[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.
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