of combined heat and power property. CHP property as defined 
     as property: (1) which uses the same energy source for the 
     simultaneous or sequential generation of electrical power, 
     mechanical shaft power, or both, in combination with the 
     generation of steam or other forms of useful thermal energy 
     (including heating and cooling applications); (2) which has 
     an electrical capacity of more than 50 kilowatts or a 
     mechanical energy capacity of more than 67 horsepower or an 
     equivalent combination of electrical and mechanical energy 
     capacities; (3) which produces at least 20 percent of its 
     total useful energy in the form of thermal energy and at 
     least 20 percent in the form of electrical or mechanical 
     power (or a combination thereof); and (4) the energy 
     efficiency percentage of which exceeds 60 percent (70 percent 
     in the case of a system with an electrical capacity in excess 
     of 50 megawatts or a mechanical energy capacity in excess of 
     67,000 horsepower, or an equivalent combination of electrical 
     and mechanical capacities.) Also, for purposes of determining 
     whether CHP property includes technologies which generate 
     electricity or mechanical power using backpressure steam 
     turbines in place of existing pressure-reducing valves, or 
     which make use of waste heat from industrial processes such 
     as by using organic rankine, stirling, or kalina heat engine 
     systems, the general requirements of clause (1), the energy 
     output requirements related to heat versus power described 
     under (3), and the energy efficiency requirements of (4), 
     above, may be disregarded.
       CHP property does include property used to transport the 
     energy source to the generating facility or to distribute 
     energy produced by the facility.
       If a taxpayer is allowed a credit for CHP property, and the 
     property would ordinarily have a depreciation class life of 
     15 years or less, the depreciation period for the property is 
     treated as having a 22-year class life. The present-law carry 
     back rules of the general business credit generally would 
     apply except that no credits attributable to combined heat 
     and power property may be carried back before the effective 
     date of this provision.


                             Effective Date

       The credit applies to property placed in service after the 
     date of enactment and before January 1, 2007.

     I. Credit for Energy Efficiency Improvements to Existing Homes

     (Sec. 309 of the bill and new sec. 25D of the Code)


                              Present Law

       A taxpayer may exclude from income the value of any subsidy 
     provided by a public utility for the purchase or installation 
     of an energy conservation measure. An energy conservation 
     measure means any installation or modification primarily 
     designed to reduce consumption of electricity or natural gas 
     or to improve the management of energy demand with respect to 
     a dwelling unit (sec. 136).
       There is no present law credit for energy efficiency 
     improvements to existing homes.


                           Reasons for change

       Since residential energy consumption represents a large 
     fraction of national energy use, the Committee believes that 
     energy savings in this sector of the economy have the 
     potential to significantly impact national energy 
     consumption, which will reduce reliance on foreign suppliers 
     of oil and reduce pollution in general. The Committee further 
     recognizes that many existing homes are inadequately 
     insulated. Accordingly, the Committee believes that a tax 
     credit for certain energy-efficiency improvements related to 
     a home's envelope (exterior windows (including skylights) and 
     doors, insulation, and certain roofing systems) will 
     encourage homeowners to improve the insulation of their 
     homes, which in turn will reduce national energy consumption.


                        Explanation of Provision

       The provision would provide a 10-percent nonrefundable 
     credit for the purchase of qualified energy efficiency 
     improvements. The maximum credit for a taxpayer with respect 
     to the same dwelling for all taxable years is $300. A 
     qualified energy efficiency improvement would be any energy 
     efficiency building envelope component that is certified to 
     meet or exceed the prescriptive criteria for such a component 
     established by the 2000 International Energy Conservation 
     Code, or any combination of energy efficiency measures that 
     is certified to achieve at least a 30-percent reduction in 
     heating and cooling energy usage for the dwelling and (1) 
     that is installed in or on a dwelling located in the United 
     States; (2) owned and used by the taxpayer as the taxpayer's 
     principal residence; (3) the original use of which commences 
     with the taxpayer; and (4) such component can reasonably be 
     expected to remain in use for at least five years.
       Building envelope components would be: (1) insulation 
     materials or systems which are specifically and primarily 
     designed to reduce the heat loss or gain for a dwelling, and 
     (2) exterior windows (including skylights) and doors.
       Homes shall be certified according to a component-based 
     method or a performance-based method. The component-based 
     method shall be based on applicable energy-efficiency 
     ratings, including current product labeling requirements. 
     Certification by the component method shall be provided by a 
     third party, such as a local building regulatory authority, a 
     utility, a manufactured home production inspection primary 
     inspection agency, or a home energy rating organization.
       The performance-based method shall be based on a comparison 
     of the projected energy consumption of the dwelling in its 
     original condition and after the completion of energy 
     efficiency measures. The performance-based method of 
     certification shall be conducted by an individual or 
     organization recognized by the Secretary of the Treasury for 
     such purposes.
       The certification process requires that energy savings to 
     the consumer be measured in terms of energy costs. To ensure 
     consistent and reasonable energy cost analyses, the 
     Department of Energy shall include in its rulemaking related 
     to this bill specific reference data to be used for 
     qualification for the credit.
       The taxpayer's basis in the property would be reduced by 
     the amount of the credit. Special rules would apply in the 
     case of condominiums and tenant-stockholders in cooperative 
     housing corporations.
       The credit is allowed against the regular and alternative 
     minimum tax.


                             Effective Date

       The credit is effective for qualified energy efficiency 
     improvements installed on or after the date of enactment and 
     before January 1, 2007.

                    TITLE IV--CLEAN COAL INCENTIVES

     A. Investment and Production Credits for Clean Coal Technology

     (Secs. 401, 411, and 412 of the bill and new secs. 451, 45J, 
         and 48A of the Code)


                              Present Law

       Present law does not provide an investment credit for 
     electricity generating units that use coal as a fuel. Nor 
     does present law provide a production credit for electricity 
     generated at units that use coal as a fuel. However, a 
     nonrefundable, 10-percent investment tax credit (``business 
     energy credit'') is allowed for the cost of new property that 
     is equipment (1) that uses solar energy to generate 
     electricity, to heat or cool a structure, or to provide solar 
     process heat, or (2) that is used to produce, distribute, or 
     use energy derived from a geothermal deposit, but only, in 
     the case of electricity generated by geothermal power, up to 
     the electric transmission stage (sec. 48). Also, an income 
     tax credit is allowed for the production of electricity from 
     either qualified wind energy, qualified ``closed-loop'' 
     biomass, or qualified poultry waste units placed in service 
     prior to January 1, 2004 (sec. 45). The credit allowed equals 
     1.5 cents per kilowatt-hour of electricity sold. The 1.5 cent 
     figure is indexed for inflation and equaled 1.8 cents for 
     2002. The credit is allowable for production during the 10-
     year period after a unit is originally placed in service. The 
     business energy tax credits and the production tax credit are 
     components of the general business credit (sec. 38(b)(1)).


                           Reasons for Change

       The Committee recognizes that coal is the nation's most 
     abundant fuel source. The Committee is also sensitive to the 
     environmental impact of burning coal for the production of 
     electricity. For coal to continue to be a viable fuel source, 
     the Committee seeks to encourage ways to burn coal in a more 
     efficient and environmentally friendly manner. Therefore, the 
     Committee supports the development and deployment of the most 
     advanced technologies for generating electricity from coal by 
     providing investment

[[Page S10548]]

     and production credits to a limited number of experimental 
     production-scale electricity generating units to reduce the 
     cost of building and operating units that represent the 
     frontier of thermal efficiency and pollution control.
       Tax-exempt organizations make up a significant percentage 
     of the electricity industry in the United States. The 
     Committee believes it is important to provide the incentives 
     for investment in, and production from, clean coal 
     technologies to all producers.


                        Explanation of Provision

     In general
       The bill creates three new credits: a production credit for 
     electricity produced from qualifying clean coal technology 
     units; a production credit for electricity produced from 
     qualifying advanced clean coal technology units; and a credit 
     for investments in qualifying advanced clean coal technology 
     units. Certain persons (public utilities, electric 
     cooperatives, Indian tribes, and the Tennessee Valley 
     Authority) will be eligible to obtain certifications from the 
     Secretary of the Treasury (as described below) for each of 
     these credits and sell, trade, or assign the credit to any 
     taxpayer. However, any credit sold, traded, or assigned may 
     only be sold, traded, or assigned once. Subsequent transfers 
     are not permitted.
     Credit for investments in qualifying advanced clean coal 
         technology units
       The bill provides a 10-percent investment tax credit for 
     qualified investments in advanced clean coal technology 
     units. A qualified investment is that amount that would 
     otherwise be a qualified investment multiplied by a fraction 
     equal to the amount of national megawatt capacity allocated 
     to the taxpayer (as described below) divided by the megawatt 
     capacity of the qualifying unit. Qualifying advanced clean 
     coal technology units must utilize advanced pulverized coal 
     or atmospheric fluidized bed combustion technology, 
     pressurized fluidized bed combustion technology, integrated 
     gasification combined cycle technology, or some other 
     technology certified by the Secretary of Energy. Any 
     qualifying advanced clean coal technology unit must meet 
     certain capacity standards, thermal efficiency standards, and 
     emissions standards for S02, nitrous oxides, 
     particulate emissions, and source emissions standards as 
     provided in the Clean Air Act. In addition, a qualifying 
     advanced clean coal technology unit must meet certain carbon 
     emissions requirements.
       The proposal defines four types of qualifying advanced 
     clean coal technology units: (1) advanced pulverized coal or 
     atmospheric fluidized bed combustion technology units (2) 
     qualifying pressurized fluidized bed combustion technology 
     units; (3) integrated gasification combined cycle technology 
     units; and (3) other technology units.
       (1) A qualifying advanced pulverized coal or atmospheric 
     fluidized bed combustion technology unit is a unit placed in 
     service after the date of enactment and before 2013 and 
     having a design net heat rate of not more than 8,500 Btu 
     (8,900 Btu if the unit is placed in service before 2009).
       (2) A qualifying pressurized fluidized bed combustion 
     technology unit is a unit placed in service after the date of 
     enactment and before 2017 and having a design net heat rate 
     of not more than 7,720 Btu (8,900 Btu if the unit is placed 
     in service before 2009 and 8,500 Btu if the unit is placed in 
     service after 2008 and before 2013).
       (3) A qualifying integrated gasification combined cycle 
     technology unit is a unit placed in service after the date of 
     enactment and before 2017 and having a design net heat rate 
     of not more than 7,720 Btu (8,900 Btu if the unit is placed 
     in service before 2009 and 8,500 Btu if the unit is placed in 
     service after 2008 and before 2013).
       (4) A qualifying other technology unit use any other 
     technology and is placed in service after the date of 
     enactment and before 2017.
       The provision provides that qualifying advanced clean coal 
     units must satisfy carbon emissions standards. For units 
     using design coal with a heat content of not more than 9,000 
     Btu per pound, the carbon emission rate must be less than 
     0.60 pound of carbon per kilowatt hour (0.51 if the unit 
     qualifies as an other technology unit). For units using 
     design coal with a heat content in excess of 9,000 Btu per 
     pound, the carbon emission rate must be less than 0.54 
     pound of carbon per kilowatt hour (0.459 if the unit 
     qualifies as an other technology unit).
       To be a qualified investment in advanced clean coal 
     technology, the taxpayer must receive a certificate from the 
     Secretary of the Treasury. The Secretary may grant 
     certificates to investments only to the point that 4,000 
     megawatts of electricity production capacity qualifies for 
     the credit. From the potential pool of 4,000 megawatts of 
     capacity, not more than 1,000 megawatts in total and not more 
     than 500 megawatts in years prior to 2009 shall be allocated 
     to units using advanced pulverized coal or atmospheric 
     fluidized bed combustion technology. From the potential pool 
     of 4,000 megawatts of capacity, not more than 500 megawatts 
     in total and not more than 250 megawatts in years prior to 
     2009 shall be allocated to units using pressurized fluidized 
     bed combustion technology. From the potential pool of 4,000 
     megawatts of capacity, not more than 2,000 megawatts in total 
     and not more than 750 megawatts in years prior to 2009 shall 
     be allocated to units using integrated gasification combined 
     cycle technology, with or without fuel or chemical co-
     production. From the potential pool of 4,000 megawatts of 
     capacity, not more than 500 in total and not more than 250 
     megawatts in years prior to 2009 shall be allocated to any 
     other technology certified by the Secretary of Energy.
     Production credit for electricity produced from qualifying 
         clean coal technology units
       The bill provides a production credit for electricity 
     produced from certain units that have been retrofitted, 
     repowered, or replaced with a clean coal technology within 
     ten years of the date of enactment. The value of the credit 
     is 0.34 cents per kilowatt-hour of electricity and the heat 
     value of other fuels or chemicals produced at the unit 
     multiplied by the fraction equal to the amount of national 
     megawatt capacity limitation (see below) allocated to the 
     qualifying unit divided by the total megawatt capacity of the 
     unit. The value of the credit is indexed for inflation 
     occurring after 2003 with the first potential adjustment in 
     2005. The taxpayer may claim the credit throughout the 10-
     year period commencing from the date on which the qualifying 
     unit is placed in service.
       A qualifying clean coal technology unit is a clean coal 
     technology unit that meets certain capacity standards, 
     thermal efficiency standards, and emissions standards for 
     SO2, nitrous oxides, particulate emissions, and 
     source emissions standards as provided in the Clean Air Act. 
     In addition, a qualifying clean coal technology unit cannot 
     be a unit that is receiving or is scheduled to receive 
     funding under the Clean Coal Technology Program, the Power 
     Plant Improvement Initiative, or the Clean Coal Power 
     Initiative administered by the Secretary of the Department of 
     Energy. Lastly, to be a qualified clean coal technology unit, 
     the taxpayer must receive a certificate from the Secretary of 
     the Treasury. The Secretary may grant certificates to units 
     only to the point that 4,000 megawatts of electricity 
     production capacity qualifies for the credit. However, no 
     qualifying unit would be eligible if the unit's capacity 
     exceeded 300 megawatts prior to having been retrofitted, 
     repowered, or replaced. The maximum eligible allocation to 
     any qualifying unit may not exceed 300 megawatts.
     Production credit for electricity produced from qualifying 
         advanced clean coal technology
       The bill also provides a production credit for electricity 
     produced from any qualified advanced clean coal technology 
     electricity generation unit that qualifies for the investment 
     credit for qualifying clean coal technology units, as 
     described above. The taxpayer may claim a production credit 
     on the sum of each kilowatt-hour of electricity produced and 
     the heat value of other fuels or chemicals produced by the 
     taxpayer at the unit. The taxpayer may claim the production 
     credit for the 10-year period commencing with the date the 
     qualifying unit is placed in service (or the date on which a 
     conventional unit was retrofitted or repowered). The value of 
     the credit varies depending upon the year the unit is placed 
     in service, whether the unit produces solely electricity or 
     electricity and fuels or chemicals, and the rated thermal 
     efficiency of the unit. In addition, the value of the credit 
     is reduced for the second five years of eligible production. 
     If a unit meets the more stringent qualification standards of 
     post-2008 in years before 2009, the taxpayer may claim the 
     higher post-2008 credit amounts. The value of the credit is 
     indexed for inflation occurring after 2003 with the first 
     potential adjustment in 2005. The tables below specify the 
     value of the credit (before indexing is applied).
       Advanced clean coal technology units producing solely 
           electricity

             TABLE 11.--UNITS PLACED IN SERVICE BEFORE 2009
------------------------------------------------------------------------
                                                      Credit amount per
                                                        kilowatt-hour
                                                   ---------------------
 The unit net heat rate, Btu/kWh adjusted for the    For the    For the
   heat content for the design coal is equal to:      first      second
                                                       five       five
                                                      years      years
------------------------------------------------------------------------
Not more than 8,500...............................     $.0060     $.0038
More than 8,500 but not more than 8,750...........     $.0025     $.0010
More than 8,750 but less than 8,900...............     $.0010     $.0010
------------------------------------------------------------------------


      TABLE 12.--UNITS PLACED IN SERVICE AFTER 2008 AND BEFORE 2013
------------------------------------------------------------------------
                                                      Credit amount per
                                                        kilowatt-hour
                                                   ---------------------
 The unit net heat rate, Btu/kWh adjusted for the    For the    For the
   heat content for the design coal is equal to:      first      second
                                                       five       five
                                                      years      years
------------------------------------------------------------------------
Not more than 7,770...............................     $.0105     $.0090
More than 7,770 but not more than 8,125...........     $.0085     $.0068
More than 8,125 but less than 8,500...............     $.0075     $.0055
------------------------------------------------------------------------


      TABLE 13.--UNITS PLACED IN SERVICE AFTER 2012 AND BEFORE 2017
------------------------------------------------------------------------
                                                      Credit amount per
                                                        kilowatt-hour
                                                   ---------------------
 The unit net heat rate, Btu/kWh adjusted for the    For the    For the
   heat content for the design coal is equal to:      first      second
                                                       five       five
                                                      years    years to:
------------------------------------------------------------------------
Not more than 7,380...............................     $.0140     $.0115
More than 7,380 but not more than 7,720...........     $.0120     $.0090
------------------------------------------------------------------------


[[Page S10549]]

       Advanced clean coal technology units producing electricity 
           and a fuel or chemical

             TABLE 14.--UNITS PLACED IN SERVICE BEFORE 2009
------------------------------------------------------------------------
                                                      Credit amount per
                                                        kilowatt-hour
                                                   ---------------------
  The unit design net thermal efficiency is equal    For the    For the
                        to:                           first      second
                                                       five       five
                                                      years      years
------------------------------------------------------------------------
Not less than 40.6%...............................     $.0060     $.0038
Less than 40.6% but not less than 40%.............     $.0025     $.0010
Less than 40% but not less than 38.4%.............     $.0010     $.0010
------------------------------------------------------------------------


      TABLE 15.--UNITS PLACED IN SERVICE AFTER 2008 AND BEFORE 2013
------------------------------------------------------------------------
                                                      Credit amount per
                                                        kilowatt-hour
                                                   ---------------------
  The unit design net thermal efficiency is equal    For the    For the
                        to:                           first      second
                                                       five       five
                                                      years      years
------------------------------------------------------------------------
Not less than 43.6%...............................     $.0105     $.0090
Less than 43.6% but not less than 42%.............     $.0085     $.0068
Less than 42% but not less than 40.2%.............     $.0075     $.0055
------------------------------------------------------------------------


      TABLE 16.--UNITS PLACED IN SERVICE AFTER 2012 AND BEFORE 2017
------------------------------------------------------------------------
                                                      Credit amount per
                                                        kilowatt-hour
                                                   ---------------------
  The unit design net thermal efficiency is equal    For the    For the
                        to:                           first      second
                                                       five       five
                                                      years      years
------------------------------------------------------------------------
Not less than 44.2%...............................     $.0140     $.0115
Less than 44.2% but not less than 43.9%...........     $.0120     $.0090
------------------------------------------------------------------------

       The credits are part of the general business credit. No 
     credit may be carried back to taxable years ending on or 
     before the date of enactment.


                             Effective Date

       The provision relating to investment credits for advanced 
     clean coal technology units is effective after the date of 
     enactment. The provisions relating to production credits are 
     effective after the date of enactment.

                    TITLE V--OIL AND GAS PROVISIONS

      A. Tax Credit for Oil and Gas Production from Marginal Wells

     (Sec. 501 of the bill and sec. 45K of the Code)


                              Present Law

       There is no credit for the production of oil and gas from 
     marginal wells. The costs of such production may be recovered 
     under the Code's depreciation and depletion rules and in 
     other cases as a deduction for ordinary and necessary 
     business expenses.


                           Reasons for Change

       The highly volatile price of oil and gas can result in lost 
     production during periods when prices are low. The Committee 
     has learned that once a marginally producing well is shut 
     down, that source of supply may be forever lost. To increase 
     domestic supply, the Committee determined that a tax credit 
     will help ensure that supply is not lost as a result of low 
     market prices.


                        Explanation of Provision

       The provision would create a new, $3 per barrel credit for 
     qualified crude oil production and a $0.50 credit per 1,000 
     cubic feet of qualified natural gas production. The maximum 
     amount of production on which credit could be claimed is 
     1,095 barrels or barrel equivalents. In both cases, the 
     credit is available only for qualified production from a 
     ``qualified marginal well.'' The credit is not available to 
     production occurring if the reference price of oil exceeded 
     $18 ($2.00 for natural gas). The credit is reduced 
     proportionately as for reference prices between $15 and $18 
     ($1.67 and $2.00 for natural gas). Reference prices are 
     determined on a one-year lookback basis.
       The terms ``qualified crude oil production'' and 
     ``qualified natural gas production'' mean domestic crude oil 
     or natural gas which is produced from a qualified marginal 
     well. Production from a marginal well that is not in 
     compliance with the applicable Federal pollution prevention, 
     control and permit requirements for any period of time is not 
     considered qualified crude oil production or qualified 
     natural gas production. A qualified marginal well is defined 
     as (1) a well production from which was marginal production 
     for purposes of the Code percentage depletion rules or (2) a 
     well that during the taxable year had (a) average daily 
     production of not more than 25 barrel equivalents and (b) 
     produced water at a rate of not less than 95 percent of total 
     well effluent.
       The credit is treated as part of the general business 
     credit. The credit cannot be carried back to a taxable year 
     ending on or before the date of enactment of the provision.


                             Effective Date

       The provision is effective for production in taxable years 
     beginning after the date of enactment.

     B. Natural Gas Gathering Lines Treated as Seven-Year Property

     (Sec. 502 of the bill and sec. 168 of the Code)


                              Present Law

       The applicable recovery period for assets placed in service 
     under the Modified Accelerated Cost Recovery System is based 
     on the ``class life of the property.'' The class lives of 
     assets placed in service after 1986 are generally set forth 
     in Revenue Procedure 87-56. Revenue Procedure 87-56 includes 
     two asset classes that could describe natural gas gathering 
     lines owned by nonproducers of natural gas. Asset class 46.0, 
     describing pipeline transportation, provides a class life of 
     22 years and a recovery period of 15 years. Asset class 13.2, 
     describing assets used in the exploration for and production 
     of petroleum and natural gas deposits, provides a class life 
     of 14 years and a depreciation recovery period of seven 
     years. The uncertainty regarding the appropriate recovery 
     period of natural gas gathering lines has resulted in 
     litigation between taxpayers and the IRS. The 10th Circuit 
     Court of Appeals held that natural gas gathering lines owned 
     by nonproducers falls within the scope of Asset class 13.2 
     (i.e., seven-year recovery period). More recently, the Tax 
     Court and the U.S. District Court for the Eastern District of 
     Michigan, Southern Division, held that natural gas gathering 
     lines owned by nonproducers falls within the scope of Asset 
     class 46.0 (i.e., 15-year recovery period).


                           Reasons For Change

       The Committee believes the appropriate recovery period for 
     natural gas gathering lines is seven years.


                        Explanation of Provision

       The provision establishes a statutory seven-year recovery 
     period and a class life of 10 years for natural gas gathering 
     lines. A natural gas gathering line is defined to include any 
     pipe, equipment, and appurtenance that is (1) determined to 
     be a gathering line by the Federal Energy Regulatory 
     Commission, or (2) used to deliver natural gas from the 
     wellhead or a common point to the point at which such gas 
     first reaches (a) a gas processing plant, (b) an 
     interconnection with an interstate transmission line, (c) an 
     interconnection with an intrastate transmission line, or (d) 
     a direct interconnection with a local distribution company, a 
     gas storage facility, or an industrial consumer.


                             Effective Date

       The provision is effective for property placed in service 
     after the date of enactment. No inference is intended as to 
     the proper treatment of natural gas gathering lines placed in 
     service before the date of enactment.

  C. Expensing of Capital Costs Incurred and Credit for Production in 
   Complying with Environmental Protection Agency Sulfur Regulations

     (Secs. 503 and 504 of the bill and new secs. 179C and 45L of 
         the Code)


                              Present Law

       Taxpayers generally may recover the costs of investments in 
     refinery property through annual depreciation deductions. 
     Present law does not provide a credit for the production of 
     lowsulfur diesel fuel.


                           Reasons for Change

       The Committee believes it is important for all refiners to 
     meet applicable pollution control standards. However, the 
     Committee is concerned that the cost of complying with the 
     Highway Diesel Fuel Sulfur Control Requirement of the 
     Environmental Protection Agency may force some small refiners 
     out of business. To maintain this refining capacity and to 
     foster compliance with pollution control standards the 
     Committee believes it is appropriate to modify cost recovery 
     provisions for small refiners to reduce their capital costs 
     of complying with the Highway Diesel Fuel Sulfur Control 
     Requirement of the Environmental Protection Agency.


                        Explanation of Provision

       The provision generally permits small business refiners to 
     claim an immediate deduction (i.e., expensing) for up to 75 
     percent of the qualified capital costs paid or incurred for 
     the purpose of complying with the Highway Diesel Fuel Sulfur 
     Control Requirements of the Environmental Protection Agency. 
     Qualified capital costs are those costs paid or incurred and 
     otherwise chargeable to the taxpayer's capital account that 
     are necessary for the refinery to come into compliance with 
     the EPA diesel fuel requirements.
       In addition, the provision provides that a small business 
     refiner may claim a credit equal to five cents per gallon for 
     each gallon of low sulfur diesel fuel produced at a facility 
     of a small business refiner. The total production credit 
     claimed by the taxpayer generally is limited to 25 percent of 
     the qualified capital costs incurred with respect to 
     expenditures at the refinery during the period beginning 
     after the date of enactment and ending with the date that is 
     one year after the date on which the taxpayer must comply 
     with applicable EPA regulations. No deduction is allowed to 
     the taxpayer for expenses otherwise allowable as a deduction 
     in an amount equal to the amount of production credit claimed 
     during the taxable year.
       For these purposes a small business refiner is a taxpayer 
     who within the business of refining petroleum products 
     employs not more than 1,500 employees directly in refining on 
     business days during a taxable year in which the deduction or 
     production credit is claimed and had an average daily 
     refinery run (or retained production) not exceeding 205,000 
     barrels per day for the year prior to enactment.
       For taxpayers with an average daily refinery run in the 
     year prior to enactment in excess of 155,000 and not greater 
     than 205,000 barrels per day, the provision limits otherwise 
     qualifying small business refiners to an immediate deduction 
     for a percentage of qualifying capital costs equal to 75 
     percent less the percentage points determined by the excess 
     of the average daily refinery runs over 155,000 barrels per 
     day divided by 50,000 barrels per day. In addition, for these 
     taxpayers, the limitation on the total production credit that 
     may be claimed also is reduced proportionately.
       In the case of a qualifying small business refiner that is 
     owned by a cooperative, the

[[Page S10550]]

     cooperative is allowed to elect to pass any production 
     credits to patrons of the organization.


                             Effective Date

       The provision is effective for expenses paid or incurred 
     after December 31, 2002.

 D. Determination of Small Refiner Exception to Oil Depletion Deduction

     (Sec. 505 of the bill and sec. 613A of the Code)


                              Present Law

       Present law classifies oil and gas producers as independent 
     producers or integrated companies. The Code provides numerous 
     special tax rules for operations by independent producers. 
     One such rule allows independent producers to claim 
     percentage depletion deductions rather than deducting the 
     costs of their asset, a producing well, based on actual 
     production from the well (i.e., cost depletion).
       A producer is an independent producer only if its refining 
     and retail operations are relatively small. For example, an 
     independent producer may not have refining operations the 
     runs from which exceed 50,000 barrels on any day in the 
     taxable year during which independent producer status is 
     claimed.


                           Reasons for Change

       The Committee believes that the goal of present law, to 
     identify producers without significant refining capacity, can 
     be achieved while permitting more flexibility to refinery 
     operations.


                        Explanation of Provision

       The provision increases the current 50,000-barrel-per-day 
     limitation to 60,000. In addition, the provision changes the 
     refinery limitation on claiming independent producer status 
     from a limit based on actual daily production to a limit 
     based on average daily production for the taxable year. 
     Accordingly, the average daily refinery run for the taxable 
     year cannot exceed 60,000 barrels. For this purpose, the 
     taxpayer calculates average daily refinery run by dividing 
     total production for the taxable year by the total number of 
     days in the taxable year.


                             Effective Date

       The provision is effective for taxable years ending after 
     the date of enactment.

  E. Extension of Suspension of Taxable Income Limit With Respect to 
                          Marginal Production

     (Sec. 506 of the bill and sec. 613A of the Code)


                              present law

     In General
       Depletion, like depreciation, is a form of capital cost 
     recovery. In both cases, the taxpayer is allowed a deduction 
     in recognition of the fact that an asset--in the case of 
     depletion for oil or gas interests, the mineral reserve 
     itself--is being expended in order to produce income. Certain 
     costs incurred prior to drilling an oil or gas property are 
     recovered through the depletion deduction. These include 
     costs of acquiring the lease or other interest in the 
     property and geological and geophysical costs (in advance of 
     actual drilling).
       Depletion is available to any person having an economic 
     interest in a producing property. An economic interest is 
     possessed in every case in which the taxpayer has acquired by 
     investment any interest in minerals in place, and secures, by 
     any form of legal relationship, income derived from the 
     extraction of the mineral, to which it must look for a return 
     of its capital. Thus, for example, both working interests and 
     royalty interests in an oil- or gasproducing property 
     constitute economic interests, thereby qualifying the 
     interest holders for depletion deductions with respect to the 
     property. A taxpayer who has no capital investment in the 
     mineral deposit does not possess an economic interest merely 
     because it possesses an economic or pecuniary advantage 
     derived from production through a contractual relation.
       Cost depletion
       Two methods of depletion are currently allowable under the 
     Internal Revenue Code (the ``Code''): (1) the cost depletion 
     method, and (2) the percentage depletion method (secs. 611-
     613). Under the cost depletion method, the taxpayer deducts 
     that portion of the adjusted basis of the depletable property 
     which is equal to the ratio of units sold from that property 
     during the taxable year to the number of units remaining as 
     of the end of taxable year plus the number of units sold 
     during the taxable year. Thus, the amount recovered under 
     cost depletion may never exceed the taxpayer's basis in the 
     property.
       Percentage depletion and related income limitations
       The Code generally limits the percentage depletion method 
     for oil and gas properties to independent producers and 
     royalty owners. Generally, under the percentage depletion 
     method 15 percent of the taxpayer's gross income from an oil- 
     or gas-producing property is allowed as a deduction in each 
     taxable year (sec. 613A(c)). The amount deducted generally 
     may not exceed 100 percent of the net income from that 
     property in any year (the ``net income limitation'') (sec. 
     613(a)). By contrast, for any other mineral qualifying for 
     the percentage depletion deduction, such deduction may not 
     exceed 50 percent of the taxpayer's taxable income from the 
     depletable property. A similar 50-percent net income 
     limitation applied to oil and gas properties for taxable 
     years beginning before 1991. Section 11522(a) of the Omnibus 
     Budget Reconciliation Act of 1990 prospectively changed the 
     net-income limitation threshold to 100 percent only for oil 
     and gas properties, effective for taxable years beginning 
     after 1990. The 100-percent net-income limitation for 
     marginal wells has been suspended for taxable years beginning 
     after December 31, 1997, and before January 1, 2004.
       Additionally, the percentage depletion deduction for all 
     oil and gas properties may not exceed 65 percent of the 
     taxpayer's overall taxable income (determined before such 
     deduction and adjusted for certain loss carrybacks and trust 
     distributions) (sec. 613A(d)(1)) Because percentage 
     depletion, unlike cost depletion, is computed without regard 
     to the taxpayer's basis in the depletable property, 
     cumulative depletion deductions may be greater than the 
     amount expended by the taxpayer to acquire or develop the 
     property.
       A taxpayer is required to determine the depletion deduction 
     for each oil or gas property under both the percentage 
     depletion method (if the taxpayer is entitled to use this 
     method) and the cost depletion method. If the cost depletion 
     deduction is larger, the taxpayer must utilize that method 
     for the taxable year in question (sec. 613(a)).
     Limitation of oil and gas percentage depletion to independent 
         producers and royalty owners
       Generally, only independent producers and royalty owners 
     (as contrasted to integrated oil companies) are allowed to 
     claim percentage depletion. Percentage depletion for eligible 
     taxpayers is allowed only with respect to up to 1,000 barrels 
     of average daily production of domestic crude oil or an 
     equivalent amount of domestic natural gas (sec. 613A(c)). For 
     producers of both oil and natural gas, this limitation 
     applies on a combined basis.
       In addition to the independent producer and royalty owner 
     exception, certain sales of natural gas under a fixed 
     contract in effect on February 1, 1975, and certain natural 
     gas from geopressured brine, are eligible for percentage 
     depletion, at rates of 22 percent and 10 percent, 
     respectively. These exceptions apply without regard to the 
     1,000-barrel-per-day limitation and regardless of whether the 
     producer is an independent producer or an integrated oil 
     company.


                           reasons for change

       The Committee is concerned that, while current oil and gas 
     operations may be profitable, the highly volatile nature of 
     oil and gas prices could quickly create economic hardships in 
     the industry. Thus, to help minimize the adverse effects of 
     future price fluctuations, the Committee believes it is 
     appropriate to extend the suspension of the 100-percent 
     net-income limitation for marginal wells.


                        explanation of provision

       The suspension of the 100-percent net income limitation for 
     marginal wells is extended through taxable years beginning 
     before January 1, 2007.


                             effective date

       The provision is effective on date of enactment.

                F. Amortization of Delay Rental Payments

     (Sec. 507 of the bill and new sec. 199A of the Code)


                              Present Law

       Present law generally requires costs associated with 
     inventory and property held for resale to be capitalized 
     rather than currently deducted as they are incurred. (sec. 
     263). Oil and gas producers typically contract for mineral 
     production in exchange for royalty payments. If mineral 
     production is delayed, these contracts provide for ``delay 
     rental payments'' as a condition of their extension. In 
     proposed regulations issued in 2000, the Treasury Department 
     took the position that the uniform capitalization rules of 
     section 263A require delay rental payments to be capitalized.


                           reasons for change

       The Committee believes that substantial simplification for 
     taxpayers and significant gains in taxpayer compliance and 
     reductions in administrative cost can be contained by 
     establishing the simple rule that all delay rental payments 
     may be amortized over two years, including the basis of 
     abandoned property.


                        explanation of provision

       The provision allows delay rental payments incurred in 
     connection with the development of oil or gas within the 
     United States to be amortized over two years. In the case of 
     abandoned property, remaining basis may no longer be 
     recovered in the year of abandonment of a property as all 
     basis is recovered over the two-year amortization period.


                             effective date

       The provision applies to delay rental payments paid or 
     incurred in taxable years beginning after the date of 
     enactment. No inference is intended from the prospective 
     effective date of this proposal as to the proper treatment of 
     pre-effective date delay rental payments.

       G. Amortization of Geological and Geophysical Expenditures

     (Sec. 508 of the bill and new sec. 199 of the Code)


                              present law

     In general
       Geological and geophysical expenditures are costs incurred 
     by a taxpayer for the purpose of obtaining and accumulating 
     data

[[Page S10551]]

     that will serve as the basis for the acquisition and 
     retention of mineral properties by taxpayers exploring for 
     minerals. A key issue with respect to the tax treatment of 
     such expenditures is whether or not they are capital in 
     nature. Capital expenditures are not currently deductible as 
     ordinary and necessary business expenses, but are allocated 
     to the cost of the property.
       Courts have held that geological and geophysical costs are 
     capital, and therefore are allocable to the cost of the 
     property acquired or retained. The costs attributable to such 
     exploration are allocable to the cost of the property 
     acquired or retained. As described further below, IRS 
     administrative rulings have provided further guidance 
     regarding the definition and proper tax treatment of 
     geological and geophysical costs.
     Revenue Ruling 77-188
       In Revenue Ruling 77-188 (hereinafter referred to as the 
     ``1977 ruling''), the IRS provided guidance regarding the 
     proper tax treatment of geological and geophysical costs. The 
     ruling describes a typical geological and geophysical 
     exploration program as containing the following elements:
       It is customary in the search for mineral producing 
     properties for a taxpayer to conduct an exploration program 
     in one or more identifiable project areas. Each project area 
     encompasses a territory that the taxpayer determines can 
     be explored advantageously in a single integrated 
     operation. This determination is made after analyzing 
     certain variables such as (1) the size and topography of 
     the project area to be explored, (2) the existing 
     information available with respect to the project area and 
     nearby areas, and (3) the quantity of equipment, the 
     number of personnel, and the amount of money available to 
     conduct a reasonable exploration program over the project 
     area.
       The taxpayer selects a specific project area from which 
     geological and geophysical data are desired and conducts a 
     reconnaissance-type survey utilizing various geological and 
     geophysical exploration techniques. These techniques are 
     designed to yield data that will afford a basis for 
     identifying specific geological features with sufficient 
     mineral potential to merit further exploration.
       Each separable, noncontiguous portion of the original 
     project area in which such a specific geological feature is 
     identified is a separate ``area of interest.'' The original 
     project area is subdivided into as many small projects as 
     there are areas of interest located and identified within the 
     original project area. If the circumstances permit a detailed 
     exploratory survey to be conducted without an initial 
     reconnaissance-type survey, the project area and the area of 
     interest will be coextensive.
       The taxpayer seeks to further define the geological 
     features identified by the prior reconnaissance-type surveys 
     by additional, more detailed, exploratory surveys conducted 
     with respect to each area of interest. For this purpose, the 
     taxpayer engages in more intensive geological and geophysical 
     exploration employing methods that are designed to yield 
     sufficiently accurate sub-surface data to afford a basis for 
     a decision to acquire or retain properties within or adjacent 
     to a particular area of interest or to abandon the entire 
     area of interest as unworthy of development by mine or well.
       The 1977 ruling provides that if, on the basis of data 
     obtained from the preliminary geological and geophysical 
     exploration operations, only one area of interest is located 
     and identified within the original project area, then the 
     entire expenditure for those exploratory operations is to be 
     allocated to that one area of interest and thus capitalized 
     into the depletable basis of that area of interest. On the 
     other hand, if two or more areas of interest are located and 
     identified within the original project area, the entire 
     expenditure for the exploratory operations is to be allocated 
     equally among the various areas of interest.
       If no areas of interest are located and identified by the 
     taxpayer within the original project area, then the 1977 
     ruling states that the entire amount of the geological and 
     geophysical costs related to the exploration is deductible as 
     a loss under section 165. The loss is claimed in the taxable 
     year in which that particular project area is abandoned as a 
     potential source of mineral production.
       A taxpayer may acquire or retain a property within or 
     adjacent to an area of interest, based on data obtained from 
     a detailed survey that does not relate exclusively to any 
     discrete property within a particular area of interest. 
     Generally, under the 1977 ruling, the taxpayer allocates the 
     entire amount of geological and geophysical costs to the 
     acquired or retained property as a capital cost under section 
     263(a). If more than one property is acquired, it is proper 
     to determine the amount of the geological and geophysical 
     costs allocable to each such property by allocating the 
     entire amount of the costs among the properties on the basis 
     of comparative acreage.
       If, however, no property is acquired or retained within or 
     adjacent to that area of interest, the entire amount of the 
     geological and geophysical costs allocable to the area of 
     interest is deductible as a loss under section 165 for the 
     taxable year in which such area of interest is abandoned as a 
     potential source of mineral production.
       In 1983, the IRS issued Revenue Ruling 83-105, which 
     elaborates on the positions set forth in the 1977 ruling by 
     setting forth seven factual situations and applying the 
     principles of the 1977 ruling to those situations. In 
     addition, Revenue Ruling 83-105 explains what constitutes 
     ``abandonment as a potential source of mineral production.''


                           Reasons for Change

       The Committee believes that substantial simplification for 
     taxpayers, significant gains in taxpayer compliance, and 
     reductions in administrative cost can be obtained by 
     establishing the simple rule that all geological and 
     geophysical costs may be amortized over two years, including 
     the basis of abandoned property.
       The Committee recognizes that, on average, a two-year 
     amortization period accelerates recovery of geological and 
     geophysical expenses. The Committee believes that more rapid 
     recovery of such expenses will foster increased exploration 
     for new sources of supply.


                        Explanation of Provision

       The provision allows geological and geophysical costs 
     incurred in connection with oil and gas exploration in the 
     United States to be amortized over two years. In the case of 
     abandoned property, remaining basis may no longer be 
     recovered in the year of abandonment of a property as all 
     basis is recovered over the two-year amortization period.


                             Effective Date

       The provision is effective for geological and geophysical 
     costs paid or incurred in taxable years beginning after the 
     date of enactment. No inference is intended from the 
     prospective effective date of this proposal as to the proper 
     treatment of pre-effective date geological and geophysical 
     costs.

 H. Extension and Modification of Credit for Producing Fuel From a Non-
                          Conventional Source

     (Sec. 509 of the bill and new sec. 45J of the Code)


                              Present Law

       Certain fuels produced from ``non-conventional sources'' 
     and sold to unrelated parties are eligible for an income tax 
     credit equal to $3 (generally adjusted for inflation) per 
     barrel or BTU oil barrel equivalent (sec. 29). Qualified 
     fuels must be produced within the United States.
       Qualified fuels include:
       (5) oil produced from shale and tar sands; as produced from 
     geopressured brine, Devonian shale, coal seams, tight 
     formations (``tight sands''), or biomass; and
       (6) liquid, gaseous, or solid synthetic fuels produced from 
     coal (including lignite).
       In general, the credit is available only with respect to 
     fuels produced from wells drilled or facilities placed in 
     service after December 31, 1979, and before January 1, 1993. 
     An exception extends the January 1, 1993 expiration date for 
     facilities producing gas from biomass and synthetic fuel from 
     coal if the facility producing the fuel is placed in service 
     before July 1, 1998, pursuant to a binding contract entered 
     into before January 1, 1997.
       The credit may be claimed for qualified fuels produced and 
     sold before January 1, 2003 (in the case of non-conventional 
     sources subject to the January 1, 1993 expiration date) or 
     January 1, 2008 (in the case of biomass gas and synthetic 
     fuel facilities eligible for the extension period).


                           Reasons for Change

       The Committee concludes that the section 29 credit, on the 
     margins, has increased production of oil and natural gas from 
     domestic sources and that in the absence of these non-
     conventional sources the demand for imported fuels may have 
     increased. To increase domestic sources of supply, the 
     Committee believes it is appropriate to extend the section 29 
     credit to help foster new domestic fuel sources. The 
     Committee is also concerned that, without the implicit 
     subsidy of the production credit due to the higher extraction 
     costs of certain ``viscous oil,'' entrepreneurs would not 
     otherwise exploit this domestic energy source. Therefore, the 
     Committee believes it is appropriate to extend the credit for 
     viscous oil produced from new wells or facilities.
       The Committee also recognizes that the credit for 
     production of synthetic fuels from coal has been interpreted 
     to include fuels that are merely chemical changes to coal 
     that do not necessarily enhance the value or environmental 
     performance of the feedstock coal. Therefore, the Committee 
     believes it is appropriate to extend the section 29 credit 
     only to fuels produced from coal that achieve significant 
     environmental and value-added improvements. Methane in coal 
     mines is a serious safety hazard. In many coal mining 
     operations, the cost of collection exceeds the value of the 
     recovered methane so the methane is vented directly into the 
     atmosphere. Methane is an extremely potent and long-lived 
     greenhouse gas. Therefore, the Committee seeks to encourage 
     capture of methane from coal mines in particular.
       The Committee recognizes that the world price of oil as the 
     nation enters the 21st century has not risen to levels 
     forecast in 1978. Therefore, the Committee believes it is 
     appropriate to restart the section 29 credit at a level lower 
     than that currently available to existing production.
       The Committee believes it is important to study the 
     efficacy of the section 29 credit in the case of methane 
     recovered from coal seams or so-called ``coal beds.''


                        Explanation of Provision

       The provision extends the placed in service date for 
     certain facilities that would otherwise qualify for the 
     section 29 credit under present law and modifies the amount 
     of the credit to equal $3.00 unindexed for inflation. The 
     provision also expands the class of facilities that are 
     eligible for the credit. In addition, under the provision, 
     the taxpayer

[[Page S10552]]

     would not be able to claim any credit for production in 
     excess of a daily average of 200,000 cubic feet of gas (or 
     barrel of oil equivalent) from a qualifying well or facility.
     Clarification of definition of when a facility is placed in 
         service
       The provision clarifies the definition of when a landfill 
     gas facility is placed in service, both for facilities 
     originally placed in service on or before the date of 
     enactment and for facilities placed in service after the date 
     of enactment. In general, a landfill gas facility includes 
     wells, pipes, and the related components to collect landfill 
     gas (i.e., the gas produced from biomass and derived from the 
     bio-degradation on municipal solid waste). The production of 
     landfill gas attributable to wells, pipes, and related 
     components placed in service after the date of enactment is 
     considered produced from a facility placed in service after 
     the date of enactment. Production of landfill gas 
     attributable to those wells, pipes, and related components 
     placed in service on or before the date of enactment is 
     considered produced from a facility placed in service on or 
     before the date of enactment. That is, all of the landfill 
     gas produced from a landfill is not considered to be from a 
     facility placed in service on the date on which the first set 
     of wells, pipes, and related components drew gas from the 
     landfill. Rather, as a landfill expands and additional 
     integrated sets of wells, pipes, and related components are 
     installed to draw off landfill gas, the landfill gas drawn 
     from each additional integrated set of wells, pipes, and 
     related components is to be considered to be produced from a 
     facility placed in service on the date each additional 
     integrated set of wells, pipes, and related components is 
     placed in service. Thus, a single landfill may have several 
     ``facilities'' eligible for the section 29 credit, each 
     placed in service on a different date.
     Extension for certain non-conventional fuels
       The provision permits taxpayers to claim the section 29 
     credit for production of certain non-conventional fuels 
     produced at wells placed in service after the date of 
     enactment and before January 1, 2007. Under the provision, 
     qualifying fuels are oil from shale or tar sands, and gas 
     from geopressured brine, Devonian shale, coal seams, a tight 
     formation, or biomass. The value of the credit is re-based to 
     $3.00 and the amount is not indexed for inflation. Taxpayers 
     may claim the credit for production from the well for each of 
     the first three years of production from the qualifying well.
     Expansion for fuels from agricultural and animal waste
       The provision adds facilities producing liquid, gaseous, or 
     solid fuels, from agricultural and animal waste placed in 
     service after the date of enactment and before January 1, 
     2007, to the list of qualified facilities for purposes of the 
     non-conventional fuel credit. The amount of the credit is 
     equal to $3.00 (unindexed) per barrel or Btu oil barrel 
     equivalent, for three years of production commencing on the 
     date the facility is placed in service. Agricultural and 
     animal waste includes by-products, packaging, and any 
     materials associated with processing, feeding, selling, 
     transporting, or disposal of agricultural or animal products 
     or wastes.
     Expansion for ``viscous oil''
       The provision expands section 29 to permit taxpayers to 
     claim the section 29 credit for production of certain viscous 
     oil produced at wells placed in service after the date of 
     enactment and before January 1, 2007. The provision defines 
     ``viscous oil'' as domestic crude oil produced from any 
     property if the crude oil has a weighted average gravity of 
     22 degrees API or less (corrected to 60 degrees Fahrenheit). 
     The value of the credit for viscous oil also is $3.00 per 
     barrel. Taxpayers may claim the credit for production from 
     the well for each of the first three years of production from 
     the time the well is placed in service. The provision 
     provides that qualifying sales to related parties for 
     consumption not in the immediate vicinity of the wellhead 
     qualify for the credit.
     Expansion for ``refined coal''
       The provision also expands section 29 to include certain 
     ``refined coal'' as a qualified non-conventional fuel. 
     ``Refined coal'' is a qualifying liquid, gaseous, or solid 
     synthetic fuel produced from coal (including lignite) from 
     facilities placed in service after date of enactment and 
     before January 1, 2007. Refined coal also would include a 
     qualifying fuel derived from high carbon fly ash produced 
     from facilities placed in service after the date of enactment 
     and before January 1, 2007. A qualifying fuel is a fuel that 
     when burned emits 20 percent less nitrogen oxide and either 
     sulfur dioxide or mercury than the burning of feedstock coal 
     or comparable coal predominantly available in the marketplace 
     as of January 1, 2003, and if the fuel sells at prices at 
     least 50 percent greater than the prices of the feedstock 
     coal or comparable coal. However, no fuel produced at a 
     qualifying advanced clean coal facility (as defined elsewhere 
     in the committee bill) would be a qualifying fuel. The amount 
     of credit for refined coal also is $3.00 per barrel 
     equivalent. Taxpayers may claim the credit for fuel produced 
     during the five-year period beginning on the date the 
     facility is placed in service.
     Expansion for coalmine gas
       In addition, the provision permits taxpayers to claim 
     credit for coalmine gas captured by the taxpayer and utilized 
     as a fuel source or sold by or on behalf of the taxpayer to 
     an unrelated person. The term ``coalmine gas'' means any 
     methane gas which is being liberated during qualified coal 
     mining operations or as a result of past qualified coal 
     mining operations, or which is captured 10 years in advance 
     of qualified coal mining operations as part of specific plan 
     to mine a coal deposit. In the case of coalmine gas that is 
     captured in advance of qualified coal mining operations, the 
     credit is allowed only after the date the coal extraction 
     occurs in the immediate area where the coalmine gas was 
     removed. The value of the credit for coalmine methane also is 
     $3.00 per Btu oil barrel equivalent (51.7 cents per million 
     Btu of heat value in the gas) for gas captured and utilized 
     or sold. Taxpayers may claim the credit for gas captured and 
     utilized or sold after the date of enactment and before 
     January 1, 2007.
     Extension of credit for certain existing facilities
       The provision extends the present-law credit through 
     December 31, 2005 for production from existing facilities 
     producing coke, coke gas, or natural gas and by-products 
     produced by coal gasification from lignite. The provision 
     provides that the credit amount will be $3.00 per Btu oil 
     barrel equivalent for production from such facilities after 
     December 31, 2002.
     Study of coal bed methane gas
       Lastly, the provision directs the Secretary of the Treasury 
     to undertake a study of the effect section 29 has had on the 
     production of coal bed methane. The study should estimate the 
     total amount of credit claimed annually and in aggregate 
     related to the production of coal bed methane since the 
     enactment of section 29. The study should report the annual 
     value of the credit allowable for coal bed methane compared 
     to the average annual wellhead price of natural gas (per 
     thousand cubic feet of natural gas). The study should 
     estimate the incremental increase in production of coal bed 
     methane that has resulted from the enactment of section 29. 
     The study should estimate the cost to the Federal government, 
     in terms of the net tax benefits claimed, per thousand cubic 
     feet of incremental coal bed methane produced annually and in 
     aggregate since the enactment of section 29.


                             Effective Date

       The provisions apply to fuels sold from qualifying wells 
     and facilities after the date of enactment.

     I. Natural Gas Distribution Lines Treated as 15-Year Property

     (Sec. 510 of the bill and sec. 168 of the Code)


                              Present Law

       The applicable recovery period for assets placed in service 
     under the Modified Accelerated Cost Recovery System is based 
     on the ``class life of the property.'' The class lives of 
     assets placed in service after 1986 are generally set forth 
     in Revenue Procedure 87-56. Natural gas distribution 
     pipelines are assigned a 20-year recovery period and a class 
     life of 35 years.


                           Reasons for Change

       The Committee recognizes the importance of modernizing our 
     aging energy infrastructure to meet the demands of the 
     twenty-first century, and the Committee also recognizes that 
     both short-term and long-term solutions are required to meet 
     this challenge. The Committee understands that investment in 
     our energy infrastructure has not kept pace with the nation's 
     needs. In light of this, the Committee believes it is 
     appropriate to reduce the recovery period for investment in 
     certain energy infrastructure property to encourage 
     investment in such property.


                        Explanation of Provision

       The provision establishes a statutory 15-year recovery 
     period and a class life of 20 years for natural gas 
     distribution lines.


                             Effective Date

       The provision is effective for property placed in service 
     after the date of enactment.

                    J. Credit for Alaska Natural Gas

     (Sec. 511 of the bill and new sec. 45M of the Code)


                              Present Law

       Present law does not provide a credit for conventional 
     production of natural gas or delivery of fuels to a pipeline. 
     However, certain fuels produced from ``non-conventional 
     sources'' and sold to unrelated parties are eligible for an 
     income tax credit equal to $3 (generally adjusted for 
     inflation) per barrel or BTU oil barrel equivalent (sec. 29). 
     Qualified fuels must be produced within the United States.
       Qualified fuels include:
       (1) gas produced from geopressured brine, Devonian shale, 
     coal seams, tight formations (``tight sands''), or biomass; 
     and
       (2) liquid, gaseous, or solid synthetic fuels produced from 
     coal (including lignite).
       In general, the credit is available only with respect to 
     fuels produced from wells drilled or facilities placed in 
     service after December 31, 1979, and before January 1, 1993. 
     An exception extends the January 1, 1993 expiration date for 
     facilities producing gas from biomass and synthetic fuel from 
     coal if the facility producing the fuel is placed in service 
     before July 1, 1998, pursuant to a binding contract entered 
     into before January 1, 1997.
       The credit may be claimed for qualified fuels produced and 
     sold before January 1, 2003 (in the case of non-conventional 
     sources subject to the January 1, 1993 expiration date) or 
     January 1, 2008 (in the case of biomass gas and synthetic 
     fuel facilities eligible for the extension period).

[[Page S10553]]

                           Reasons for Change

       The Committee recognizes the natural gas in Alaska is an 
     important natural resource that can expand domestic energy 
     supplies. However, due to the volatility of energy prices, 
     the private sector may be unwilling to make the substantial 
     investment in a pipeline to bring some of the natural gas to 
     the lower 48 States. The Committee believes it is important 
     to make this natural gas resource available to the lower 48 
     States and to provide an economic stimulus to the Alaskan 
     economy. The Committee believes that a credit against income 
     taxes for delivery of natural gas to a transmission pipeline 
     will provide a minimum return and the reduced volatility 
     necessary to induce the private sector to invest in the 
     pipeline to bring Alaska natural gas to the rest of the U.S. 
     market.

                        Explanation of Provision

       The provision provides a credit per million British thermal 
     units (Btu) of natural gas for Alaska natural gas entering a 
     pipelines during the 15-year period beginning the later of 
     January 1, 2010 or the initial date for the interstate 
     transportation of Alaska natural gas. Taxpayers may claim the 
     credit against both the regular and minimum tax.
       The credit amount for any month is a maximum of 52 cents 
     per million Btu of natural gas. The credit phases out as the 
     reference price of Alaska natural gas rises above 83 cents 
     per million Btu, at a rate of one cent of credit lost per 
     each cent by which the reference price of Alaska natural gas 
     exceeds 83 cents per million Btu. The credit is not available 
     if the reference price of Alaska natural gas rises above 
     $1.35 per million Btu. The 52-cent and 83-cent figures are 
     indexed for inflation after 2002, with the first adjustment 
     for calendar year 2004.
       The bill provides that the Secretary of Treasury calculate 
     the reference price of Alaska natural gas as the average 
     price of natural gas delivered in the lower 48 States less 
     certain transportation costs and gas processing costs. The 
     Committee intends that an appropriate measure of the price of 
     natural gas delivered to the lower 48 States be the monthly 
     Chicago city gate price for natural gas as reliably reported 
     in one or more trade publications or as reported by the 
     Secretary of Energy. Because qualifying natural gas is likely 
     to be transported across both the United States and Canada, 
     the Committee intends that transportation costs be measured 
     as such costs as determined (pursuant to approved tariffs) by 
     the appropriate national regulatory body. At the present 
     time, the appropriate national regulatory body for 
     transportation of natural gas in the United States is the 
     Federal Energy Regulatory Commission. At the present time, 
     the Committee understands the appropriate national regulatory 
     body for transportation of natural gas in Canada is the 
     Canadian National Energy Board. The Committee further intends 
     that gas processing costs include all rates and charges of 
     whatever kind for firm service assessed with respect to the 
     processing of Alaska natural gas as calculated pursuant to 
     approved tariffs under the Natural Gas Act (15 U.S.C. 717), 
     if such costs are regulated by the Federal government, or as 
     calculated under the principles of sec. 482 of the Code, if 
     such costs are not regulated by the Federal government.
       Alaska natural gas is any gas derived from an area of the 
     State of Alaska lying north of 64 degrees North latitude, but 
     not including the Alaska National Wildlife Refuge.
       The credit is part of the general business credit.


                             effective date

       The proposal is effective on the date of enactment.

   K. Certain Alaska Pipeline Systems Treated as Seven-Year Property

     (Sec. 512 of the bill and sec. 168 of the Code)


                              present law

       The applicable recovery period for assets placed in service 
     under the Modified Accelerated Cost Recovery System is based 
     on the ``class life of the property.'' The class lives of 
     assets placed in service after 1986 are generally set forth 
     in Revenue Procedure 87-56. Assets used in the private, 
     commercial, and contract carrying of petroleum, gas and other 
     products by means of pipes and conveyors are assigned a 15-
     year recovery period and a class life of 22 years.


                           reasons for chance

       The Committee recognizes that, on our present course, the 
     nation will be ever more reliant on foreign governments, that 
     do not always have America's interest at heart, for oil and 
     natural gas. The Committee recognizes that even with 
     conservation efforts and alternative sources of energy that 
     our nation's long-term security depends on reducing our 
     reliance on foreign energy sources. In light of this, the 
     Committee believes it is appropriate to reduce the recovery 
     period, and thus the cost of capital, for investment in 
     natural gas pipeline systems in Alaska that meet certain 
     requirements.


                        explanation of provision

       The provision establishes a statutory seven-year recovery 
     period and a class life of 10 years for any natural gas 
     pipeline system, located in Alaska, that has a capacity 
     greater than five hundred billion Btu of natural gas per day 
     and is placed in service after 2014. For purposes of the 
     proposal, a natural gas pipeline system is defined as any 
     system used in the carrying of natural gas by means of pipes, 
     including pipe, trunk lines, related equipment, and 
     appurtenances. It does not include any gas treatment plant 
     related to such pipeline.


                             effective date

       The proposal is effective on the date of enactment.

  L. Exempt Certain Prepayments for Natural Gas From Tax-Exempt Bond 
                            Arbitrage Rules

     (Sec. 513 of the bill and sec. 148 of the Code)


                              Present Law

       Interest on bonds issued by States or local governments to 
     finance activities carried out or paid for by those entities 
     generally is exempt from income tax (sec. 103). Restrictions 
     are imposed on the ability of States or local governments to 
     invest the proceeds of these bonds for profit (the 
     ``arbitrage restrictions''). One such restriction limits the 
     use of bond proceeds to acquire ``investment type property.'' 
     A prepayment for property or services may give rise to 
     investment-type property. A prepayment can produce prohibited 
     arbitrage profits when the discount received for prepaying 
     the costs exceeds the yield on the tax-exempt bonds. In 
     general, prohibited prepayments include all prepayments that 
     are not customary in an industry by both beneficiaries of 
     tax-exempt bonds and other persons using taxable financing 
     for the same transaction.
       On April 17, 2002, the Department of the Treasury issued 
     proposed regulations regarding arbitrage and private activity 
     restrictions applicable to tax-exempt bonds issued by State 
     and local governments. The proposed regulations add an 
     exception to the definition of investment type property for 
     certain natural gas prepayments that are made by or for one 
     or more utilities that are owned by a governmental person. 
     The exception applies if at least 95 percent of the natural 
     gas purchased with the prepayment is to be (1) consumed by 
     retail customers in the service area of a municipal gas 
     utility, or (2) used to produce electricity that will be 
     furnished to retail customers that a municipal electric 
     utility is obligated to serve under State or Federal law. An 
     obligation that arises solely because of a contract is not an 
     obligation to serve under State or Federal law. For this 
     purpose, the service area of a municipal gas utility is 
     defined as (1) any area throughout which the municipal 
     utility provided (at all times during the five-year period 
     ending on the issue date) gas transmission or distribution 
     service, and any area that is contiguous to such an area, or 
     (2) any area where the municipal utility is obligated under 
     State or Federal law to provide gas distribution services as 
     provided in such law. Issuers may apply principles similar to 
     the rules governing private use to cure a violation of the 95 
     percent requirement.
       A prepayment will not fail to meet the requirements for 
     prepaid gas contracts by reason of any commodity swap 
     contract that may be entered into between the issuer and an 
     unrelated party (other than the gas supplier), or between the 
     gas supplier and an unrelated party (other than the issuer), 
     so long as each swap contract is an independent contract. A 
     swap contract is an independent contract if the obligation of 
     each party to perform under the swap contract is not 
     dependent on performance by any person (other than the other 
     party to the swap contract) under another contract (for 
     example, a gas contract or another swap contract). A natural 
     gas commodity swap contract will not fail to be an 
     independent contract solely because the swap contract may 
     terminate in the event of a failure of a gas supplier to 
     deliver gas for which the swap contract is a hedge. The 
     Commissioner may, by published guidance, set forth additional 
     circumstances in which a prepayment does not give rise to 
     investment type property.


                           reasons for change

       The Committee determined that it was appropriate to 
     complement the proposed Treasury regulations with a safe 
     harbor that provides certainty on the date of issuance that 
     prepayments for natural gas within the safe harbor will not 
     violate the arbitrage rules. This provision will ensure 
     adequate supplies of natural gas at predictable prices for 
     natural gas utility customers without sacrificing to a great 
     degree the appropriate present-law limitations regarding tax-
     exempt bond issuance for the purchase of investment property. 
     The Committee believes that this proposal strikes an 
     appropriate balance between these two competing policies. The 
     creation of this safe harbor is not intended to limit the 
     Secretary's regulatory authority to identify other situations 
     in which prepayments do not give rise to investment type 
     property.


                        explanation of provision

     In general
       The provision creates a safe harbor exception to the 
     general rule that tax-exempt bondfinanced prepayments violate 
     the arbitrage restrictions. The term ``investment type 
     property'' does not include a prepayment under a qualified 
     natural gas supply contract. The provision also provides that 
     such prepayments are not treated as private loans for 
     purposes of the private business tests.
       Under the provision, a prepayment financed with tax-exempt 
     bond proceeds for the purpose of obtaining a supply of 
     natural gas for service area customers of a governmental 
     utility is not treated as the acquisition of investment-type 
     property. A contract is a qualified natural gas supply 
     contract if the volume of natural gas secured for any

[[Page S10554]]

     year covered by the prepayment does not exceed the sum of (1) 
     the average annual natural gas purchased (other than for 
     resale) by customers of the utility within the service area 
     of the utility (``retail natural gas consumption'') during 
     the testing period, and (2) the amount of natural gas that is 
     needed to fuel transportation of the natural gas to the 
     governmental utility. The testing period is the 5-calendar-
     year period immediately preceding the calendar year in which 
     the bonds are issued. A retail customer is one who does not 
     purchase natural gas for resale. Natural gas used to generate 
     electricity by a governmental utility is counted as retail 
     natural gas consumption if the electricity was sold to retail 
     customers within the service area of the governmental 
     electric utility.
       With respect to qualified natural gas supply contracts 
     entered into by joint action agencies acting for or on behalf 
     of one or more governmental utilities, the requirements of 
     the safe harbor are tested at the utility level. A joint 
     action agency shall be treated as the agent of the utility 
     when selling directly to a retail customer within that 
     utility's service area.
     Adiustments
       The volume of gas permitted by the general rule is reduced 
     by natural gas otherwise available on the date of issuance. 
     Specifically, the amount of natural gas permitted to be 
     acquired under a qualified natural gas supply contract for 
     any period is to be reduced by the applicable share of 
     natural gas held by the utility on the date of issuance of 
     the bonds and natural gas that the utility has a right to 
     acquire for the prepayment period (determined as of the date 
     of issuance). For purposes of the preceding sentence, 
     applicable share means, with respect to any period, the 
     natural gas allocable to such period if the gas were 
     allocated ratably over the period to which the prepayment 
     relates.
       For purposes of the safe harbor, if after the close of the 
     testing period and before the issue date of the bonds (1) the 
     governmental utility enters into a contract to supply natural 
     gas (other than for resale) for use by a business at a 
     property within the service area of such utility and (2) the 
     gas consumption for such property was not included in 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 the amount of gas permitted to be 
     purchased may be increased to accommodate the contract.
       The average annual retail natural gas consumption 
     calculation for purposes of the safe harbor, however, is not 
     to exceed the annual amount of natural gas reasonably 
     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.
     Intentional acts
       The safe harbor does not apply if the utility engages in 
     intentional acts to render the volume of natural gas covered 
     by the prepayment to be in excess of that needed for (1) 
     retail natural gas consumption, and (2) the amount of natural 
     gas that is needed to fuel transportation of the natural gas 
     to the governmental utility. Sales to dispose of excess gas 
     outside the service area that are necessitated by 
     circumstances beyond the control of the utility, such as 
     weather conditions, are not considered intentional acts to 
     render the prepaid gas supply in excess of the utility's 
     needs.
     Definition of service area
       Service area is defined as (1) any area throughout which 
     the governmental utility provided (at all times during the 
     testing period) in the case of a natural gas utility, natural 
     gas transmission or distribution service, or in the case of 
     an electric utility, electric distribution service; (2) 
     limited areas contiguous to such areas, and (3) any area 
     recognized as the service area of the governmental utility 
     under State or Federal law. Contiguous areas are limited to 
     any area within a county contiguous to the area described in 
     (1) in which retail customers of the utility are located if 
     such area is not also served by another utility providing the 
     same service.
     Ruling request for higher prepayment amounts
       Upon written request, the Secretary may allow an issuer to 
     prepay for an amount of gas greater than that allowed by the 
     safe harbor based on objective evidence of growth in gas 
     consumption or population that demonstrates that the amount 
     permitted by the exception is insufficient.


                             Effective Date

       The provision is effective for obligations issued after the 
     date of enactment.

          TITLE VI--ELECTRIC UTILITY RESTRUCTURING PROVISIONS

  A. Modifications to Special Rules for Nuclear Decommissioning Costs

     (Sec. 601 of the bill and sec. 468A of the Code)


                              Present Law

     Overview
       Special rules dealing with nuclear decommissioning reserve 
     funds were adopted by Congress in the Deficit Reduction Act 
     of 1984 (``1984 Act''), when tax issues regarding the time 
     value of money were addressed generally. Under general tax 
     accounting rules, a deduction for accrual basis taxpayers is 
     deferred until there is economic performance for the item for 
     which the deduction is claimed. However, the 1984 Act 
     contains an exception under which a taxpayer responsible for 
     nuclear powerplant decommissioning may elect to deduct 
     contributions made to a qualified nuclear decommissioning 
     fund for future decommissioning costs. Taxpayers who do not 
     elect this provision are subject to general tax accounting 
     rules.
     Qualified nuclear decommissioning fund
       A qualified nuclear decommissioning fund (a ``qualified 
     fund'') is a segregated fund established by a taxpayer that 
     is used exclusively for the payment of decommissioning costs, 
     taxes on fund income, management costs of the fund, and for 
     making investments. The income of the fund is taxed at a 
     reduced rate of 20 percent for taxable years beginning after 
     December 31, 1995.
       Contributions to a qualified fund are deductible in the 
     year made to the extent that these amounts were collected as 
     part of the cost of service to ratepayers (the ``cost of 
     service requirement''). Funds withdrawn by the taxpayer to 
     pay for decommissioning costs are included in the taxpayer's 
     income, but the taxpayer also is entitled to a deduction for 
     decommissioning costs as economic performance for such costs 
     occurs.
       Accumulations in a qualified fund are limited to the amount 
     required to fund decommissioning costs of a nuclear 
     powerplant for the period during which the qualified fund is 
     in existence (generally post-1984 decommissioning costs of a 
     nuclear powerplant). For this purpose, decommissioning costs 
     are considered to accrue ratably over a nuclear powerplant's 
     estimated useful life. In order to prevent accumulations of 
     funds over the remaining life of a nuclear powerplant in 
     excess of those required to pay future decommissioning costs 
     of such nuclear powerplant and to ensure that contributions 
     to a qualified fund are not deducted more rapidly than level 
     funding (taking into account an appropriate discount rate), 
     taxpayers must obtain a ruling from the IRS to establish the 
     maximum annual contribution that may be made to a qualified 
     fund (the ``ruling amount''). In certain instances (e.g., 
     change in estimates), a taxpayer is required to obtain a new 
     ruling amount to reflect updated information.
       A qualified fund may be transferred in connection with the 
     sale, exchange or other transfer of the nuclear powerplant to 
     which it relates. If the transferee is a regulated public 
     utility and meets certain other requirements, the transfer 
     will be treated as a nontaxable transaction. No gain or loss 
     will be recognized on the transfer of the qualified fund and 
     the transferee will take the transferor's basis in the fund. 
     The transferee is required to obtain a new ruling amount from 
     the IRS or accept a discretionary determination by the IRS.
     Nonqualified nuclear decommissioning funds
       Federal and State regulators may require utilities to set 
     aside funds for nuclear decommissioning costs in excess of 
     the amount allowed as a deductible contribution to a 
     qualified fund. In addition, taxpayers may have set aside 
     funds prior to the effective date of the qualified fund 
     rules. The treatment of amounts set aside for decommissioning 
     costs prior to 1984 varies. Some taxpayers may have received 
     no tax benefit while others may have deducted such amounts or 
     excluded such amounts from income. Since 1984, taxpayers have 
     been required to include in gross income customer charges for 
     decommissioning costs (sec. 88), and a deduction has not been 
     allowed for amounts set aside to pay for decommissioning 
     costs except through the use of a qualified fund. Income 
     earned in a nonqualified fund is taxable to the fund's owner 
     as it is earned.


                           Reasons for Change

       The Committee does not believe a utility should be denied 
     the opportunity to contribute to a qualified fund simply 
     because it operates in a deregulated environment. The 
     Committee also believes that it is appropriate to permit all 
     decommissioning costs associated with a nuclear powerplant to 
     be funded through a qualified fund. In addition, the 
     Committee recognizes the importance of providing clear and 
     concise rules to minimize disputes between taxpayers and the 
     IRS.


                        explanation of provision

     Repeal of cost of service requirement
       The provision repeals the cost of service requirement for 
     deductible contributions to a nuclear decommissioning fund. 
     Thus, all taxpayers, including unregulated taxpayers, would 
     be allowed a deduction for amounts contributed to a qualified 
     fund.
     Permit contributions to a qualified fund for pre-1984 
         decommissioning costs
       The proposal also repeals the limitation that a qualified 
     fund only accumulate an amount sufficient to pay for a 
     nuclear powerplant's decommissioning costs incurred during 
     the period that the qualified fund is in existence (generally 
     post-1984 decommissioning costs). Thus, any taxpayer is 
     permitted to accumulate an amount sufficient to cover the 
     present value of 100 percent of a nuclear powerplant's 
     estimated decommissioning costs in a qualified fund. The 
     proposal does not change the requirement that contributions 
     to a qualified fund not be deducted more rapidly than level 
     funding.
     Clarify treatment of transfers of qualified funds
       The provision clarifies the Federal income tax treatment of 
     the transfer of a qualified fund. No gain or loss would be 
     recognized to the transferor or the transferee (or the 
     qualified fund) as a result of the transfer of a qualified 
     fund in connection with the transfer of the powerplant with 
     respect to which such fund was established.

[[Page S10555]]

     Exception to ruling amount for certain decommissioning costs
       The provision permits a taxpayer to make contributions to a 
     qualified fund in excess of the ruling amount in one 
     circumstance. Specifically, a taxpayer is permitted to 
     contribute up to the present value of the amount required to 
     fund a nuclear powerplant's decommissioning costs which under 
     present law section 468A(d)(2)(A) is not permitted to be 
     accumulated in a qualified fund (generally pre-1984 
     decommissioning costs). It is anticipated that an amount that 
     is permitted to be contributed under this special rule shall 
     be determined using the estimate of total decommissioning 
     costs used for purposes of determining the taxpayer's most 
     recent ruling amount. Any amount transferred to the qualified 
     fund under this special rule that has not previously been 
     deducted, or excluded from gross income is allowed as a 
     deduction over the remaining useful life of the nuclear 
     powerplant. If a qualified fund that has received amounts 
     under this rule is transferred to another person, that person 
     will be entitled to the deduction at the same time and in the 
     same manner as the transferor. Thus, if the transferor was 
     not subject to tax at the time and thus would have been 
     unable to use the deduction, the transferee will similarly 
     not be able to utilize the deduction.


                             effective date

       The provision is effective for taxable years beginning 
     after date of enactment.

             B. Treatment of Certain Income of Cooperatives

     (Sec. 602 of the bill and sec. 501 of the Code)


                              Present Law

     In general
       Under present law, an entity must be operated on a 
     cooperative basis in order to be treated as a cooperative for 
     Federal income tax purposes. Although not defined by statute 
     or regulation, the two principal criteria for determining 
     whether an entity is operating on a cooperative basis are: 
     (1) ownership of the cooperative by persons who patronize the 
     cooperative; and (2) return of earnings to patrons in 
     proportion to their patronage. The IRS requires that 
     cooperatives must operate under the following principles: (1) 
     subordination of capital in control over the cooperative 
     undertaking and in ownership of the financial benefits from 
     the cooperative; (2) democratic control by the members of the 
     cooperative; (3) vesting in and allocation among the members 
     of all excess of operating revenues over the expenses 
     incurred to generate revenues in proportion to their 
     participation in the cooperative (patronage); and (4) 
     operation at cost (not operating for profit or below cost)
       In general, cooperative members are those who participate 
     in the management of the cooperative and who share in 
     patronage capital. As described below, income from the sale 
     of electric energy by an electric cooperative may be member 
     or non-member income to the cooperative, depending on the 
     membership status of the purchaser. A municipal corporation 
     may be a member of a cooperative.
       For Federal income tax purposes, a cooperative generally 
     computes its income as if it were a taxable corporation, with 
     one exception--the cooperative may exclude from its taxable 
     income distributions of patronage dividends. In general, 
     patronage dividends are the profits of the cooperative that 
     are rebated to its patrons pursuant to a pre-existing 
     obligation of the cooperative to do so. The rebate must be 
     made in some equitable fashion on the basis of the quantity 
     or value of business done with the cooperative.
       Except for tax-exempt farmers' cooperatives, cooperatives 
     that are subject to the cooperative tax rules of subchapter T 
     of the Code (sec. 1381, et seq.) are permitted a deduction 
     for patronage dividends from their taxable income only to the 
     extent of net income that is derived from transactions with 
     patrons who are members of the cooperative (sec. 1382). The 
     availability of such deductions from taxable income has the 
     effect of allowing the cooperative to be treated like a 
     conduit with respect to profits derived from transactions 
     with patrons who are members of the cooperative.
       Cooperatives that qualify as tax-exempt farmers' 
     cooperatives are permitted to exclude patronage dividends 
     from their taxable income to the extent of all net income, 
     including net income that is derived from transactions with 
     patrons who are not members of the cooperative, provided the 
     value of transactions with patrons who are not members of the 
     cooperative does not exceed the value of transactions with 
     patrons who are members of the cooperative (sec. 521).
     Taxation of electric cooperatives exempt from subchapter T
       In general, the cooperative tax rules of subchapter T apply 
     to any corporation operating on a cooperative basis (except 
     mutual savings banks, insurance companies, other tax-exempt 
     organizations, and certain utilities), including tax-exempt 
     farmers' cooperatives (described in sec. 521(b)). However, 
     subchapter T does not apply to an organization that is 
     ``engaged in furnishing electric energy, or providing 
     telephone service, to persons in rural areas'' (sec. 
     1381(a)(2)(C)). Instead, electric cooperatives are taxed 
     under rules that were generally applicable to cooperatives 
     prior to the enactment of subchapter T in 1962. Under these 
     rules, an electric cooperative can exclude patronage 
     dividends from taxable income to the extent of all net income 
     of the cooperative, including net income derived from 
     transactions with patrons who are not members of the 
     cooperative.
     Tax exemption of rural electric cooperatives
       Section 501(c)(12) provides an income tax exemption for 
     rural electric cooperatives if at least 85 percent of the 
     cooperative's income consists of amounts collected from 
     members for the sole purpose of meeting losses and expenses 
     of providing service to its members. The IRS takes the 
     position that rural electric cooperatives also must comply 
     with the fundamental cooperative principles described above 
     in order to qualify for tax exemption under section 
     501(c)(12). The 85-percent test is determined without taking 
     into account any income from qualified pole rentals and 
     cancellation of indebtedness income from the prepayment of a 
     loan under sections 306A, 306B, or 311 of the Rural 
     Electrification Act of 1936 (as in effect on January 1, 
     1987). The exclusion for cancellation of indebtedness income 
     applies to such income arising in 1987, 1988, or 1989 on debt 
     that either originated with, or is guaranteed by, the Federal 
     Government. Rural electric cooperatives generally are subject 
     to the tax on unrelated trade or business income under 
     section 511.


                           Reasons for Change

       The purpose of the 85-percent test under section 501(c)(12) 
     is to ensure that the primary activities of a tax-exempt 
     electric cooperative fulfill the statutory purpose of 
     providing electricity services to the members of the 
     cooperative. Similarly, the fundamental cooperative 
     principles described above are the defining characteristics 
     of a cooperative upon which the Federal tax rules condition 
     conduit treatment.
       The Committee believes that the nature of an electric 
     cooperative's activities does not change because it has 
     income from open access transactions with non-members or from 
     nuclear decommissioning transactions (as these terms are 
     defined in the bill). Accordingly, the Committee believes 
     that the 85-percent test for tax exemption under present law 
     should be applied without regard to such income. The 
     Committee intends that the term ``open access 
     transaction'' shall be applied in a manner that allows an 
     electric cooperative to carry out its statutory purpose in 
     a restructured electric energy market environment without 
     adversely impacting its tax-exempt status.
       For similar reasons, the Committee believes that the 85-
     percent test for tax exemption under present law should be 
     applied without regard to cancellation of indebtedness income 
     from the prepayment of certain loans that are provided, 
     insured, or guaranteed by the Federal government, as well as 
     income from certain transactions that would otherwise qualify 
     for deferred gain recognition under section 1031 or 1033.
       The Committee further believes that electric energy sales 
     to nonmembers should not result in a loss of tax-exempt 
     status or cooperative status to the extent that such sales 
     are necessary to replace lost sales of electric energy to 
     members as a result of restructuring of the electric energy 
     industry. Accordingly, the Committee believes that 
     replacement electric energy sales to nonmembers (defined as 
     ``load loss transactions'' in the bill) should be treated, 
     for a limited period of time, as member income in applying 
     the 85-percent test for tax exemption of rural electric 
     cooperatives. The Committee believes that such treatment also 
     should apply for purposes of determining whether tax-exempt 
     and taxable electric cooperatives comply with the fundamental 
     cooperative principles. Finally, the Committee believes that 
     income from replacement electric energy sales should not be 
     subject to the tax on unrelated trade or business income 
     under Code section 511.


                        Explanation of Provision

     Treatment of income from open access transactions
       The bill provides that income received or accrued by a 
     rural electric cooperative from any ``open access 
     transaction'' (other than income received or accrued directly 
     or indirectly from a member of the cooperative) is excluded 
     in determining whether a rural electric cooperative satisfies 
     the 85-percent test for tax exemption under section 
     501(c)(12). The term ``open access transaction'' is defined 
     as--
       (1) the provision or sale of electric energy transmission 
     services or ancillary services on a nondiscriminatory open 
     access basis: (i) pursuant to an open access transmission 
     tariff filed with and approved by the Federal Energy 
     Regulatory Commission (``FERC'') (including acceptable 
     reciprocity tariffs), but only if (in the case of a 
     voluntarily filed tariff) the cooperative files a report with 
     FERC within 90 days of enactment of this provision relating 
     to whether or not the cooperative will join a regional 
     transmission organization (``RTO''); or (ii) under an RTO 
     agreement approved by FERC (including an agreement providing 
     for the transfer of control--but not ownership--of 
     transmission facilities);
       (2) the provision or sale of electric energy distribution 
     services or ancillary services on a nondiscriminatory open 
     access basis to end-users served by distribution facilities 
     owned by the cooperative or its members; or
       (3) the delivery or sale of electric energy on a 
     nondiscriminatory open access basis, provided that such 
     electric energy is generated by a generation facility that is 
     directly connected to distribution facilities owned by the 
     cooperative (or its members) which owns the generation 
     facility.

[[Page S10556]]

       For purposes of the 85-percent test, the bill also provides 
     that income received or accrued by a rural electric 
     cooperative from any ``open access transaction'' is treated 
     as an amount collected from members for the sole purpose of 
     meeting losses and expenses if the income is received or 
     accrued indirectly from a member of the cooperative.
     Treatment of income from nuclear decommissioning transactions
       The bill provides that income received or accrued by a 
     rural electric cooperative from any ``nuclear decommissioning 
     transaction'' also is excluded in determining whether a rural 
     electric cooperative satisfies the 85-percent test for tax 
     exemption under section 501(c)(12). The term ``nuclear 
     decommissioning transaction'' is defined as--
       (1) 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 
     cooperative's interest in a nuclear powerplant or nuclear 
     powerplant unit;
       (2) any distribution from a trust, fund, or instrument 
     established to pay any nuclear decommissioning costs; or
       (3) any earnings from a trust, fund, or instrument 
     established to pay any nuclear decommissioning costs.
     Treatment of income from asset exchange or conversion 
         transactions
       The bill provides that gain realized by a tax-exempt rural 
     electric cooperative from a voluntary exchange or involuntary 
     conversion of certain property is excluded in determining 
     whether a rural electric cooperative satisfies the 85-percent 
     test for tax exemption under section 501(c)(12). This 
     provision only applies to the extent that: (1) the gain would 
     qualify for deferred recognition under section 1031 (relating 
     to exchanges of property held for productive use or 
     investment) or section 1033 (relating to involuntary 
     conversions); and (2) the replacement property that is 
     acquired by the cooperative pursuant to section 1031 or 
     section 1033 (as the case may be) constitutes property that 
     is used, or to be used, for the purpose of generating, 
     transmitting, distributing, or selling electricity or 
     methane-based natural gas.
     Treatment of cancellation of indebtedness income from 
         prepayment of certain loans
       The bill provides that income from the prepayment of any 
     loan, debt, or obligation of a tax-exempt rural electric 
     cooperative that is originated, insured, or guaranteed by the 
     Federal Government under the Rural Electrification Act of 
     1936 is excluded in determining whether the cooperative 
     satisfies the 85-percent test for tax exemption under 
     section 501(c)(12)
     Treatment of income from load loss transactions
       Tax-exempt rural electric cooperatives.--The bill provides 
     that income received or accrued by a tax-exempt rural 
     electric cooperative from a ``load loss transaction'' is 
     treated under 501(c)(12) as income collected from members for 
     the sole purpose of meeting losses and expenses of providing 
     service to its members. Therefore, income from load loss 
     transactions is treated as member income in determining 
     whether a rural electric cooperative satisfies the 85-percent 
     test for tax exemption under section 501(c)(12). The bill 
     also provides that income from load loss transactions does 
     not cause a tax-exempt electric cooperative to fail to be 
     treated for Federal income tax purposes as a mutual or 
     cooperative company under the fundamental cooperative 
     principles described above.
       The term ``load loss transaction'' is generally defined as 
     any wholesale or retail sale of electric energy (other than 
     to a member of the cooperative) to the extent that the 
     aggregate amount of such sales during a seven-year period 
     beginning with the ``start-up year'' does not exceed the 
     reduction in the amount of sales of electric energy during 
     such period by the cooperative to members. The ``start-up 
     year'' is defined as the calendar year which includes the 
     date of enactment of this provision or, if later, at the 
     election of the cooperative: (1) the first year that the 
     cooperative offers nondiscriminatory open access; or (2) the 
     first year in which at least 10 percent of the cooperative's 
     sales of electric energy are to patrons who are not members 
     of the cooperative.
       The bill also excludes income received or accrued by rural 
     electric cooperatives from load loss transactions from the 
     tax on unrelated trade or business income.
       Taxable electric cooperatives.--The bill provides that the 
     receipt or accrual of income from load loss transactions by 
     taxable electric cooperatives is treated as income from 
     patrons who are members of the cooperative. Thus, income from 
     a load loss transaction is excludible from the taxable income 
     of a taxable electric cooperative if the cooperative 
     distributes such income pursuant to a pre-existing contract 
     to distribute the income to a patron who is not a member of 
     the cooperative. The bill also provides that income from load 
     loss transactions does not cause a taxable electric 
     cooperative to fail to be treated for Federal income tax 
     purposes as a mutual or cooperative company under the 
     fundamental cooperative principles described above.


                             Effective Date

       This provision is effective for taxable years beginning 
     after the date of enactment.

    C. Sales or Dispositions to Implement Federal Energy Regulatory 
           Commission or State Electric Restructuring Policy

     (Sec. 603 of the bill and sec. 451 of the Code)


                              Present Law

       Generally, a taxpayer recognizes gain to the extent the 
     sales price (and any other consideration received) exceeds 
     the seller's basis in the property. The recognized gain is 
     subject to current income tax unless the gain is deferred or 
     not recognized under a special tax provision.


                           Reasons for Change

       The Committee recognizes that electric deregulation has 
     been occurring, and is continuing to occur, at both the 
     Federal and State level. Federal and state energy regulators 
     are calling for the ``unbundling'' of electric transmission 
     assets held by vertically integrated utilities, with the 
     transmission assets ultimately placed under the ownership or 
     control of independent transmission providers (or other 
     similarly-approved operators). This policy is intended to 
     improve transmission management and facilitate the formation 
     of competitive markets. To facilitate the implementation of 
     these policy objectives, the Committee believes it is 
     appropriate to assist taxpayers in moving forward with 
     industry restructuring by providing a tax deferral for gain 
     associated with certain dispositions of electric transmission 
     assets.


                        Explanation of Provision

       The provision permits a taxpayer to elect to recognize gain 
     from a qualifying electric transmission transaction ratably 
     over an eight-year period beginning in the year of sale. A 
     qualifying electric transmission transaction is the sale or 
     other disposition of property used by the taxpayer in the 
     trade or business of providing electric transmission 
     services, or an ownership interest in such an entity, to an 
     independent transmission company prior to January 1, 2008.
       A taxpayer electing the application of the provision is 
     required to attach a statement to that effect in the tax 
     return for the taxable year in which the transaction takes 
     place in the manner as the Secretary shall prescribe. The 
     election shall be binding for that taxable year and all 
     subsequent taxable years.


                             Effective Date

       The provision is effective for transactions occurring after 
     the date of enactment.

                    TITLE VII--ADDITIONAL PROVISIONS

 A. Extension of Accelerated Depreciation and Wage Credit Benefits on 
                          Indian Reservations

     (Sec. 701 of the bill and secs. 45A and 1680(j) of the Code)


                              Present Law

       Present law includes the following tax incentives for 
     businesses located within Indian reservations.
     Accelerated depreciation
       With respect to certain property used in connection with 
     the conduct of a trade or business within an Indian 
     reservation, depreciation deductions under section 1680(j) 
     will be determined using the following recovery periods:

3-year property.................................................2 years
5-year property.................................................3 years
7-year property.................................................4 years
10-year property................................................6 years
15-year property................................................9 years
20-year property...............................................12 years
Nonresidential real property...................................22 years

       ``Qualified Indian reservation property'' eligible for 
     accelerated depreciation includes property which is (1) used 
     by the taxpayer predominantly in the active conduct of a 
     trade or business within an Indian reservation, (2) not used 
     or located outside the reservation on a regular basis, (3) 
     not acquired (directly or indirectly) by the taxpayer from a 
     person who is related to the taxpayer (within the meaning of 
     section 465(b)(3)(C)), and (4) described in the recovery-
     period table above. In addition, property is not ``qualified 
     Indian reservation property'' if it is placed in service for 
     purposes of conducting gaming activities. Certain ``qualified 
     infrastructure property'' may be eligible for the accelerated 
     depreciation even if located outside an Indian reservation, 
     provided that the purpose of such property is to connect with 
     qualified infrastructure property located within the 
     reservation (e.g., roads, power lines, water systems, 
     railroad spurs, and communications facilities).
       The depreciation deduction allowed for regular tax purposes 
     is also allowed for purposes of the alternative minimum tax. 
     The accelerated depreciation for Indian reservations is 
     available with respect to property placed in service on or 
     after January 1, 1994, and before January 1, 2005.
     Indian employment credit
       In general, a credit against income tax liability is 
     allowed to employers for the first $20,000 of qualified wages 
     and qualified employee health insurance costs paid or 
     incurred by the employer with respect to certain employees 
     (sec. 45A). The credit is equal to 20 percent of the excess 
     of eligible employee qualified wages and health insurance 
     costs during the current year over the amount of such wages 
     and costs incurred by the employer during 1993. The credit is 
     an incremental credit, such that an employer's current-year 
     qualified wages and qualified employee health insurance costs 
     (up to $20,000 per employee) are eligible for the credit only 
     to the extent that the sum of such costs exceeds the sum of 
     comparable costs paid during 1993. No deduction is allowed 
     for the portion of the wages equal to the amount of the 
     credit.

[[Page S10557]]

       Qualified wages means wages paid or incurred by an employer 
     for services performed by a qualified employee. A qualified 
     employee means any employee who is an enrolled member of an 
     Indian tribe or the spouse of an enrolled member of an Indian 
     tribe, who performs substantially all of the services within 
     an Indian reservation, and whose principal place of abode 
     while performing such services is on or near the reservation 
     in which the services are performed. An employee will not be 
     treated as a qualified employee for any taxable year of the 
     employer if the total amount of wages paid or incurred by the 
     employer with respect to such employee during the taxable 
     year exceeds an amount determined at an annual rate of 
     $30,000 (adjusted for inflation after 1993).
       The wage credit is available for wages paid or incurred on 
     or after January 1, 1994, in taxable years that begin before 
     December 31, 2004.


                           Reasons for Change

       The Committee recognizes the significant potential on 
     Indian lands for development of energy resources and other 
     projects. The special nature of Native American tribes and 
     high poverty rates in certain areas in some circumstances 
     create unique barriers to development that these incentives 
     help overcome. The Committee understands that a significant 
     portion of these incentives are used in development of energy 
     projects.
       The Committee concluded that extending the accelerated 
     depreciation and wage credit tax incentives within Indian 
     reservations will both increase the supply of energy and 
     expand business and employment opportunities in these areas.


                        Explanation of Provision

     Accelerated depreciation
       The provision extends the accelerated depreciation 
     incentive for one year (to property placed in service before 
     January 1, 2006).
     Indian employment credit
       The provision extends the Indian employment credit 
     incentive for one year (to taxable years beginning before 
     January 1, 2006).


                             Effective Date

       The provision is effective on the date of enactment.

                              B. GAO Study

     (Sec. 702 of the bill)


                              Present Law

       Present law does not require study of the present law 
     provisions relating to clean fuel vehicles and electric 
     vehicles.


                           Reasons for Change

       The Committee believes it is important to gain information 
     on the value of benefits compared to costs in order to make 
     informed decisions regarding the propriety of special tax 
     treatment of various products or technologies designed to 
     reduce dependence on petroleum, reduce emissions of 
     pollutants, or to promote energy conservation. The Committee 
     believes it is important to have measures of the amount of 
     conservation or reduction in pollution that results from 
     provisions designed to achieve such results.


                        Explanation of Provision

       The bill directs the Comptroller General to undertake an 
     ongoing analysis of the effectiveness of the tax credits 
     allowed to alternative motor vehicles and the tax credits 
     allowed to various alternative fuels under Title II of the 
     bill and the tax credits and enhanced deductions allowed for 
     energy conservation and efficiency under Title III of the 
     bill. The studies should estimate the energy savings and 
     reductions in pollutants achieved from taxpayer utilization 
     of these provisions. The studies should estimate the dollar 
     value of the benefits of reduced energy consumption and 
     reduced air pollution in comparison to estimates of the 
     revenue cost of these provisions to the U.S. Treasury. The 
     studies should include an analysis of the distribution of the 
     taxpayers who utilize these provisions by income and other 
     relevant characteristics.
       The bill directs the Comptroller General to submit annual 
     reports to Congress beginning not later than December 31, 
     2004.


                             Effective Date

       The provision is effective on the date of enactment.

C. Repeal Certain Excise Taxes on Rail Diesel Fuel and Inland Waterway 
                              Barge Fuels

     (Sec. 703 of the bill and secs. 4041 and 4042 of the Code)


                              Present Law

       Under present law, diesel fuel used in trains is subject to 
     a 4.4-cents-per gallon excise tax. Revenues from 4.3 cents 
     per gallon of this excise tax are retained in the General 
     Fund of the Treasury. The remaining 0.1-cent per gallon is 
     deposited in the Leaking Underground Storage Tank (``LUST'') 
     Trust Fund.
       Similarly, fuel used in barges operating on the designated 
     inland waterways system is subject to a 4.3-cents-per-gallon 
     General Fund excise tax. This tax is in addition to the 20.1-
     cents-per-gallon tax rates that is imposed on fuels used in 
     these barges to fund the Inland Waterways Trust Fund and the 
     Leaking Underground Storage Tank Trust Fund.
       In both cases, the 4.3-cents-per-gallon excise tax rates 
     are permanent. The LUST Trust Fund tax is scheduled to expire 
     after March 31, 2005.


                           Reasons for Change

       The Committee notes that in 1993, the Congress enacted the 
     present-law 4.3-cents-per-gallon excise tax on motor fuels as 
     a deficit reduction measure, with the receipts payable to the 
     General Fund. Since that time, the Congress has diverted the 
     4.3-cents-per-gallon excise tax for most uses to specified 
     trust funds that provide benefits for those motor fuel users 
     who ultimately bear the burden of these taxes. As a result, 
     the Committee finds that generally only rail and barge 
     operators remain as motor fuel users subject to the 4.3-
     cents-per-gallon excise tax who receive no benefits from a 
     dedicated trust fund as a result of their tax burden. The 
     Committee observes that rail and barge operators compete with 
     other transportation service providers who benefit from 
     expenditures paid from dedicated trust funds. The Committee 
     concludes that it is inequitable and distortive of 
     transportation decisions to continue to impose the 4.3-cents-
     per-gallon excise tax on diesel fuel used in trains and 
     barges.


                        Explanation of Provision

       The 4.3-cents-per-gallon General Fund excise tax rate on 
     diesel fuel used in trains and fuels used in barges operating 
     on the designated inland waterways system is repealed. The 
     0.1 cent per gallon for the Leaking Underground Storage Tank 
     (``LUST'') Trust Fund is unchanged by the provision.


                             Effective Date

       The proposal is effective on January 1, 2004.

       D. Modify Research Credit for Research Relating to Energy

     (Sec. 704 of the bill and sec. 41 of the Code)


                              Present Law

     General rule
       Section 41 provides for a research tax credit equal to 20 
     percent of the amount by which a taxpayer's qualified 
     research expenses for a taxable year exceed its base amount 
     for that year. The research tax credit is scheduled to expire 
     and generally will not apply to amounts paid or incurred 
     after June 30, 2004.
       A 20-percent research tax credit also applied to the excess 
     of (1) 100 percent of corporate cash expenses (including 
     grants or contributions) paid for basic research conducted by 
     universities (and certain nonprofit scientific research 
     organizations) over (2) the sum of (a) the greater of two 
     minimum basic research floors plus (b) an amount reflecting 
     any decrease in nonresearch giving to universities by the 
     corporation as compared to such giving during a fixed-base 
     period, as adjusted for inflation. This separate credit 
     computation is commonly referred to as the university basic 
     research credit (see sec. 41(e)).
     Alternative incremental research credit regime
       Taxpayers are allowed to elect an alternative incremental 
     research credit regime. If a taxpayer elects to be subject to 
     this alternative regime, the taxpayer is assigned a three-
     tiered fixed-base percentage (that is lower than the fixed-
     base percentage otherwise applicable under present law) and 
     the credit rate likewise is reduced. Under the alternative 
     credit regime, a credit rate of 2.65 percent applies to the 
     extent that a taxpayer's current-year research expenses 
     exceed a base amount computed by using a fixed-base 
     percentage of one percent (i.e., the base amount equals one 
     percent of the taxpayer's average gross receipts for the four 
     preceding years) but do not exceed a base amount computed by 
     using a fixed-base percentage of 1.5 percent. A credit rate 
     of 3.2 percent applies to the extent that a taxpayer's 
     current-year research expenses exceed a base amount computed 
     by using a fixed-base percentage of 1.5 percent but do not 
     exceed a base amount computed by using a fixed-base 
     percentage of two percent. A credit rate of 3.75 percent 
     applies to the extent that a taxpayer's current-year research 
     expenses exceed a base amount computed by using a fixed-base 
     percentage of two percent. An election to be subject to this 
     alternative incremental credit regime may be made for any 
     taxable year beginning after June 30, 1996, and such an 
     election applies to that taxable year and all subsequent 
     years unless revoked with the consent of the Secretary of the 
     Treasury.
     Eligible expenses
       Qualified research expenses eligible for the research tax 
     credit consist of: (1) in-house expenses of the taxpayer for 
     wages and supplies attributable to qualified research; (2) 
     certain time-sharing costs for computer use in qualified 
     research; and (3) 65 percent of amounts paid or incurred by 
     the taxpayer to certain other persons for qualified research 
     conducted on the taxpayer's behalf (so-called contract 
     research expenses). In the case of amounts paid to a research 
     consortium, 75 percent of amounts paid for qualified research 
     is treated as qualified research expenses eligible for the 
     research credit (rather than 65 percent under the general 
     rule) if (1) such research consortium is a tax-exempt 
     organization that is described in section 501(c)(3) (other 
     than a private foundation) or section 501(c)(6) and is 
     organized and operated primarily to conduct scientific 
     research, and (2) such qualified research is conducted by the 
     consortium on behalf of the taxpayer and one or more persons 
     not related to the taxpayer.
       To be eligible for the credit, the research must not only 
     satisfy the requirements of present-law section 174 for the 
     deduction for research expenses, but must be undertaken for 
     the purpose of discovering information

[[Page S10558]]

     that is technological in nature, the application of which is 
     intended to be useful in the development of a new or improved 
     business component of the taxpayer, and substantially all of 
     the activities of which must constitute elements of a process 
     of experimentation for functional aspects, performance, 
     reliability, or quality of a business component.


                           Reasons for Change

       The Committee believes that research into energy production 
     and energy conservation will help reduce pollution and 
     enhance energy independence in the future.


                        Explanation of provision

       The bill modifies the present-law research credit as it 
     applies to qualified energy research. In particular, the 
     provision provides that the taxpayer may claim a credit equal 
     to 20 percent of the taxpayer's expenditures on qualified 
     energy research undertaken by an energy research consortium. 
     The amount of credit claimed is determined only by regard to 
     such expenditures by the taxpayer within the taxable year. 
     Unlike the general rule for the research credit, the 20-
     percent credit for research by an energy research consortium 
     applies to all such expenditures, not only those in excess of 
     a base amount however determined. An energy research 
     consortium is a qualified research consortium as under 
     present law that also is organized and operated primarily to 
     conduct energy research and development in the public 
     interest and to which at least five unrelated persons paid, 
     or incurred amounts, to such organization within the calendar 
     year. In addition, to be a qualified energy research 
     consortium no single person shall pay or incur more than 50 
     percent of the total amounts received by the research 
     consortium during the calendar year.
       The bill also provides that 100 percent of amounts paid or 
     incurred by the taxpayer to eligible small businesses, 
     universities, and Federal for qualified energy research would 
     constitute qualified research expenses as contract research 
     expenses, rather than 65 percent of qualified research 
     expenditures allowed under present law. An eligible small 
     business for this purpose is a business in which the taxpayer 
     does not own a 50 percent or greater interest and the 
     business has employed, on average, 500 or fewer employees 
     in the two preceding calendar years.
       Qualified energy research expenditures are expenditures 
     that would otherwise qualify for the research credit under 
     present law and relate to the production, supply, and 
     conservation of energy, including otherwise qualifying 
     research expenditures related to alternative energy sources 
     or the use of alternative energy sources. For example, 
     research relating to hydrogen fuel cell vehicles would 
     qualify under this provision, if the research expenditures 
     otherwise satisfy the criteria of present-law sec. 41. 
     Likewise, otherwise qualifying research undertaken to improve 
     the energy-efficiency of lighting would qualify under this 
     provision.


                             Effective Date

       The provision is effective for amounts paid or incurred 
     after the date of enactment in taxable years ending after 
     such date.

                     TITLE VIII--REVENUE PROVISIONS

             A. Provisions Designed To Curtail Tax Shelters

     1. Penalty for failure to disclose reportable transactions 
         (sec. 801 of the bill and new sec. 6707A of the Code)


                              Present Law

       Regulations under section 6011 require a taxpayer to 
     disclose with its tax return certain information with respect 
     to each ``reportable transaction'' in which the taxpayer 
     participates.
       There are six categories of reportable transactions. The 
     first category is any transaction that is the same as (or 
     substantially similar to) a transaction that is specified by 
     the Treasury Department as a tax avoidance transaction whose 
     tax benefits are subject to disallowance under present law 
     (referred to as a ``listed transaction'').
       The second category is any transaction that is offered 
     under conditions of confidentiality. In general, if a 
     taxpayer's disclosure of the structure or tax aspects of the 
     transaction is limited in any way by an express or implied 
     understanding or agreement with or for the benefit of any 
     person who makes or provides a statement, oral or written, as 
     to the potential tax consequences that may result from the 
     transaction, it is considered offered under conditions of 
     confidentiality (whether or not the understanding is legally 
     binding).
       The third category of reportable transactions is any 
     transaction for which (1) the taxpayer has the right to a 
     full or partial refund of fees if the intended tax 
     consequences from the transaction are not sustained or, (2) 
     the fees are contingent on the intended tax consequences from 
     the transaction being sustained.
       The fourth category of reportable transactions relates to 
     any transaction resulting in a taxpayer claiming a loss 
     (under section 165) of at least (1) $10 million in any single 
     year or $20 million in any combination of years by a 
     corporate taxpayer or a partnership with only corporate 
     partners; (2) $2 million in any single year or $4 million in 
     any combination of years by all other partnerships, S 
     corporations, trusts, and individuals; or (3) $50,000 in any 
     single year for individuals or trusts if the loss arises with 
     respect to foreign currency translation losses.
       The fifth category of reportable transactions refers to any 
     transaction done by certain taxpayers in which the tax 
     treatment of the transaction differs (or is expected to 
     differ) by more than $10 million from its treatment for book 
     purposes (using generally accepted accounting principles) in 
     any year.
       The final category of reportable transactions is any 
     transaction that results in a tax credit exceeding $250,000 
     (including a foreign tax credit) if the taxpayer holds the 
     underlying asset for less than 45 days.
       Under present law, there is no specific penalty for failing 
     to disclose a reportable transaction; however, such a failure 
     may jeopardize a taxpayer's ability to claim that any income 
     tax understatement attributable to such undisclosed 
     transaction is due to reasonable cause, and that the taxpayer 
     acted in good faith.


                           Reasons for Change

       The Committee is aware that individuals and corporations 
     are increasingly using sophisticated transactions to avoid or 
     evade Federal income tax. Such a phenomenon could pose a 
     serious threat to the efficacy of the tax system because of 
     both the potential loss of revenue and the potential threat 
     to the integrity and perceived fairness of the self-
     assessment system.
       The Committee over two years ago began working on 
     legislation to address this significant compliance problem. 
     In addition, the Treasury Department, using the tools 
     available, issued regulations requiring disclosure of certain 
     transactions and requiring organizers and promoters of tax-
     engineered transactions to maintain customer lists and make 
     these lists available to the IRS. Nevertheless, the Committee 
     believes that additional legislation is needed to provide the 
     Treasury Department with additional tools to assist its 
     efforts to curtail abusive transactions. Moreover, the 
     Committee believes that a penalty for failing to make the 
     required disclosures, when the imposition of such penalty is 
     not dependent on the tax treatment of the underlying 
     transaction ultimately being sustained, will provide an 
     additional incentive for taxpayers to satisfy their reporting 
     obligations under the new disclosure provisions.


                        Explanation of Provision

     In general
       The bill creates a new penalty for any person who fails to 
     include with any return or statement any required information 
     with respect to a reportable transaction. The new penalty 
     applies without regard to whether the transaction ultimately 
     results in an understatement of tax, and applies in addition 
     to any accuracy-related penalty that may be imposed.
     Transactions to be disclosed
       The bill does not define the terms ``listed transaction'' 
     or ``reportable transaction,'' nor does the bill explain the 
     type of information that must be disclosed in order to avoid 
     the imposition of a penalty. Rather, the bill authorizes the 
     Treasury Department to define a ``listed transaction'' and a 
     ``reportable transaction'' under section 6011.
     Penalty rate
       The penalty for failing to disclose a reportable 
     transaction is $50,000. The amount is increased to $100,000 
     if the failure is with respect to a listed transaction. For 
     large entities and high net worth individuals, the penalty 
     amount is doubled (i.e., $100,000 for a reportable 
     transaction and $200,000 for a listed transaction). The 
     penalty cannot be waived with respect to a listed 
     transaction. As to reportable transactions, the penalty can 
     be rescinded (or abated) only if: (1) the taxpayer on whom 
     the penalty is imposed has a history of complying with the 
     Federal tax laws, (2) it is shown that the violation is due 
     to an unintentional mistake of fact, (3) imposing the penalty 
     would be against equity and good conscience, and (4) 
     rescinding the penalty would promote compliance with the tax 
     laws and effective tax administration. The authority to 
     rescind the penalty can only be exercised by the IRS 
     Commissioner personally or the head of the Office of Tax 
     Shelter Analysis. Thus, the penalty cannot be rescinded by a 
     revenue agent, an Appeals officer, or any other IRS 
     personnel. The decision to rescind a penalty must be 
     accompanied by a record describing the facts and reasons for 
     the action and the amount rescinded. There will be no 
     taxpayer right to appeal a refusal to rescind a penalty. The 
     IRS also is required to submit an annual report to Congress 
     summarizing the application of the disclosure penalties and 
     providing a description of each penalty rescinded under this 
     provision and the reasons for the rescission.
       A ``large entity'' is defined as any entity with gross 
     receipts in excess of $10 million in the year of the 
     transaction or in the preceding year. A ``high net worth 
     individual'' is defined as any individual whose net worth 
     exceeds $2 million, based on the fair market value of the 
     individual's assets and liabilities immediately before 
     entering into the transaction.
       A public entity that is required to pay a penalty for 
     failing to disclose a listed transaction (or is subject to an 
     understatement penalty attributable to a non-disclosed listed 
     transaction or a non-disclosed reportable avoidance 
     transaction) must disclose the imposition of the penalty in 
     reports to the Securities and Exchange Commission for such 
     period as the Secretary shall specify. The bill applies 
     without regard to whether the taxpayer determines the amount 
     of the penalty to be material to the reports in which the 
     penalty must appear, and treats any failure to disclose a 
     transaction in such reports

[[Page S10559]]

     as a failure to disclose a listed transaction. A taxpayer 
     must disclose a penalty in reports to the Securities and 
     Exchange Commission once the taxpayer has exhausted its 
     administrative and judicial remedies with respect to the 
     penalty (or if earlier, when paid).


                             Effective Date

       The bill is effective for returns and statements the due 
     date for which is after the date of enactment.
       2. Modifications to the accuracy-related penalties for 
     listed transactions and reportable transactions having a 
     significant tax avoidance purpose
     (Sec. 802 of the bill and new Sec. 6662A of the Code)


                              Present Law

       The accuracy-related penalty applies to the portion of any 
     underpayment that is attributable to (1) negligence, (2) any 
     substantial understatement of income tax, (3) any substantial 
     valuation misstatement, (4) any substantial overstatement of 
     pension liabilities, or (5) any substantial estate or gift 
     tax valuation understatement. If the correct income tax 
     liability exceeds that reported by the taxpayer by the 
     greater of 10 percent of the correct tax or $5,000 ($10,000 
     in the case of corporations), then a substantial 
     understatement exists and a penalty may be imposed equal to 
     20 percent of the underpayment of tax attributable to the 
     understatement. The amount of any understatement generally is 
     reduced by any portion attributable to an item if (1) the 
     treatment of the item is supported by substantial authority, 
     or (2) facts relevant to the tax treatment of the item were 
     adequately disclosed and there was a reasonable basis for its 
     tax treatment.
       Special rules apply with respect to tax shelters. For 
     understatements by non-corporate taxpayers attributable to 
     tax shelters, the penalty may be avoided only if the taxpayer 
     establishes that, in addition to having substantial authority 
     for the position, the taxpayer reasonably believed that the 
     treatment claimed was more likely than not the proper 
     treatment of the item. This reduction in the penalty is 
     unavailable to corporate tax shelters.
       The understatement penalty generally is abated (even with 
     respect to tax shelters) in cases in which the taxpayer can 
     demonstrate that there was ``reasonable cause'' for the 
     underpayment and that the taxpayer acted in good faith. The 
     relevant regulations provide that reasonable cause exists 
     where the taxpayer ``reasonably relies in good faith on an 
     opinion based on a professional tax advisor's analysis of the 
     pertinent facts and authorities [that] . . . unambiguously 
     concludes that there is a greater than 50-percent likelihood 
     that the tax treatment of the item will be upheld if 
     challenged'' by the IRS.


                           Reasons for Change

       Because the Treasury shelter initiative emphasizes 
     combating abusive tax avoidance transactions by requiring 
     increased disclosure of such transactions by all parties 
     involved, the Committee believes that taxpayers should be 
     subject to a strict liability penalty on an understatement of 
     tax that is attributable to non-disclosed listed transactions 
     or non-disclosed reportable transactions that have a 
     significant purpose of tax avoidance. Furthermore, in order 
     to deter taxpayers from entering into tax avoidance 
     transactions, the Committee believes that a more meaningful 
     (but less stringent) accuracy-related penalty should apply to 
     such transactions even when disclosed.


                        Explanation of Provision

     In general
       The bill modifies the present-law accuracy related penalty 
     by replacing the rules applicable to tax shelters with a new 
     accuracy-related penalty that applies to listed transactions 
     and reportable transactions with a significant tax avoidance 
     purpose (hereinafter referred to as a ``reportable avoidance 
     transaction''). The penalty rate and defenses available to 
     avoid the penalty vary depending on whether the transaction 
     was adequately disclosed.
       Disclosed transactions
       In general, a 20-percent accuracy-related penalty is 
     imposed on any understatement attributable to an adequately 
     disclosed listed transaction or reportable avoidance 
     transaction. The only exception to the penalty is if the 
     taxpayer satisfies a more stringent reasonable cause and good 
     faith exception (hereinafter referred to as the 
     ``strengthened reasonable cause exception''), which is 
     described below. The strengthened reasonable cause exception 
     is available only if the relevant facts affecting the tax 
     treatment are adequately disclosed, there is or was 
     substantial authority for the claimed tax treatment, and the 
     taxpayer reasonably believed that the claimed tax treatment 
     was more likely than not the proper treatment.
       Undisclosed transactions
       If the taxpayer does not adequately disclose the 
     transaction, the strengthened reasonable cause exception is 
     not available (i.e., a strict-liability penalty applies), and 
     the taxpayer is subject to an increased penalty rate equal to 
     30 percent of the understatement.
       In addition, a public entity that is required to pay the 30 
     percent penalty must disclose the imposition of the penalty 
     in reports to the SEC for such periods as the Secretary shall 
     specify. The disclosure to the SEC applies without regard to 
     whether the taxpayer determines the amount of the penalty to 
     be material to the reports in which the penalty must appear, 
     and any failure to disclose such penalty in the reports is 
     treated as a failure to disclose a listed transaction. A 
     taxpayer must disclose a penalty in reports to the SEC once 
     the taxpayer has exhausted its administrative and judicial 
     remedies with respect to the penalty (or if earlier, when 
     paid).
       Once the 30 percent penalty has been included in the 
     Revenue Agent Report, the penalty cannot be compromised for 
     purposes of a settlement without approval of the Commissioner 
     personally or the head of the Office of Tax Shelter Analysis. 
     Furthermore, the IRS is required to submit an annual report 
     to Congress summarizing the application of this penalty 
     and providing a description of each penalty compromised 
     under this provision and the reasons for the compromise.


               Determination of the understatement amount

       The penalty is applied to the amount of any understatement 
     attributable to the listed or reportable avoidance 
     transaction without regard to other items on the tax return. 
     For purposes of this bill, the amount of the understatement 
     is determined as the sum of (1) the product of the highest 
     corporate or individual tax rate (as appropriate) and the 
     increase in taxable income resulting from the difference 
     between the taxpayer's treatment of the item and the proper 
     treatment of the item (without regard to other items on the 
     tax return), and (2) the amount of any decrease in the 
     aggregate amount of credits which results from a difference 
     between the taxpayer's treatment of an item and the proper 
     tax treatment of such item.
       Except as provided in regulations, a taxpayer's treatment 
     of an item shall not take into account any amendment or 
     supplement to a return if the amendment or supplement is 
     filed after the earlier of when the taxpayer is first 
     contacted regarding an examination of the return or such 
     other date as specified by the Secretary.


                Strengthened reasonable cause exception

       A penalty is not imposed under the bill with respect to any 
     portion of an understatement if it shown that there was 
     reasonable cause for such portion and the taxpayer acted in 
     good faith. Such a showing requires (1) adequate disclosure 
     of the facts affecting the transaction in accordance with the 
     regulations under section 6011, (2) that there is or was 
     substantial authority for such treatment, and (3) that the 
     taxpayer reasonably believed that such treatment was more 
     likely than not the proper treatment. For this purpose, a 
     taxpayer will be treated as having a reasonable belief with 
     respect to the tax treatment of an item only if such belief 
     (1) is based on the facts and law that exist at the time the 
     tax return (that includes the item) is filed, and (2) relates 
     solely to the taxpayer's chances of success on the merits and 
     does not take into account the possibility that (a) a return 
     will not be audited, (b) the treatment will not be raised on 
     audit, or (c) the treatment will be resolved through 
     settlement if raised.
       A taxpayer may (but is not required to) rely on an opinion 
     of a tax advisor in establishing its reasonable belief with 
     respect to the tax treatment of the item. However, a taxpayer 
     may not rely on an opinion of a tax advisor for this purpose 
     if the opinion (1) is provided by a ``disqualified tax 
     advisor,'' or (2) is a ``disqualified opinion.''
       Disqualified tax advisor
       A disqualified tax advisor is any advisor who (1) is a 
     material advisor and who participates in the organization, 
     management, promotion or sale of the transaction or is 
     related (within the meaning of section 267 or 707) to any 
     person who so participates, (2) is compensated directly or 
     indirectly by a material advisor with respect to the 
     transaction, (3) has a fee arrangement with respect to the 
     transaction that is contingent on all or part of the intended 
     tax benefits from the transaction being sustained, or (4) as 
     determined under regulations prescribed by the Secretary, has 
     a continuing financial interest with respect to the 
     transaction.
       Organization, management, promotion or sale of a 
     transaction.--A material advisor is considered as 
     participating in the ``organization'' of a transaction if the 
     advisor performs acts relating to the development of the 
     transaction. This may include, for example, preparing 
     documents (1) establishing a structure used in connection 
     with the transaction (such as a partnership agreement), (2) 
     describing the transaction (such as an offering memorandum or 
     other statement describing the transaction), or (3) relating 
     to the registration of the transaction with any federal, 
     state or local government body. Participation in the 
     ``management'' of a transaction means involvement in the 
     decision-making process regarding any business activity with 
     respect to the transaction. Participation in the ``promotion 
     or sale'' of a transaction means involvement in the marketing 
     or solicitation of the transaction to others. Thus, an 
     advisor who provides information about the transaction to a 
     potential participant is involved in the promotion or sale of 
     a transaction, as is any advisor who recommends the 
     transaction to a potential participant.
       Disqualified opinion
       An opinion may not be relied upon if the opinion (1) is 
     based on unreasonable factual or legal assumptions (including 
     assumptions as to future events), (2) unreasonably relies 
     upon representations, statements, finding or

[[Page S10560]]

     agreements of the taxpayer or any other person, (3) does not 
     identify and consider all relevant facts, or (4) fails to 
     meet any other requirement prescribed by the Secretary.
     Coordination with other penalties
       Any understatement upon which a penalty is imposed under 
     this bill is not subject to the accuracy-related penalty 
     under section 6662. However, such understatement is included 
     for purposes of determining whether any understatement (as 
     defined in sec. 6662(d)(2)) is a substantial understatement 
     as defined under section 6662(d)(1).
       The penalty imposed under this provision shall not apply to 
     any portion of an understatement to which a fraud penalty is 
     applied under section 6663.


                             Effective Date

       The bill is effective for taxable years ending after the 
     date of enactment.
     3. Tax shelter exception to confidentiality privileges 
         relating to taxpayer communications
     (Sec. 803 of the bill and sec. 7525 of the Code)


                              Present Law

       In general, a common law privilege of confidentiality 
     exists for communications between an attorney and client with 
     respect to the legal advice the attorney gives the client. 
     The Code provides that, with respect to tax advice, the same 
     common law protections of confidentiality that apply to a 
     communication between a taxpayer and an attorney also apply 
     to a communication between a taxpayer and a federally 
     authorized tax practitioner to the extent the communication 
     would be considered a privileged communication if it were 
     between a taxpayer and an attorney. This rule is inapplicable 
     to communications regarding corporate tax shelters.


                           Reasons for Change

       The Committee believes that the rule currently applicable 
     to corporate tax shelters should be applied to all tax 
     shelters, regardless of whether or not the participant is a 
     corporation.


                        Explanation of Provision

       The bill modifies the rule relating to corporate tax 
     shelters by making it applicable to all tax shelters, whether 
     entered into by corporations, individuals, partnerships, tax-
     exempt entities, or any other entity. Accordingly, 
     communications with respect to tax shelters are not subject 
     to the confidentiality provision of the Code that otherwise 
     applies to a communication between a taxpayer and a federally 
     authorized tax practitioner.


                             Effective Date

       The bill is effective with respect to communications made 
     on or after the date of enactment.
     4. Disclosure of reportable transactions by material advisors
     (Secs. 804 and 805 of the bill and secs. 6111 and 6707 of the 
         Code)


                              Present Law

     Registration of tax shelter arrangements
       An organizer of a tax shelter is required to register the 
     shelter with the Secretary not later than the day on which 
     the shelter is first offered for sale. A ``tax shelter'' 
     means any investment with respect to which the tax shelter 
     ratio for any investor as of the close of any of the first 
     five years ending after the investment is offered for sale 
     may be greater than two to one and which is: (1) required to 
     be registered under Federal or State securities laws, (2) 
     sold pursuant to an exemption from registration requiring the 
     filing of a notice with a Federal or State securities agency, 
     or (3) a substantial investment (greater than $250,000 and at 
     least five investors).
       Other promoted arrangements are treated as tax shelters for 
     purposes of the registration requirement if. (1) a 
     significant purpose of the arrangement is the avoidance or 
     evasion of Federal income tax by a corporate participant; (2) 
     the arrangement is offered under conditions of 
     confidentiality; and (3) the promoter may receive fees in 
     excess of $100,000 in the aggregate.
       In general, a transaction has a ``significant purpose of 
     avoiding or evading Federal income tax'' if the transaction: 
     (1) is the same as or substantially similar to a ``listed 
     transaction,'' 101 or (2) is structured to produce tax 
     benefits that constitute an important part of the intended 
     results of the arrangement and the promoter reasonably 
     expects to present the arrangement to more than one taxpayer. 
     Certain exceptions are provided with respect to the second 
     category of transactions.
       An arrangement is offered under conditions of 
     confidentiality if. (1) an offeree has an understanding or 
     agreement to limit the disclosure of the transaction or any 
     significant tax features of the transaction; or (2) the 
     promoter knows, or has reason to know that the offeree's use 
     or disclosure of information relating to the transaction is 
     limited in any other manner.
     Failure to register tax shelter
       The penalty for failing to timely register a tax shelter 
     (or for filing false or incomplete information with respect 
     to the tax shelter registration) generally is the greater of 
     one percent of the aggregate amount invested in the shelter 
     or $500. However, if the tax shelter involves an arrangement 
     offered to a corporation under conditions of confidentiality, 
     the penalty is the greater of $10,000 or 50 percent of the 
     fees payable to any promoter with respect to offerings prior 
     to the date of late registration. Intentional disregard of 
     the requirement to register increases the penalty to 75 
     percent of the applicable fees.
       Section 6707 also imposes (1) a $100 penalty on the 
     promoter for each failure to furnish the investor with the 
     required tax shelter identification number, and (2) a $250 
     penalty on the investor for each failure to include the tax 
     shelter identification number on a return.


                           Reasons for Change

       The Committee has been advised that the current promoter 
     registration rules have not proven particularly effective, in 
     part because the rules are not appropriate for the kinds of 
     abusive transactions now prevalent, and because the 
     limitations regarding confidential corporate arrangements 
     have proven easy to circumvent.
       The Committee believes that providing a single, clear 
     definition regarding the types of transactions that must be 
     disclosed by taxpayers and material advisors, coupled with 
     more meaningful penalties for failing to disclose such 
     transactions, are necessary tools if the effort to curb the 
     use of abusive tax avoidance transactions is to be effective.


                        Explanation of Provision

     Disclosure of reportable--transactions by material advisors
       The bill repeals the present law rules with respect to 
     registration of tax shelters. Instead, the bill requires each 
     material advisor with respect to any reportable transaction 
     (including any listed transaction) to timely file an 
     information return with the Secretary (in such form and 
     manner as the Secretary may prescribe). The return must be 
     filed on such date as specified by the Secretary.
       The information return will include (1) information 
     identifying and describing the transaction, (2) information 
     describing any potential tax benefits expected to result from 
     the transaction, and (3) such other information as the 
     Secretary may prescribe. It is expected that the Secretary 
     may seek from the material advisor the same type of 
     information that the Secretary may request from a taxpayer in 
     connection with a reportable transaction.
       A ``material advisor'' means any person (1) who provides 
     material aid, assistance, or advice with respect to 
     organizing, promoting, selling, implementing, or carrying out 
     any reportable transaction, and (2) who directly or 
     indirectly derives gross income in excess of $250,000 
     ($50,000 in the case of a reportable transaction 
     substantially all of the tax benefits from which are provided 
     to natural persons) for such advice or assistance.
       The Secretary may prescribe regulations which provide (1) 
     that only one material advisor has to file an information 
     return in cases in which two or more material advisors would 
     otherwise be required to file information returns with 
     respect to a particular reportable transaction, (2) 
     exemptions from the requirements of this section, and (3) 
     other rules as may be necessary or appropriate to carry out 
     the purposes of this section (including, for example, rules 
     regarding the aggregation of fees in appropriate 
     circumstances).
     Penalty for failing to furnish information regarding 
         reportable transactions
       The bill repeals the present law penalty for failure to 
     register tax shelters. Instead, the bill imposes a penalty on 
     any material advisor who fails to file an information return, 
     or who files a false or incomplete information return, with 
     respect to a reportable transaction (including a listed 
     transaction). The amount of the penalty is $50,000. If the 
     penalty is with respect to a listed transaction, the amount 
     of the penalty is increased to the greater of (1) $200,000, 
     or (2) 50 percent of the gross income of such person with 
     respect to aid, assistance, or advice which is provided with 
     respect to the transaction before the date the information 
     return that includes the transaction is filed. Intentional 
     disregard by a material advisor of the requirement to 
     disclose a listed transaction increases the penalty to 75 
     percent of the gross income.
       The penalty cannot be waived with respect to a listed 
     transaction. As to reportable transactions, the penalty can 
     be rescinded (or abated) only in exceptional circumstances. 
     All or part of the penalty may be rescinded only if: (1) the 
     material advisor on whom the penalty is imposed has a history 
     of complying with the Federal tax laws, (2) it is shown that 
     the violation is due to an unintentional mistake of fact, (3) 
     imposing the penalty would be against equity and good 
     conscience, and (4) rescinding the penalty would promote 
     compliance with the tax laws and effective tax 
     administration. The authority to rescind the penalty can only 
     be exercised by the Commissioner personally or the head of 
     the Office of Tax Shelter Analysis; this authority to rescind 
     cannot otherwise be delegated by the Commissioner. Thus, the 
     penalty cannot be rescinded by a revenue agent, an Appeals 
     officer, or other IRS personnel. The decision to rescind a 
     penalty must be accompanied by a record describing the facts 
     and reasons for the action and the amount rescinded. There 
     will be no right to appeal a refusal to rescind a penalty. 
     The IRS also is required to submit an annual report to 
     Congress summarizing the application of the disclosure 
     penalties and providing a description of each penalty 
     rescinded under this provision and the reasons for the 
     rescission.

[[Page S10561]]

                             Effective Date

       The provision requiring disclosure of reportable 
     transactions by material advisors applies to transactions 
     with respect to which material aid, assistance or advice is 
     provided after the date of enactment.
       The provision imposing a penalty for failing to disclose 
     reportable transactions applies to returns the due date for 
     which is after the date of enactment.
     5. Investor lists and modification of penalty for failure to 
         maintain investor lists
     (Secs. 804 and 806 of the bill and secs. 6112 and 6708 of the 
         Code)


                              Present Law

     Investor lists
       Any organizer or seller of a potentially abusive tax 
     shelter must maintain a list identifying each person who was 
     sold an interest in any such tax shelter with respect to 
     which registration was required under section 6111 (even 
     though the particular party may not have been subject to 
     confidentiality restrictions). Recently issued regulations 
     under section 6112 contain rules regarding the list 
     maintenance requirements. In general, the regulations apply 
     to transactions that are potentially abusive tax shelters 
     entered into, or acquired after, February 28, 2003.
       The regulations provide that a person is an organizer or 
     seller of a potentially abusive tax shelter if the person is 
     a material advisor with respect to that transaction. A 
     material advisor is defined any person who is required to 
     register the transaction under section 6111, or expects to 
     receive a minimum fee of (1) $250,000 for a transaction that 
     is a potentially abusive tax shelter if all participants are 
     corporations, or (2) $50,000 for any other transaction that 
     is a potentially abusive tax shelter. For listed transactions 
     (as defined in the regulations under section 6011), the 
     minimum fees are reduced to $25,000 and $10,000, 
     respectively.
       A potentially abusive tax shelter is any transaction that 
     (1) is required to be registered under section 6111, (2) is a 
     listed transaction (as defined under the regulations under 
     section 6011), or (3) any transaction that a potential 
     material advisor, at the time the transaction is entered 
     into, knows is or reasonably expects will become a reportable 
     transaction (as defined under the new regulations under 
     section 6011).
       The Secretary is required to prescribe regulations which 
     provide that, in cases in which two or more persons are 
     required to maintain the same list, only one person would be 
     required to maintain the list.
     Penalties for failing to maintain investor lists
       Under section 6708, the penalty for failing to maintain the 
     list required under section 6112 is $50 for each name omitted 
     from the list (with a maximum penalty of $100,000 per year).


                           Reasons for Change

       The Committee has been advised that the present-law 
     penalties for failure to maintain customer lists are not 
     meaningful and that promoters often have refused to provide 
     requested information to the IRS. The Committee believes that 
     requiring material advisors to maintain a list of advisees 
     with respect to each reportable transaction, coupled with 
     more meaningful penalties for failing to maintain an investor 
     list, are important tools in the ongoing efforts to curb 
     the use of abusive tax avoidance transactions.


                        Explanation of Provision

     Investor lists
       Each material advisor with respect to a reportable 
     transaction (including a listed transaction) is required to 
     maintain a list that (1) identifies each person with respect 
     to whom the advisor acted as a material advisor with respect 
     to the reportable transaction, and (2) contains other 
     information as may be required by the Secretary. In addition, 
     the bill authorizes (but does not require) the Secretary to 
     prescribe regulations which provide that, in cases in which 2 
     or more persons are required to maintain the same list, only 
     one person would be required to maintain the list.
     Penalty for failing to maintain investor lists
       The bill modifies the penalty for failing to maintain the 
     required list by making it a time-sensitive penalty. Thus, a 
     material advisor who is required to maintain an investor list 
     and who fails to make the list available upon written request 
     by the Secretary within 20 business days after the request 
     will be subject to a $10,000 per day penalty. The penalty 
     applies to a person who fails to maintain a list, maintains 
     an incomplete list, or has in fact maintained a list but does 
     not make the list available to the Secretary. The penalty can 
     be waived if the failure to make the list available is due to 
     reasonable cause.


                             Effective Date

       The provision requiring a material advisor to maintain an 
     investor list applies to transactions with respect to which 
     material aid, assistance or advice is provided after the date 
     of enactment.
       The provision imposing a penalty for failing to maintain 
     investor lists applies to requests made after the date of 
     enactment.
     6. Penalties on promoters of tax shelters
     (Sec. 807 of the bill and sec. 6700 of the Code)


                              Present Law

       A penalty is imposed on any person who organizes, assists 
     in the organization of, or participates in the sale of any 
     interest in, a partnership or other entity, any investment 
     plan or arrangement, or any other plan or arrangement, if in 
     connection with such activity the person makes or furnishes a 
     qualifying false or fraudulent statement or a gross valuation 
     overstatement. A qualified false or fraudulent statement is 
     any statement with respect to the allowability of any 
     deduction or credit, the excludability of any income, or the 
     securing of any other tax benefit by reason of holding an 
     interest in the entity or participating in the plan or 
     arrangement which the person knows or has reason to know is 
     false or fraudulent as to any material matter. A ``gross 
     valuation overstatement'' means any statement as to the value 
     of any property or services if the stated value exceeds 200 
     percent of the correct valuation, and the value is directly 
     related to the amount of any allowable income tax deduction 
     or credit.
       The amount of the penalty is $1,000 (or, if the person 
     establishes that it is less, 100 percent of the gross income 
     derived or to be derived by the person from such activity). A 
     penalty attributable to a gross valuation misstatement can be 
     waived on a showing that there was a reasonable basis for the 
     valuation and it was made in good faith.


                           Reasons for Change

       The Committee believes that the present-law penalty rate is 
     insufficient to deter the type of conduct that gives rise to 
     the penalty.


                        Explanation of Provision

       The bill modifies the penalty amount to equal 50 percent of 
     the gross income derived by the person from the activity for 
     which the penalty is imposed. The new penalty rate applies to 
     any activity that involves a statement regarding the tax 
     benefits of participating in a plan or arrangement if the 
     person knows or has reason to know that such statement is 
     false or fraudulent as to any material matter. The enhanced 
     penalty does not apply to a gross valuation overstatement.


                             Effective Date

       The bill is effective for activities after the date of 
     enactment.

           B. Provisions to Discourage Corporate Expatriation

     1. Tax treatment of inversion transactions
     (Sec. 821 of the bill and new Sec. 7874 of the Code)


                              Present Law

     Determination of corporate residence
       The U.S. tax treatment of a multinational corporate group 
     depends significantly on whether the top-tier ``parent'' 
     corporation of the group is domestic or foreign. For purposes 
     of U.S. tax law, a corporation is treated as domestic if it 
     is incorporated under the law of the United States or of any 
     State. All other corporations (i.e., those incorporated under 
     the laws of foreign countries) are treated as foreign. Thus, 
     place of incorporation determines whether a corporation is 
     treated as domestic or foreign for purposes of U.S. tax law, 
     irrespective of other factors that might be thought to bear 
     on a corporation's ``nationality,'' such as the location of 
     the corporation's management activities, employees, business 
     assets, operations, or revenue sources, the exchanges on 
     which the corporation's stock is traded, or the residence of 
     the corporation's managers and shareholders.
     U.S. taxation of domestic corporations
       The United States employs a ``worldwide'' tax system, under 
     which domestic corporations generally are taxed on all 
     income, whether derived in the United States or abroad. In 
     order to mitigate the double taxation that may arise from 
     taxing the foreign-source income of a domestic corporation, a 
     foreign tax credit for income taxes paid to foreign countries 
     is provided to reduce or eliminate the U.S. tax owed on such 
     income, subject to certain limitations.
       Income earned by a domestic parent corporation from foreign 
     operations conducted by foreign corporate subsidiaries 
     generally is subject to U.S. tax when the income is 
     distributed as a dividend to the domestic corporation. Until 
     such repatriation, the U.S. tax on such income is generally 
     deferred. However, certain anti-deferral regimes may cause 
     the domestic parent corporation to be taxed on a current 
     basis in the United States with respect to certain categories 
     of passive or highly mobile income earned by its foreign 
     subsidiaries, regardless of whether the income has been 
     distributed as a dividend to the domestic parent corporation. 
     The main antideferral regimes in this context are the 
     controlled foreign corporation rules of subpart F and the 
     passive foreign investment company rules. A foreign tax 
     credit is generally available to offset, in whole or in part, 
     the U.S. tax owed on this foreign-source income, whether 
     repatriated as an actual dividend or included under one of 
     the anti-deferral regimes.
     U.S. taxation of foreign corporations
       The United States taxes foreign corporations only on income 
     that has a sufficient nexus to the United States. Thus, a 
     foreign corporation is generally subject to U.S. tax only on 
     income that is ``effectively connected'' with the conduct of 
     a trade or business in the United States. Such ``effectively 
     connected income'' generally is taxed in the same manner and 
     at the same rates as the income of a U.S. corporation. An 
     applicable tax treaty may limit the imposition of U.S. tax on 
     business operations of a foreign corporation to cases in 
     which the business is conducted through a ``permanent 
     establishment'' in the United States.

[[Page S10562]]

       In addition, foreign corporations generally are subject to 
     a gross-basis U.S. tax at a flat 30-percent rate on the 
     receipt of interest, dividends, rents, royalties, and certain 
     similar types of income derived from U.S. sources, subject to 
     certain exceptions. The tax generally is collected by means 
     of withholding by the person making the payment. This tax may 
     be reduced or eliminated under an applicable tax treaty.
     U.S. tax treatment of inversion transactions
       Under present law, U.S. corporations may reincorporate in 
     foreign jurisdictions and thereby replace the U.S. parent 
     corporation of a multinational corporate group with a foreign 
     parent corporation. These transactions are commonly referred 
     to as ``inversion'' transactions. Inversion transactions may 
     take many different forms, including stock inversions, asset 
     inversions, and various combinations of and variations on the 
     two. Most of the known transactions to date have been stock 
     inversions. In one example of a stock inversion, a U.S. 
     corporation forms a foreign corporation, which in turn forms 
     a domestic merger subsidiary. The domestic merger subsidiary 
     then merges into the U.S. corporation, with the U.S. 
     corporation surviving, now as a subsidiary of the new foreign 
     corporation. The U.S. corporation's shareholders receive 
     shares of the foreign corporation and are treated as having 
     exchanged their U.S. corporation shares for the foreign 
     corporation shares. An asset inversion reaches a similar 
     result, but through a direct merger of the top-tier U.S. 
     corporation into a new foreign corporation, among other 
     possible forms. An inversion transaction may be accompanied 
     or followed by further restructuring of the corporate group. 
     For example, in the case of a stock inversion, in order to 
     remove income from foreign operations from the U.S. taxing 
     jurisdiction, the U.S. corporation may transfer some or all 
     of its foreign subsidiaries directly to the new foreign 
     parent corporation or other related foreign corporations.
       In addition to removing foreign operations from the U.S. 
     taxing jurisdiction, the corporate group may derive further 
     advantage from the inverted structure by reducing U.S. tax on 
     U.S.-source income through various ``earnings stripping'' or 
     other transactions. This may include earnings stripping 
     through payment by a U.S. corporation of deductible amounts 
     such as interest, royalties, rents, or management service 
     fees to the new foreign parent or other foreign affiliates. 
     In this respect, the post-inversion structure enables the 
     group to employ the same tax reduction strategies that are 
     available to other multinational corporate groups with 
     foreign parents and U.S. subsidiaries, subject to the same 
     limitations. These limitations under present law include 
     section 163(j), which limits the deductibility of certain 
     interest paid to related parties, if the payor's debt-equity 
     ratio exceeds 1.5 to 1 and the payor's net interest expense 
     exceeds 50 percent of its ``adjusted taxable income.'' More 
     generally, section 482 and the regulations thereunder require 
     that all transactions between related parties be conducted on 
     terms consistent with an ``arm's length'' standard, and 
     permit the Secretary of the Treasury to reallocate income and 
     deductions among such parties if that standard is not met.
       Inversion transactions may give rise to immediate U.S. tax 
     consequences at the shareholder and/or the corporate level, 
     depending on the type of inversion. In stock inversions, the 
     U.S. shareholders generally recognize gain (but not loss) 
     under section 367(a), based on the difference between the 
     fair market value of the foreign corporation shares received 
     and the adjusted basis of the domestic corporation stock 
     exchanged. To the extent that a corporation's share value has 
     declined, and/or it has many foreign or tax-exempt 
     shareholders, the impact of this section 367(a) ``toll 
     charge'' is reduced. The transfer of foreign subsidiaries or 
     other assets to the foreign parent corporation also may give 
     rise to U.S. tax consequences at the corporate level (e.g., 
     gain recognition and earnings and profits inclusions under 
     sections 1001, 311(b), 304, 367, 1248 or other provisions). 
     The tax on any income recognized as a result of these 
     restructurings may be reduced or eliminated through the use 
     of net operating losses, foreign tax credits, and other tax 
     attributes.
       In asset inversions, the U.S. corporation generally 
     recognizes gain (but not loss) under section 367(a) as though 
     it had sold all of its assets, but the shareholders generally 
     do not recognize gain or loss, assuming the transaction meets 
     the requirements of a reorganization under section 368.


                           Reasons for Change

       The Committee believes that inversion transactions 
     resulting in a minimal presence in a foreign country of 
     incorporation are a means of avoiding U.S. tax and should be 
     curtailed. In particular, these transactions permit 
     corporations and other entities to continue to conduct 
     business in the same manner as they did prior to the 
     inversion, but with the result that the inverted entity 
     avoids U.S. tax on foreign operations and may engage in 
     earnings-stripping techniques to avoid U.S. tax on domestic 
     operations. The Committee believes that certain inversion 
     transactions (involving 80 percent or greater identity of 
     stock ownership) have little or no non-tax effect or purpose 
     and should be disregarded for U.S. tax purposes. The 
     Committee believes that other inversion transactions 
     (involving greater than 50 but less than 80 percent identity 
     of stock ownership) may have sufficient non-tax effect and 
     purpose to be respected, but warrant heightened scrutiny and 
     other restrictions to ensure that the U.S. tax base is not 
     eroded through related-party transactions.


                        Explanation of Provision

     In general
       The provision defines two different types of corporate 
     inversion transactions and establishes a different set of 
     consequences for each type. Certain partnership transactions 
     also are covered.
     Transactions involving at least 80 percent identity of stock 
         ownership
       The first type of inversion is a transaction in which, 
     pursuant to a plan or a series of related transactions: (1) a 
     U.S. corporation becomes a subsidiary of a foreign-
     incorporated entity or otherwise transfers substantially all 
     of its properties to such an entity; (2) the former 
     shareholders of the U.S. corporation hold (by reason of 
     holding stock in the U.S. corporation) 80 percent or more (by 
     vote or value) of the stock of the foreign-incorporated 
     entity after the transaction; and (3) the foreign-
     incorporated entity, considered together with all companies 
     connected to it by a chain of greater than 50 percent 
     ownership (i.e., the ``expanded affiliated group''), does not 
     have substantial business activities in the entity's country 
     of incorporation, compared to the total worldwide business 
     activities of the expanded affiliated group. The provision 
     denies the intended tax benefits of this type of inversion by 
     deeming the top-tier foreign corporation to be a domestic 
     corporation for all purposes of the Code.
       Except as otherwise provided in regulations, the provision 
     does not apply to a direct or indirect acquisition of the 
     properties of a U.S. corporation no class of the stock of 
     which was traded on an established securities market at any 
     time within the four-year period preceding the acquisition. 
     In determining whether a transaction would meet the 
     definition of an inversion under the provision, stock held by 
     members of the expanded affiliated group that includes the 
     foreign incorporated entity is disregarded. For example, if 
     the former top-tier U.S. corporation receives stock of the 
     foreign incorporated entity (e.g., so-called ``hook'' stock), 
     the stock would not be considered in determining whether the 
     transaction meets the definition. Stock sold in a public 
     offering (whether initial or secondary) or private placement 
     related to the transaction also is disregarded for these 
     purposes. Acquisitions with respect to a domestic corporation 
     or partnership are deemed to be ``pursuant to a plan'' if 
     they occur within the four-year period beginning on the date 
     which is two years before the ownership threshold under the 
     provision is met with respect to such corporation or 
     partnership.
       Transfers of properties or liabilities as part of a plan a 
     principal purpose of which is to avoid the purposes of the 
     provision are disregarded. In addition, the Treasury 
     Secretary is granted authority to prevent the avoidance of 
     the purposes of the provision, including avoidance through 
     the use of related persons, pass-through or other 
     noncorporate entities, or other intermediaries, and through 
     transactions designed to qualify or disqualify a person as a 
     related person, a member of an expanded affiliated group, or 
     a publicly traded corporation. Similarly, the Treasury 
     Secretary is granted authority to treat certain non-stock 
     instruments as stock, and certain stock as not stock, where 
     necessary to carry out the purposes of the provision.
     Transactions involving greater than 50 percent but less than 
         80 percent identity of stock ownership
       The second type of inversion is a transaction that would 
     meet the definition of an inversion transaction described 
     above, except that the 80-percent ownership threshold is not 
     met. In such a case, if a greater-than-50-percent ownership 
     threshold is met, then a second set of rules applies to the 
     inversion. Under these rules, the inversion transaction is 
     respected (i.e., the foreign corporation is treated as 
     foreign), but: (1) any applicable corporate-level ``toll 
     charges'' for establishing the inverted structure may not be 
     offset by tax attributes such as net operating losses or 
     foreign tax credits; (2) the IRS is given expanded authority 
     to monitor related-party transactions that may be used to 
     reduce U.S. tax on U.S.-source income going forward; and (3) 
     section 163(j), relating to ``earnings stripping'' through 
     related-party debt, is strengthened. These measures generally 
     apply for a 10-year period following the inversion 
     transaction. In addition, inverting entities are required to 
     provide information to shareholders or partners and the IRS 
     with respect to the inversion transaction.
       With respect to ``toll charges,'' any applicable corporate-
     level income or gain required to be recognized under sections 
     304, 311(b), 367, 1001, 1248, or any other provision with 
     respect to the transfer of controlled foreign corporation 
     stock or other assets by a U.S. corporation as part of the 
     inversion transaction or after such transaction to a related 
     foreign person is taxable, without offset by any tax 
     attributes (e.g., net operating losses or foreign tax 
     credits). To the extent provided in regulations, this rule 
     will not apply to certain transfers of inventory and similar 
     transactions conducted in the ordinary course of the 
     taxpayer's business.
       In order to enhance IRS monitoring of related-party 
     transactions, the provision establishes a new pre-filing 
     procedure. Under this procedure, the taxpayer will be 
     required

[[Page S10563]]

     annually to submit an application to the IRS for an agreement 
     that all return positions to be taken by the taxpayer with 
     respect to related-party transactions comply with all 
     relevant provisions of the Code, including sections 163(j), 
     267(a)(3), 482, and 845. The Treasury Secretary is given the 
     authority to specify the form, content, and supporting 
     information required for this application, as well as the 
     timing for its submission.
       The IRS will be required to take one of the following three 
     actions within 90 days of receiving a complete application 
     from a taxpayer: (1) conclude an agreement with the taxpayer 
     that the return positions to be taken with respect to 
     related-party transactions comply with all relevant 
     provisions of the Code; (2) advise the taxpayer that the IRS 
     is satisfied that the application was made in good faith and 
     substantially complies with the requirements set forth by the 
     Treasury Secretary for such an application, but that the IRS 
     reserves substantive judgment as to the tax treatment of the 
     relevant transactions pending the normal audit process; or 
     (3) advise the taxpayer that the IRS has concluded that the 
     application was not made in good faith or does not 
     substantially comply with the requirements set forth by the 
     Treasury Secretary.
       In the case of a compliance failure described in (3) above 
     (and in cases in which the taxpayer fails to submit an 
     application), the following sanctions will apply for the 
     taxable year for which the application was required: (1) no 
     deductions or additions to basis or cost of goods sold for 
     payments to foreign related parties will be permitted; (2) 
     any transfers or licenses of intangible property to related 
     foreign parties will be disregarded; and (3) any cost sharing 
     arrangements will not be respected. In such a case, the 
     taxpayer may seek direct review by the U.S. Tax Court of the 
     IRS's determination of compliance failure.
       If the IRS fails to act on the taxpayer's application 
     within 90 days of receipt, then the taxpayer will be treated 
     as having submitted in good faith an application that 
     substantially complies with the above-referenced 
     requirements. Thus, the deduction disallowance and other 
     sanctions described above will not apply, but the IRS will be 
     able to examine the transactions at issue under the normal 
     audit process. The IRS is authorized to request that the 
     taxpayer extend this 90-day deadline in cases in which the 
     IRS believes that such an extension might help the parties to 
     reach an agreement.
       The ``earnings stripping'' rules of section 163(j), which 
     deny or defer deductions for certain interest paid to foreign 
     related parties, are strengthened for inverted corporations. 
     With respect to such corporations, the provision eliminates 
     the debt-equity threshold generally applicable under section 
     163(j) and reduces the 50-percent thresholds for ``excess 
     interest expense'' and ``excess limitation'' to 25 percent.
       In cases in which a U.S. corporate group acquires 
     subsidiaries or other assets from an unrelated inverted 
     corporate group, the provisions described above generally do 
     not apply to the acquiring U.S. corporate group or its 
     related parties (including the newly acquired subsidiaries or 
     assets) by reason of acquiring the subsidiaries or assets 
     that were connected with the inversion transaction. The 
     Treasury Secretary is given authority to issue regulations 
     appropriate to carry out the purposes of this provision and 
     to prevent its abuse.
     Partnership transactions
       Under the proposal, both types of inversion transactions 
     include certain partnership transactions. Specifically, both 
     parts of the provision apply to transactions in which a 
     foreign-incorporated entity acquires substantially all of the 
     properties constituting a trade or business of a domestic 
     partnership (whether or not publicly traded), if after the 
     acquisition at least 80 percent (or more than 50 percent but 
     less than 80 percent, as the case may be) of the stock of the 
     entity is held by former partners of the partnership (by 
     reason of holding their partnership interests), and the 
     ``substantial business activities'' test is not met. For 
     purposes of determining whether these tests are met, all 
     partnerships that are under common control within the meaning 
     of section 482 are treated as one partnership, except as 
     provided otherwise in regulations. In addition, the modified 
     ``toll charge'' provisions apply at the partner level.


                             Effective Date

       The regime applicable to transactions involving at least 80 
     percent identity of ownership applies to inversion 
     transactions completed after March 20, 2002. The rules for 
     inversion transactions involving greater-than-50-percent 
     identity of ownership apply to inversion transactions 
     completed after 1996 that meet the 50-percent test and to 
     inversion transactions completed after 1996 that would have 
     met the 80-percent test but for the March 20, 2002 date.
     2. Excise tax on stock compensation of insiders of inverted 
         corporations
     (Sec. 822 of the bill and new sec. 5000A and sec. 275(a) of 
         the Code)


                              Present Law

       The income taxation of a nonstatutory compensatory stock 
     option is determined under the rules that apply to property 
     transferred in connection with the performance of services 
     (sec. 83). If a nonstatutory stock option does not have a 
     readily ascertainable fair market value at the time of grant, 
     which is generally the case unless the option is actively 
     traded on an established market, no amount is included in the 
     gross income of the recipient with respect to the option 
     until the recipient exercises the option. Upon exercise of 
     such an option, the excess of the fair market value of the 
     stock purchased over the option price is included in the 
     recipient's gross income as ordinary income in such taxable 
     year.
       The tax treatment of other forms of stock based 
     compensation (e.g., restricted stock and stock appreciation 
     rights) is also determined under section 83. The excess of 
     the fair market value over the amount paid (if any) for such 
     property is generally includable in gross income in the first 
     taxable year in which the rights to the property are 
     transferable or are not subject to substantial risk of 
     forfeiture.
       Shareholders are generally required to recognize gain upon 
     stock inversion transactions. An inversion transaction is 
     generally not a taxable event for holders of stock options 
     and other stock based compensation.


                           Reasons for Change

       The Committee believes that certain inversion transactions 
     are a means of avoiding U.S. tax and should be curtailed. The 
     Committee is concerned that, while shareholders are generally 
     required to recognize gain upon stock inversion transactions, 
     executives holding stock options and certain stock-based 
     compensation are not taxed upon such transactions. Since such 
     executives are often instrumental in deciding whether to 
     engage in inversion transactions, the Committee believes 
     that, upon certain inversion transactions, it is appropriate 
     to impose an excise tax on certain executives holding stock 
     options and stock-based compensation.


                        Explanation of Provision

       Under the provision, specified holders of stock options and 
     other stock-based compensation are subject to an excise tax 
     upon certain inversion transactions. The provision imposes a 
     20 percent excise tax on the value of specified stock 
     compensation held (directly or indirectly) by or for the 
     benefit of a disqualified individual, or a member of such 
     individual's family, at any time during the 12-month period 
     beginning six months before the corporation's inversion date. 
     Specified stock compensation is treated as held for the 
     benefit of a disqualified individual if such compensation is 
     held by an entity, e.g., a partnership or trust, in which the 
     individual, or a member of the individual's family, has an 
     ownership interest.
       A disqualified individual is any individual who, with 
     respect to a corporation, is, at any time during the 12-month 
     period beginning on the date which is six months before the 
     inversion date, subject to the requirements of section 16(a) 
     of the Securities and Exchange Act of 1934 with respect to 
     the corporation, or any member of the corporation's expanded 
     affiliated group, or would be subject to such requirements if 
     the corporation (or member) were an issuer of equity 
     securities referred to in section 16(a). Disqualified 
     individuals generally include officers (as defined by section 
     16(a)) directors, and 10-percent owners of private and 
     publicly-held corporations.
       The excise tax is imposed on a disqualified individual of 
     an inverted corporation only if gain (if any) is recognized 
     in whole or part by any shareholder by reason of either the 
     80 percent or 50 percent identity of stock ownership 
     corporate inversion transactions previously described in the 
     provision.
       Specified stock compensation subject to the excise tax 
     includes any payment (or right to payment) granted by the 
     inverted corporation (or any member of the corporation's 
     expanded affiliated group) to any person in connection with 
     the performance of services by a disqualified individual for 
     such corporation (or member of the corporation's expanded 
     affiliated group) if the value of the payment or right is 
     based on, or determined by reference to, the value or change 
     in value of stock of such corporation (or any member of the 
     corporation's expanded affiliated group). In determining 
     whether such compensation exists and valuing such 
     compensation, all restrictions, other than non-lapse 
     restrictions, are ignored. Thus, the excise tax applies, and 
     the value subject to the tax is determined, without regard to 
     whether such specified stock compensation is subject to a 
     substantial risk of forfeiture or is exercisable at the time 
     of the inversion transaction. Specified stock compensation 
     includes compensatory stock and restricted stock grants, 
     compensatory stock options, and other forms of stock based 
     compensation, including stock appreciation rights, phantom 
     stock, and phantom stock options. Specified stock 
     compensation also includes nonqualified deferred 
     compensation that is treated as though it were invested in 
     stock or stock options of the inverting corporation (or 
     member). For example, the provision applies to a 
     disqualified individual's deferred compensation if company 
     stock is one of the actual or deemed investment options 
     under the nonqualified deferred compensation plan.
       Specified stock compensation includes a compensation 
     arrangement that gives the disqualified individual an 
     economic stake substantially similar to that of a corporate 
     shareholder. Thus, the excise tax does not apply where a 
     payment is simply triggered by a target value of the 
     corporation's stock or where a payment depends on a 
     performance measure other than the value of the corporation's 
     stock. Similarly, the tax does not apply if the amount of the 
     payment is not directly measured by the value of the stock or 
     an increase in the value of the

[[Page S10564]]

     stock. For example, an arrangement under which a disqualified 
     individual is paid a cash bonus of $500,000 if the 
     corporation's stock increased in value by 25 percent over two 
     years or $1,000,000 if the stock increased by 33 percent over 
     two years is not specified stock compensation, even though 
     the amount of the bonus generally is keyed to an increase in 
     the value of the stock. By contrast, an arrangement under 
     which a disqualified individual is paid a cash bonus equal to 
     $10,000 for every $1 increase in the share price of the 
     corporation's stock is subject to the provision because the 
     direct connection between the compensation amount and the 
     value of the corporation's stock gives the disqualified 
     individual an economic stake substantially similar to that of 
     a shareholder.
       The excise tax applies to any such specified stock 
     compensation previously granted to a disqualified individual 
     but cancelled or cashed-out within the six-month period 
     ending with the inversion transaction, and to any specified 
     stock compensation awarded in the six-month period beginning 
     with the inversion transaction. As a result, for example, if 
     a corporation were to cancel outstanding options three months 
     before the transaction and then reissue comparable options 
     three months after the transaction, the tax applies both to 
     the cancelled options and the newly granted options. It is 
     intended that the Treasury Secretary issue guidance to avoid 
     double counting with respect to specified stock compensation 
     that is cancelled and then regranted during the applicable 
     twelve-month period.
       Specified stock compensation subject to the tax does not 
     include a statutory stock option or any payment or right from 
     a qualified retirement plan or annuity, a tax sheltered 
     annuity, a simplified employee pension, or a simple 
     retirement account. In addition, under the provision, the 
     excise tax does not apply to any stock option that is 
     exercised during the six-month period before the inversion or 
     to any stock acquired pursuant to such exercise. The excise 
     tax also does not apply to any specified stock compensation 
     which is sold, exchanged, distributed or cashed-out during 
     such period in a transaction in which gain or loss is 
     recognized in full.
       For specified stock compensation held on the inversion 
     date, the amount of the tax is determined based on the value 
     of the compensation on such date. The tax imposed on 
     specified stock compensation cancelled during the six-month 
     period before the inversion date is determined based on the 
     value of the compensation on the day before such 
     cancellation, while specified stock compensation granted 
     after the inversion date is valued on the date granted. Under 
     the provision, the cancellation of a nor-lapse restriction is 
     treated as a grant.
       The value of the specified stock compensation on which the 
     excise tax is imposed is the fair value in the case of stock 
     options (including warrants and other similar rights to 
     acquire stock) and stock appreciation rights and the fair 
     market value for all other forms of compensation. For 
     purposes of the tax, the fair value of an option (or a 
     warrant or other similar right to acquire stock) or a stock 
     appreciation right is determined using an appropriate option-
     pricing model, as specified or permitted by the Treasury 
     Secretary, that takes into account the stock price at the 
     valuation date; the exercise price under the option; the 
     remaining term of the option; the volatility of the 
     underlying stock and the expected dividends on it; and the 
     risk-free interest rate over the remaining term of the 
     option. Options that have no intrinsic value (or ``spread'') 
     because the exercise price under the option equals or exceeds 
     the fair market value of the stock at valuation nevertheless 
     have a fair value and are subject to tax under the provision. 
     The value of other forms of compensation, such as phantom 
     stock or restricted stock, are the fair market value of the 
     stock as of the date of the inversion transaction. The value 
     of any deferred compensation that could be valued by 
     reference to stock is the amount that the disqualified 
     individual would receive if the plan were to distribute all 
     such deferred compensation in a single sum on the date of the 
     inversion transaction (or the date of cancellation or grant, 
     if applicable). It is expected that the Treasury Secretary 
     issue guidance on valuation of specified stock compensation, 
     including guidance similar to the revenue procedures issued 
     under section 280G, except that the guidance would not permit 
     the use of a term other than the full remaining term. Pending 
     the issuance of guidance, it is intended that taxpayers could 
     rely on the revenue procedures issued under section 280G 
     (except that the full remaining term must be used).
       The excise tax also applies to any payment by the inverted 
     corporation or any member of the expanded affiliated group 
     made to an individual, directly or indirectly, in respect of 
     the tax. Whether a payment is made in respect of the tax is 
     determined under all of the facts and circumstances. Any 
     payment made to keep the individual in the same after-tax 
     position that the individual would have been in had the tax 
     not applied is a payment made in respect of the tax. This 
     includes direct payments of the tax and payments to reimburse 
     the individual for payment of the tax. It is expected that 
     the Treasury Secretary issue guidance on determining when a 
     payment is made in respect of the tax and that such guidance 
     would include certain factors that give rise to a rebuttable 
     presumption that a payment is made in respect of the tax, 
     including a rebuttable presumption that if the payment is 
     contingent on the inversion transaction, it is made in 
     respect to the tax. Any payment made in respect of the tax is 
     includible in the income of the individual, but is not 
     deductible by the corporation.
       To the extent that a disqualified individual is also a 
     covered employee under section 162(m), the $1,000,000 limit 
     on the deduction allowed for employee remuneration for such 
     employee is reduced by the amount of any payment (including 
     reimbursements) made in respect of the tax under the 
     provision. As discussed above, this includes direct payments 
     of the tax and payments to reimburse the individual for 
     payment of the tax.
       The payment of the excise tax has no effect on the 
     subsequent tax treatment of any specified stock compensation. 
     Thus, the payment of the tax has no effect on the 
     individual's basis in any specified stock compensation and no 
     effect on the tax treatment for the individual at the time of 
     exercise of an option or payment of any specified stock 
     compensation, or at the time of any lapse or forfeiture of 
     such specified stock compensation. The payment of the tax is 
     not deductible and has no effect on any deduction that might 
     be allowed at the time of any future exercise or payment.
       Under the provision, the Treasury Secretary is authorized 
     to issue regulations as may be necessary or appropriate to 
     carry out the purposes of the section.


                             Effective Date

       The provision is effective as of July 11, 2002, except that 
     periods before July 11, 2002, are not taken into account in 
     applying the tax to specified stock compensation held or 
     cancelled during the six-month period before the inversion 
     date.
     3. Reinsurance agreements
     (Sec. 823 of the bill and sec. 845(a) of the Code)


                              Present Law

       In the case of a reinsurance agreement between two or more 
     related persons, present law provides the Treasury Secretary 
     with authority to allocate among the parties or 
     recharacterize income (whether investment income, premium or 
     otherwise), deductions, assets, reserves, credits and any 
     other items related to the reinsurance agreement, or make any 
     other adjustment, in order to reflect the proper source and 
     character of the items for each party. For this purpose, 
     related persons are defined as in section 482. Thus, persons 
     are related if they are organizations, trades or businesses 
     (whether or not incorporated, whether or not organized in the 
     United States, and whether or not affiliated) that are owned 
     or controlled directly or indirectly by the same interests. 
     The provision may apply to a contract even if one of the 
     related parties is not a domestic company. In addition, the 
     provision also permits such allocation, recharacterization, 
     or other adjustments in a case in which one of the parties to 
     a reinsurance agreement is, with respect to any contract 
     covered by the agreement, in effect an agent of another party 
     to the agreement, or a conduit between related persons.


                           Reasons for Change

       The Committee is concerned that reinsurance transactions 
     are being used to allocate income, deductions, or other items 
     inappropriately among U.S. and foreign related persons. The 
     Committee is concerned that foreign related party reinsurance 
     arrangements may be a technique for eroding the U.S. tax 
     base. The Committee believes that the provision of present 
     law permitting the Treasury Secretary to allocate or 
     recharacterize items related to a reinsurance agreement 
     should be applied to prevent misallocation, improper 
     characterization, or to make any other adjustment in the case 
     of such reinsurance transactions between U.S. and foreign 
     related persons (or agents or conduits). The Committee also 
     wishes to clarify that, in applying the authority with 
     respect to reinsurance agreements, the amount, source or 
     character of the items may be allocated, recharacterized or 
     adjusted.


                        Explanation of Provision

       The provision clarifies the rules of section 845, relating 
     to authority for the Treasury Secretary to allocate items 
     among the parties to a reinsurance agreement, recharacterize 
     items, or make any other adjustment, in order to reflect the 
     proper source and character of the items for each party. The 
     proposal authorizes such allocation, recharacterization, or 
     other adjustment, in order to reflect the proper source, 
     character or amount of the item. It is intended that this 
     authority be exercised in a manner similar to the authority 
     under section 482 for the Treasury Secretary to make 
     adjustments between related parties. It is intended that 
     this authority be applied in situations in which the 
     related persons (or agents or conduits) are engaged in 
     crossborder transactions that require allocation, 
     recharacterization, or other adjustments in order to 
     reflect the proper source, character or amount of the item 
     or items. No inference is intended that present law does 
     not provide this authority with respect to reinsurance 
     agreements.
       No regulations have been issued under section 845(a). It is 
     expected that the Treasury Secretary will issue regulations 
     under section 845(a) to address effectively the allocation of 
     income (whether investment income, premium or otherwise) and 
     other items, the recharacterization of such items, or any

[[Page S10565]]

     other adjustment necessary to reflect the proper amount, 
     source or character of the item.


                             Effective Date

       The provision is effective for any risk reinsured after 
     April 11, 2002.

                     C. Extension of IRS User Fees

     (Sec. 831 of the bill and new sec. 7529 of the Code)


                              Present Law

       The IRS provides written responses to questions of 
     individuals, corporations, and organizations relating to 
     their tax status or the effects of particular transactions 
     for tax purposes. The IRS generally charges a fee for 
     requests for a letter ruling, determination letter, opinion 
     letter, or other similar ruling or determination. Public Law 
     104-117 extended the statutory authorization for these user 
     fees through September 30, 2003.


                           Reasons for Change

       The Committee believes that it is appropriate to provide a 
     further extension of these user fees.


                        Explanation of Provision

       The bill extends the statutory authorization for these user 
     fees through September 30, 2013. The bill also moves the 
     statutory authorization for these fees into the Code.


                             Effective Date

       The provision, including moving the statutory authorization 
     for these fees into the Code and repealing the off-Code 
     statutory authorization for these fees, is effective for 
     requests made after the date of enactment.

  D. Add Vaccines Against Hepatitis A to the List of Taxable Vaccines

     (Sec. 842 of the bill and sec. 4132 of the Code)


                              Present Law

       A manufacturer's excise tax is imposed at the rate of 75 
     cents per dose on the following vaccines routinely 
     recommended for administration to children: diphtheria, 
     pertussis, tetanus, measles, mumps, rubella, polio, HIB 
     (haemophilus influenza type B), hepatitis B, varicella 
     (chicken pox), rotavirus gastroenteritis, and streptococcus 
     pneumoniae. The tax applied to any vaccine that is a 
     combination of vaccine components equals 75 cents times the 
     number of components in the combined vaccine.
       Amounts equal to net revenues from this excise tax are 
     deposited in the Vaccine Injury Compensation Trust Fund to 
     finance compensation awards under the Federal Vaccine Injury 
     Compensation Program for individuals who suffer certain 
     injuries following administration of the taxable vaccines. 
     This program provides a substitute Federal, ``no fault'' 
     insurance system for the State-law tort and private liability 
     insurance systems otherwise applicable to vaccine 
     manufacturers. All persons immunized after September 30, 
     1988, with covered vaccines must pursue compensation under 
     this Federal program before bringing civil tort actions under 
     State law.


                           Reasons for Change

       The Committee is aware that the Centers for Disease Control 
     and Prevention have recommended that children in 17 highly 
     endemic States be inoculated with a hepatitis A vaccine. The 
     population of children in the affected States exceeds 20 
     million. Several of the affected States mandate childhood 
     vaccination against hepatitis A. The Committee is aware that 
     the Advisory Commission on Childhood Vaccines has recommended 
     that the vaccine excise tax be extended to cover vaccines 
     against hepatitis A. For these reasons, the Committee 
     believes it is appropriate to include vaccines against 
     hepatitis A as part of the Vaccine Injury Compensation 
     Program. Making the hepatitis A vaccine taxable is a first 
     step. In the unfortunate event of an injury related to this 
     vaccine, families of injured children are eligible for the 
     no-fault arbitration system established under the Vaccine 
     Injury Compensation Program rather than going to Federal 
     Court to seek compensatory redress.


                        Explanation of Provision

       The bill adds any vaccine against hepatitis A to the list 
     of taxable vaccines. The bill also makes a conforming 
     amendment to the trust fund expenditure purposes.


                             Effective Date

       The provision is effective for vaccines sold beginning on 
     the first day of the first month beginning more than four 
     weeks after the date of enactment.

                E. Individual Expatriation To Avoid Tax

     (Sec. 833 of the bill and secs. 877, 2107, 2501, and 6039 of 
         the Code)


                              Present Law

       U.S. citizens and residents generally are subject to U.S 
     income taxation on their worldwide income. The U.S. tax may 
     be reduced or offset by a credit allowed for foreign income 
     taxes paid with respect to foreign source income. 
     Nonresidents who are not U.S. citizens are taxed at a flat 
     rate of 30 percent (or a lower treaty rate) on certain types 
     of passive income derived from U.S. sources, and at regular 
     graduated rates on net profits derived from a U.S. trade or 
     business.
       An individual who relinquishes his or her U.S. citizenship 
     or terminates his or her U.S. residency with a principal 
     purpose of avoiding U.S. taxes is subject to an alternative 
     method of income taxation for the 10 taxable years ending 
     after the citizenship relinquishment or residency termination 
     (the ``alternative tax regime''). The alternative tax regime 
     modifies the rules generally applicable to the taxation of 
     nonresident noncitizens. For the 10-year period, the 
     individual is subject to tax only on U.S.-source income at 
     the rates applicable to U.S. citizens, rather than the rates 
     applicable to nonresident noncitizens. However, for this 
     purpose, U.S.-source income has a broader scope than it does 
     for normal U.S. Federal tax purposes and includes, for 
     example, gain from the sale of U.S. corporate stock or debt 
     obligations. The alternative tax regime applies only if it 
     results in a higher U.S. tax liability than the liability 
     that would result if the individual were taxed as a 
     nonresident noncitizen.
       In addition, the alternative tax regime includes special 
     estate and gift tax rules. Under present law, estates of 
     nonresident noncitizens are subject to U.S. estate tax on 
     U.S.-situated property. For these purposes, stock in a 
     foreign corporation generally is not treated as U.S.-situated 
     property, even if the foreign corporation itself owns U.S.-
     situated property. However, a special estate tax rule (sec. 
     2107) applies to former citizens and former long-term 
     residents who are subject to the alternative tax regime. 
     Under this rule, certain closely-held foreign stock owned by 
     the former citizen or former long-term resident is includible 
     in his or her gross estate to the extent that the foreign 
     corporation owns U.S.-situated assets, if the former citizen 
     or former long-term resident dies within 10 years of 
     citizenship relinquishment or residency termination. This 
     rule prevents former citizens and former long-term residents 
     who are subject to the alternative tax regime from avoiding 
     U.S. estate tax through the expedient of transferring U.S.-
     situated assets to a foreign corporation (subject to income 
     tax on any appreciation under section 367). In addition, 
     under the alternative tax regime, the individual is subject 
     to gift tax on gifts of U.S.-situated intangibles, such as 
     U.S. stock, made during the 10 years following citizenship 
     relinquishment or residency termination.
       Anti-abuse rules are, provided to prevent the circumvention 
     of the alternative tax regime. Accordingly, the alternative 
     tax regime generally applies to exchanges of property that 
     give rise to U.S.-source income for property that gives rise 
     to foreign source income. In addition, amounts earned by 
     former citizens and former long-term residents through 
     controlled foreign corporations are subject to the 
     alternative tax regime, and the 10-year liability period is 
     suspended during any time at which a former citizen's or 
     former long-term resident's risk of loss with respect to 
     property subject to the alternative tax regime is 
     substantially diminished, among other measures.
       A U.S. citizen who relinquishes citizenship or a long-term 
     resident who terminates residency is treated as having done 
     so with a principal purpose of tax avoidance (and, thus, 
     generally is subject to the alternative tax regime described 
     above) if: (1) the individual's average annual U.S. Federal 
     income tax liability for the five taxable years preceding 
     citizenship relinquishment or residency termination exceeds 
     $100,000; or (2) the individual's net worth on the date of 
     citizenship relinquishment or residency termination equals or 
     exceeds $500,000. These amounts are adjusted annually for 
     inflation. Certain categories of individuals may avoid being 
     deemed to have a tax avoidance purpose for relinquishing 
     citizenship or terminating residency by submitting a ruling 
     request to the IRS regarding whether the individual 
     relinquished citizenship or terminated residency principally 
     for tax reasons.
       Under present law, the Immigration and Nationality Act 
     governs the determination of when a U.S. citizen is treated 
     for U.S. Federal tax purposes as having relinquished 
     citizenship. Similarly, an individual's U.S. residency is 
     considered terminated for U.S. Federal tax purposes when the 
     individual ceases to be a lawful permanent resident under the 
     immigration law (or is treated as a resident of another 
     country under a tax treaty and does not waive the benefits of 
     such treaty). In view of this reliance on immigration-law 
     status, it is possible in many instances for a U.S. citizen 
     or resident to convert his or her Federal tax status to that 
     of a nonresident noncitizen without notifying the IRS.
       Individuals subject to the alternative tax regime are 
     required to provide certain tax information, including tax 
     identification numbers, upon relinquishment of citizenship or 
     termination of residency (on IRS Form 8854, Expatriation 
     Initial Information Statement). In the case of an individual 
     with a net worth of at least $500,000, the individual also 
     must provide detailed information about the individual's 
     assets and liabilities. The penalty for the failure to 
     provide the required tax information is the greater of $1,000 
     or five percent of the tax imposed under the alternative tax 
     regime for the year. In addition, the U.S. Department of 
     State and other governmental agencies are required to provide 
     this information to the IRS.
       Former citizens and former long-term residents who are 
     subject to the alternative tax regime also are required to 
     file annual income tax returns, but only in the event that 
     they owe U.S. Federal income tax. If a tax return is 
     required, the former citizen or former long-term resident 
     is required to provide the IRS with a statement setting 
     forth (generally by category) all items of U.S.-source and 
     foreign-source gross income, but no detailed information 
     with respect to all assets held by the individual.


                           Reasons for Change

       There are several difficulties in administering the 
     present-law alternative tax regime. One such difficulty is 
     that the IRS is

[[Page S10566]]

     required to determine the subjective intent of taxpayers who 
     relinquish citizenship or terminate residency. The present-
     law presumption of a tax avoidance purpose in cases in which 
     objective income tax liability or net worth thresholds are 
     exceeded mitigates this problem to some extent. However, the 
     present-law rules still require the IRS to make subjective 
     determinations of intent in cases involving taxpayers who 
     fall below these thresholds, as well for certain taxpayers 
     who exceed these thresholds but are nevertheless allowed to 
     seek a ruling from the IRS to the effect that they did not 
     have a principal purpose of tax avoidance. The Committee 
     believes that the replacement of the subjective determination 
     of tax avoidance as a principal purpose for citizenship 
     relinquishment or residency termination with objective rules 
     will result in easier administration of the tax regime for 
     individuals who relinquish their citizenship or terminate 
     residency.
       Similarly, present-law information-reporting and return-
     filing provisions do not provide the IRS with the information 
     necessary to administer the alternative tax regime. Although 
     individuals are required to file tax information statements 
     upon the relinquishment of their citizenship or termination 
     of their residency, difficulties have been encountered in 
     enforcing this requirement. The Committee believes that the 
     tax benefits of citizenship relinquishment or residency 
     termination should be denied an individual until he or she 
     provides the information necessary for the IRS to enforce the 
     alternative tax regime. The Committee also believes an annual 
     report requirement and a penalty for the failure to comply 
     with such requirement are needed to provide the IRS with 
     sufficient information to monitor the compliance of former 
     U.S. citizens and long-term residents.
       Individuals who relinquish citizenship or terminate 
     residency for tax reasons often do not want to fully sever 
     their ties with the United States; they hope to retain some 
     of the benefits of citizenship or residency without being 
     subject to the U.S. tax system as a U.S. citizen or resident. 
     These individuals generally may continue to spend significant 
     amounts of time in the United States following citizenship 
     relinquishment or residency termination--approximately four 
     months every year--without being treated as a U.S. resident. 
     The Committee believes that provisions in the bill that 
     impose full U.S. taxation if the individual is present in the 
     United States for more than 30 days in a calendar year will 
     substantially reduce the incentives to relinquish citizenship 
     or terminate residency for individuals who desire to maintain 
     significant ties to the United States.
       With respect to the estate and gift tax rules, the 
     Committee is concerned that present-law does not adequately 
     address opportunities for the avoidance of tax on the value 
     of assets held by a foreign corporation whose stock the 
     individual transfers. Thus, the provision imposes gift tax 
     under the alternative tax regime in the case of gifts of 
     certain stock of a closely held foreign corporation.


                        Explanation of Provision

     In general
       The provision provides: (1) objective standards for 
     determining whether former citizens or former long-term 
     residents are subject to the alternative tax regime; (2) tax 
     based (instead of immigration-based) rules for determining 
     when an individual is no longer a U.S. citizen or long term 
     resident for U.S. Federal tax purposes; (3) the imposition of 
     full U.S. taxation for individuals who are subject to the 
     alternative tax regime and who return to the United States 
     for extended periods; (4) imposition of U.S. gift tax on 
     gifts of stock of certain closely-held foreign corporations 
     that hold U.S.-situated property; and (5) an annual return-
     filing requirement for individuals who are subject to the 
     alternative tax regime, for each of the 10 years following 
     citizenship relinquishment or residency termination.
     Objective rules for the alternative tax regime
       The provision replaces the subjective determination of tax 
     avoidance as a principal purpose for citizenship 
     relinquishment or residency termination under present law 
     with objective rules. Under the provision, a former citizen 
     or former long-term resident would be subject to the 
     alternative tax regime for a 10-year period following 
     citizenship relinquishment or residency termination, unless 
     the former citizen or former long-term resident: (1) 
     establishes that his or her average annual net income tax 
     liability for the five preceding years does not exceed 
     $122,000 (adjusted for inflation) and his or her net worth 
     does not exceed $2 million, or alternatively satisfies 
     limited, objective exceptions for dual citizens and minors 
     who have had no substantial contact with the United States; 
     and (2) certifies under penalties of perjury that he or she 
     has complied with all U.S. Federal tax obligations for the 
     preceding five years and provides such evidence of compliance 
     as the Secretary of the Treasury may require.
       The monetary thresholds under the provision replace the 
     present-law inquiry into the taxpayer's intent. In addition, 
     the provision eliminates the present-law process of IRS 
     ruling requests.
       If a former citizen exceeds the monetary thresholds, that 
     person is excluded from the alternative tax regime if he or 
     she falls within the exceptions for certain dual citizens and 
     minors (provided that the requirement of certification and 
     proof of compliance with Federal tax obligations is met). 
     These exceptions provide relief to individuals who have never 
     had substantial connections with the United States, as 
     measured by certain objective criteria, and eliminate IRS 
     inquiries as to the subjective intent of such taxpayers.
       In order to be excepted from the application of the 
     alternative tax regime under the provision, whether by reason 
     of falling below the net worth and income tax liability 
     thresholds or qualifying for the dual-citizen or minor 
     exceptions, the former citizen or former long-term resident 
     also is required to certify, under penalties of perjury, that 
     he or she has complied with all U.S. Federal tax obligations 
     for the five years preceding the relinquishment of 
     citizenship or termination of residency and to provide 
     such documentation as the Secretary of the Treasury may 
     require evidencing such compliance (e.g., tax returns, 
     proof of tax payments). Until such time, the individual 
     remains subject to the alternative tax regime. It is 
     intended that the IRS should continue to verify that the 
     information submitted was accurate, and it is intended 
     that the IRS should randomly audit such persons to assess 
     compliance.
     Termination of U.S. citizen or long-term resident status for 
         U.S. Federal income tax purposes
       Under the provision, an individual continues to be treated 
     as a U.S. citizen or long-term resident for U.S. Federal tax 
     purposes, including for purposes of section 7701(b)(10), 
     until the individual: (1) gives notice of an expatriating act 
     or termination of residency (with the requisite intent to 
     relinquish citizenship or terminate residency) to the 
     Secretary of State or the Secretary of Homeland Security, 
     respectively; and (2) provides a statement in accordance with 
     section 6039G.
     Sanction for individuals subject to the individual tax regime 
         who return to the United States for extended periods
       The alternative tax regime does not apply to any individual 
     for any taxable year during the 10-year period following 
     citizenship relinquishment or residency termination if such 
     individual is present in the United States for more than 30 
     days in the calendar year ending in such taxable year. Such 
     individual is treated as a U.S. citizen or resident for such 
     taxable year.
       Similarly, if an individual subject to the alternative tax 
     regime is present in the United States for more than 30 days 
     in any calendar year ending during the 10-year period 
     following citizenship relinquishment or residency 
     termination, and the individual dies during that year, he or 
     she is treated as a U.S. resident, and the individual's 
     worldwide estate is subject to U.S. estate tax. Likewise, if 
     an individual subject to the alternative tax regime is 
     present in the United States for more than 30 days in any 
     year during the 10-year period following citizenship 
     relinquishment or residency termination, the individual is 
     subject to U.S. gift tax on any transfer of his or her 
     worldwide assets by gift during that taxable year.
       For purposes of these rules, an individual is treated as 
     present in the United States on any day if such individual is 
     physically present in the United States at any time during 
     that day, with no exceptions. The present-law exceptions from 
     being treated as present in the United States for residency 
     purposes do not apply for this purpose.
     Imposition of gift tax with respect to stock of certain 
         closely held foreign corporations
       Gifts of stock of certain closely-held foreign corporations 
     by a former citizen or former long-term resident who is 
     subject to the alternative tax regime are subject to gift tax 
     under this provision, if the gift is made within the 10-year 
     period after citizenship relinquishment or residency 
     termination. The gift tax rule applies if: (1) the former 
     citizen or former long-term resident, before making the gift, 
     directly or indirectly owns 10 percent or more of the total 
     combined voting power of all classes of stock entitled to 
     vote of the foreign corporation; and (2) directly or 
     indirectly, is considered to own more than 50 percent of (a) 
     the total combined voting power of all classes of stock 
     entitled to vote in the foreign corporation, or (b) the total 
     value of the stock of such corporation. If this stock 
     ownership test is met, then taxable gifts of the former 
     citizen or former long-term resident include that proportion 
     of the fair market value of the foreign stock transferred by 
     the individual, at the time of the gift, which the fair 
     market value of any assets owned by such foreign corporation 
     and situated in the United States (at the time of gift) bears 
     to the total fair market value of all assets owned by such 
     foreign corporation (at the time of gift).
       This gift tax rule applies to a former citizen or former 
     long-term resident who is subject to the alternative tax 
     regime and who owns stock in a foreign corporation at the 
     time of the gift, regardless of how such stock was acquired 
     (e.g., whether issued originally to the donor, purchased, or 
     received as a gift or bequest).
     Annual return
       The provision requires former citizens and former long-term 
     residents to file an annual return for each year following 
     citizenship relinquishment or residency termination in which 
     they are subject to the alternative tax regime. The annual 
     return is required even if no U.S. Federal income tax is due. 
     The annual return requires certain information, including 
     information on the permanent home

[[Page S10567]]

     of the individual, the individual's country of residency, the 
     number of days the individual was present in the United 
     States for the year, and detailed information about the 
     individual's income and assets that are subject to the 
     alternative tax regime. This requirement includes information 
     relating to foreign stock potentially subject to the special 
     estate tax rule of section 2107(b) and the gift tax rules of 
     this provision.
       If the individual fails to file the statement in a timely 
     manner or fails correctly to include all the required 
     information, the individual is required to pay a penalty of 
     $5,000. The $5,000 penalty does not apply if it is shown that 
     the failure is due to reasonable cause and not to willful 
     neglect.


                             Effective Date

       The provisions apply to individuals who relinquish 
     citizenship or terminate long-term residency after February 
     27, 2003.

                     II. BUDGET EFFECTS OF THE BILL

                         A. Committee Estimates

       In compliance with paragraph 11(a) of Rule XXVI of the 
     Standing Rules of the Senate, the following statement is made 
     concerning the estimated budget effects of the revenue 
     provisions of the ``Energy Tax Incentives Act of 2003'' as 
     reported.

                B. Budget Authority and Tax Expenditures

     Budget authority
       In compliance with section 308(a)(1) of the Budget Act, the 
     Committee states that the revenue provisions of the bill as 
     reported involve no new or increased budget authority.
     Tax expenditures
       In compliance with section 308(a)(2) of the Budget Act, the 
     Committee states that the revenue-reducing provisions of the 
     bill involve increased tax expenditures (see revenue table in 
     Part III. A., above).

            C. Consultation with Congressional Budget Office

       In accordance with section 403 of the Budget Act, the 
     Committee advises that the Congressional Budget Office 
     submitted the following statement on this bill:

                      III. VOTES OF THE COMMITTEE

       In compliance with paragraph 7(b) of Rule XXVI of the 
     standing rules of the Senate, the following statements are 
     made concerning the roll call votes in the Committee's 
     consideration of the ``Energy Tax Incentives Act of 2003.''
     Motion to report the Bill
       An original bill, the ``Energy Tax Incentives Act of 
     2003,'' was ordered favorably reported, by a record vote on 
     April 2, 2003.
       Yeas.--Senators Grassley, Hatch, Lott, Snowe, Thomas, 
     Santorum (proxy), Frist (proxy), Smith, Bunning, Baucus, 
     Rockefeller (proxy), Daschle (proxy), Breaux, Conrad (proxy), 
     Jeffords (proxy), Bingaman (proxy), Kerry (proxy), Lincoln.
       Nays.--Senators Nickles, Kyl.
     Votes on other amendments
       The Committee accepted an amendment by Senator Bingaman to 
     expand the research credit to 100 percent of expenses for 
     energy related research by universities and 20 percent for 
     payments to research consortiums for energy research. The 
     Committee rejected a motion by Senators Baucus and Graham, to 
     extend Superfund taxes, by record vote.
       Yeas.--Senators Snowe, Baucus, Rockefeller, Daschle, 
     Conrad, Graham (proxy), Jeffords, Bingaman, Kerry (proxy).
       Nays.--Senators Grassley, Hatch, Nickles, Lott, Kyl, 
     Thomas, Santorum, Frist (proxy), Smith, Bunning, Breaux, 
     Lincoln.
       The Committee rejected a motion by Senators Baucus, 
     Rockefeller, Daschle, Breaux, Conrad, Graham, Jeffords, 
     Bingaman, Kerry and Lincoln regarding tax shelter 
     transparency and enforcement, by record vote.
       Yeas.--Baucus, Rockefeller, Daschle, Breaux, Conrad, Graham 
     (proxy), Jeffords, Bingaman, Kerry (proxy), Lincoln.
       Nays.--Senators Grassley, Hatch, Nickles, Lott, Snowe, Kyl, 
     Thomas, Santorum, Frist (proxy), Smith, Bunning.
       The Committee rejected a modified amendment by Senator 
     Jeffords, regarding the motor fuel excise tax on diesel fuel 
     used by railroads, by record vote.
       Yeas.--Baucus, Rockefeller (proxy), Jeffords, Kerry 
     (proxy).
       Nays.--Grassley, Hatch (proxy), Nickles, Lott, Snowe, Kyl, 
     Thomas, Santorum (proxy), Frist (proxy), Smith, Bunning, 
     Daschle, Breaux, Conrad, Bingaman, Lincoln.
       The Committee accepted an amendment by Senator Lott 
     regarding the immediate repeal of 4.3 cents tax on diesel 
     used by rails and barges, by voice vote.
       The Committee accepted an amendment by Senator Conrad to 
     provide credit for business installations of stationary 
     microturbine power plants. (Senator Kyl objected.)
       The Committee rejected an amendment by Senator Nickles to 
     strike section 29 of the Chairman's mark, by roll call vote.
       Ayes.--Senators Nickles, Lott, Kyl, Bunning.
       Nays.--Senators Grassley, Hatch (proxy), Snowe, Thomas, 
     Santorum (proxy), Frist (proxy), Smith, Baucus, Rockefeller 
     (proxy), Daschle (proxy), Breaux, Conrad (proxy), Graham 
     (proxy), Jeffords (proxy), Bingaman (proxy), Kerry (proxy), 
     Lincoln.
       The Committee accepted an amendment by Senator Lincoln to 
     modify section 29 of the Internal Revenue Code with respect 
     to the definition of a landfill gas facility and to modify 
     section 45 of the Internal Revenue Code for the production of 
     electricity to include electricity produced from facilities 
     that burn municipal solid waste. The amendment was modified 
     to include the President's Budget Proposal of definition 
     change for landfill gas placed in service date and to amend 
     the extension of Internal Revenue Service user fees.

                IV. REGULATORY IMPACT AND OTHER MATTERS

                          A. Regulatory Impact

       Pursuant to paragraph 11 (b) of Rule XXVI of the Standing 
     Rules of the Senate, the Committee makes the following 
     statement concerning the regulatory impact that might be 
     incurred in carrying out the provisions of the bill as 
     amended.
     Impact on individuals and businesses
       With respect to individuals and businesses, the bill 
     modifies the rules relating to (1) tax benefits for 
     alternative fuels; (2) coal production; (3) oil and gas 
     production; (4) energy conservation; and (5) electric 
     industry participants involved in industry restructuring 
     activities. Taxpayers may elect whether to avail themselves 
     of the provisions of the bill. Thus, the provisions do not 
     impose increased regulatory burdens on individuals or 
     businesses. Certain provisions of the bill, such as the 
     provision relating to transfers of decommissioning funds 
     associated with nuclear generating facilities, simplify the 
     present-law rules and, therefore, reduce burdens on taxpayers 
     electing to utilize the provision. Thus, the bill does not 
     impose increased regulatory burdens on individuals and 
     businesses.
     Impact on personal privacy and paperwork
       The provisions of the bill do not impact personal privacy. 
     Individuals may elect whether to avail themselves of the 
     provisions of the bill. Thus, the bill does not impose 
     increased paperwork burdens on individuals. Individuals who 
     elect to take advantage of the bill may in some cases need to 
     keep records in order to demonstrate that they qualify for 
     the tax treatment provided by the bill. In some cases the 
     bill simplifies present law, thus reducing recordkeeping 
     requirements.

                     B. Unfunded Mandates Statement

       This information is provided in accordance with section 423 
     of the Unfunded Mandates Reform Act of 1995 (P.L. 104-4).
       The Committee has determined that four of the revenue 
     provisions of the bill impose Federal mandates on the private 
     sector. The four provisions are (1) the provisions to curtail 
     tax shelters; (2) tax treatment of corporate inversion 
     transactions; (3) the excise tax on stock compensation of 
     insiders of inverted corporations; and (4) the revisions to 
     the alternative tax regime for individuals who expatriate. 
     The Committee has determined that the remaining revenue 
     provisions of the bill do not impose a Federal 
     intergovernmental mandate on State, local, or tribal 
     governments.

                       C. Tax Complexity Analysis

       Section 4022(b) of the Internal Revenue Service Reform and 
     Restructuring Act of 1998 (the ``IRS Reform Act'') requires 
     the Joint Committee on Taxation (in consultation with the 
     Internal Revenue Service and the Department of the Treasury) 
     to provide a tax complexity analysis. The complexity analysis 
     is required for all legislation reported by the 
     Senate Committee on Finance, the House Committee on Ways 
     and Means, or any committee of conference if the 
     legislation includes a provision that directly or 
     indirectly amends the Internal Revenue Code (the ``Code'') 
     and has widespread applicability to individuals or small 
     businesses.
       The staff of the Joint Committee on Taxation has determined 
     that a complexity analysis is not required under section 
     4022(b) of the IRS Reform Act because the bill contains no 
     provisions that amend the Internal Revenue Code and that have 
     ``widespread applicability'' to individuals or small 
     businesses.

        V. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

       In the opinion of the Committee, it is necessary in order 
     to expedite the business of the Senate, to dispense with the 
     requirements of paragraph 12 of Rule XXVI of the Standing 
     Rules of the Senate (relating to the showing of changes in 
     existing law made by the bill as reported by the Committee).
  Mr. BAUCUS. Mr. President, I yield the floor.
  Mr. GRASSLEY. Mr. President, last night, Senator Baucus and I, along 
with Chairman Domenici and Senator Bingaman introduced the Energy Tax 
Incentives Act of 2003 as an amendment to the underlying energy bill. 
We also submitted an amendment that contains technical and conforming 
modifications to the Finance Committee reported amendment. Those 
amendments are numbered 1424 and 1431 and are printed in the Record of 
Wednesday, July 30, 2003. These important tax initiatives were 
developed after several months of consultation between our Committee 
members, and voted out of the Finance Committee as a bipartisan 
product. In my estimation, the Energy Tax Incentives Act reflects a 
fair balance of the interests of the members and effectively supports 
the development of energy production from renewable and environmentally 
beneficial sources.

[[Page S10568]]

  I would like to briefly describe that amendment before I talk about 
the tax incentives part of the energy bill.
  For years, I have worked to decrease our reliance on foreign sources 
of energy and accelerate and diversify domestic energy production. I 
believe public policy ought to promote renewable domestic production 
that uses renewable energy and fosters economic development.
  Specifically, the development of alternative energy sources should 
alleviate domestic energy shortages and insulate the United States from 
the Middle East dominated oil supply. In addition, the development of 
renewable energy resources conserves existing natural resources and 
protects the environment. Finally, alternative energy development 
provides economic benefits to farmers, ranchers and forest land owners, 
such as those in Iowa who have launched efforts to diversify the 
state's economy and to find creative ways to extract a greater return 
from abundant natural resources.
  Section 45 of the Internal Revenue Code currently provides a 
production tax credit for electricity produced from renewable sources 
including wind, closed-loop biomass, and poultry waste. The Energy Tax 
Incentives Act extends the section 45 credit and expands the sources of 
electricity to include biomass, including agricultural waste nutrients, 
geothermal wells and solar energy.
  I have been a constant advocate of alternative energy sources. Since 
the inception almost ten years ago of the wind energy tax credit, 
nearly 4,300 megawatts of generating capacity have been installed 
across the country. Forty percent of that capacity was added during 
2001, a year in which wind energy installations increased 3000% over 
the prior year--the most new wind capacity ever installed in the United 
States. Wind farms installed last year produce enough electricity to 
power almost half a million average American households per year, 
demonstrating the significant capacity of wind. In addition, wind 
represents an affordable and inexhaustible source of domestically 
produced energy. Extending the wind energy tax credit until 2007 would 
support the tremendous continued development of this clean, renewable 
energy source.
  The Finance Committee's amendment supports a maturing green energy 
source. Experts have established wind energy's valuable contributions 
to maintaining cleaner air and a cleaner environment. Every 10,000 
megawatts of wind energy produced in the United States can reduce 
carbon monoxide emissions by 33 million metric tons by replacing the 
combustion of fossil fuels.
  In addition, this proposal helps to empower our rural communities to 
reap continued economic benefits. The installation of wind turbines has 
a stimulative economic effect because it requires significant capital 
investment which results in the creation of jobs and the injection of 
capital into often rural economic areas. The wind industry now 
estimates that nearly $2 billion in employment and economic development 
will be added this year alone in the presence of the prompt extension 
of the credit through January 1, 2007
  In addition, for each wind turbine, a farmer or rancher can receive 
more than $2,000 per year for 20 years in direct lease payments. Iowa's 
major wind farms currently pay more than $640,000 per year to land 
owners, and the development of 1,000 megawatts of capacity in 
California, for example, would result in annual payments of 
approximately $2 million to farm and forest landowners in that state.
  As many of my colleagues know, I authored the section 45 tax credit 
included in the Energy Policy Act of 1992 which provided a tax credit 
for the production of energy from closed loop biomass.
  This term refers to biomass produced specifically for energy 
production. An example is switchgrass grown in my home state of Iowa. 
To sustain many of the benefits derived from the production of biomass 
energy, we extend the existing credit and expand the provision to 
additional new sources of biomass energy production.
  Environmentally-friendly biomass energy production is a proven, 
effective technology that generates numerous waste management public 
benefits across the country.
  Moreover, the amendment expands the biomass definition to cover open 
loop biomass. Open loop biomass, includes organic, non-hazardous 
materials such as saw dust, tree trimmings, agricultural byproducts and 
untreated construction debris.
  The development of a local industry to convert biomass to electricity 
has the potential to produce enormous economic benefits and electricity 
security for rural America.
  In addition, studies show that biomass crops could produce between $2 
and $5 billion in additional farm income for American farmers. As an 
example, over 450 tons of turkey and chicken litter are under contract 
to be sold for an electricity plant using poultry litter being built in 
Minnesota. This is a win-win, not only do the farmers not have to pay 
to dispose of this stuff, they get paid to sell the litter.
  Finally, marginal farmland incapable of sustaining traditional yearly 
production is often capable of generating native grasses and organic 
materials that are ideal for biomass energy production. Turning tree 
trimmings and native grasses into energy provides an economic gain and 
serves an important public interest.
  I am very proud of a long history of supporting new alternative 
energy concepts in the production of electricity. This amendment 
continues and expands that commitment. As discussed previously, section 
45 provides a production tax credit for electricity produced from 
renewable sources including wind, closed-loop biomass, and poultry 
waste. The amendment modifies section 45 to include electricity 
generated from swine and bovine waste nutrient. This is a great example 
of how the agriculture and energy industries can come together to 
develop an environmentally-friendly renewable resource.
  By using animal waste as an energy source, an American livestock 
producer can reduce or eliminate monthly energy purchases from electric 
and gas suppliers and provide excess energy for distribution to other 
members of the community. By way of example, in January 2001, an 850-
cow dairy operation near Princeton, MN generated enough electricity to 
run its entire dairy farm and to sell $4,400 worth of excess power to 
the local electric provider--enough to power 78 homes during the 
coldest month of the year. In addition, a 5,000-hog farm, has potential 
to generate approximately 650,000 kilowatts of electricity--an amount 
equal to the consumption of 76 average American homes.
  The swine and bovine proposal is truly Green electricity, as it also 
furthers environmental objectives. Specifically, anaerobic digestion of 
manure improves air quality because it eliminates of as much as 90 
percent of the odor from feedlots and improves soil and water quality 
by dramatically reducing problems with waste run-off. Maximizing farm 
resources in such a manner may prove essential to remain competitive in 
today's livestock market. In addition, the technology used to create 
the electricity results in the production of a fertilizer product that 
is of a higher quality than unprocessed animal waste.
  The Energy Tax Incentives Act is important to agriculture, rural 
economy and small business, it is also important for domestic supply 
and energy independence.
  Rural America can play an important part in energy independence and 
domestic supply. In addition to the production of electricity, this 
amendment includes additional tax incentives for the production of 
alternative fuels from renewable resources.
  A small producers credit for the production of ethanol has been 
included to clarify that farmers cooperatives producing ethanol will be 
able to pass that tax incentive through to their farmer members. And we 
have a new incentive for the production of biodiesel. Biodiesel is a 
natural substitute for diesel fuel and can be made from almost all 
vegetable oils and animal fats. Modern science is allowing us to slowly 
substitute natural renewable agricultural sources for traditional 
petroleum. It gives us choices for the future and it can relieve the 
strain on the domestic oil production to fulfill those important needs 
that agricultural products cannot serve.

[[Page S10569]]

  Let me point out that the Finance Committee amendment contains 
provisions that enhance the tax incentives for ethanol production. 
Ethanol is a clean burning fuel that will continue to be a key element 
in our transportation fuels policy. We reshaped the ethanol excise tax 
exemption. Under the Finance Committee change, ethanol-blended fuels 
will make the same contribution to the highway trust fund as regular 
gasoline while also retaining an important incentive to promote the use 
of domestic, renewable fuels.
  It makes common sense for ethanol taxes to contribute just as much to 
building highways as traditional gasoline taxes. It isn't logical for a 
smaller portion of ethanol taxes to contribute to highways than the 
taxes from traditional gasoline. All types of vehicle fuel taxes should 
contribute equally to highway construction and maintenance.
  Our highway needs are great. Our dependence on imported fuel should 
decrease. This restructuring of ethanol excise taxes contributes to 
both of those priorities. At the same time, it preserves all incentives 
to use the clean-burning, renewable, domestically produced ethanol, the 
fuel of the future.
  Renewable fuels like ethanol and biodiesel will improve air quality, 
strengthen national security, reduce the trade deficit, decrease 
dependence on the Middle East for oil, and expand markets for 
agricultural products.
  The Energy Tax Incentives Act amendment is a balanced package. I 
would like to note, with some satisfaction, that today we have the 
opportunity to do the people's business in the way they want us to do 
business. This Energy Tax Incentive amendment was crafted in a 
bipartisan way on an important initiative in a way that reflects the 
diversity of our views and the diversity of our nation. In this wartime 
climate, this is what the people want.
  I have only taken a few minutes to review a portion of the amendment. 
The electricity tax credits and the alternative fuel incentives in the 
amendment are good for agriculture, good for the environment, good for 
energy consumers and good for national security interests. But this 
entire tax incentive amendment is equally important to a sound energy 
policy and I hope that my colleagues will join with me to advance these 
important legislative objectives.
  Let me turn to the peculiar procedural situation that we find 
ourselves in. I want to enter conference with a clear understanding of 
the bipartisan intent of the Senate.
  Today, the Senate will pass the text of last year's energy bill. Read 
literally, the unanimous consent agreement, states that the text of 
last year's Finance Committee amendment, which was adopted unanimously 
at the time, passes the Senate.
  Folks in my home state of Iowa or my friend, Senator Baucus' home 
State of Montana, might reasonably ask a question. That question would 
be if you have improved the Finance Committee amendment from last 
year's bill, why not last year's tax title with this year's tax title? 
That's a good question. That was my position and that of Senator 
Baucus.
  From a technical standpoint, you'd have to scratch your head, looking 
at effective dates for a bill that is now over a year old. There are 
other details in the official Senate-passed bill that will appear odd 
simply because the text has not been updated in over a year.
  The answer to the question is simple. The answer is that this 
procedural agreement would not hold together unless last year's bill 
text stayed exactly the same. That reflects the agreement of the 
leaders on both sides. It has nothing to do with the substance of this 
year's Finance Committee amendment which is non-controversial. It has 
to do with the all or nothing, simplistic nature of the offer made by 
Senators Daschle and Reid. The problem is that, if tax matters are 
opened up, no matter how non-controversial, then other matters would be 
open. In that situation, then the agreement of the leaders could not be 
consummated expeditiously.
  Our majority leader, Senator Frist, assured me that the position of 
the Senate Republican Caucus would be this year's Finance Committee 
amendment. As the senior Finance Committee conferee, let me assure the 
Senate, that will be our conference position. Just as importantly, let 
me make sure the other body understands the letter and spirit of our 
position. Let me repeat that, loudly and clearly.
  The Senate position for conference purposes will be this year's 
Finance Committee amendment. Everyone here knows, that in regular 
order, this year's Finance Committee would have been adopted by the 
Senate. That is the substantive position and the intellectually honest 
position. I expect my House counterparts to recognize and respect that 
intellectually honest position.
  Before I finish I would like to comment on a few tax incentive 
proposals I intended to offer to the Finance Committee amendment. 
Because of the procedural situation we are in, these matters will not 
be in the Senate-passed bill. That is unfortunate, but, if we are to 
get a bill out of the Senate, these proposals became casualties for the 
cause.
  The first proposal deals with dividend allocation rules for 
cooperatives. This proposal would allow the payments of dividends on 
the stock of cooperatives without reducing patronage dividends. This 
measure is very important for energy production and agriculture and, I 
expect, would have easily cleared the Senate.
  The second proposal deals with an expansion of the qualified zone 
academy bond program to cover certain ``green'' teaching facilities 
recognized by the Department of Energy. This is an important matter for 
one such facility in my home State of Iowa. Like the first proposal, I 
expect this provision would have easily cleared the Senate.
  The third proposal deals with publicly-traded partnerships. This 
proposal would permit mutual funds to acquire interests in publicly-
traded partnerships. Publicly-traded partnerships are a key source of 
financing for energy production projects such as pipelines.
  I regret the procedural situation we find ourselves in. 
Unfortunately, these important priorities will not be directly 
addressed in the Senate bill. I intend to raise them in conference in 
the spirit of this bill. If not successful, I will pursue them on 
future tax vehicles.

                          ____________________