[Congressional Record Volume 151, Number 104 (Wednesday, July 27, 2005)]
[Senate]
[Pages S9117-S9147]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                    TECHNICAL EXPLANATION OF H.R. 6

  I ask unanimous consent that a document entitled ``Description and 
Technical Explanation of the Conference Agreement of H.R. 6, Title 
XIII, ``Energy Tax Incentives Act of 2005,'' prepared by the Joint 
Committee on Taxation, dated July 27, 2005, be printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

 Description and Technical Explanation of the Conference Agreement of 
       H.R. 6, Title XIII, ``Energy Tax Incentives Act of 2005''

                A. Energy Infrastructure Tax Incentives

     1. Natural gas gathering lines treated as seven-year property 
         (sec. 1301 of the House bill, sec. 1326 of the conference 
         agreement, 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 either of which 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. In 
     each of three recent cases, appellate courts have held that 
     natural gas gathering lines owned by nonprocedures fall 
     within the scope of Asset class 13.2 (i.e., seven-year 
     recovery period). The appellate court in each case reversed a 
     lower court holding that natural gas gathering lines owned by 
     nonproducers fall within the scope of Asset class 46.0 (i.e., 
     15-year recovery period). The IRS has not yet indicated 
     whether it acquiesces in the result in these three appellate 
     decisions in cases arising in other circuits.


                               house bill

       The House bill establishes a statutory seven-year recovery 
     period and a class life of 14 years for natural gas gathering 
     lines. In addition, no adjustment will be made to the 
     allowable amount of depreciation with respect to this 
     property for purposes of computing a taxpayer's alternative 
     minimum taxable income. 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 House bill provision is effective for 
     property placed in service after April 11, 2005. No inference 
     is intended as to the proper treatment of natural gas 
     gathering lines placed in service on or before April 11, 
     2005.


                            senate amendment

       No provision.


                          conference agreement

       The conference agreement follows the House bill, except 
     that the provision requires that the original use of the 
     property begin with the taxpayer. The provision does not 
     apply to property with respect to which the taxpayer (or a 
     related party) had a binding acquisition contract on or 
     before April 11, 2005.
     2. Natural gas distribution lines treated a fifteen-year 
         property (sec. 1302 of the House bill, sec. 1515 of the 
         Senate amendment, sec. 1325 of the conference agreement, 
         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.


                               house bill

       The House bill establishes a statutory 15-year recovery 
     period and a class life of 35 years for natural gas 
     distribution lines.
       Effective date.--The House bill provision is effective for 
     property placed in service after April 11, 2005.


                            senate amendment

       The Senate amendment is the same as the House bill, except 
     the Senate amendment requires that the original use of the 
     property being with the taxpayer and that the property be 
     placed in service prior to January 1, 2008.
       Effective date.--The Senate amendment provision is 
     effective for property placed in service after the date of 
     enactment. However, the provision does not apply to property 
     subject to a binding contract on or before June 14, 2005.


                          conference agreement

       The conference agreement follows the House bill, with the 
     following modifications. The conference agreement is 
     effective for property, the original use of which begins with 
     the taxpayer after April 11, 2005, which is placed in service 
     after April 11, 2005 and before January 1, 2011. The 
     provision does not apply to property subject to a binding 
     contract on or before April 11, 2005.
     3. Transmission property treated as fifteen-year property 
         (sec. 1301 of the House bill, sec. 1308 of the conference 
         agreement, 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 transmission 
     and distribution of electricity for sale and related land 
     improvements are assigned a 20-year recovery period and a 
     class life of 30 years.


                               House Bill

       The House bill provision establishes a statutory 15-year 
     recovery period and a class life

[[Page S9118]]

     of 30 years for certain assets used in the transmission of 
     electricity for sale and related land improvements. For 
     purposes of the provision, section 1245 property used in the 
     transmission at 69 or more kilovolts of electricity for sale, 
     the original use of which commences with the taxpayers after 
     April 11, 2005, will qualify for the new recovery period.
       Effective date.--The House bill provision is effective for 
     property placed in service after April 11, 2005.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement follows the House bill, except 
     that the provision does not apply to property which is the 
     subject of a binding contract on or before April 11, 2005.
     4. Amortization of atmospheric pollution control facilities 
         (sec. 1304 of the House bill, sec. 1309 of the conference 
         agreement, and sec. 169 of the Code)


                              Present Law

       In general, a taxpayer may elect to recover the cost of any 
     certified pollution control facility over a period of 60 
     months. A certified pollution control facility is defined as 
     a new, identifiable treatment facility which (1) is used in 
     connection with a plant in operation before January 1, 1976, 
     to abate or control water or atmospheric pollution or 
     contamination by removing, altering, disposing, storing, or 
     preventing the creation or emission of pollutants, 
     contaminants, wastes or heat; and (2) does not lead to a 
     significant increase in output or capacity, a significant 
     extension of useful life, a significant reduction in total 
     operating costs for such plant or other property (or any unit 
     thereof), or a significant alteration in the nature of a 
     manufacturing production process or facility. Certification 
     is required by appropriate State and Federal authorities that 
     the facility complies with appropriate standards.
       For a pollution control facility with a useful life greater 
     than 15 years, only the portion of the basis attributable to 
     the first 15 years is eligible to be amortized over a 60-
     month period. In addition, a corporate taxpayer must reduce 
     the amount of basis otherwise eligible for the 60-month 
     recovery by 20 percent. The amount of basis not eligible for 
     60-month amortization is depreciable under the regular tax 
     rules for depreciation.


                               House Bill

       The House bill expands the provision allowing a taxpayer to 
     recover the cost of certain certified air pollution control 
     facilities (but not water pollution control facilities) over 
     60 months by repealing the requirement that only certified 
     pollution control facilities used in connection with a plant 
     in operation before January 1, 1976 qualify. Under the House 
     bill, a certified air pollution control facility which used 
     in connection with an electric generation plant which is 
     primarily coal fired will be eligible for 60-month 
     amortization regardless of whether the associated plant or 
     other property was in operation prior to January 1, 1976. In 
     the case of a facility used in connection with a plant or 
     other property not in operation before January 1, 1976, the 
     facility must be property that either (i) the construction, 
     reconstruction, or erection of which is completed by the 
     taxpayer after April 11, 2005 (to the extent of the portion 
     of the basis properly attributable to the construction, 
     reconstruction, or erection after that date), or (ii) is 
     acquired after April 11, 2005, if the original use of the 
     property commences with the taxpayer after that date. The 
     House bill does not change the present-law rules relating to 
     corporate taxpayers or to pollution control facilities with a 
     useful life greater than 15 years, and the House bill does 
     not modify in any way the treatment of water pollution 
     control facilities.
       Effective date.--The provision is effective for air 
     pollution control facilities placed in service after April 
     11, 2005.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement follows the House bill, except 
     that the amortization period is 84 months (rather than 60 
     months) for certified air pollution control facilities used 
     in connection with an electric generation plant which is 
     primarily coal fired and which was not in operation before 
     January 1, 1976.

     5. Modification of credit for producing fuel from a non-
       conventional source (sec. 1305 of the House bill, secs. 
       1321 and 1322 of the conference agreement, and sec. 29 and 
       new sec. 45K 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 (``section 29 credit''). 
     Qualified fuels must be produced within the United States.
       Qualified fuels include:
       oil produced from shale and tar sands;
       gas produced from geopressured brine, Devonian shale, coal 
     seams, tight formations, or biomass; and
       liquid, gaseous, or solid synthetic fuels produced from 
     coal (including lignite).
       Generally, the section 29 credit has expired, except for 
     certain biomass gas and synthetic fuels sold before January 
     1, 2008, and produced at facilities placed in service after 
     December 31, 1992, and before July 1, 1998.
       The section 29 credit may not exceed the excess of the 
     regular tax liability over the tentative minimum tax. Unused 
     section 29 credits may not be carried forward or carried back 
     to other taxable years. However, to the extent the section 29 
     credit is disallowed because of the tentative minimum tax, 
     the minimum tax credit allowable in future years is increased 
     by the amount so disallowed.
       Other business credits are included in the general business 
     credit (sec. 38). Generally, the general business credit may 
     not exceed the excess of the taxpayer's net income tax over 
     the greater of the taxpayer's tentative minimum tax or 25 
     percent of so much of the taxpayer's net regular tax 
     liability as exceeds $25,000. General business credits in 
     excess of this limitation may be carried back one year and 
     forward up to 20 years. The section 29 credit is not part of 
     the general business credit.
       The section 29 credit includes definitional cross-
     references and a credit limitation relating to the Natural 
     Gas Policy Act of 1978. The Natural Gas Policy Act of 1978 
     has been repealed.


                               House Bill

       The provision makes the credit for producing fuel from a 
     non-conventional source part of the general business credit. 
     Thus, the credit for producing fuel from a non-conventional 
     source will be subject to the limitations applicable to the 
     general business credit. Any unused credits may be carried 
     back one year and forward 20 years.
       The provision also makes certain clerical changes in cross-
     references to the Natural Gas Policy Act of 1978, which has 
     been repealed.
       Effective date.--The provision applies to credits 
     determined for taxable years ending after December 31, 2005. 
     The clerical changes are effective on the date of enactment.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement follows the House provision with 
     modifications. In addition to making the section 29 credit 
     part of the general business credit, the conference agreement 
     adds a production credit for qualified facilities that 
     produce coke or coke gas. Qualified facilities must have been 
     placed in service before January 1, 1993, or after June 30, 
     1998, and before January 1, 2010. The conferees understand 
     that a single facility for the production of coke or coke gas 
     is generally composed of multiple coke ovens or similar 
     structures.
       The production credit may be claimed with respect to coke 
     and coke gas produced and sold during the period beginning on 
     the later of January 1, 2006, or the date such facility is 
     placed in service and ending on the date which is four years 
     after such period began. The amount of credit-eligible coke 
     produced may not exceed an average barrel-of-oil equivalent 
     of 4,000 barrels per day. The $3.00 credit for coke or coke 
     gas is indexed for inflation using 2004 as the base year 
     instead of 1979. A facility that has claimed a credit under 
     Code section 29(g) is not eligible to claim the new credit 
     for producing coke or coke gas.
       The conferees understand that the Internal Revenue Service 
     has stopped issuing private letter rulings and other 
     taxpayer-specific guidance regarding the section 29 credit. 
     The conferees believe that the Internal Revenue Service 
     should consider issuing such rulings and guidance on an 
     expedited basis to those taxpayers who had pending ruling 
     requests at the time the moratorium was implemented.

  6. Modification to special rules for nuclear decommissioning costs 
 (sec. 1306 of the House bill, sec. 1310 of the conference agreement, 
                       and sec. 468A of the Code)


                              Present Law

     Overview
       Special rules dealing with nuclear decommissioning reserve 
     funds were enacted 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

[[Page S9119]]

     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.


                               House Bill

     Repeal of cost of service requirement
       The House bill repeals the cost of service requirement for 
     deductible contributions to a nuclear decommissioning fund. 
     Thus, all taxpayers, including unregulated taxpayers, are 
     allowed a deduction for amounts contributed to a qualified 
     fund.
     Permit contributions to a qualified fund for pre-1984 
         decommissioning costs
       The House bill 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 
     House bill does not change the requirement that contributions 
     to a qualified fund not be deducted more rapidly than level 
     funding.
     Exception to ruling amount for certain decommissioning costs
       The House bill 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 total nuclear 
     decommissioning costs with respect to a nuclear powerplant 
     previously excluded under section 468A(d)(2)(A). 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 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, the transferor will be permitted a deduction for any 
     remaining deductible amounts at the time of transfer.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2005.


                              Senate Bill

       No provision.


                          Conference Agreement

       The conference agreement follows the House bill, with the 
     following modification. The conference agreement requires 
     that a taxpayer apply for a new ruling amount with respect to 
     a nuclear powerplant in any tax year in which the powerplant 
     is granted a license renewal, extending its useful life.

 7. Arbitrage rules not to apply to prepayments for natural gas (sec. 
1307 of the House bill, sec. 1327 of the conference agreement, and sec. 
                            148 of the Code)


                              Present Law

     Arbitrage restrictions
       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. 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.'' The term 
     investment-type property includes the acquisition of property 
     in a transaction involving a prepayment if a principal 
     purpose of the prepayment is to receive an investment return 
     from the time the prepayment is made until the time payment 
     otherwise would be made. 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 August 4, 2003, the Treasury Department issued final 
     regulations deeming to be customary, and not in violation of 
     the arbitrage rules, certain prepayments for natural gas and 
     electricity. Generally, a qualified prepayment under the 
     regulations requires that 90 percent of the natural gas or 
     electricity purchased with the prepayment be used for a 
     qualifying use. Generally, natural gas is used for a 
     qualifying use if it is to be (1) furnished to retail gas 
     customers of the issuing municipal utility who are located in 
     the natural gas service area of the issuing municipal 
     utility, however, gas used to produce electricity for sale is 
     not included under this provision (2) used by the issuing 
     municipal utility to produce electricity that will be 
     furnished to retail electric service area customers of the 
     issuing utility, (3) used by the issuing municipal utility to 
     produce electricity that will be sold to a utility owned by a 
     governmental person and furnished to the service area retail 
     electric customers of the purchaser, (4) sold to a utility 
     that is owned by a governmental person if the requirements of 
     (1), (2) or (3) are satisfied by the purchasing utility 
     (treating the purchaser as the issuing utility) or (5) used 
     to fuel the pipeline transportation of the prepaid gas 
     supply. Electricity is used for a qualifying use if it is to 
     be (1) furnished to retail service area electric customers of 
     the issuing municipal utility or (2) sold to a municipal 
     utility and furnished to retail electric customers of the 
     purchaser who are located in the electricity service area of 
     the purchaser.
     Private activity bond tests
       State and local bonds may be classified as either 
     governmental bonds or private activity bonds. Governmental 
     bonds are bonds the proceeds of which are primarily used to 
     finance governmental functions or the debt is repaid with 
     governmental funds. Private activity bonds are bonds where 
     the State or local government serves as a conduit providing 
     financing to private businesses or individuals. A bond will 
     be treated as a private activity bond if more than five 
     percent of the proceeds of the bond issue, or, if less, more 
     than $5,000,000 is used (directly or indirectly) to make or 
     finance loans to persons other than governmental units (the 
     ``private loan financing test'') or if it meets the 
     requirements of a two-part private business test.
       The exclusion from income for State and local bonds does 
     not apply to private activity bonds, unless the bonds are 
     issued for certain purposes permitted by the Code. Section 
     141(d) of the Code provides that the term ``private activity 
     bond'' includes any bond issued as part of an issue if the 
     amount of the proceeds of the issue which are to be used 
     (directly or indirectly) for the acquisition by a 
     governmental unit of nongovernmental output property exceeds 
     the lesser of five percent of such proceeds or $5 million. 
     ``Nongovernmental output property'' generally means any 
     property (or interest therein) which before such acquisition 
     was used (or held for use) by a person other than a 
     governmental unit in connection with an output facility 
     (other than a facility for the furnishing of water). An 
     exception applies to output property which is to be used in 
     connection with an output facility 95 percent or more of the 
     output of which will be consumed in (1) a qualified service 
     area of the governmental unit acquiring the property, or (2) 
     a qualified annexed area of such unit.


                               House Bill

     In general
       The House bill creates a safe harbor exception to the 
     general rule that tax-exempt bond-financed 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 House bill, 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 contract if 
     the volume of natural gas secured for any 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

[[Page S9120]]

     are issued. A retail customer is one who does not purchase 
     natural gas for resale. Natural gas used to generate 
     electricity by a utility owned by a governmental unit is 
     counted as retail natural gas consumption if the electricity 
     was sold to retail customers within the service area of the 
     governmental electric utility.
     Adjustments
       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 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 
     government utility enters into a contract to supply natural 
     gas (other than for resale) for a commercial person for use 
     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 calculation of average annual retail natural gas 
     consumption 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 (1) the volume of natural gas 
     covered by the prepayment to be in excess of that needed for 
     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.
     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 services, or in the case of 
     an electric utility, electricity distribution services; (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.
     Nongovernmental output property restrictions
       A qualified natural gas supply contract as defined in the 
     provision is not nongovernmental output property for purposes 
     of subsection (d) of section 141. Subsection (d) of section 
     141 does not apply to prepayment contracts for natural gas or 
     electricity that either under the Treasury regulations or 
     statutory safe harbor are not investment-type property for 
     purposes of the arbitrage rules under section 148. No 
     inference is intended regarding the application of subsection 
     141(d) to prepayment contracts not covered by the statutory 
     safe harbor or Treasury regulations.
     Application to joint action agencies
       In a number of States, joint action agencies serve as 
     purchasing agents for their member municipal gas utilities. 
     The provision is intended to allow municipal utilities in a 
     State to participate in such buying arrangements as 
     established under State law, subject to the same limitations 
     that would apply if an individual utility were to purchase 
     gas directly. When acting on behalf of its municipal gas 
     utility members, the total amount of gas that can be 
     purchased by a joint action agency under the provision's 
     exception to the arbitrage rules is the aggregate of what 
     each such member could purchase for itself on a direct basis. 
     Thus, with respect to qualified natural gas supply contracts 
     entered into by joint action agencies for or on behalf of one 
     or more member municipal utilities, the requirements of the 
     safe harbor are tested at the individual municipal utility 
     level based on the amount of gas that would be allocated to 
     such member during any year covered by the contract.
       Effective date.--The provision is effective for bonds 
     issued after the date of enactment.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement follows the House bill.
     8. Determination of small refiner exception to oil depletion 
         deduction (sec. 1308 of the House bill, sec. 1328 of the 
         conference agreement, and sec. 613A of the Code)


                              Present Law

       Present law classifies oil and gas producers as independent 
     producers or integrated companies. The Code provides 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. A refinery run is the volume of inputs of crude oil 
     (excluding any product derived from oil) into the refining 
     stream.


                               House Bill

       The bill increases the current 50,000-barrel-per-day 
     limitation to 75,000. In addition, the bill 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 runs for the taxable 
     year may not exceed 75,000 barrels. For this purpose, the 
     taxpayer calculates average daily refinery runs by dividing 
     total refinery runs 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 date of enactment.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement follows the House bill.
     9. Extension and modification of renewable electricity 
         production credit (secs. 1501-1503 of the Senate 
         amendment, secs. 1301 and 1302 of the conference 
         agreement, and sec. 45 of the Code)


                              Present Law

     In general
       An income tax credit is allowed for the production of 
     electricity from qualified facilities sold by the taxpayer to 
     an unrelated person (sec. 45). Qualified facilities comprise 
     wind energy facilities, closed-loop biomass facilities, open-
     loop biomass (including agricultural livestock waste 
     nutrients) facilities, geothermal energy facilities, solar 
     energy facilities, small irrigation power facilities, 
     landfill gas facilities, and trash combustion facilities. In 
     addition, an income tax credit is allowed for the production 
     of refined coal.
     Credit amounts and credit period
       In general
       The base amount of the credit is 1.5 cents per kilowatt-
     hour (indexed for inflation) of electricity produced. The 
     amount of the credit is 1.9 cents per kilowatt-hour for 2005. 
     A taxpayer may claim credit for the 10-year period commencing 
     with the date the qualified facility is placed in service. 
     The credit is reduced for grants, tax-exempt bonds, 
     subsidized energy financing, and other credits. The amount of 
     credit a taxpayer may claim is phased out as the market price 
     of electricity (or refined coal in the case of the refined 
     coal production credit) exceeds certain threshold levels.
       Reduced credit amounts and credit periods
       In the case of open-loop biomass facilities (including 
     agricultural livestock waste nutrient facilities), geothermal 
     energy facilities, solar energy facilities, small irrigation 
     power facilities, landfill gas facilities, and trash 
     combustion facilities, the 10-year credit period is reduced 
     to five years commencing on the date the facility is placed 
     in service. In general, for eligible pre-existing facilities 
     and other facilities placed in service prior to January 1, 
     2005, the credit period commences on January 1, 2005. In the 
     case of a closed-loop biomass facility modified to co-fire 
     with coal, to co-fire with other biomass, or to co-fire with 
     coal and other biomass, the credit period begins no earlier 
     than October 22, 2004.
       In the case of open-loop biomass facilities (including 
     agricultural livestock waste nutrient facilities), small 
     irrigation power facilities, landfill gas facilities, and 
     trash combustion facilities, the otherwise allowable credit 
     amount is 0.75 cent per kilowatt-hour, indexed for inflation 
     measured after 1992 (currently 0.9 cents per kilowatt-hour 
     for 2005).
       Credit applicable to refined coal
       The amount of the credit for refined coal is $4.375 per ton 
     (also indexed for inflation after 1992 and equaling $5.481 
     per ton for 2005).
       Other limitations on credit claimants and credit amounts
       In general, in order to claim the credit, a taxpayer must 
     own the qualified facility and sell the electricity produced 
     by the facility (or refined coal in the case of the refined 
     coal production credit) to an unrelated party. A lessee or 
     operator may claim the credit in lieu of the owner of the 
     qualifying facility in the case of qualifying open-loop 
     biomass facilities originally placed in service on or before 
     the date of enactment and in the case of a closed-loop 
     biomass facilities modified to co-fire with coal, to co-fire 
     with other biomass, or to co-fire with coal and

[[Page S9121]]

     other biomass. In the case of a poultry waste facility, the 
     taxpayer may claim the credit as a lessee or operator of a 
     facility owned by a governmental unit.
       For all qualifying facilities, other than closed-loop 
     biomass facilities modified to co-fire with coal, to co-fire 
     with other biomass, or to co-fire with coal and other 
     biomass, the amount of credit a taxpayer may claim is reduced 
     by reason of grants, tax-exempt bonds, subsidized energy 
     financing, and other credits, but the reduction cannot exceed 
     50 percent of the otherwise allowable credit. In the case of 
     closed-loop biomass facilities modified to co-fire with coal, 
     to co-fire with other biomass, or to co-fire with coal and 
     other biomass, there is no reduction in credit by reason of 
     grants, tax-exempt bonds, subsidized energy financing, and 
     other credits.
       The credit for electricity produced from renewable sources 
     is a component of the general business credit (sec. 
     38(b)(8)). Generally, the general business credit for any 
     taxable year may not exceed the amount by which the 
     taxpayer's net income tax exceeds the greater of the 
     tentative minimum tax or so much of the net regular tax 
     liability as exceeds $25,000. Excess credits may be carried 
     back one year and forward up to 20 years.
       A taxpayer's tentative minimum tax is treated as being zero 
     for purposes of determining the tax liability limitation with 
     respect to the section 45 credit for electricity produced 
     from a facility (placed in service after October 22, 2004) 
     during the first four years of production beginning on the 
     date the facility is placed in service.
     Qualified facilities
       Wind energy facility
       A wind energy facility is a facility that uses wind to 
     produce electricity. To be a qualified facility, a wind 
     energy facility must be placed in service after December 31, 
     1993, and before January 1, 2006.
       Closed-loop biomass facility
       A closed-loop biomass facility is a facility that uses any 
     organic material from a plant which is planted exclusively 
     for the purpose of being used at a qualifying facility to 
     produce electricity. In addition, a facility can be a closed-
     loop biomass facility if it is a facility that is modified to 
     use closed-loop biomass to co-fire with coal, with other 
     biomass, or with both coal and other biomass, but only if the 
     modification is approved under the Biomass Power for Rural 
     Development Programs or is part of a pilot project of the 
     Commodity Credit Corporation.
       To be a qualified facility, a closed-loop biomass facility 
     must be placed in service after December 31, 1992, and before 
     January 1, 2006. In the case of a facility using closed-loop 
     biomass but also co-firing the closed-loop biomass with coal, 
     other biomass, or coal and other biomass, a qualified 
     facility must be originally placed in service and modified to 
     co-fire the closed-loop biomass at any time before January 1, 
     2006.
       Open-loop biomass (including agricultural livestock waste 
           nutrients) facility
       An open-loop biomass facility is a facility using open-loop 
     biomass to produce electricity. Open-loop biomass is defined 
     as (1) any agricultural livestock waste nutrients, or (2) any 
     solid, nonhazardous, cellulosic or lignin waste material 
     which is segregated from other waste materials and which is 
     derived from certain forest-related resources, solid wood 
     waste materials, or agricultural sources. Eligible forest-
     related resources are mill residues, other than spent 
     chemicals from pulp manufacturing, 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 open-loop biomass does not 
     include municipal solid waste (garbage), gas derived from 
     biodegradation of solid waste, or paper that is commonly 
     recycled. In addition, open-loop biomass does not include 
     closed-loop biomass or any biomass burned in conjunction with 
     fossil fuel (co-firing) beyond such fossil fuel required for 
     start up and flame stabilization.
       Agricultural livestock waste nutrients are defined as 
     agricultural livestock manure and litter, including bedding 
     material for the disposition of manure.
       To be a qualified facility, an open-loop biomass facility 
     must be placed in service after October 22, 2004 and before 
     January 1, 2006, in the case of a facility using agricultural 
     livestock waste nutrients and must be placed in service at 
     any time prior to January 1, 2006 in the case of a facility 
     using other open-loop biomass.
       Geothermal facility
       A geothermal facility is a facility that uses geothermal 
     energy to produce electricity. 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). To be a qualified facility, a geothermal facility 
     must be placed in service after October 22, 2004 and before 
     January 1, 2006.
       Solar facility
       A solar facility is a facility that uses solar energy to 
     produce electricity. To be a qualified facility, a solar 
     facility must be placed in service after October 22, 2004 and 
     before January 1, 2006.
       Small irrigation facility
       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 must be not less 
     than 150 kilowatts but less than five megawatts. To be a 
     qualified facility, a small irrigation facility must be 
     originally placed in service after October 22, 2004 and 
     before January 1, 2006.
       Landfill gas facility
       A landfill gas facility is a facility that uses landfill 
     gas to produce electricity. Landfill gas is defined as 
     methane gas derived from the biodegradation of municipal 
     solid waste. To be a qualified facility, a landfill gas 
     facility must be placed in service after October 22, 2004 and 
     before January 1, 2006.
     Trash combustion facility
       Trash combustion facilities are facilities that burn 
     municipal solid waste (garbage) to produce steam to drive a 
     turbine for the production of electricity. To be a qualified 
     facility, a trash combustion facility must be placed in 
     service after October 22, 2004 and before January 1, 2006.
       Refined coal facility
       A qualifying refined coal facility is a facility producing 
     refined coal that is placed in service after October 22, 2004 
     and before January 1, 2009. Refined coal is a qualifying 
     liquid, gaseous, or solid synthetic fuel produced from coal 
     (including lignite) or high-carbon fly ash, including such 
     fuel used as a feedstock. A qualifying fuel is a fuel that 
     when burned emits 20 percent less nitrogen oxides and either 
     SO2 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. In addition, to be qualified refined 
     coal the fuel must be sold by the taxpayer with the 
     reasonable expectation that it will be used for the primary 
     purpose of producing steam.
     Summary of credit rate and credit period by facility type

  TABLE 1.--SUMMARY OF SECTION 45 CREDIT FOR ELECTRICITY PRODUCED FROM
              CERTAIN RENEWABLE RESOURCES AND REFINED COAL
------------------------------------------------------------------------
                                    Credit amount for    Credit period
     Electricity produced from       2005  (cents per     (years from
        renewable resources           kilowatt-hour;   placed-in-service
                                     dollars per ton)       date)\1\
------------------------------------------------------------------------
Wind..............................                1.9                 10
Closed-loop biomass...............                1.9                 10
Open-loop biomass (including                      0.9                  5
 agricultural livestock waste
 nutrient facilities).............
Geothermal........................                1.9                  5
    Solar.........................                1.9                  5
Small irrigation power............                0.9                  5
Municipal solid waste (including                  0.9                  5
 landfill gas facilities and trash
 combustion facilities)...........
                                   -------------------------------------
    Refined Coal..................              5.481                 10
------------------------------------------------------------------------
\1\ For eligible pre-existing facilities and other facilities placed in
  service prior to January 1, 2005, the credit period commences on
  January 1, 2005. In the case of certain co-firing closed-loop
  facilities, the credit period begins no earlier than October 22, 2004.

     Taxation of cooperatives and their patrons
       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. Generally, 
     cooperatives that are subject to the cooperative tax rules of 
     subchapter T of the Code 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. 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. Present law does not permit 
     cooperatives to pass any portion of the income tax credit for 
     electricity production through to their patrons.


                               house bill

       No provision.


                            senate amendment

     Extension of placed-in-service date for qualifying facilities
       The provision extends the placed-in-service date by three 
     years (through December 31, 2008) for the following 
     qualifying facilities: wind facilities; closed-loop biomass 
     facilities (including a facility co-firing the closed-loop 
     biomass with coal, other biomass, or coal and other biomass); 
     open-loop biomass facilities; geothermal facilities; small 
     irrigation power facilities; landfill gas facilities; and 
     trash combustion facilities. The proposal does not extend the 
     terminating placed-in-service date for solar facilities 
     (December 31, 2005) or refined coal facilities (December 31, 
     2008).
     New qualifying energy resources
       The provision adds three new qualifying energy resources: 
     fuel cells; hydropower; and wave, current, tidal, and ocean 
     thermal energy.
       Fuel cells
       A qualifying fuel cell facility is an integrated system 
     composed of a fuel cell stack assembly and associated balance 
     of plant components that converts a fuel into electricity 
     using electrochemical means. A qualifying facility must have 
     an electricity-

[[Page S9122]]

     only generation efficiency of greater than 30 percent, 
     generate at least 0.5 megawatt of electricity, and be placed 
     in service after December 31, 2005 and before January 1, 
     2009.
       Hydropower
       A qualifying hydropower facility is (1) a facility that 
     produced hydroelectric power (a hydroelectric dam) prior to 
     the date of enactment at which efficiency improvements or 
     additions to capacity have been made after the date of 
     enactment and before January 1, 2009, that enable the 
     taxpayer to produce incremental hydropower or (2) a facility 
     placed in service before the date of enactment that did not 
     produce hydroelectric power (a nonhydroelectric dam) on the 
     date of enactment and to which turbines or other electricity 
     generating equipment have been added after the date of 
     enactment and before January 1, 2009.
       At an existing hydroelectric facility, the taxpayer may 
     only claim credit for the production of incremental 
     hydroelectric power. Incremental hydroelectric power for any 
     taxable year is equal to the percentage of average annual 
     hydroelectric power produced at the facility attributable to 
     the efficiency improvement or additions of capacity 
     determined by using the same water flow information used to 
     determine an historic average annual hydroelectric power 
     production baseline for that facility. The Federal Energy 
     Regulatory Commission will certify the baseline power 
     production of the facility and the percentage increase due to 
     the efficiency and capacity improvements.
       At a nonhydroelectric dam, the facility must be licensed by 
     the Federal Energy Regulatory Commission and meet all other 
     applicable environmental, licensing, and regulatory 
     requirements and the turbines or other generating devices are 
     added to the facility after the date of enactment and before 
     January 1, 2009. In addition there must not be any 
     enlargement of the diversion structure, or construction or 
     enlargement of a bypass channel, or the impoundment or any 
     withholding of additional water from the natural stream 
     channel.
       In the case of electricity generated from a qualifying 
     hydropower facility, the taxpayer may claim a credit equal to 
     one-half the otherwise allowable amount.
       Wave, current, tidal, and ocean thermal energy
       A qualifying wave, current, tidal, and ocean thermal energy 
     facility is a facility placed in service after the date of 
     enactment and before January 1, 2009 that uses free flowing 
     ocean water derived from tidal currents, ocean currents, 
     waves, or estuary currents, ocean thermal energy, or free 
     flowing water in rivers, lakes, man-made channels, or streams 
     to produce electricity. However, a qualifying facility does 
     not include any facility that includes impoundment structures 
     or a small irrigation power facility.
     Equalization of credit period for all qualifying renewable 
         resources
       The provision extends the credit period from five years to 
     10 years for electricity produced from qualifying open-loop 
     biomass facilities (including agricultural livestock waste 
     nutrient facilities), geothermal facilities, solar 
     facilities, small irrigation power facilities, landfill gas 
     facilities, and trash combustion facilities placed in service 
     after the date of enactment. The provision also provides that 
     for electricity produced from the energy resources newly 
     qualified under the bill--fuel cells, hydropower, and wave, 
     current, tidal, and ocean thermal energy--the credit period 
     is 10 years.
     Clarification of units added to pre-existing trash combustion 
         facilities
       The provision clarifies that a qualifying trash combustion 
     facility includes a new unit, placed in service after October 
     22, 2004, that increases electricity production capacity at 
     an existing trash combustion facility. A new unit generally 
     would include a new burner/boiler and turbine. The new unit 
     may share certain common equipment, such as trash handling 
     equipment, with other pre-existing units at the same 
     facility. Electricity produced at a new unit of an existing 
     facility qualifies for the production credit only to the 
     extent of the increased amount of electricity produced at the 
     entire facility.
     Taxation of cooperatives and their patrons
       The Senate amendment allows eligible cooperatives to elect 
     to pass any portion of the credit through to their patrons. 
     An eligible cooperative is defined as a cooperative 
     organization that is owned more than 50 percent by 
     agricultural producers or entities owned by agricultural 
     producers.
       Under the Senate amendment, the credit may be apportioned 
     among patrons eligible to share in patronage dividends on the 
     basis of the quantity or value of business done with or for 
     such patrons for the taxable year. The election must be made 
     on a timely filed return for the taxable year, and once made, 
     is irrevocable for such taxable year.
       The amount of the credit apportioned to patrons is not 
     included in the organization's credit for the taxable year of 
     the organization. The amount of the credit apportioned to a 
     patron is included in the taxable year the patron with or 
     within which the taxable year of the organization ends. If 
     the amount of the credit for any taxable year is less than 
     the amount of the credit shown on the cooperative's return 
     for such taxable year, an amount equal to the excess of the 
     reduction in the credit over the amount not apportioned to 
     patrons for the taxable year is treated as an increase in the 
     cooperative's tax. The increase is not treated as tax imposed 
     for purposes of determining the amount of any tax credit.
       Effective date.--The provision generally is effective on 
     the date of enactment.


                          Conference Agreement

       The conference agreement follows the Senate amendment with 
     modifications.
     Extension of placed-in-service date for qualifying facilities
       The conference agreement extends the placed-in-service date 
     by two years (through December 31, 2007) for the following 
     qualifying facilities: wind facilities; closed-loop biomass 
     facilities (including a facility co-firing the closed-loop 
     biomass with coal, other biomass, or coal and other biomass); 
     open-loop biomass facilities; geothermal facilities; small 
     irrigation power facilities; landfill gas facilities; and 
     trash combustion facilities. The conference agreement does 
     not alter the terminating placed-in-service date for solar 
     facilities (December 31, 2005) or refined coal facilities 
     (December 31, 2008).
     New qualifying energy resources
       The conference agreement adds two new qualifying energy 
     resources: hydropower; and Indian coal.
       Hydropower
       The conference agreement follows the Senate amendment with 
     respect to hydropower.
       Indian coal
       The conference agreement adds Indian coal as a new energy 
     source. The taxpayer may claim a credit for sales of coal to 
     an unrelated third party from a qualified facility for the 
     seven- year period beginning on January 1, 2006, and ending 
     after December 31, 2012. The value of the credit is $1.50 per 
     ton for the first four years of the seven-year period and 
     $2.00 per ton for the last three years of the seven-year 
     period. The credit amounts are indexed for inflation. A 
     qualified Indian coal facility is a facility that produces 
     coal from reserves that on June 14, 2005, were owned by a 
     Federally recognized tribe of Indians or were held in trust 
     by the United States for a tribe or its members.
     Equalization of credit period for all qualifying renewable 
         resources
       The conference agreement follows the Senate amendment with 
     respect to equalization of the credit period for qualifying 
     open-loop biomass facilities (including agricultural 
     livestock waste nutrient facilities), geothermal facilities, 
     solar facilities, small irrigation power facilities, landfill 
     gas facilities, trash combustion facilities, and hydropower 
     facilities. The conference agreement provides a seven-year 
     credit period for Indian coal facilities, as explained above.
     Clarification of units added to pre-existing trash combustion 
         facilities
       The conference agreement follows the Senate amendment with 
     respect to clarification of units added to pre-existing trash 
     combustion facilities.
     Taxation of cooperatives and their patrons
       The conference agreement follows the Senate amendment with 
     respect to the taxation of cooperatives and their patrons.
       Effective date.--The provision generally is effective on 
     the date of enactment. With respect to the taxation of 
     cooperatives and their patrons, the provision applies to 
     taxable years ending after the date of enactment.
     10. Clean renewable energy bonds (sec. 1504 of the Senate 
         amendment, sec. 1303 of the conference agreement, and new 
         sec. 54 of the Code)


                              Present law

     Tax-exempt bonds
       Interest on State and local governmental bonds generally is 
     excluded from gross income for Federal income tax purposes if 
     the proceeds of the bonds are used to finance direct 
     activities of these governmental units or if the bonds are 
     repaid with revenues of the governmental units. Subject to 
     certain restrictions, activities that can be financed with 
     these tax-exempt bonds include electric power facilities 
     (i.e., generation, transmission, distribution, and 
     retailing).
       Generally, interest on State or local government bonds to 
     finance activities of private persons (``private activity 
     bonds'') is taxable unless a specific exception is contained 
     in the Code. The term ``private person'' generally includes 
     the Federal Government and all other individuals and entities 
     other than States or local governments. The Code includes 
     exceptions permitting States or local governments to act as 
     conduits providing tax-exempt financing for certain private 
     activities. In most cases, the aggregate volume of these tax-
     exempt private activity bonds is restricted by annual 
     aggregate volume limits imposed on bonds issued by issuers 
     within each State. For calendar year 2005, the State volume 
     cap is the greater of $80 per resident or $239 million. The 
     Code imposes several additional restrictions on tax-exempt 
     private activity bonds that do not apply to bonds for 
     governmental activities.
       The tax exemption for State and local bonds also does not 
     apply to any arbitrage bond. An arbitrage bond is defined as 
     any bond that is part of an issue if any proceeds of the 
     issue are reasonably expected to be used (or intentionally 
     are used) to acquire higher yielding investments or to 
     replace funds that are used to acquire higher yielding 
     investments. In general, arbitrage profits may be earned only 
     during specified periods (e.g., defined ``temporary 
     periods'') before funds are needed for the purpose of the 
     borrowing or on specified types of investments

[[Page S9123]]

     (e.g., ``reasonably required reserve or replacement funds''). 
     Subject to limited exceptions, investment profits that are 
     earned during these periods or on such investments must be 
     rebated to the Federal government.
       An issuer must file with the IRS certain information in 
     order for a bond issue to be tax-exempt. Generally, this 
     information return is required to be filed no later the 15th 
     day of the second month after the close of the calendar 
     quarter in which the bonds were issued.
     Qualified zone academy bonds
       As an alternative to traditional tax-exempt bonds, States 
     and local governments may issue ``qualified zone academy 
     bonds.'' ``Qualified zone academy bonds'' are defined as any 
     bond issued by a State or local government, provided that (1) 
     at least 95 percent of the proceeds are used for the purpose 
     of renovating, providing equipment to, developing course 
     materials for use at, or training teachers and other school 
     personnel in a ``qualified zone academy'' and (2) private 
     entities have promised to contribute to the qualified zone 
     academy certain equipment, technical assistance or training, 
     employee services, or other property or services with a value 
     equal to at least 10 percent of the bond proceeds. A school 
     is a ``qualified zone academy'' if (1) the school is a public 
     school that provides education and training below the college 
     level, (2) the school operates a special academic program in 
     cooperation with businesses to enhance the academic 
     curriculum and increase graduation and employment rates, and 
     (3) either (a) the school is located in an empowerment zone 
     or enterprise community designated under the Code, or (b) it 
     is reasonably expected that at least 35 percent of the 
     students at the school will be eligible for free or reduced-
     cost lunches under the school lunch program established under 
     the National School Lunch Act.
       Financial institutions that hold qualified zone academy 
     bonds are entitled to a nonrefundable tax credit in an amount 
     equal to a credit rate multiplied by the face amount of the 
     bond. The Treasury Department sets the credit rate at a rate 
     estimated to allow issuance of qualified zone academy bonds 
     without discount and without interest cost to the issuer. The 
     credit is includable in gross income (as if it were a taxable 
     interest payment on the bond), and may be claimed against 
     regular income tax and AMT liability. The maximum term of the 
     bond is determined by the Treasury Department, so that the 
     present value of the obligation to repay the bond is 50 
     percent of the face value of the bond.
       There is an annual limitation of $400 million on the amount 
     of qualified zone academy bonds that may be issued in 
     calendar years 1998 through 2005. The $400 million aggregate 
     bond cap is allocated each year to the States according to 
     their respective populations of individuals below the poverty 
     line. Each State, in turn, allocates the credit authority to 
     qualified zone academies within such State.
     Tax credits for production of electricity from renewable 
         sources
       An income tax credit is allowed for the production of 
     electricity from qualified facilities sold by the taxpayer to 
     an unrelated person. The base amount of the credit is 1.5 
     cents per kilowatt-hour (indexed for inflation) of 
     electricity produced. The amount of the credit is 1.9 cents 
     per kilowatt-hour for 2005. A taxpayer may claim credit for 
     the 10-year period commencing with the date the qualified 
     facility is placed in service. The credit is reduced for 
     grants, tax-exempt bonds, subsidized energy financing, and 
     other credits. The amount of credit a taxpayer may claim is 
     phased out as the market price of electricity (or refined 
     coal in the case of or refined coal production credit) 
     exceeds certain threshold levels.
       Qualified facilities comprise wind energy facilities, 
     closed-loop biomass facilities, open-loop biomass (including 
     agricultural livestock waste nutrients) facilities, 
     geothermal energy facilities, solar energy facilities, small 
     irrigation power facilities, landfill gas facilities, and 
     trash combustion facilities. In addition, an income tax 
     credit is allowed for the production of refined coal.
       For purposes of the credit, qualified facilities must be 
     placed in service by certain dates. However, with the 
     exception of qualifying refined coal facilities, in no event 
     may qualifying facilities be placed in service after December 
     31, 2005.


                               House Bill

       No provision.


                            Senate Amendment

       The provision creates a new category of tax credit bonds: 
     Clean Renewable Energy Bonds (``CREBs''). CREBs are defined 
     as any bond issued by a qualified issuer if, in addition to 
     the requirements discussed below, 95 percent or more of the 
     proceeds of such bonds are used to finance capital 
     expenditures incurred by qualified borrowers for facilities 
     that qualify for the tax credit under section 45 (``qualified 
     projects''), without regard to the placed-in-service date 
     requirements of that section.
       Like qualified zone academy bonds, CREBs are not interest-
     bearing obligations. Rather, the taxpayer holding CREBs on a 
     credit allowance date would be entitled to a tax credit. The 
     amount of the credit is determined by multiplying the bond's 
     credit rate by the face amount on the holder's bond. The 
     credit rate on the bonds is determined by the Secretary and 
     is to be a rate that permits issuance of CREBs without 
     discount and interest cost to the qualified issuer. The 
     credit accrues quarterly and is includible in gross income 
     (as if it were an interest payment on the bond), and can be 
     claimed against regular income tax liability and alternative 
     minimum tax liability.
       The provision also imposes a maximum maturity limitation on 
     any CREBs. The maximum maturity is the term which the 
     Secretary estimates will result in the present value of the 
     obligation to repay the principal on a CREBs being equal to 
     50 percent of the face amount of such bond. Moreover, the 
     provision requires level amortization of CREBs during the 
     period such bonds are outstanding.
       For purposes of the provision, ``qualified issuers'' 
     include (1) governmental bodies (including Indian tribal 
     governments); (2) the Tennessee Valley Authority; (3) mutual 
     or cooperative electric companies (described in section 
     501(c)(12) or section 1381(a)(2)(C), or a not-for-profit 
     electric utility which has received a loan or guarantee under 
     the Rural Electrification Act); and (4) clean energy bond 
     lenders. A clean energy bond lender means a cooperative which 
     is owned by, or has outstanding loans to, 100 or more 
     cooperative electric companies and is in existence on 
     February 1, 2002. The term ``qualified borrower'' includes a 
     governmental body, the Tennessee Valley Authority, and a 
     mutual or cooperative electric company.
       Under the provision, CREBs are subject to the arbitrage 
     requirements of section 148 that apply to traditional tax-
     exempt bonds. Principles under section 148 and the 
     regulations thereunder shall apply for purposes of 
     determining the yield restriction and arbitrage rebate 
     requirements applicable to CREBs. For example, for arbitrage 
     purposes, the yield on an issue of CREBs is computed by 
     taking into account all payments of interest, if any, on such 
     bonds, i.e., whether the bonds are issued at par, premium, or 
     discount. However, for purposes of determining yield, the 
     amount of the credit allowed to a taxpayer holding CREBs is 
     not treated as interest, although such credit amount is 
     treated as interest income to the taxpayer.
       In addition, to qualify as CREBs, the qualified issuer must 
     reasonably expect to and actually spend 95 percent or more of 
     the proceeds of such bonds on qualified projects within the 
     five-year period that begins on the date of issuance. To the 
     extent less than 95 percent of the proceeds are used to 
     finance qualified projects during the five-year spending 
     period, bonds will continue to qualify as CREBs if unspent 
     proceeds are used within 90 days from the end of such five-
     year period to redeem any ``nonqualified bonds.'' For these 
     purposes, the amount of nonqualified bonds is to be 
     determined in the same manner as Treasury regulations under 
     section 142. In addition, the provision provides that the 
     five-year spending period may be extended by the Secretary 
     upon the qualified issuer's request.
       Unlike qualified zone academy bonds, the provision requires 
     issuers of CREBs to report issuance to the IRS in a manner 
     similar to the information returns required for tax-exempt 
     bonds. Under the provision, there is a national limitation of 
     $1 billion of CREBs that the Secretary may allocate, in the 
     aggregate, to qualified projects. The authority to issue 
     CREBs expires December 31, 2008.
       Effective date.--The provision is effective for bonds 
     issued after December 31, 2005.


                          Conference Agreement

       The conference agreement follows the Senate amendment with 
     modifications. Under the conference agreement, the term 
     ``qualified issuers'' includes (1) governmental bodies 
     (including Indian tribal governments); (2) mutual or 
     cooperative electric companies (described in section 
     501(c)(12) or section 1381(a)(2)(C), or a not-for-profit 
     electric utility which has received a loan or guarantee under 
     the Rural Electrification Act); and (3) clean energy bond 
     lenders. The term ``qualified borrower'' includes a 
     governmental body (including an Indian tribal government) and 
     a mutual or cooperative electric company.
       Under the conference agreement, there is a national 
     limitation of $800 million of CREBs that the Secretary may 
     allocate, in the aggregate, to qualified projects. Qualified 
     projects are any ``qualified facilities'' within the meaning 
     of section 45 (without regard to the placed-in-service date 
     requirements of that section), other than Indian coal 
     production facilities. In addition, the conference agreement 
     provides that the authority to issue CREBs expires December 
     31, 2007. However, the Secretary shall not allocate more than 
     $500 million of CREBs to finance qualified projects for 
     qualified borrowers that are governmental bodies (as defined 
     under the conference agreement).
     11. Treatment of income of certain electric cooperatives 
         (sec. 1505 of the Senate amendment, sec. 1304 of the 
         conference agreement, and sec. 501(c)(12) 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 Internal Revenue Service 
     requires that cooperatives must operate under

[[Page S9124]]

     the following principles: (1) subordination of capital in 
     control over the cooperative undertaking and in ownership of 
     the financial benefits from ownership; (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 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. 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.
     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.'' 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: (1) qualified pole rentals; (2) 
     open access electric energy transmission services; (3) open 
     access electric energy distribution services; (4) any nuclear 
     decommissioning transaction; (5) any asset exchange or 
     conversion transaction.
       Income from open access transactions
       Income received or accrued by a rural electric cooperative 
     (other than income received or accrued directly or indirectly 
     from a member of the cooperative) from the provision or sale 
     of electric energy transmission services or ancillary 
     services on a nondiscriminatory open access basis under an 
     open access transmission tariff approved or accepted by FERC 
     or under an independent transmission provider agreement 
     approved or accepted by FERC (including an agreement 
     providing for the transfer of control--but not ownership--of 
     transmission facilities) is excluded in determining whether a 
     rural electric cooperative satisfies the 85-percent test for 
     tax exemption under section 501(c)(12).
       In addition, income is excluded for purposes of the 85-
     percent test if it is received or accrued by a rural electric 
     cooperative (other than income received or accrued directly 
     or indirectly from a member of the cooperative) from the 
     provision or sale of electric energy distribution services or 
     ancillary services, provided such services are provided on a 
     nondiscriminatory open access basis to distribute electric 
     energy not owned by the cooperative: (1) to end-users who are 
     served by distribution facilities not owned by the 
     cooperative or any of its members; or (2) generated by a 
     generation facility that is not owned or leased by the 
     cooperative or any of its members and that is directly 
     connected to distribution facilities owned by the cooperative 
     or any of its members.
       The exclusion for income from open access transactions does 
     not apply to taxable years beginning after December 31, 2006.
       Income from nuclear decommissioning transactions
       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.
       The exclusion for income from nuclear decommissioning 
     transactions does not apply to taxable years beginning after 
     December 31, 2006.
       Income from asset exchange or conversion transactions
       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 natural gas.
       The exclusion for income from asset exchange or conversion 
     transactions does not apply to taxable years beginning after 
     December 31, 2006.
     Treatment of income from load loss transactions
       Tax-exempt rural electric cooperatives
       Under present law, income received or accrued by a tax-
     exempt rural electric cooperative from a ``load loss 
     transaction'' is treated under section 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). In addition, 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 first year that the cooperative 
     offers nondiscriminatory open access or, if later and at the 
     election of the cooperative, 2004.
       Present law also excludes income received or accrued by 
     rural electric cooperatives from load loss transactions from 
     the tax on unrelated trade or business income.
       The special rule for income received or accrued by a tax-
     exempt rural electric cooperative from a load loss 
     transaction does not apply to taxable years beginning after 
     December 31, 2006.
       Taxable electric cooperatives
       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. In addition, 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.
       The special rule for income received or accrued by a 
     taxable electric cooperative from a load loss transaction 
     does not apply to taxable years beginning after December 31, 
     2006.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment eliminates the sunset date for the 
     rules excluding income received or accrued by tax-exempt 
     rural electric cooperatives from open access electric energy 
     transmission or distribution services,

[[Page S9125]]

     any nuclear decommissioning transaction, and any asset 
     exchange or conversion transaction for purposes of the 85-
     percent test under section 501(c)(12). The provision also 
     eliminates the sunset date for the rule that allows income 
     from load loss transactions to be treated as member income in 
     determining whether a rural electric cooperative satisfies 
     the 85-percent test. In addition, the provision eliminates 
     the sunset date for the rule that permits taxable electric 
     cooperatives to treat the receipt or accrual of income from 
     load loss transactions as income from patrons who are members 
     of the cooperative.
       Effective date.--The provision is effective on the date of 
     enactment.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     12. Dispositions of transmission property to implement FERC 
         restructuring policy (sec. 1506 of the Senate amendment, 
         sec. 1305 of the conference agreement, and sec. 451 of 
         the Code)


                              Present Law

       Generally, a taxpayer selling property 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.
       One such special tax provision permits taxpayers to elect 
     to recognize gain from qualifying electric transmission 
     transactions ratably over an eight-year period beginning in 
     the year of sale if the amount realized from such sale is 
     used to purchase exempt utility property within the 
     applicable period (the ``reinvestment property''). If the 
     amount realized exceeds the amount used to purchase 
     reinvestment property, any realized gain is recognized to the 
     extent of such excess in the year of the qualifying electric 
     transmission transaction.
       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, 2007. In 
     general, an independent transmission company is defined as: 
     (1) an independent transmission provider approved by the 
     FERC; (2) a person (i) who the FERC determines under section 
     203 of the Federal Power Act (or by declaratory order) is not 
     a ``market participant'' and (ii) whose transmission 
     facilities are placed under the operational control of a 
     FERC-approved independent transmission provider before the 
     close of the period specified in such authorization, but not 
     later than January 1, 2007; or (3) in the case of facilities 
     subject to the jurisdiction of the Public Utility Commission 
     of Texas, (i) a person which is approved by that Commission 
     as consistent with Texas State law regarding an independent 
     transmission organization, or (ii) a political subdivision, 
     or affiliate thereof, whose transmission facilities are under 
     the operational control of an organization described in (i).
       Exempt utility property is defined as: (1) property used in 
     the trade or business of generating, transmitting, 
     distributing, or selling electricity or producing, 
     transmitting, distributing, or selling natural gas, or (2) 
     stock in a controlled corporation whose principal trade or 
     business consists of the activities described in (1).
       If a taxpayer is a member of an affiliated group of 
     corporations filing a consolidated return, the reinvestment 
     property may be purchased by any member of the affiliated 
     group (in lieu of the taxpayer).


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provision extends the treatment under 
     the present-law deferral provision to sales or dispositions 
     to an independent transmission company prior to January 1, 
     2008.
       Effective date.--The Senate amendment provision is 
     effective for transactions occurring after the date of 
     enactment. However, because the provision is an extension of 
     a present law provision which expires on December 31, 2006, 
     only transactions occurring after December 31, 2006 and prior 
     to January 1, 2008 will be affected.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     13. Credit for production from advanced nuclear power 
         facilities (sec. 1507 of the Senate amendment, sec. 1306 
         of the conference agreement, and new sec. 45J of the 
         Code)


                              Present Law

       An income tax credit is allowed for production of 
     electricity from qualified facilities sold by the taxpayer to 
     an unrelated person (sec. 45). Qualified facilities comprise 
     wind energy facilities, ``closed-loop'' biomass facilities, 
     open-loop biomass (including agricultural livestock waste 
     nutrients) facilities, geothermal energy facilities, solar 
     energy facilities, small irrigation power facilities, 
     landfill gas facilities, and trash combustion facilities. The 
     base amount of the credit is 1.5 cents per kilowatt-hour 
     (indexed for inflation) of electricity produced. The amount 
     of the credit is 1.9 cents per kilowatt-hour for 2005. 
     However, electricity produced at open-loop biomass, small 
     irrigation power, and municipal solid waste facilities 
     receives only 50 percent of the credit, or 0.9 cents per 
     kilowatt-hour for 2005. Generally, wind and closed-loop 
     biomass facilities may claim this credit for 10 years from 
     the placed-in-service date of the facility. Other qualified 
     facilities may claim the credit for only five years from the 
     placed-in-service date.
       Present law does not provide a credit for electricity 
     produced at advanced nuclear power facilities.


                               House Bill

       No provision.


                            Senate Amendment

       The provision permits a taxpayer producing electricity at a 
     qualifying advanced nuclear power facility to claim a credit 
     equal to 1.8 cents per kilowatt-hour of electricity produced 
     for the eight-year period starting when the facility is 
     placed in service. The aggregate amount of credit that a 
     taxpayer may claim in any year during the eight-year period 
     is subject to limitation based on allocated capacity and an 
     annual limitation as described below.
       A qualifying advanced nuclear facility is an advanced 
     nuclear facility for which the taxpayer has received an 
     allocation of megawatt capacity from the Secretary and is 
     placed in service before January 1, 2021. The taxpayer may 
     only claim credit for production of electricity equal to the 
     ratio of the allocated capacity that the taxpayer receives 
     from the Secretary to the rated nameplate capacity of the 
     taxpayer's facility. For example, if the taxpayer receives 
     an allocation of 750 megawatts of capacity from the 
     Secretary and the taxpayer's facility has a rated 
     nameplate capacity of 1,000 megawatts, then the taxpayer 
     may claim three-quarters of the otherwise allowable 
     credit, or 1.35 cents per kilowatt-hour, for each 
     kilowatt-hour of electricity produced at the facility 
     (subject to the annual limitation described below). The 
     Secretary may allocate up to 6,000 megawatts of capacity.
       A taxpayer operating a qualified facility may claim no more 
     than $125 million in tax credits per 1,000 megawatts of 
     allocated capacity in any one year of the eight-year credit 
     period. If the taxpayer operates a 1,350 megawatt rated 
     nameplate capacity system and has received an allocation from 
     the Secretary for 1,350 megawatts of capacity eligible for 
     the credit, the taxpayer's annual limitation on credits that 
     may be claimed is equal to 1.35 times $125 million, or 
     $168.75 million. If the taxpayer operates a facility with a 
     nameplate rated capacity of 1,350 megawatts, but has received 
     an allocation from the Secretary for 750 megawatts of credit 
     eligible capacity, then the two limitations apply such that 
     the taxpayer may claim a credit equal to 1.35 cents per 
     kilowatt-hour of electricity produced (as described above) 
     subject to an annual credit limitation of $93.75 million in 
     credits (three-quarters of $125 million).
       An advanced nuclear facility is any nuclear facility for 
     the production of electricity, the reactor design for which 
     was approved after 1993 by the Nuclear Regulatory Commission. 
     For this purpose, a qualifying advanced nuclear facility does 
     not include any facility for which a substantially similar 
     design for a facility of comparable capacity was approved 
     before 1994.
       In addition, the credit allowable to the taxpayer is 
     reduced by reason of grants, tax-exempt bonds, subsidized 
     energy financing, and other credits, but such reduction 
     cannot exceed 50 percent of the otherwise allowable credit. 
     The credit is treated as part of the general business credit.
       Effective date.--The provision applies to electricity 
     produced in taxable years beginning after the date of 
     enactment.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     14. Credit for investment in clean coal facilities (sec. 1508 
         of the Senate amendment, sec. 1307 of the conference 
         agreement, and new secs. 48A and 48B of the Code)


                              Present Law

       Present law does not provide an investment credit for 
     electricity production facilities property that uses coal as 
     a fuel or for the gasification of coal or other materials. 
     However, a nonrefundable, 10-percent investment tax credit 
     (``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). The energy credit 
     is a component of the general business credit (sec. 
     38(b)(1)).


                               House Bill

       No provision.


                            Senate Amendment

       The provision creates two new 20-percent investment tax 
     credits. Both credits are available only to projects 
     certified by the Secretary of Treasury, in consultation with 
     the Secretary of Energy. Certifications are issued using a 
     competitive bidding process.
       With respect to the first investment tax credit, the 
     provision establishes a 10-year program to produce 7,500 
     megawatts of power generation capacity using integrated 
     gasification combined cycle (``IGCC'') and other advanced 
     coal-based electricity generation technologies. Qualified 
     projects must be economically feasible and use the 
     appropriate clean coal technologies. The Secretary of

[[Page S9126]]

     Treasury, in consultation with the Secretary of Energy, must 
     allocate up to 4,125 megawatts of power generation capacity 
     to credit-eligible projects using IGCC technology. The 
     remaining 3,375 megawatts of power generation capacity must 
     be allocated to credit-eligible projects that use other 
     advanced coal-based technologies.
       In determining which projects to certify that use IGCC 
     technology, the Secretary must allocate power generation 
     capacity in relatively equal amounts to projects that use 
     bituminous coal, subbituminous coal, and lignite as primary 
     feedstock. In addition, the Secretary must give high priority 
     to projects which include greenhouse gas capture capability, 
     increased by-product utilization, and other benefits.
       With respect to the second investment tax credit, the 
     provision authorizes the certification of certain 
     gasification projects. Qualified gasification projects 
     convert coal, petroleum residue, biomass, or other materials 
     recovered for their energy or feedstock value into a 
     synthesis gas composed primarily of carbon monoxide and 
     hydrogen for direct use or subsequent chemical or physical 
     conversion. Under the provision, certified gasification 
     projects are eligible for the new 20 percent investment tax 
     credit. The total qualified investment which may be certified 
     as eligible for credit under the gasification program may not 
     exceed $4 billion. In addition, the Secretary may certify a 
     maximum of $1 billion in qualified investment as eligible for 
     credit with respect to any single project.
       Effective date.--The credits apply to periods after the 
     date of enactment, under rules similar to the rules of 
     section 48(m) (as in effect before its repeal).


                          Conference Agreement

       The conference agreement follows the Senate amendment with 
     modifications. Under the conference agreement, the Secretary 
     may allocate investment credits for projects using IGCC and 
     other advanced coal-based technologies based on the amount 
     invested, rather than on megawatts of power generation 
     capacity. The Secretary may allocate $800 million of credits 
     to IGCC projects and $500 million of credits to projects 
     using other advanced coal-based technologies.
       Under the agreement, the credit available to IGCC projects 
     remains 20 percent of qualified investments; however, the 
     credit for other advanced coal-based projects is reduced to 
     15 percent of qualified investments. With respect to IGCC 
     projects, the conference agreement narrows the definition of 
     credit-eligible investments to include only investments in 
     property associated with the gasification of coal, including 
     any coal handling and gas separation equipment. Thus, 
     investments in equipment that could operate by drawing fuel 
     directly from a natural gas pipeline do not qualify for the 
     credit.
       The conference agreement retains the 20 percent investment 
     credit for certified gasification projects. The agreement, 
     however, reduces the total amount of gasification credits 
     allocable by the Secretary to $350 million. A maximum of $650 
     million of credit-eligible investment may be allocated to any 
     single gasification project. The conference agreement also 
     clarifies that only property which is part of a qualifying 
     gasification project and necessary for the gasification 
     technology of such project is eligible for the gasification 
     credit.
     15. Clean energy coal bonds (sec. 1509 of the Senate 
         amendment)


                              Present law

     Tax-exempt bonds
       Interest on State and local governmental bonds generally is 
     excluded from gross income for Federal income tax purposes if 
     the proceeds of the bonds are used to finance direct 
     activities of these governmental units or if the bonds are 
     repaid with revenues of the governmental units. Subject to 
     certain restrictions, activities that can be financed with 
     these tax-exempt bonds include electric power facilities 
     (i.e., generation, transmission, distribution, and 
     retailing).
       Generally, interest on State or local government bonds to 
     finance activities of private persons (``private activity 
     bonds'') is taxable unless a specific exception is contained 
     in the Code. The term ``private person'' generally includes 
     the Federal Government and all other individuals and entities 
     other than States or local governments. The Code includes 
     exceptions permitting States or local governments to act as 
     conduits providing tax-exempt financing for certain private 
     activities. In most cases, the aggregate volume of these tax-
     exempt private activity bonds is restricted by annual 
     aggregate volume limits imposed on bonds issued by issuers 
     within each State. For calendar year 2005, the State volume 
     cap is the greater of $80 per resident or $239 million. The 
     Code imposes several additional restrictions on tax-exempt 
     private activity bonds that do not apply to bonds for 
     governmental activities.
       The tax exemption for State and local bonds also does not 
     apply to any arbitrage bond. An arbitrage bond is defined as 
     any bond that is part of an issue if any proceeds of the 
     issue are reasonably expected to be used (or intentionally 
     are used) to acquire higher yielding investments or to 
     replace funds that are used to acquire higher yielding 
     investments. In general, arbitrage profits may be earned only 
     during specified periods (e.g., defined ``temporary 
     periods'') before funds are needed for the purpose of the 
     borrowing or on specified types of investments (e.g., 
     ``reasonably required reserve or replacement funds''). 
     Subject to limited exceptions, investment profits that are 
     earned during these periods or on such investments must be 
     rebated to the Federal Government.
       An issuer must file with the IRS certain information in 
     order for a bond issue to be tax-exempt. Generally, this 
     information return is required to be filed no later than the 
     15th day of the second month after the close of the calendar 
     quarter in which the bonds were issued.
     Qualified zone academy bonds
       As an alternative to traditional tax-exempt bonds, States 
     and local governments may issue ``qualified zone academy 
     bonds.'' ``Qualified zone academy bonds'' are defined as any 
     bond issued by a State or local government, provided that (1) 
     at least 95 percent of the proceeds are used for the purpose 
     of renovating, providing equipment to, developing course 
     materials for use at, or training teachers and other school 
     personnel in a ``qualified zone academy'' and (2) private 
     entities have promised to contribute to the qualified zone 
     academy certain equipment, technical assistance or training, 
     employee services, or other property or services with a value 
     equal to at least 10 percent of the bond proceeds. A school 
     is a ``qualified zone academy'' if (1) the school is a public 
     school that provides education and training below the college 
     level, (2) the school operates a special academic program in 
     cooperation with businesses to enhance the academic 
     curriculum and increase graduation and employment rates, and 
     (3) either (a) the school is located in an empowerment zone 
     or enterprise community designated under the Code, or (b) it 
     is reasonably expected that at least 35 percent of the 
     students at the school will be eligible for free or reduced-
     cost lunches under the school lunch program established under 
     the National School Lunch Act.
       Financial institutions that hold qualified zone academy 
     bonds are entitled to a nonrefundable tax credit in an amount 
     equal to a credit rate multiplied by the face amount of the 
     bond. The Treasury Department sets the credit rate at a rate 
     estimated to allow issuance of qualified zone academy bonds 
     without discount and without interest cost to the issuer. The 
     credit is includable in gross income (as if it were a taxable 
     interest payment on the bond), and may be claimed against 
     regular income tax and AMT liability. The maximum term of the 
     bond is determined by the Treasury Department, so that the 
     present value of the obligation to repay the bond is 50 
     percent of the face value of the bond.
       There is an annual limitation of $400 million on the amount 
     of qualified zone academy bonds that may be issued in 
     calendar years 1998 through 2005. The $400 million aggregate 
     bond cap is allocated each year to the States according to 
     their respective populations of individuals below the poverty 
     line. Each State, in turn, allocates the credit authority to 
     qualified zone academies within such State.


                               House Bill

       No provision.


                            Senate Amendment

       The provision creates a new category of tax credit bonds: 
     Clean Energy Coal Bonds (``ClECos''). ClECos are defined as 
     any bond issued by a qualified issuer if, in addition to 
     the requirements discussed below, 95 percent or more of 
     the proceeds of such bonds are used to finance capital 
     expenditures incurred by qualified borrowers for 
     ``certified coal property.'' Certified coal property is 
     defined as any property that is part of a qualifying 
     advanced coal project certified by the Secretary.
       Like qualified zone academy bonds, ClECos are not interest-
     bearing obligations. Rather, the taxpayer holding a ClECos on 
     a credit allowance date would be entitled to a tax credit. 
     The amount of the credit is determined by multiplying the 
     bond's credit rate by the face amount on the holder's bond. 
     The credit rate on the bonds is determined by the Secretary 
     and is to be a rate that permits issuance of ClECos without 
     discount and interest cost to the qualified issuer. The 
     credit accrues quarterly and is includible in gross income 
     (as if it were an interest payment on the bond), and can be 
     claimed against regular income tax liability and alternative 
     minimum tax liability.
       For purposes of the provision, ``qualified issuers'' 
     include (1) governmental bodies; (2) the Tennessee Valley 
     Authority; (3) mutual or cooperative electric companies 
     (described in section 501(c)(12) or section 1381(a)(2)(C), or 
     a not-for-profit electric utility which has received a loan 
     or guarantee under the Rural Electrification Act); and (4) 
     clean energy bond lenders. A clean energy bond lender means a 
     cooperative which is owned by, or has outstanding loans to, 
     100 or more cooperative electric companies and is in 
     existence on February 1, 2002. The term ``qualified 
     borrower'' includes a governmental body, the Tennessee Valley 
     Authority, and a mutual or cooperative electric company.
       Under the provision, ClECos are subject to the arbitrage 
     requirements of section 148 that apply to traditional tax-
     exempt bonds. In addition, to qualify as ClECos, the 
     qualified issuer must reasonably expect to and actually spend 
     95 percent or more of the proceeds of such bonds on certified 
     coal property within the five-year period that begins on the 
     date of issuance. To the extent less than 95 percent of the 
     proceeds are used to finance qualified projects during the 
     five- year spending period, bonds will continue to qualify as 
     ClECos if unspent proceeds are used

[[Page S9127]]

     within 90 days from the end of such five-year period to 
     redeem any ``nonqualified bonds.'' For these purposes, the 
     amount of nonqualified bonds is to be determined in the same 
     manner as Treasury regulations under section 142. In 
     addition, the provision provides that the five-year spending 
     period may be extended by the Secretary upon the qualified 
     issuer's request.
       The provision also imposes a maximum maturity limitation on 
     any ClECos. The maximum maturity is the term which the 
     Secretary estimates will result in the present value of the 
     obligation to repay the principal on a ClECos being equal to 
     50 percent of the face amount of such bond. Moreover, the 
     provision requires level amortization of ClECos during the 
     period such bonds are outstanding.
       Unlike qualified zone academy bonds, the provision requires 
     issuers of ClECos to report issuance to the IRS in a manner 
     similar to the information returns required for tax-exempt 
     bonds. Under the provision, there is a national limitation of 
     $1 billion of ClECos that the Secretary may allocate, in the 
     aggregate, to certified coal property projects. The authority 
     to issue ClECos expires December 31, 2010.
       Effective date.--The provision is effective for bonds 
     issued after December 31, 2005.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     16. Credit for investment in clean coke/cogeneration 
         manufacturing facilities (sec. 1511 of the Senate 
         amendment)


                              Present Law

       Present law does not provide a credit for investment in 
     clean coke/cogeneration manufacturing facilities property.


                               House Bill

       No provision.


                            Senate Amendment

       The provision provides a 20-percent investment tax credit 
     for qualified investments in clean coke/cogeneration 
     facilities property. The provision defines clean coke/
     cogeneration manufacturing facilities property as depreciable 
     real and tangible personal property located in the United 
     States that meets certain emission standards and is used for 
     the manufacture of metallurgical coke or for the production 
     of steam or electricity from waste heat generated during the 
     production of metallurgical coke.
       The qualified investment for any taxable year is the basis 
     of each coke/cogeneration facilities property placed in 
     service by the taxpayer during such taxable year. The 
     provision excludes the credit from the basis adjustment rules 
     for investment credit property set out in section 50(c) of 
     the Code. Under the basis adjustment rules, the basis in 
     investment credit property is generally reduced by the amount 
     of the investment credit.
       Effective date.--The provision applies to periods after 
     December 31, 2004, and before January 1, 2010, under rules 
     similar to the rules of section 48(m) (as in effect before 
     its repeal).


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     17. Temporary expensing for equipment used in the refining of 
         liquid fuels (sec. 1512 of the Senate amendment, sec. 
         1323 of the conference agreement, and new sec. 179C of 
         the Code)


                              Present Law

     Depreciation of refinery assets
       Under present law, depreciation allowances for property 
     used in a trade or business generally are determined under 
     the Modified Accelerated Cost Recovery System (``MACRS'') of 
     section 168 of the Internal Revenue Code. Under MACRS, 
     petroleum refining assets are depreciated for regular tax 
     purposes over a 10-year recovery period using the double 
     declining balance method. Petroleum refining assets are 
     assets used for distillation, fractionation, and catalytic 
     cracking of crude petroleum into gasoline and its other 
     components. Present law also provides a special expensing 
     rule for small refiners for capital costs incurred in 
     complying with Environmental Protection Agency sulfur 
     regulations.
     Taxation of cooperatives and their patrons
       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. Generally, 
     cooperatives that are subject to the cooperative tax rules of 
     subchapter T of the Code 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. 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.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provision provides a temporary 
     election to expense qualified refinery property. Qualified 
     refinery property includes assets, located in the United 
     States, used in the refining of liquid fuels: (1) with 
     respect to the construction of which there is a binding 
     construction contract before January 1, 2008; (2) which are 
     placed in service before January 1, 2012; (3) which increase 
     the capacity of an existing refinery by at least five percent 
     or increase the percentage of total throughput attributable 
     to qualified fuels (as defined in present law section 29(c), 
     which is redesignated as section 45K(c) by section 1322(a)(1) 
     of the Act) such that it equals or exceeds 25 percent; and 
     (4) which meet all applicable environmental laws in effect 
     when the property is placed in service.
       The expensing election is not available with respect to 
     identifiable refinery property built solely to comply with 
     Federally mandated projects or consent decrees. For example, 
     a taxpayer may not elect to expense the cost of a scrubber, 
     even if the scrubber is installed as part of a larger 
     project, if the scrubber does not increase throughput or 
     increased capacity to accommodate qualified fuels and is 
     necessary for the refinery to comply with the Clean Air Act. 
     This exclusion applies regardless of whether the mandate or 
     consent decree addresses environmental concerns with respect 
     to the refinery itself or the refined fuels.
       The Senate amendment provision allows cooperative 
     organizations to pass through to the owners of such 
     organizations the expensing deduction for qualified refinery 
     property. To the extent the deduction is passed through to 
     owners, the cooperative is denied deductions it would 
     otherwise be entitled with respect to qualified refinery 
     property.
       As a condition of eligibility for the expensing of 
     equipment used in the refining of liquid fuels, the Senate 
     amendment provision provides that a refinery must report to 
     the IRS concerning its refinery operations (e.g. production 
     and output).
       Effective date.--The Senate amendment provision is 
     effective for property placed in service after the date of 
     enactment, the original use of which begins with the 
     taxpayer, provided the property was not subject to a binding 
     contract for construction on or before June 14, 2005.


                          Conference Agreement

       The conference agreement follows the Senate amendment, with 
     the following modifications. Under the conference agreement, 
     the expensing election is limited to 50% of the taxpayer's 
     qualifying expenditures. The remaining 50% is recovered as 
     under present law.
       Under the conference agreement, the five percent capacity 
     requirement refers to the output capacity of the refinery, as 
     measured by the volume of finished products other than 
     asphalt and lube oil, rather than input capacity, as measured 
     by rated capacity.
       The conference agreement includes a clarification that the 
     expensing election is not available with respect to 
     identifiable refinery property built solely to comply with 
     consent decrees or projects mandated by Federal, State, or 
     local governments.
       Finally, an exception to the original use requirement is 
     provided for property which would meet the requirement but 
     for a sale-leaseback transaction within the first three 
     months after the property is originally placed in service.
       Under the conference agreement, a cooperative organization 
     electing to pass the expensing deduction through to its 
     owners must make such an election on the tax return for the 
     taxable year to which the deduction relates. Once made, the 
     election is irrevocable. Moreover, the organization making 
     the election must provide cooperative owners receiving an 
     allocation of the deduction written notice of the amount of 
     such allocation.
     18. Allow pass through to owners of deduction for capital 
         costs incurred by small refiner cooperative in complying 
         with Environmental Protection Agency sulfur regulations 
         (sec. 1513 of the Senate amendment, sec. 1324 of the 
         conference agreement, and sec. 179B of the Code)


                              Present Law

     Expensing and credit for small refiners
       Taxpayers generally may recover the costs of investments in 
     refinery property through annual depreciation deductions. In 
     addition, the Code permits small business refiners to 
     immediately deduct as an expense up to 75 percent of the 
     costs paid or incurred for the purpose of complying with the 
     Highway Diesel Fuel Sulfur Control Requirements of the 
     Environmental Protection Agency (``EPA''). Costs qualifying 
     for the deduction are those costs paid or incurred with 
     respect to any facility of a small business refiner during 
     the period beginning on January 1, 2003 and ending on the 
     earlier of the date that is one year after the date on 
     which the taxpayer must comply with the applicable EPA 
     regulations or December 31, 2009.
       The Code also provides that a small business refiner may 
     claim credit equal to five cents per gallon for each gallon 
     of low sulfur diesel fuel produced during the taxable year 
     that is in compliance with the Highway Diesel Fuel Sulfur 
     Control Requirements. The total production credit claimed by 
     the taxpayer is limited to 25 percent of the capital costs 
     incurred to come into compliance with the EPA diesel fuel 
     requirements. As with the deduction permitted under present 
     law, costs qualifying for the credit are those costs paid or 
     incurred with respect to any facility of a small business 
     refiner during the period beginning on January 1, 2003 and 
     ending on the earlier of the date that is one year after the 
     date on which the taxpayer must comply with the applicable 
     EPA regulations or December 31, 2009. The taxpayer's basis in 
     property with respect to which the credit applies

[[Page S9128]]

     is reduced by the amount of production credit claimed.
       For these purposes a small business refiner is a taxpayer 
     who is within the business of refining petroleum products 
     employs not more than 1,500 employees directly in refining 
     and has less than 205,000 barrels per day (average) of total 
     refinery capacity. The deduction is reduced, pro rata, for 
     taxpayers with capacity in excess of 155,000 barrels per day.
       In the case of a qualifying small business refiner that is 
     owned by a cooperative, the cooperative is allowed to elect 
     to pass any production credits to patrons of the 
     organization. Present law does not permit cooperatives to 
     pass through to members the deduction permitted for the costs 
     paid or incurred for the purpose of complying with the 
     Highway Diesel Fuel Sulfur Control Requirements.
     Taxation of cooperatives and their patrons
       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 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. 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.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment allows cooperatives to pass through to 
     their owners the deduction permitted for costs paid or 
     incurred for the purpose of complying with the Highway Diesel 
     Fuel Sulfur Control Requirements. To the extent the deduction 
     is passed through to owners, the cooperative is denied 
     deductions it would otherwise be entitled with respect to 
     costs attributable to complying with the Highway Diesel Fuel 
     Sulfur Control Requirements.
       Effective date.--The provision is effective as if included 
     in the amendments made by section 338(a) of the American Jobs 
     Creation Act of 2004.


                          Conference Agreement

       The conference agreement follows the Senate amendment with 
     modifications. The conference agreement clarifies the manner 
     in which a cooperative organization may elect to pass through 
     to cooperative owners the deduction for costs paid or 
     incurred for the purpose of complying with the Highway Diesel 
     Fuel Sulfur Control Requirements. Specifically, the election 
     must be made on the tax return of the organization for the 
     taxable year to which the deduction relates. Once made, the 
     election is irrevocable. Moreover, the organization making 
     such an election must provide cooperative owners receiving an 
     allocation of the deduction written notice of the amount of 
     such allocation. The written notice must be provided by the 
     due date for the tax return on which the election is made.
     19. Modification of enhanced oil recovery credit (sec. 1514 
         of the Senate amendment)


                              Present Law

       Taxpayers may claim a credit equal to 15 percent of 
     enhanced oil recovery (``EOR'') costs (sec. 43). Qualified 
     EOR costs include the following costs associated with an EOR 
     project: (1) amounts paid for depreciable tangible property; 
     (2) intangible drilling and development expenses; (3) 
     tertiary injectant expenses; and (4) construction costs for 
     certain Alaskan natural gas treatment facilities.
       The EOR credit is ratably reduced over a $6 phase-out range 
     when the reference price for domestic crude oil exceeds $28 
     per barrel (adjusted for inflation after 1991). The reference 
     price is determined based on the annual average price of 
     domestic crude oil for the calendar year preceding the 
     calendar year in which the taxable year begins (sec. 
     29(d)(2)(C)).


                               House Bill

       No provision.


                            Senate Amendment

       The provision modifies the EOR credit to increase the 
     credit rate to 20 percent with respect to any new EOR project 
     or substantial expansion of an existing EOR project that 
     occurs after December 31, 2005, and uses carbon dioxide 
     flooding or injection as an oil recovery method. The 
     increased credit is available only for qualified EOR projects 
     that use carbon dioxide that is (1) from an industrial source 
     or (2) separated from natural gas and natural gas liquids at 
     a natural gas processing plant.
       The provision also expands the definition of a qualified 
     EOR project to include qualified deep gas well projects. A 
     qualified deep gas well project is defined as any project 
     located in the United States which involves the production of 
     natural gas from onshore formations deeper than 20,000 feet. 
     Under the provision, the credit for qualified deep gas well 
     projects phases out as crude oil prices increase using the 
     same formula applicable to other EOR projects.
       Effective date.--The provision applies to costs paid or 
     incurred in taxable years ending after December 31, 2005, but 
     terminates for costs paid or incurred after December 31, 
     2009.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.

                 B. MISCELLANEOUS ENERGY TAX INCENTIVES

     1. Credit for residential energy efficient property (sec. 
         1311 of the House bill, sec. 1527 of the Senate 
         amendment, sec. 1335 of the conference agreement, 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 residential solar hot 
     water, photovoltaic, or fuel cell property.


                               house bill

       The provision provides a personal tax credit for the 
     purchase of 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 of qualified investment up to a 
     maximum credit of $2,000 for solar water heating property and 
     $2,000 for rooftop photovoltaic property. The provision also 
     provides a 15-percent personal tax credit for the purchase of 
     qualified fuel cell power plants. The credit may not exceed 
     $500 for each 0.5 kilowatt of capacity. The credit is 
     nonrefundable. The taxpayer's basis in the property is 
     reduced by the amount of the credit.
       Qualifying solar water heating property is property that 
     heats water for use in a dwelling unit 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. 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.
       To qualify for the credit, the property must be installed 
     on or in connection with a dwelling unit located in the 
     United States and used as a residence by the taxpayer. If 
     less than 80 percent of the use of an item is for nonbusiness 
     purposes, only that portion of the expenditures for such item 
     which is properly allocable to use for nonbusines purposes 
     shall be taken into account. 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.
       Effective date.--The credit applies to expenditures made 
     after the date of enactment in taxable years ending before 
     January 1, 2008.


                            senate amendment

       The provision provides a personal tax credit for the 
     purchase of 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 30 percent of qualifying expenditures, 
     with a maximum credit for each of these systems of property 
     of $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. A qualified fuel cell 
     power plant is an integrated system comprised of a fuel cell 
     stack assembly and associated balance of plant components 
     that (1) converts a fuel into electricity using 
     electrochemical means, (2) has an electricity-only generation 
     efficiency of greater than 30 percent, and (3) 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.

[[Page S9129]]

       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.
       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. 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 property placed in 
     service after December 31, 2005 and prior to January 1, 2010.


                          conference agreement

       The conference agreement follows the Senate amendment, but 
     only for property placed in service prior to January 1, 2008.
       Effective date.--The credit applies to property placed in 
     service after December 31, 2005 and prior to January 1, 2008.
     2. Credit for business installation of qualified fuel cells 
         and stationary microturbine power plants (sec. 1528 of 
         the Senate amendment, sec. 1336 of the conference 
         agreement, and sec. 48 of the Code)


                              present law

       A 10-percent business energy investment tax 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 investment tax credit is a component of 
     the general business credit. The general business credit 
     generally may not exceed the excess of the taxpayer's net 
     income tax over the greater of (1) the tentative minimum tax 
     or (2) 25 percent of net regular tax liability in excess of 
     $25,000. A general business credit in excess of the tax 
     limitation generally may be carried back one year and carried 
     forward up to 20 years.
       There is no present-law credit for fuel cell or 
     microturbine power plant property.


                               house bill

       The provision provides a 15-percent credit for the purchase 
     of qualified fuel cell power plants for businesses. The 
     credit is part of the business energy investment tax credit. 
     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. The credit may not exceed $500 for each 0.5 kilowatt 
     of capacity. The taxpayer's basis in the property is reduced 
     by the amount of the credit claimed.
       Effective date.--The provision applies to property placed 
     in service after April 11, 2005, and before January 1, 2008, 
     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).


                            senate amendment

       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 composed of a fuel cell stack assembly and 
     associated balance of plant components that (1) converts a 
     fuel into electricity using electrochemical means, (2) has an 
     electricity-only generation efficiency of greater than 30 
     percent, and (3) generates at least 0.5 kilowatts of 
     electricity. 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 that 
     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.
       Additionally, for purposes of the fuel cell and 
     microturbine credits, and only in the case of 
     telecommunications companies, the provision removes the 
     present-law section 48 restriction that would prevent 
     telecommunication companies from claiming the new credit due 
     to their status as public utilities.
       The credit is nonrefundable. The taxpayer's basis in the 
     property is reduced by the amount of the credit claimed.
       Effective date.--The credit applies to periods after 
     December 31, 2005 and before January 1, 2010 (January 1, 2009 
     in the case of micro turbines), for property placed in 
     service in taxable years ending after December 31, 2005, 
     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).


                          Conference Agreement

       The conference agreement follows the Senate amendment, but 
     only for periods before January 1, 2008.
       Effective date.--The credit applies to periods after 
     December 31, 2005 and before January 1, 2008, for property 
     placed in service in taxable years ending after December 31, 
     2005, 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).
     3. Business solar investment tax credit (sec. 1529 of the 
         Senate amendment, sec. 1337 of the conference agreement, 
         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 so much of the net regular 
     tax liability as exceeds $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).


                               House Bill

       No provision.


                            Senate Amendment

       The provision increases the 10-percent credit to 30-percent 
     in the case of solar energy property. Additionally, the 
     provision provides that equipment that uses fiber-optic 
     distributed sunlight to illuminate the inside of a structure 
     is solar energy property eligible for the 30-percent credit. 
     The provision provides that property used to generate energy 
     for the purposes of heating a swimming pool is not eligible 
     solar energy property.
       Effective date.--The provision applies to periods after 
     December 31, 2005 and before January 1, 2012 for property 
     placed in service in taxable years ending after December 31, 
     2005, 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).


                          conference agreement

       The conference agreement follows the Senate amendment, but 
     only for periods before January 1, 2008 with respect to the 
     30-percent credit and the fiber-optic distributed sunlight. 
     The conference agreement makes permanent the provision that 
     provides that property used to generate energy for the 
     purposes of heating a swimming pool is not eligible solar 
     energy property.
       Effective date.--The provision with respect to the heating 
     of swimming pools applies to periods after December 31, 2005. 
     The increase in the credit rate and the provision related to 
     fiber-optic distributed sunlight applies to periods after 
     December 31, 2005 and before January 1, 2008 for property 
     placed in service in taxable years ending after December 31, 
     2005, 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).
     4. Diesel-water fuel emulsion (sec. 1313 of the House bill, 
         sec. 1343 of the conference agreement, and sec. 4081 of 
         the Code)


                              Present Law

       A 24.3-cents-per-gallon excise tax is imposed on diesel 
     fuel to finance the Highway Trust Fund. Gasoline and most 
     special motor fuels are subject to tax at 18.3 cents per 
     gallon for the Trust Fund.
       The tax rate for certain special motor fuels is determined, 
     on an energy equivalent basis, as follows:

 
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Liquefied petroleum gas (propane).........  13.6 cents per gallon
Liquefied natural gas.....................  11.9 cents per gallon
Methanol derived from natural gas.........  9.15 cents per gallon
Compressed natural gas....................  48.54 cents per MCF
------------------------------------------------------------------------

       No special tax rate is provided for diesel fuel blended 
     with water to form a diesel-water fuel emulsion.


                               House Bill

       A special tax rate of 19.7 cents per gallon is provided for 
     diesel fuel blended with water into a diesel-water fuel 
     emulsion to reflect the reduced Btu content per gallon 
     resulting from the water. Emulsion fuels eligible for the 
     special rate must consist of not more than 83.1 percent 
     diesel (and other minor chemical additives to enhance 
     combustion) and at least 16.9 percent water. The emulsion 
     addition must be registered by a United States manufacturer 
     with the Environmental Protection Agency pursuant to section 
     211 of the Clean Air Act (as in effect on

[[Page S9130]]

     March 31, 2003). A refund of the difference between the 
     regular rate (24.3 cents per gallon) and the incentive rate 
     (19.7 cents per gallon) is available to the extent tax-paid 
     diesel is used to produce a qualifying emulsion diesel fuel. 
     Anyone who separates the diesel fuel from the diesel-water 
     fuel emulsion on which a reduced rate of tax was imposed is 
     treated as a refiner of the fuel and is liable for the 
     difference between the amount of tax on the latest removal of 
     the separated fuel and the amount of tax that was imposed 
     upon the pre-mixture removal.
       Effective date.--The provision is effective on January 1, 
     2006.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement follows the House bill except the 
     diesel-water emulsion fuels eligible for the special rate 
     must consist of least 14 percent water. In addition, the 
     person claiming entitlement to the special rate of tax must 
     be registered with the Secretary. The conference agreement 
     clarifies that claims for refund based on the incentive rate 
     may be filed quarterly if such person can claim at least 
     $750. If the person cannot claim at least $750 at the end of 
     quarter, the amount can be carried over to the next quarter 
     to determine if the person can claim at least $750. If the 
     person cannot claim at least $750 at the end of the taxable 
     year, the person must claim a credit on the person's income 
     tax return.
     5. Amortization of delay rental payments (sec. 1314 of the 
         House bill)


                              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. The 
     Internal Revenue Service has taken the position that the 
     uniform capitalization rules of section 263A require delay 
     rental payments to be capitalized.


                               House Bill

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


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not include the House 
     provision.
     6. Amortization of geological and geophysical expenditures 
         (sec. 1315 of the House bill, sec. 1329 of the conference 
         agreement, and sec. 167 of the Code)


                              Present Law

     In general
       Geological and geophysical expenditures (``G&G costs'') are 
     costs incurred by a taxpayer for the purpose of obtaining and 
     accumulating data 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 G&G 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 G&G 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 G&G 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 G&G 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 G&G 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 G&G 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 
     G&G 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.''


                               House Bill

       The provision allows geological and geophysical amounts 
     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 
     provision as to the proper treatment of pre-effective date 
     geological and geophysical costs.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement follows the House bill.
     7. Alternative technology vehicle credits (sec. 1316 of the 
         House bill, sec. 1553 of the Senate amendment, secs. 1341 
         and 1348 of the conference agreement, sec. 179A of the 
         Code, and new sec. 30B of the Code)


                              Present Law

       Certain costs of qualified clean-fuel vehicle 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

[[Page S9131]]

     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 is reduced to 25 
     percent of the otherwise allowable deduction in 2006 and is 
     unavailable for purchases after December 31, 2006.


                               House Bill

       The House bill provides a credit for each new qualified 
     advanced lean-burn technology motor vehicle placed in service 
     by the taxpayer during the taxable year. The amount of the 
     credit for any vehicle is the sum of an amount for fuel 
     efficiency and an amount for conservation. The amount for 
     fuel efficiency is based on a comparison of the fuel 
     efficiency of the vehicle compared to the Environmental 
     Protection Agency's 2000 model year city fuel economy for a 
     vehicle in the same inertia weight class. The amount for 
     conservation is based on the qualifying vehicle's estimated 
     lifetime fuel savings compared to the same 2000 model year 
     standard.
       Table 2, below, shows the credit amount for fuel efficiency 
     of a qualified advanced lean- burn technology motor vehicle.

TABLE 2.--FUEL EFFICIENCY CREDIT AMOUNT FOR QUALIFIED ADVANCED LEAN-BURN
                        TECHNOLOGY MOTOR VEHICLES
------------------------------------------------------------------------
                              If Fuel Economy of the Vehicle Is:
    Credit Amount    ---------------------------------------------------
                              at least                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
------------------------------------------------------------------------

       The credit amount for conservation of a qualified advanced 
     lean burn technology vehicle is computed as follows. The 
     vehicle is assumed to be driven 120,000 miles over its life. 
     The 120,000 miles of lifetime mileage is divided by the fuel 
     economy rating of the vehicle. The 120,000 miles of lifetime 
     mileage also is divided by the 2000 model year city economy 
     for a vehicle in the same inertia weight class. The 
     difference is the lifetime fuel savings. If the vehicle 
     achieves a lifetime motor fuel savings between 1,500 and 
     2,500 gallons of fuel, the credit amount for the vehicle is 
     $250. If the vehicle achieves a lifetime fuel savings of at 
     least 2,500 gallons of motor fuel, the credit amount is $500.
       The base fuel economy is the 2000 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 II of the Clean Air Act. A qualifying 
     advanced lean-burn technology motor vehicle means a motor 
     vehicle the original use of which commences with the 
     taxpayer, powered by an internal combustion engine that is 
     designed to operate primarily using more air than is 
     necessary for complete combustion of the fuel and 
     incorporates direct injection, that uses only diesel fuel (as 
     defined in section 4083(a)(3)), has sufficient fuel economy 
     to qualify for the credit, and meets the Environmental 
     Protection Agency's Tier II bin 8 emissions standards. In 
     addition, in order to qualify for a credit, a vehicle must be 
     in compliance with the applicable provisions of the Clean Air 
     Act and the motor vehicle safety provisions.
       In general, the credit is allowed to the vehicle owner, 
     including the lessor of a vehicle subject to a lease. If the 
     use of the vehicle is described in paragraph (3) or (4) of 
     section 50(b) (relating to use by tax-exempts, governments, 
     and foreign persons) and is not subject to a lease, the 
     seller of the vehicle may claim the credit so long the seller 
     clearly discloses to the user in a document the amount that 
     is allowable as a credit. A vehicle must be used 
     predominantly in the United States to qualify for the credit.
       The provision permits the credit to offset both the regular 
     tax and the alternative minimum tax. Credits in excess of 
     this limitation may be carried forward for up to 20 years; 
     credits may not be carried back to earlier years.
       Effective date.--The provision is effective for property 
     placed in service after the date of enactment and before 
     January 1, 2008.


                            Senate Amendment

     Alternative motor vehicle credits
       The Senate amendment provides a credit for each new 
     qualified fuel cell vehicle, each new qualified hybrid motor 
     vehicle, and each new qualified alternative fuel motor 
     vehicle placed in service by the taxpayer during the taxable 
     year.
       In general, the credit is allowed to the vehicle owner, 
     including the lessor of a vehicle subject to a lease. If the 
     use of the vehicle is described in paragraphs (3) or (4) of 
     section 50(b) (relating to use by tax-exempts, governments, 
     and foreign persons) and is not subject to a lease, the 
     seller of the vehicle may claim the credit so long as the 
     seller clearly discloses to the user in a document the amount 
     that is allowable as a credit. A vehicle must be used 
     predominantly in the United States to qualify for the credit.
       Any deduction otherwise allowable under section 179A is 
     reduced by the amount of the credit allowable.
       The provision permits the credit to offset the excess of 
     the regular tax (reduced by certain credits) over the 
     alternative minimum tax. Credits in excess of this limitation 
     may be carried back for up to three years and forward for up 
     to 20 years; credits may not be carried back to taxable years 
     beginning before the date of enactment and credits for 
     vehicles used for personal use may not be carried back.
       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 3, 
     below, shows the proposed base credit amounts.

           TABLE 3.--BASE CREDIT AMOUNT FOR FUEL CELL VEHICLES
------------------------------------------------------------------------
        Vehicle Gross Weight Rating in Pounds            Credit Amount
------------------------------------------------------------------------
Vehicle  8,500.......................................             $8,000
8,500 < vehicle  14,000..............................            $10,000
14,000 < vehicle  26,000.............................            $20,000
26,000 < vehicle.....................................            $40,000
------------------------------------------------------------------------

       In the case of a fuel cell vehicle weighing less than 8,500 
     pounds and placed in service after December 31, 2009, the 
     $8,000 amount in Table 3, above is reduced to $4,000.
       Table 4, below, shows the proposed additional credits for 
     passenger automobiles or light trucks.

           Table 4.--CREDIT FOR QUALIFYING FUEL CELL VEHICLES
------------------------------------------------------------------------
                         If Fuel Economy of the Fuel Cell Vehicle Is:
       Credit        ---------------------------------------------------
                              At least                but less than
------------------------------------------------------------------------
$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         275% of base fuel
                       economy.                  economy
3,500...............  275% of base fuel         300% of base fuel
                       economy.                  economy
4,000...............               300% of base fuel economy
------------------------------------------------------------------------

       Hybrid motor 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). A qualifying hybrid motor 
     vehicle must be placed in service before January 1, 2010.
       In the case of an automobile or light truck (vehicles 
     weighing 8,500 pounds or less), the amount of credit for the 
     purchase of a hybrid vehicle varies with the rated fuel 
     economy of the vehicle compared to a 2002 model year. A 
     qualifying hybrid automobile or light truck must have a 
     maximum available power from the rechargeable energy 
     storage system of at least five percent. In addition, the 
     vehicle must meet or exceed certain EPA emissions 
     standards. For a vehicle with a gross vehicle weight 
     rating of 8,500 pounds or less the applicable emissions 
     standards are the Bin 5 Tier II emissions standards.
       Table 5, below, shows the 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.

                      Table 5.--Fuel Economy Credit
------------------------------------------------------------------------
                         If Fuel Economy of the Fuel Cell Vehicle Is:
       Credit        ---------------------------------------------------
                              At least                but less than
------------------------------------------------------------------------
$400................  125% of base fuel         150% of base fuel
                       economy.                  economy
800.................  150% of base fuel         175% of base fuel
                       economy.                  economy
1,200...............  175% of base fuel         200% of base fuel
                       economy.                  economy
1,600...............  200% of base fuel         225% of base fuel
                       economy.                  economy
2,000...............  225% of base fuel         250% of base fuel
                       economy.                  economy
2,400...............               250% of base fuel economy
------------------------------------------------------------------------

       In the case of a qualifying hybrid motor vehicle weighing 
     more than 8,500 pounds, the amount of credit is determined by 
     the estimated increase in fuel economy and the incremental 
     cost of the hybrid vehicle compared to a comparable vehicle 
     powered solely by a gasoline or diesel internal combustion 
     engine and that is comparable in weight, size, and use of the 
     vehicle. For a vehicle that achieves a fuel economy increase 
     of at least 30 percent but less than 40 percent, the credit 
     is equal to 20 percent of the incremental cost of the hybrid 
     vehicle. For a vehicle that achieves a fuel economy increase 
     of at least 40 percent but less than 50 percent, the credit 
     is equal to 30 percent of the incremental cost of the hybrid 
     vehicle. For a vehicle that achieves a fuel economy increase 
     of 50 percent or more, the credit is equal to 40 percent of 
     the incremental cost of the hybrid vehicle.
       The credit is subject to certain maximum applicable 
     incremental cost amounts. For a qualifying hybrid motor 
     vehicle weighing more than 8,500 pounds but not more than 
     14,000 pounds, the maximum allowable incremental cost amount 
     is $7,500. For a qualifying hybrid motor vehicle weighing 
     more than 14,000 pounds but not more than 26,000 pounds, the 
     maximum allowable incremental cost amount is $15,000. For a 
     qualifying hybrid motor vehicle weighing more than 26,000

[[Page S9132]]

     pounds, the maximum allowable incremental cost amount is 
     $30,000.
       A qualifying hybrid motor vehicle weighing more than 8,500 
     pounds but not more than 14,000 pounds must have a maximum 
     available power from the rechargeable energy storage system 
     of at least 10 percent. A qualifying hybrid vehicle weighing 
     more than 14,000 pounds must have a maximum available power 
     from the rechargeable energy storage system of at least 15 
     percent.
       Alternative fuel vehicle
       The credit for the purchase of a new alternative fuel 
     vehicle would be 50 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 $4,000 
     and $32,000 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 6.--MAXIMUM ALLOWABLE INCREMENTAL COST FOR CALCULATION OF
                     ALTERNATIVE FUEL VEHICLE CREDIT
------------------------------------------------------------------------
                                                    Maximum Allowable
     Vehicle Gross Weight Rating in Pounds           Incremental Cost
------------------------------------------------------------------------
Vehicl  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 
     combination 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 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 II of the Clean Air Act.
       Table 7, below, shows the 2002 model year city fuel economy 
     for vehicles by type and by inertia weight class.

                                   TABLE 7.--2002 MODEL YEAR CITY FUEL ECONOMY
----------------------------------------------------------------------------------------------------------------
                                                                  Passenger Automobile   Light Truck  (miles per
            Vehicle Inertia Weight Class  (Pounds)                 (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
----------------------------------------------------------------------------------------------------------------

       Effective date.--The provision applies to vehicles placed 
     in service after the date of enactment and, in the case of 
     qualified fuel cell motor vehicles, before January 1, 2015; 
     in the case of qualified hybrid motor vehicles, before 
     January 1, 2010; and in the case of qualified alternative 
     fuel motor vehicles, before January 1, 2011.


                          Conference Agreement

       The conference agreement follows both the House bill and 
     the Senate amendment with modifications.
     Fuel cell vehicles
       The conference agreement follows the Senate amendment with 
     respect to fuel cell vehicles.
     Alternate fuel vehicles
       The conference agreement follows the Senate amendment with 
     respect to alternate fuel vehicles.
     Hybrid vehicles and advanced lean-burn technology vehicles
       Qualifying hybrid vehicle
       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). A qualifying hybrid motor 
     vehicle must be placed in service before January 1, 2011 
     (January 1, 2010 in the case of a hybrid motor vehicle 
     weighing more than 8,500 pounds).


         Hybrid vehicles that are automobiles and light trucks

       In the case of an automobile or light truck (vehicles 
     weighing 8,500 pounds or less), the amount of credit for the 
     purchase of a hybrid vehicle is the sum of two components: a 
     fuel economy credit amount that varies with the rated fuel 
     economy of the vehicle compared to a 2002 model year standard 
     and a conservation credit based on the estimated lifetime 
     fuel savings of a qualifying vehicle compared to a comparable 
     2002 model year vehicle. A qualifying hybrid automobile or 
     light truck must have a maximum available power from the 
     rechargeable energy storage system of at least four percent. 
     In addition, the vehicle must meet or exceed certain EPA 
     emissions standards. For a vehicle with a gross vehicle 
     weight rating of 6,000 pounds or less the applicable 
     emissions standards are the Bin 5 Tier II emissions 
     standards. For a vehicle with a gross vehicle weight 
     rating greater than 6,000 pounds and less than or equal to 
     8,500 pounds, the applicable emissions standards are the 
     Bin 8 Tier II emissions standards.
       Table 8, below, shows the 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.

                      TABLE 8.--FUEL ECONOMY CREDIT
------------------------------------------------------------------------
                           If Fuel Economy of the Hybrid Vehicle Is:
       Credit        ---------------------------------------------------
                              at least                but less than
------------------------------------------------------------------------
$400................  125% of base fuel         150% of base fuel
                       economy.                  economy
800.................  150% of base fuel         175% of base fuel
                       economy.                  economy
1,200...............  175% of base fuel         200% of base fuel
                       economy.                  economy
1,600...............  200% of base fuel         225% of base fuel
                       economy.                  economy
2,000...............  225% of base fuel         250% of base fuel
                       economy.                  economy
2,400...............               250% of base fuel economy
------------------------------------------------------------------------

       Table 9, below, shows the conservation credit.

                      TABLE 9.--CONSERVATION CREDIT
------------------------------------------------------------------------
                                                          Conservation
           Estimated Lifetime Fuel Savings                   Amount
------------------------------------------------------------------------
At least 1,200 but less than 1,800...................               $250
At least 1,800 but less than 2,400...................                500
At least 2,400 but less than 3,000...................                750
At least 3,000.......................................              1,000
------------------------------------------------------------------------

       Advanced lean-burn technology motor vehicles
       The conference agreement a credit for the purchase of a new 
     advanced lean burn technology motor vehicle. The amount of 
     credit for the purchase of an advanced lean burn technology 
     motor vehicle is the sum of two components: a fuel economy 
     credit amount that varies with the rated fuel economy of the 
     vehicle compared to a 2002 model year standard as described 
     in Table 8, above and a conservation credit based on the 
     estimated lifetime fuel savings of a qualifying vehicle 
     compared to a comparable 2002 model year vehicle as described 
     in Table 9 above.
       A qualifying advanced lean burn technology motor vehicle 
     that incorporates direct injection, achieves at least 125 
     percent of the 2002 model year city fuel economy, and 2004 
     and later model vehicles meets or exceeds certain 
     Environmental Protection Agency emissions standards. For a 
     vehicle with a gross vehicle weight rating of 6,000 pounds or 
     less the applicable emissions standards are the Bin 5 Tier II 
     emissions standards. For a vehicle with a gross vehicle 
     weight rating greater than 6,000 pounds and less than or 
     equal to 8,500 pounds, the applicable emissions standards are 
     the Bin 8 Tier II emissions standards. A qualifying advanced 
     lean burn technology motor vehicle must be placed in service 
     before January 1, 2011.
       Limitation on number of qualified hybrid and advanced lean-
           burn technology motor vehicles eligible for the credit
       The conference agreement imposes a limitation on the number 
     of qualified hybrid motor vehicles and advanced lean-burn 
     technology motor vehicles sold by each manufacturer of such 
     vehicles that are eligible for the credit. Taxpayers may 
     claim the full amount of the allowable credit up to the end 
     of the first calendar quarter after the quarter in which the 
     manufacturer records its sale of the 60,000th hybrid and 
     advanced lean-burn technology motor vehicle. Taxpayers may 
     claim one half of the otherwise allowable credit during the 
     two calendar quarters subsequent to the first quarter after 
     the manufacturer has recorded its 60,000th such sale. In the 
     third and fourth calendar quarters subsequent to the first 
     quarter after the manufacturer has recorded its 60,000th such 
     sale, the taxpayer may claim one quarter of the otherwise 
     allowable credit.
       Thus, summing the sales of qualifying hybrid motor vehicles 
     of all weight classes and all sales of qualifying advanced 
     lean-burn technology motor vehicles, if a manufacturer 
     records the sale of its 60,000th in February of 2007, 
     taxpayers purchasing such vehicles from the manufacturer may 
     claim the full amount of the credit on their purchases of 
     qualifying vehicles through June 30, 2007. For the period 
     July 1, 2007, through December 31, 2007, taxpayers may claim 
     one half of the otherwise allowable credit on purchases of 
     qualifying vehicles of the manufacturer. For the period 
     January 1, 2008, through June 30, 2008, taxpayers may claim 
     one quarter of the otherwise allowable credit on the 
     purchases of qualifying vehicles of the manufacturer. After 
     June 30, 2008, no credit may be claimed for purchases of 
     hybrid motor vehicles or advanced lean-burn technology motor 
     vehicles sold by the manufacturer.

[[Page S9133]]

       Hybrid vehicles that are medium and heavy trucks
       In the case of a qualifying hybrid motor vehicle weighing 
     more than 8,500 pounds, the conference agreement follows the 
     Senate amendment.
     Other rules
       The portion of the credit attributable to vehicles of a 
     character subject to an allowance for depreciation is treated 
     as a portion of the general business credit; the remainder of 
     the credit is allowable to the extent of the excess of the 
     regular tax (reduced by certain other credits) over the 
     alternative minimum tax for the taxable year.
     Termination of Code section 179A
       The conference agreement provides that section 179A sunsets 
     after December 31, 2005.
       Effective date.--The provision applies to vehicles placed 
     in service after December 31, 2005, in the case of qualified 
     fuel cell motor vehicles, before January 1, 2015; in the case 
     of qualified hybrid motor vehicles that are automobiles and 
     light trucks and in the case of advanced lean-burn technology 
     vehicles, before January 1, 2011; in the case of qualified 
     hybrid motor vehicles that medium and heavy trucks, before 
     January 1, 2010; and in the case of qualified alternative 
     fuel motor vehicles, before January 1, 2011.
     8. Modification and extension of credit for electric vehicles 
         (sec. 1532 of the Senate amendment)


                              Present Law

       A 10-percent tax credit is provided for the cost of a 
     qualified electric vehicle, up to a maximum credit of $4,000. 
     A qualified electric vehicle generally 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 full amount of 
     the credit is available for purchases prior to 2006. The 
     credit is reduced to 25 percent of the otherwise allowable 
     amount for purchases in 2006, and is unavailable for 
     purchases after December 31, 2006.


                               House Bill

       No provision.


                            Senate Amendment

       The provision repeals the phase out of the credit 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
------------------------------------------------------------------------
        Vehicle Gross Weight Rating in Pounds            Credit 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
------------------------------------------------------------------------

       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 general, the credit is allowed to the vehicle owner, 
     including the lessor of a vehicle subject to a lease. If the 
     use of the vehicle is described in paragraph (3) or (4) of 
     section 50(b) (relating to use by tax-exempts, governments, 
     and foreign persons) and is not subject to a lease, the 
     seller of the vehicle may claim the credit so long the seller 
     clearly discloses to the user in a document the amount that 
     is allowable as a credit. A vehicle must be used 
     predominantly in the United States to qualify for the credit.
       The provision permits the credit to offset the excess of 
     the regular tax (reduced by certain credits) over the 
     alternative minimum tax. Credits in excess of this limitation 
     may be carried back for up to three years and forward for up 
     to 20 years; credits may not be carried back to taxable years 
     beginning before the date of enactment and credits for 
     vehicles used for personal use may not be carried back.
       Effective date.--The provision is effective for property 
     placed in service after the date of enactment and before 
     January 1, 2010.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     9. Credit for installation of alternative fuel refueling 
         property (sec. 1533 of the Senate amendment, sec. 1342 of 
         the conference agreement, and new sec. 30C of the Code)


                              Present Law

       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.
       For the purpose of sec. 179A clean fuels comprise natural 
     gas, liquefied natural gas, liquefied petroleum gas, 
     hydrogen, electricity, and any other fuel at least 85 percent 
     of which is methanol, ethanol, or any other alcohol or ether.


                               House Bill

       No provision.


                            Senate Amendment

       The provision 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.
       Under the provision clean fuels are any fuel at least 85 
     percent of the volume of which consists of ethanol, natural 
     gas, compressed natural gas, liquefied natural gas, liquefied 
     petroleum gas, and hydrogen and any mixture of diesel fuel 
     and biodiesel containing at least 20 percent biodiesel.
       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, 2010. 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.
       Effective date.--The provision is effective for property 
     placed in service December 31, 2005.


                          Conference Agreement

       The conference agreement follows the Senate amendment with 
     modifications. The conference agreement provides that the 
     credit rate is 30 percent rather than 50 percent.
       The portion of the credit attributable to property of a 
     character subject to an allowance for depreciation is treated 
     as a portion of the general business credit; the remainder of 
     the credit is allowable to the extent of the excess of the 
     regular tax (reduced by certain other credits) over the 
     alternative minimum tax for the taxable year.
       The conference agreement provides that the credit may not 
     be claimed for property placed in service after December 31, 
     2007.
       Effective date.--The provision is effective for property 
     placed in service December 31, 2005 and before January 1, 
     2008.
     10. Volumetric excise tax credit for alternative fuels (sec. 
         1534 of the Senate amendment)


                              Present Law

       A 24.3-cents-per-gallon excise tax is imposed on diesel 
     fuel to finance the Highway Trust Fund. Gasoline and most 
     special motor fuels are subject to tax at 18.3 cents per 
     gallon for the Trust Fund. The statutory rates for certain 
     special motor fuels are determined on an energy equivalent 
     basis, as follows:

------------------------------------------------------------------------
 
------------------------------------------------------------------------
Liquefied petroleum gas (propane).........  13.6 cents per gallon
Liquefied natural gas.....................  11.9 cents per gallon
Methanol derived from petroleum or natural  9.15 cents per gallon
 gas.
Compressed natural gas....................  48.54 cents per MCF
------------------------------------------------------------------------

       Under section 4041, tax is imposed on special motor fuels 
     (any liquid other than gas oil, fuel oil or any product 
     taxable under section 4081) when there is a taxable sale by 
     any person to an owner, lessee or other operator of a motor 
     vehicle or motorboat, for use as fuel in the motor vehicle or 
     motorboat or used by any person as a fuel in a motor vehicle 
     or motorboat unless there was a prior taxable sale. No excise 
     tax credit is provided for the sale or use of those fuels.
       Liquid hydrogen is a special motor fuel for purposes of the 
     tax on special motor fuels and is subject to a tax of 18.3 
     cents per gallon. Compressed hydrogen gas used or sold as a 
     fuel is not subject to tax.
       Prior to the American Jobs Creation Act of 2004, gasohol 
     and gasoline to be blended into gasohol was taxed at a 
     reduced rate based on the amount of ethanol contained in the 
     mixture (e.g., 10 percent, 7.7 percent or 5.5 percent alcohol 
     in the mixture). The Act eliminated reduced rates of excise 
     tax for most alcohol-blended fuels. In place of the reduced 
     rates, the Act amended the Code to create two new excise tax 
     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). A person 
     may also file a claim for payment equal to the amount of 
     these credits for biodiesel or alcohol used to produce an 
     eligible mixture. The credits and payments are paid out of 
     the General Fund. If the alcohol is ethanol with a proof of 
     190 or greater, the credit or payment amount is 51 cents per 
     gallon. For agri-biodiesel, the credit or payment amount is 
     $1.00 per gallon; for biodiesel other than agri-biodiesel, 
     the credit or payment amount is 50 cents per gallon. Under 
     the Code's coordination rules, a claim may be taken only 
     once with respect to any particular gallon of alcohol or 
     biodiesel.


                               House Bill

       No provision.


                            Senate Amendment

       Under the Senate amendment, the liquefied petroleum gas, 
     and P Series fuels (as defined by the Secretary of Energy 
     under 42

[[Page S9134]]

     U.S.C. sec. 13211(2)) are taxed at 18.3 cents per gallon 
     under section 4041. Compressed natural gas is taxed at 18.3 
     cents per energy equivalent of a gallon of gasoline. 
     Liquefied natural gas, any liquid fuel derived from coal 
     (other than ethanol or methanol) and liquid hydrocarbons 
     derived from biomass are taxed at 24.3 cents per gallon under 
     section 4041. Under the provision, hydrogen (whether in 
     liquid or gas form) is exempt from the tax imposed by section 
     4041; however, persons selling hydrogen as fuel are required 
     to register with the Secretary. Collectively, these fuels 
     (including hydrogen) are referred to as ``alternative 
     fuels.''
       In addition, the Senate amendment creates two new excise 
     tax credits, the alternative fuel credit, and the alternative 
     fuel mixture credit. The credits are allowed against section 
     4041 liability. The alternative fuel credit is 50 cents per 
     gallon of alternative fuel or gasoline gallon equivalents of 
     nonliquid alternative fuel sold by the taxpayer for use as a 
     motor fuel in a highway vehicle. The alternative fuel mixture 
     credit is 50 cents per gallon of alternative fuel used in 
     producing an alternative fuel mixture for sale or use in a 
     trade or business of the taxpayer. The mixture must be sold 
     by the taxpayer for use as a fuel in a highway vehicle or 
     used by the taxpayer for use as a fuel in a highway vehicle. 
     Liquid fuel derived from coal would only qualify for the 
     credits if derived from the Fisher-Tropsch process. The 
     credits generally expire after September 30, 2009. The 
     provision also allows persons to file a claim for payment 
     equal to the amount of the alternative fuel credit and 
     alternative fuel mixture credits. These payment provisions 
     generally also expire after September 30, 2009. With respect 
     to hydrogen, the credit and payment provisions expire after 
     December 31, 2014. Both credits and payments are made out of 
     the General Fund. Under coordination rules, a claim for 
     payment or credit may only be taken once with respect to any 
     particular gallon or gasoline-gallon equivalent of 
     alternative fuel.
       Effective date.--The provision is effective for any sale, 
     use or removal for any period after September 30, 2006.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     11. Extend excise tax provisions and income tax credit for 
         biodiesel and create similar incentives for renewable 
         diesel (sec. 1535 of the Senate amendment, secs. 1344 and 
         1346 of the conference agreement, and secs. 40A, 6426 and 
         6427 of the Code)


                              Present Law

     Biodiesel income tax credit
       Overview
       The Code provides an income tax credit for biodiesel and 
     qualified biodiesel mixtures, the biodiesel fuels credit.\80\ 
     The biodiesel fuels credit is the sum of the biodiesel 
     mixture credit plus the biodiesel credit and is treated as a 
     general business credit. The amount of the biodiesel fuels 
     credit is includable in gross income. The biodiesel fuels 
     credit is coordinated to take into account benefits from the 
     biodiesel excise tax credit and payment provisions discussed 
     below. The credit may not be carried back to a taxable year 
     ending before or on December 31, 2004. The provision does not 
     apply to fuel sold or used after December 31, 2006.
       Biodiesel is monoalkyl esters of long chain fatty acids 
     derived from plant or animal matter that meet (1) the 
     registration requirements established by the Environmental 
     Protection Agency under section 211 of the Clean Air Act and 
     (2) the requirements of the American Society of Testing and 
     Materials D6751. Agri-biodiesel is biodiesel derived solely 
     from virgin oils including oils from corn, soybeans, 
     sunflower seeds, cottonseeds, canola, crambe, rapeseeds, 
     safflowers, flaxseeds, rice bran, mustard seeds, or animal 
     fats.
       Biodiesel may be taken into account for purposes of the 
     credit only if the taxpayer obtains a certification (in such 
     form and manner as prescribed by the Secretary) from the 
     producer or importer of the biodiesel which identifies the 
     product produced and the percentage of the biodiesel and 
     agri-biodiesel in the product.
       Biodiesel mixture credit
       The biodiesel mixture credit is 50 cents for each gallon of 
     biodiesel used by the taxpayer in the production of a 
     qualified biodiesel mixture. For agri-biodiesel, the credit 
     is $1.00 per gallon. A qualified biodiesel mixture is a 
     mixture of biodiesel and diesel fuel that is (1) 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. The sale or use must be in the trade or business of 
     the taxpayer and is to be taken into account for the taxable 
     year in which such sale or use occurs. No credit is allowed 
     with respect to any casual off-farm production of a qualified 
     biodiesel mixture.
       Biodiesel credit
       The biodiesel credit is 50 cents for each gallon of 
     biodiesel which is not in a mixture with diesel fuel (100 
     percent biodiesel or B-100) and which during the taxable year 
     is (1) used by the taxpayer as a fuel in a trade or business 
     or (2) sold by the taxpayer at retail to a person and placed 
     in the fuel tank of such person's vehicle. For agri-
     biodiesel, the credit is $1.00 per gallon.
     Biodiesel mixture excise tax credit
       The Code also provides an excise tax credit for biodiesel 
     mixtures.\81\ The credit is 50 cents for each gallon of 
     biodiesel used by the taxpayer in producing a biodiesel 
     mixture for sale or use in a trade or business of the 
     taxpayer. In the case of agri-biodiesel, the credit is $1.00 
     per gallon. A biodiesel mixture is a mixture of biodiesel and 
     diesel fuel 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. No credit is 
     allowed unless the taxpayer obtains a certification (in 
     such form and manner as prescribed by the Secretary) from 
     the producer of the biodiesel that identifies the product 
     produced and the percentage of biodiesel and agri-
     biodiesel in the product.
       The credit is not available for any sale or use for any 
     period after December 31, 2006. This excise tax credit is 
     coordinated with the 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 biodiesel fuel mixtures
       If any person produces a biodiesel fuel mixture in such 
     person's trade or business, the Secretary is to pay such 
     person an amount equal to the biodiesel mixture credit. To 
     the extent the biodiesel fuel mixture credit exceeds the 
     section 4081 liability of a person, the Secretary is to pay 
     such person an amount equal to the biodiesel fuel mixture 
     credit with respect to such mixture. Thus, if the person has 
     no section 4081 liability, the credit is refundable. The 
     payment provision does not apply with respect to biodiesel 
     fuel mixtures sold or used after December 31, 2006.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment extends the income tax credit, excise 
     tax credit, and payment provisions through December 31, 2010.
       Effective date.--The provision is effective on the date of 
     enactment.


                          Conference Agreement

       The conference agreement extends the income tax credit, 
     excise tax credit, and payment provisions through December 
     31, 2008. The conference agreement also creates a similar 
     income tax credit, excise tax credit and payment system for 
     renewable diesel; however, there is no credit for small 
     producers of renewable diesel. Renewable diesel means diesel 
     fuel derived from biomass (as defined in section 29(c)(3), 
     thus excluding petroleum oil, natural gas, coal, or any 
     product thereof) using a thermal depolymerization process. 
     Renewable diesel must meet the requirements of the American 
     Society of Testing and Materials D975 or D396, and meet the 
     registration requirements for fuels and fuel additives 
     established by the Environmental Protection Agency under 
     section 211 of the Clean Air Act (42 USC 7545). The amount of 
     the credit for renewable diesel is $1.00 per gallon. In 
     addition, all producers of renewable diesel must be 
     registered with the Secretary.
       Effective date.--The extension of incentives is effective 
     on the date of enactment. The renewable diesel provisions are 
     effective for fuel sold or used after December 31, 2005.
     12. Credit for certain nonbusiness energy property (sec. 1317 
         of the House bill, sec. 1524 of the Senate amendment, 
         sec. 1333 of the conference agreement, 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 credit for energy efficiency 
     improvements to existing homes.


                               House Bill

       The provision provides a 20-percent credit for the purchase 
     of qualified energy efficiency improvements to existing 
     homes. The maximum credit for a taxpayer with respect to the 
     same dwelling for all taxable years is $2,000. A qualified 
     energy efficiency improvement is any energy efficiency 
     building envelope component that meets or exceeds the 
     prescriptive criteria for such a component established by the 
     2000 International Energy Conservation Code as supplemented 
     and as in effect on the date of enactment (or, in the case of 
     metal roofs with appropriate pigmented coatings, meets the 
     Energy Star program requirements), 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 reasonably can be expected 
     to remain in use for at least five years. The credit is 
     nonrefundable.
       Building envelope components are: (1) insulation materials 
     or systems which are specifically and primarily designed to 
     reduce the heat loss or gain for a dwelling; (2) exterior 
     windows (including skylights) and doors; and (3) metal roofs 
     with appropriate pigmented coatings which are specifically 
     and primarily designed to reduce the heat loss or gain for a 
     dwelling.
       The taxpayer's basis in the property is reduced by the 
     amount of the credit. Special rules apply in the case of 
     condominiums and tenant-stockholders in cooperative housing 
     corporations.
       In the case of expenditures that exceed $1,000, certain 
     certification requirements

[[Page S9135]]

     must be met in order to qualify for the credit.
       Effective date.--The provision is effective for qualified 
     energy efficiency improvements installed after the date of 
     enactment and before January 1, 2008.


                            Senate Amendment

       The provision provides a personal tax credit equal to the 
     greater of (1) the total of the allowable credits for the 
     purchase of certain property, or (2) the credit with respect 
     to a highly energy-efficient principal residence.
       The allowable credit for the purchase of certain property 
     is (1) $50 for each advanced main air circulating fan, (2) 
     $150 for each qualified natural gas, propane, or oil furnace 
     or hot water boiler, and (3) $300 for each item of qualified 
     energy efficient property.
       An advanced main air circulating fan is a fan used in a 
     natural gas, propane, or oil furnace originally placed in 
     service by the taxpayer during the taxable year, and which 
     has an annual electricity use of no more than two percent of 
     the total annual energy use of the furnace (as determined in 
     the standard Department of Energy test procedures).
       A qualified natural gas, propane, or oil furnace or hot 
     water boiler is a natural gas, propane, or oil furnace or hot 
     water boiler with an annual fuel utilization efficiency rate 
     of at least 95.
       Qualified energy-efficient property is: (1) an electric 
     heat pump water heater which yields an energy factor of at 
     least 2.0 in the standard Department of Energy test 
     procedure, (2) an electric heat pump which has a heating 
     seasonal performance factor (HSPF) of at least 9, a seasonal 
     energy efficiency ratio (SEER) of at least 15, and an energy 
     efficiency ratio (EER) of at least 13, (3) a geothermal heat 
     pump which (i) in the case of a closed loop product, has an 
     energy efficiency ratio (EER) of at least 14.1 and a heating 
     coefficient of performance (COP) of at least 3.3, (ii) in the 
     case of an open loop product, has an energy efficiency ratio 
     (EER) of at least 16.2 and a heating coefficient of 
     performance (COP) of at least 3.6, and (iii) in the case of a 
     direct expansion (DX) product, has an energy efficiency ratio 
     (EER) of at least 15 and a heating coefficient of performance 
     (COP) of at least 3.5, (4) a central air conditioner which 
     has a seasonal energy efficiency ratio (SEER) of at least 15 
     and an energy efficiency ratio (EER) of at least 13, and (5) 
     a natural gas, propane, or oil water heater which has an 
     energy factor of at least 0.80.
       The credit with respect to a highly energy-efficient 
     principal residence is $2,000 if the principal residence 
     achieves a 50 percent reduction in energy costs relative to 
     the original condition of the building. In the case of a new 
     home, the original condition of the building is deemed to be 
     a home constructed in accordance with the standards of 
     chapter 4 of the 2003 International Energy Conservation Code 
     as in effect (including supplements) on the date of 
     enactment, and for which and any applicable Federal minimum 
     efficiency standards for equipment are met. In the case of a 
     principal residence that achieves a reduction in energy costs 
     between 20 and 50 percent, the allowable credit is $4,000 
     times the percentage reduction. No credit is allowed in the 
     case of energy cost savings of less than 20 percent.
       The residence must be located in the United States, and, in 
     the case of a new residence, not be acquired from a 
     contractor eligible for a credit for the production of a new 
     energy efficient home under Code section 45K (as added by the 
     bill).
       If a credit is allowed under Code section 25D (as added by 
     the bill) relating to residential solar, photovoltaic and 
     fuel cell property, for the purpose of measuring energy 
     efficiency improvements under this provision, the original 
     condition of the home, or the comparable building in the case 
     of a new home, is determined assuming the building contains 
     the property for which the credit is allowed. Additionally, 
     if a credit is allowed under this provision for any 
     expenditure, the increase in the basis of the property that 
     would result from such expenditure is reduced by the amount 
     of the credit.
       In order to be eligible for the credit, the residence's 
     energy savings must be demonstrated by performance-based 
     compliance and be certified according to regulations 
     established by the Secretary that follow various rules and 
     procedures, including the use of computer software based on 
     the 2005 California Residential Alternative Calculation 
     Method Approval Manual. The determination of compliance may 
     be provided by a local building regulatory authority, a 
     utility, a manufactured home production inspection primary 
     inspection agency (IPIA), or an accredited home energy rating 
     system provider. All providers shall be accredited, or 
     otherwise authorized to use approved energy performance 
     measurement methods, by the Residential Energy Services 
     Network (RESNET).
       Special proration rules apply in the case of jointly owned 
     property, condominiums, and tenant-stockholders in 
     cooperative housing corporations. Certain restrictions and 
     limitations apply with respect to property financed by 
     subsidized energy financing or obtained through grant 
     programs. 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. If a 
     credit is allowed under this provision with respect to any 
     property, the basis of such property is reduced by the amount 
     of the credit so allowed.
       Effective date.--The credit applies to property placed in 
     service after December 31, 2005 and prior to January 1, 2009.


                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment with modifications. The conference agreement 
     follows the House bill with respect to energy efficient 
     improvements to the building envelope, but the credit rate is 
     reduced to 10 percent. The conference agreement includes the 
     Senate amendment provisions related to (1) advanced main air 
     circulating fans, (2) natural gas, propane, or oil furnace or 
     hot water boilers and (3) qualified energy-efficient 
     property, The conference agreement does not include the 
     Senate amendment provision related to highly energy-efficient 
     principal residences. The credit allowed under the conference 
     agreement may not exceed $500 in total across all taxable 
     years, and no more than $200 dollars of such credit may be 
     attributable to expenditures on windows. There is no 
     requirement for certification of expenditures.
       The conference agreement modifies the energy efficiency 
     requirements for qualifying central air conditioners to be 
     the highest efficiency tier established by the Consortium for 
     Energy Efficiency as in effect on Jan. 1, 2006.
       The conference agreement also modifies the effective date.
       Effective date.--The credit applies to property placed in 
     service after December 31, 2005 and prior to January 1, 2008.
     13. Energy efficient commercial buildings deduction (sec. 
         1521 of the Senate amendment sec. 1331 of the conference 
         agreement, and new sec. 179D of the Code)


                              Present Law

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


                               House Bill

       No provision.


                            Senate Amendment

     In general
       The provision provides a deduction equal to energy-
     efficient commercial building property expenditures made by 
     the taxpayer. Energy-efficient commercial building property 
     expenditures is defined as property (1) which is installed on 
     or in any building located in the United States that is 
     within the scope of 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''), (2) which is installed as part of 
     (i) the interior lighting systems, (ii) the heating, cooling, 
     ventilation, and hot water systems, or (iii) the building 
     envelope, and (3) which is certified as being installed as 
     part of a plan designed to reduce the total annual energy and 
     power costs with respect to the interior lighting systems, 
     heating, cooling, ventilation, and hot water systems of the 
     building by 50 percent or more in comparison to a reference 
     building which meets the minimum requirements of Standard 
     90.1-2001 (as in effect on April 2, 2003). 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.
       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 using qualified computer software based on the 
     provisions of the 2005 California Nonresidential Alternative 
     Calculation Method Approval Manual or, in the case of 
     residential property, the 2005 California Residential 
     Alternative Calculation Method Approval Manual.
       The Committee intends that the methods for calculation be 
     fuel neutral, such that the same energy efficiency features 
     qualify a building for the deduction under this provision 
     regardless of whether the heating source is a gas or oil 
     furnace or boiler or an electric heat pump. The Committee 
     also intends that the calculation methods provide appropriate 
     calculated energy savings for design methods and technologies 
     not otherwise credited in either Standard 90.1-2001 or in the 
     2005 California Nonresidential Alternative Calculation Method 
     Approval Manual, including the following: (i) Natural 
     ventilation (ii) Evaporative cooling (iii) Automatic lighting 
     controls such as occupancy sensors, photocells, and 
     timeclocks( iv) Daylighting (v) Designs utilizing semi-
     conditioned spaces which maintain adequate comfort conditions 
     without air conditioning or without heating (vi) Improved fan 
     system efficiency, including reductions in static pressure 
     (vii) Advanced unloading mechanisms for mechanical cooling, 
     such as multiple or variable speed compressors (viii) On-site 
     generation of electricity, including combined heat and power 
     systems, fuel cells, and renewable energy generation such as 
     solar energy (ix) Wiring with lower energy losses than wiring 
     satisfying Standard 90.1-2001 requirements for building power 
     distribution systems. 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
       The Secretary shall prescribe 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

[[Page S9136]]

     Mortgage Industry National Accreditation Procedures for Home 
     Energy Rating Systems. Individuals qualified to determine 
     compliance shall only be those recognized by one or more 
     organizations certified by the Secretary for such purposes.
       For energy-efficient commercial building property 
     expenditures made by a public entity, such as public schools, 
     the Secretary shall promulgate regulations that allow the 
     deduction to be allocated to the person primarily responsible 
     for designing the property in lieu of the public entity.
       If a deduction is allowed under this section, the basis of 
     the property shall be reduced by the amount of the deduction. 
     Additionally, if a deduction is allowed for business energy 
     property under section 1523 of the Senate amendment, or an 
     individual credit for nonbusiness energy property or 
     principal residence is allowed under section 1524 of the 
     Senate amendment, then with respect to property for which a 
     deduction under this provision may be claimed, the annual 
     energy and power costs of the reference building is to be 
     determined assuming the reference building contains the 
     property for which the deduction or credit has been allowed, 
     and any cost of such property taken into account under those 
     other provisions of the bill cannot be taken into account 
     under this provision.
     Partial allowance of deduction
       In the case of a building that does not meet the overall 
     building requirement of a 50-percent energy savings, a 
     partial deduction is allowed with respect to each separate 
     building system that comprises energy efficient property and 
     which is certified by a qualified professional as meeting or 
     exceeding the applicable system-specific savings targets 
     established by the Secretary of the Treasury. The applicable 
     system-specific savings targets to be established by the 
     Secretary are those that would result in a total annual 
     energy savings with respect to the whole building of 50 
     percent, if each of the separate systems met the system 
     specific target. The separate building systems are (1) the 
     interior lighting system, (2) the heating, cooling, 
     ventilation and hot water systems, and (3) the building 
     envelope. The maximum allowable deduction is $0.75 per square 
     foot for each separate system.
       In the case of system-specific partial deductions, in 
     general no deduction is allowed until the Secretary 
     establishes system-specific targets. However, in the case of 
     lighting system retrofits, until such time as the Secretary 
     issues final regulations, the system-specific energy savings 
     target for the lighting system is deemed to be met by a 
     reduction in Lighting Power Density of 40 percent (50 percent 
     in the case of a warehouse) of the minimum requirements in 
     Table 9.3.1.1 or Table 9.3.1.2 of ASHRAE/IESNA Standard 90.1-
     2001. Also, in the case of a lighting system that reduces 
     lighting power density by 25 percent, a partial deduction of 
     37.5 cents per square foot is allowed. A pro-rated partial 
     deduction is allowed in the case of a lighting system that 
     reduces lighting power density between 25 percent and 40 
     percent. Certain lighting level and lighting control 
     requirements must also be met in order to qualify for the 
     partial lighting deductions.
       Effective date.--The provision is effective for property 
     placed in service after the date of enactment and prior to 
     January 1, 2010.


                          conference agreement

       The conference agreement follows the Senate amendment with 
     modifications. The conference agreement provides that the 
     deduction amount is reduced to $1.80 per square foot, and 
     that the partial deduction for building subsystems is reduced 
     to $0.60 per square foot. The conference agreement also 
     modifies the effective date.
       Effective date.--The provision is effective for property 
     placed in service after December 31, 2005 and prior to 
     January 1, 2008.
     14. Deduction for business energy property (sec. 1523 of the 
         Senate amendment)


                              present law

       There is no special deduction provided for energy-efficient 
     property.


                               house bill

       No provision.


                            senate amendment

       The provision provides a deduction equal to the greater of 
     (1) the total of the allowable deductions for the purchase of 
     certain property, or (2) the allowable deduction with respect 
     to energy-efficient residential rental building property.
       The allowable deduction for the purchase of certain 
     property is (1) $150 for each advanced main air circulating 
     fan, (2) $450 for each qualified natural gas, propane, or oil 
     furnace or hot water boiler, and (3) $900 for each item of 
     qualified energy efficient property.
       An advanced main air circulating fan is a fan used in a 
     natural gas, propane, or oil furnace originally placed in 
     service by the taxpayer during the taxable year, and which 
     has an annual electricity use of no more than two percent of 
     the total annual energy use of the furnace (as determined in 
     the standard Department of Energy test procedures).
       A qualified natural gas, propane, or oil furnace or hot 
     water boiler is a natural gas, propane, or oil furnace or hot 
     water boiler with an annual fuel utilization efficiency rate 
     of at least 95.
       Qualified energy-efficient property is: (1) an electric 
     heat pump water heater which yields an energy factor of at 
     least 2.0 in the standard Department of Energy test 
     procedure, (2) an electric heat pump which has a heating 
     seasonal performance factor (HSPF) of at least 9, a seasonal 
     energy efficiency ratio (SEER) of at least 15, and an energy 
     efficiency ratio (EER) of at least 13, (3) a geothermal heat 
     pump which (i) in the case of a closed loop product, has an 
     energy efficiency ratio (EER) of at least 14.1 and a heating 
     coefficient of performance (COP) of at least 3.3, (ii) in the 
     case of an open loop product, has an energy efficiency ratio 
     (EER) of at least 16.2 and a heating coefficient of 
     performance (COP) of at least 3.6, and (iii) in the case of a 
     direct expansion (DX) product, has an energy efficiency ratio 
     (EER) of at least 15 and a heating coefficient of performance 
     (COP) of at least 3.5, (4) a central air conditioner which 
     has a seasonal energy efficiency ratio (SEER) of at least 15 
     and an energy efficiency ratio (EER) of at least 13, and (5) 
     a natural gas, propane, or oil water heater which has an 
     energy factor of at least 0.80.
       The allowable deduction with respect to energy-efficient 
     residential rental building property is $6,000 if the 
     building achieves a 50 percent reduction in energy costs 
     relative to the original condition of the building (in the 
     case of new construction, the original condition of the 
     building is deemed to be a building built to the standards 
     necessary for compliance with applicable local building 
     construction codes). In the case of a building that achieves 
     a reduction in energy costs between 20 and 50 percent, the 
     allowable deduction is $12,000 times the percentage 
     reduction. No deduction is allowed in the case of energy cost 
     savings of less than 20 percent. In order to be eligible for 
     the deduction, the building's energy savings must be 
     certified according to regulations established by the 
     Secretary that follow various rules and procedures. In the 
     case of energy efficient residential rental building property 
     which is public property, the Secretary shall promulgate a 
     regulation to allow the allocation of the deduction to the 
     person primarily responsible for designing the improvements 
     to the property in lieu of the public entity which is the 
     owner of such property.
       In order to be eligible for the deduction, the rental 
     building's energy savings must be demonstrated by 
     performance-based compliance and be certified according to 
     regulations established by the Secretary that follow various 
     rules and procedures, including the use of computer software 
     based on the 2005 California Residential Alternative 
     Calculation Method Approval Manual. The determination of 
     compliance may be provided by a local building regulatory 
     authority, a utility, a manufactured home production 
     inspection primary inspection agency (IPIA), or an accredited 
     home energy rating system provider. All providers shall be 
     accredited, or otherwise authorized to use approved energy 
     performance measurement methods, by the Residential Energy 
     Services Network (RESNET).
       For energy-efficient residential rental building property 
     owned by a Federal, State, or local government or political 
     subdivision thereof, the Secretary shall promulgate 
     regulations that allow the deduction to be allocated to the 
     person primarily responsible for designing the property in 
     lieu of the public entity.
       No deduction for energy efficient residential rental 
     property is allowed for any property for which a deduction is 
     allowable under Code section 179D (as added by the bill), 
     relating to the deduction for energy efficient commercial 
     building property.
       If a deduction is allowed under this provision with respect 
     to any property, the basis of such property is reduced by the 
     amount of the deduction so allowed.
       Effective date.--The credit applies to property placed in 
     service after the date of enactment and prior to January 1, 
     2009.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     15. Energy efficient new homes (sec. 1522 of the Senate 
         amendment, sec. 1332 of the conference agreement, and new 
         sec. 45L of the Code)


                              present law

       There is no present-law credit for the construction of new 
     energy-efficient homes.


                               house bill

       No provision.


                            senate amendment

       The provision provides a credit to an eligible contractor 
     for the construction of a qualified new energy-efficient 
     home. To qualify as an energy-efficient new home, the home 
     must be: (1) a dwelling located in the United States, (2) 
     substantially completed after the date of enactment, and (3) 
     certified in accordance with guidance prescribed by the 
     Secretary to have a projected level of annual heating and 
     cooling energy consumption that meets the standards for 
     either a 30-percent or 50-percent reduction in energy usage, 
     compared to a comparable dwelling constructed in accordance 
     with the standards of chapter 4 of the 2003 International 
     Energy Conservation Code as in effect (including supplements) 
     on the date of enactment, and any applicable Federal minimum 
     efficiency standards for equipment. With respect to homes 
     that meet the 30-percent standard, one-third of such 30 
     percent savings must come from the building envelope, and 
     with respect to homes that meet the 50-percent standard, one-
     fifth of such 50 percent savings must come from the building 
     envelope.
       The credit equals $1,000 in the case of a new home that 
     meets the 30 percent standard

[[Page S9137]]

     and $2,000 in the case of a new home that meets the 50 
     percent standard.
       The eligible contractor is the person who constructed the 
     home, or in the case of a manufactured home, the producer of 
     such home. The Committee intends that the building envelope 
     component means insulation materials or system specifically 
     and primarily designed to reduce heat loss or gain, exterior 
     windows (including skylights), doors, and any duct sealing 
     and infiltration reduction measures.
       Manufactured homes that conform to federal manufactured 
     home construction and safety standards are eligible for the 
     credit provided all the criteria for the credit are met. 
     Manufactured homes certified by a method prescribed by the 
     Administrator of the Environmental Protection Agency under 
     the Energy Star Labeled Homes program are eligible for the 
     $1,000 credit provided criteria (1) and (2), above, are met.
       The credit is part of the general business credit. No 
     credits attributable to energy efficient homes can 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, 
     2009 (December 31, 2007 in the case of the $1,000 credit).


                          conference agreement

       The conference agreement follows the Senate amendment with 
     modifications. The conference agreement provides that the 
     credit related to homes meeting the 30-percent efficiency 
     standard applies only to manufactured homes. The conference 
     agreement also modifies the effective date.
       Effective date.--The credit applies to homes whose 
     construction is substantially completed after December 31, 
     2005, and which are purchased after December 31, 2005 and 
     prior to January 1, 2008.
     16. Energy credit for combined heat and power system property 
         (sec. 1525 of the Senate amendment)


                              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 combined heat and power 
     (``CHP'') property.


                               house bill

       No provision.


                            senate amendment

       The provision provides a 10-percent credit for the purchase 
     of CHP property.
       CHP property is property: (1) that 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) that has an electrical capacity of not 
     more than 15 megawatts or a mechanical energy capacity of no 
     more than 2000 horsepower or an equivalent combination of 
     electrical and mechanical energy capacities; (3) that 
     produces at least 20 percent of its total useful energy in 
     the form of thermal energy that is not used to produce 
     electrical or mechanical power, and produces at least 20 
     percent of its total useful energy in the form of electrical 
     or mechanical power (or a combination thereof); and (4) the 
     energy efficiency percentage of which exceeds 60 percent. CHP 
     property does not include property used to transport the 
     energy source to the generating facility or to distribute 
     energy produced by the facility.
       Additionally, the provision provides that systems whose 
     fuel source is at least 90 percent bagasse and that would 
     qualify for the credit but for the failure to meet the 
     efficiency standard are eligible for a credit that is reduced 
     in proportion to the degree to which the system fails to meet 
     the efficiency standard. For example, a system that would 
     otherwise be required to meet the 60-percent efficiency 
     standard, but which only achieves 30-percent efficiency, 
     would be permitted a credit equal to one-half of the 
     otherwise allowable credit (i.e., a 5-percent credit).
       Effective date.--The credit applies to periods after the 
     date of enactment in taxable years ending after the date of 
     enactment, for property placed in service before January 1, 
     2008, 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).


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     17. Energy efficient appliances (sec. 1526 of the Senate 
         amendment, sec. 1334 of the conference agreement, and new 
         sec. 45M of the Code)


                              present law

       There is no present-law credit for the manufacture of 
     energy-efficient appliances.


                               house bill

       No provision.


                            senate amendment

       The provision provides a credit for the eligible production 
     of certain energy-efficient dishwashers, clothes washers and 
     refrigerators.
       The credit for dishwashers applies to dishwashers produced 
     in 2006 and 2007 that meet the Energy Star standards for 
     2007. The credit amount equals $3 multiplied by the 
     percentage by which the efficiency of the 2007 standards (not 
     yet known) exceeds that of the 2005 standards. The credit may 
     not exceed $100 per dishwasher.
       The credit for clothes washers equals (1) $50 for clothes 
     washers manufactured in 2005 that have a modified energy 
     factor (MEF) of at least 1.42, (2) $100 for clothes washers 
     manufactured in 2005-2007 that meet the requirements of the 
     Energy Star program which are in effect for clothes washers 
     in 2007, or (3) the minimum of (i) $200 or (ii) $10 
     multiplied by the average of the energy and water savings 
     percentages of the 2010 Energy Star standards relative to the 
     2007 Energy Star standards, for clothes washers manufactured 
     in 2008-2010 that meet the requirements of the Energy Star 
     program which are in effect for clothes washers in 2010.
       The credit for refrigerators is based on energy savings and 
     year of manufacture. The energy savings are determined 
     relative to the energy conservation standards promulgated by 
     the Department of Energy that took effect on July 1, 2001. 
     Refrigerators that achieve a 15 to 20 percent energy saving 
     and that are manufactured in 2005 or 2006 receive a $75 
     credit. Refrigerators that achieve a 20 to 25 percent energy 
     saving receive a (i) $125 credit if manufactured in 2005-
     2007, or (ii) $100 credit if manufactured in 2008. 
     Refrigerators that achieve at least a 25 percent energy 
     saving receive a (i) $175 credit if manufactured in 2005-
     2007, or (ii) $150 credit if manufactured in 2008-2010.
       Appliances eligible for the credit include only those that 
     exceed the average amount of production from the 3 prior 
     calendar years for each category of appliance. In the case of 
     refrigerators, eligible production is production that exceeds 
     110 percent of the average amount of production from the 3 
     prior calendar years. Proration rules apply in the case of 
     credits for 2005 production.
       A dishwasher is any a residential dishwasher subject to the 
     energy conservation standards established by the Department 
     of Energy. 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.
       The taxpayer may not claim credits in excess of $75 million 
     for all taxable years, and may not claim credits in excess of 
     $20 million with respect to clothes washers eligible for the 
     $50 credit and refrigerators eligible for the $75 credit. A 
     taxpayer may elect to increase the $20 million limitation 
     described above to $25 million provided that the aggregate 
     amount of credits with respect to such appliances, plus 
     refrigerators eligible for the $100 and $125 credits, is 
     limited to $50 million for all taxable years.
       Additionally, the credit allowed in a taxable year 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 is part of the general business credit.
       Effective date.--The credit applies to appliances produced 
     after the date of enactment and prior to January 1, 2011 
     (January 1, 2008, in the case of dishwashers).


                          conference agreement

       The conference agreement follows the Senate amendment, but 
     only with respect to the provisions that cover production 
     after December 31, 2005 and prior to January 1, 2008.
       Effective date.--The credit applies to appliances produced 
     after December 31, 2005 and prior to January 1, 2008.

              C. Alternative Minimum Tax Relief Provisions

     1. Allow nonbusiness energy credits against the alternative 
         minimum tax (sec. 1321 of the House bill)


                              Present Law

       Present law imposes an alternative minimum tax on 
     individuals in an amount equal to the excess of the tentative 
     minimum tax over the regular tax liability. The tentative 
     minimum tax is an amount equal to specified rates of tax 
     imposed on the excess of the alternative minimum taxable 
     income over an exemption amount.

[[Page S9138]]

       Generally, for taxable years beginning after December 31, 
     2005, nonrefundable personal credits may not exceed the 
     excess of the regular tax liability over the tentative 
     minimum tax.


                               House Bill

       The provision allows the personal energy credits added by 
     the House bill to offset both the regular tax and the 
     alternative minimum tax.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2005.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not contain the House bill 
     provision.
     2. Allow certain business energy credits against the 
         alternative minimum tax (sec. 1322 of the House bill and 
         sec. 1548(c) of the Senate amendment)


                              Present Law

       Present law imposes an alternative minimum tax on 
     individuals and corporations in an amount equal to the excess 
     of the tentative minimum tax over the regular tax liability. 
     The tentative minimum tax is an amount equal to specified 
     rates of tax imposed on the excess of the alternative minimum 
     taxable income over an exemption amount.
       Generally, the general business credit may not exceed the 
     excess of the regular tax liability over the tentative 
     minimum tax (or, if greater, 25 percent of so much of the 
     regular tax liability as exceeds $25,000). Amounts in excess 
     of this limitation generally may be carried back one year and 
     forward 20 years. In applying the tax limitation to certain 
     business energy credits, the tentative minimum tax is treated 
     as being zero. These credits include the alcohol fuels credit 
     and the section 45 credit for electricity produced from a 
     facility (placed in service after October 22, 2004) during 
     the first four years of production beginning on the date the 
     facility is placed in service.


                               House Bill

       The House bill expands the list of business energy credits 
     for which the tentative minimum tax is treated as being zero 
     to include (i) the low sulfur diesel fuel production credit, 
     (ii) the marginal oil and gas well production credit, (iii) 
     the portion of the investment credit attributable to 
     qualified fuel cells, and (iv) for taxable years beginning 
     after December 31, 2005, and before January 1, 2008, the 
     enhanced oil recovery credit.
       Effective date.--The provision generally applies to credits 
     determined for taxable years beginning after December 31, 
     2005. In the case of the credit for qualified fuel cells, the 
     provision applies for taxable years ending after April 11, 
     2005.


                            Senate Amendment

       The Senate amendment expands the list of business energy 
     credits for which the tentative minimum tax is treated as 
     being zero to include the credit for production of coal owned 
     by Indian tribes.
       Effective date.--The provision is effective as if included 
     in the provision allowing the credit.


                          Conference Agreement

       The conference agreement does not expand the list of 
     business energy credits for which the tentative minimum tax 
     is treated as being zero.

                  D. Additional Energy Tax Incentives

     1. Ten-year recovery period for underground natural gas 
         storage facilities and cushion gas (sec. 1541 of the 
         Senate amendment)


                              Present Law

       Under present law, depreciation allowances for property 
     used in a trade or business generally are determined under 
     the Modified Accelerated Cost Recovery System (``MACRS''). 
     Under MACRS, natural gas storage facilities and related 
     equipment have a class life of 22 years and a recovery period 
     of 15 years.
       Cushion gas is the minimum volume of natural gas necessary 
     to provide the pressure to facilitate the flow of gas from a 
     storage reservoir to a pipeline. Recoverable cushion gas will 
     be available for sale or other use upon abandonment of the 
     storage reservoir, while nonrecoverable cushion gas will 
     become obsolete with that abandonment. Under present law, the 
     tax treatment of cushion gas depends on whether such gas is 
     recoverable. The quantity of cushion gas that is recoverable 
     is not subject to depreciation because it is not subject to 
     exhaustion, wear, tear, or obsolescence. Conversely, non-
     recoverable cushion gas is subject to obsolescence and is 
     therefore subject to tax depreciation. The depreciable life 
     of non-recoverable cushion gas is also 15 years.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment reclassifies underground natural gas 
     storage facilities and nonrecoverable cushion gas as 10-year 
     MACRS property. The present law treatment of recoverable 
     cushion gas remains unchanged.
       Effective date.--The Senate amendment provision applies to 
     property placed in service after the date of enactment, the 
     original use of which commences with the taxpayer.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     2. Modify research credit for research relating to energy 
         (sec. 1542 of the Senate amendment, sec. 1351 of the 
         conference agreement, 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 December 31, 2005.
       A 20-percent research tax credit also applies 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 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.


                               House Bill

       No provision.


                            Senate Amendment

       The provision 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

[[Page S9139]]

     incur more than 50 percent of the total amounts received by 
     the research consortium during the calendar year.
       The provision 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.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     3. Small agri-biodiesel producer credit (sec. 1543 of the 
         Senate amendment, sec. 1345 of the conference agreement, 
         and sec. 40A of the Code)


                              Present Law

     Biodiesel income tax credit
       The Code provides an income tax credit for biodiesel and 
     qualified biodiesel mixtures, the biodiesel fuels credit. The 
     biodiesel fuels credit is the sum of the biodiesel mixture 
     credit plus the biodiesel credit and is treated as a general 
     business credit. The amount of the biodiesel fuels credit is 
     includable in gross income. The biodiesel fuels credit is 
     coordinated to take into account benefits from the biodiesel 
     excise tax credit and payment provisions created by the Act. 
     The credit may not be carried back to a taxable year ending 
     before or on December 31, 2004. The provision does not apply 
     to fuel sold or used after December 31, 2006.
       Biodiesel is monoalkyl esters of long chain fatty acids 
     derived from plant or animal matter that meet (1) the 
     registration requirements established by the Environmental 
     Protection Agency under section 211 of the Clean Air Act and 
     (2) the requirements of the American Society of Testing and 
     Materials D6751. Agri-biodiesel is biodiesel derived solely 
     from virgin oils including oils from corn, soybeans, 
     sunflower seeds, cottonseeds, canola, crambe, rapeseeds, 
     safflowers, flaxseeds, rice bran, mustard seeds, or animal 
     fats.
       Biodiesel may be taken into account for purposes of the 
     credit only if the taxpayer obtains a certification (in such 
     form and manner as prescribed by the Secretary) from the 
     producer or importer of the biodiesel which identifies the 
     product produced and the percentage of the biodiesel and 
     agri-biodiesel in the product.
       The biodiesel income tax credit does not contain any 
     incentives for small producers.
     Small ethanol producer credit
       Present law provides several tax benefits for ethanol and 
     methanol produced from renewable sources 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 up to 15 million gallons per 
     year 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 ethanol must (1) be sold by such producer to 
     another person (a) for use by such other person in the 
     production of al qualified alcohol fuel mixture in such 
     person's trade or business (other than casual off-farm 
     production), (b) for use by such other person as a fuel in a 
     trade or business, or, (c) who sells such ethanol at retail 
     to another person and places such ethanol in the fuel tank of 
     such other person; or (2) used by the producer for any 
     purpose described in (a), (b), or (c). A cooperative may pass 
     through the small ethanol producer credit to its patrons. The 
     alcohol fuels tax credits are includible in income. This 
     credit may be used to offset alternative minimum tax 
     liability. The credit is a 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, 2010.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment adds to the biodiesel fuels credit a 
     small agri-biodiesel producer credit. The credit is a 10-
     cents-per-gallon credit for up to 15 million gallons of agri-
     biodiesel produced by small producers, defined generally as 
     persons whose agri-biodiesel production capacity does not 
     exceed 60 million gallons per year. The agri-biodiesel must 
     (1) be sold by such producer to another person (a) for use by 
     such other person in the production of a qualified biodiesel 
     mixture in such person's trade or business (other than casual 
     off-farm production), (b) for use by such other person as a 
     fuel in a trade or business, or, (c) who sells such agri-
     biodiesel at retail to another person and places such ethanol 
     in the fuel tank of such other person; or (2) used by the 
     producer for any purpose described in (a), (b), or (c).
       Like the small ethanol producer credit, cooperatives may 
     elect to pass through any portion of the small agri-biodiesel 
     producer credits to its patrons. The credit is apportioned 
     pro rata among patrons of the cooperative on the basis of the 
     quantity or value of the business done with or for such 
     patrons for the taxable year. An election to pass through the 
     credit is made on a timely filed return for the taxable year 
     and is irrevocable for such taxable year.
       The amount of the credit not apportioned to patrons is 
     included in the organization's credit for the taxable year of 
     the organization. The amount of the credit apportioned to 
     patrons is to be included in the patron's credit for the 
     first taxable year of each patron ending on or after the last 
     day of the payment period for the taxable year of the 
     organization, or, if earlier, for the taxable year of each 
     patron ending on or after the date on which the patron 
     receives notice from the cooperative of the apportionment.
       If the amount of the cooperative's credit for a taxable 
     year is less than the amount of the credit shown on the 
     organization's tax return for such taxable year, an amount 
     equal to the excess of the reduction in the credit over the 
     amount not apportioned to patrons for the taxable year is 
     treated as an increase in the cooperative's tax. The increase 
     is not treated as tax imposed for purposes of determining the 
     amount of any tax credit or for purposes of the alternative 
     minimum tax.
       The credit sunsets after December 31, 2010, along with the 
     other biodiesel incentives as extended under the Senate 
     amendment.
       Effective date.--The provision is effective for taxable 
     years ending after the date of enactment.


                          Conference Agreement

       The conference agreement follows the Senate amendment 
     except the credit sunsets after December 31, 2008.
     4. Modifications to small ethanol producer credit (sec. 1544 
         of the Senate amendment, sec. 1347 of the conference 
         agreement, and sec. 40 of the Code)


                              Present Law

       Present law provides several tax benefits for ethanol and 
     methanol that are used as a fuel or that are blended with 
     other fuels (e.g., gasoline) for such a use. For example, the 
     Code provides an income tax credit for alcohol and alcohol-
     blended fuels. In the case of ethanol, the Code provides an 
     additional 10-cents-per-gallon credit for small producers, 
     defined generally as persons whose production capacity does 
     not exceed 30 million gallons per year.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment increases the limit on production 
     capacity for small ethanol producers from 30 million gallons 
     to 60 million gallons per year.
       The Senate amendment also provides that an election to pass 
     the small ethanol producer credit through to cooperative 
     patrons is not valid unless the cooperative provides patrons 
     timely written notice of the apportionment of the credit. 
     Under the Senate amendment, notice is timely if mailed to 
     patrons during the payment period described in section 
     1382(d) of the Code.
       Effective date.--The provision is effective for taxable 
     years ending after the date of enactment.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     5. Credit for equipment for processing or sorting materials 
         gathered through recycling (sec. 1545 of the Senate 
         amendment and sec. 1353 of the conference agreement)


                              Present Law

       There is no present law credit for equipment for processing 
     or sorting materials gathered through recycling.


                               House Bill

       No provision.


                            Senate Amendment

       The provision provides a 15-percent business tax credit for 
     the cost of qualified recycling equipment placed in service 
     or leased by the taxpayer. Qualified recycling equipment is 
     equipment, including connecting piping, (1) that is employed 
     in sorting or processing residential and commercial qualified 
     recyclable materials (any packaging or printed material 
     which is glass, paper, plastic, steel, or aluminum 
     generated by an individual or business) for the purpose of 
     converting such materials for use in manufacturing 
     tangible consumer products, including packaging, or (2) 
     whose primary purpose is the shredding and processing of 
     any electronic waste, including any cathode ray tube, flat 
     panel screen, or similar video display device with a 
     screen size greater than four inches measured diagonally, 
     or a central processing unit.
       Qualified recycling equipment does not include rolling 
     stock or other equipment used to transport recyclable 
     materials. Materials

[[Page S9140]]

     that are not packaging or printed material, such as tires or 
     scrap metal from junked automobiles, are not qualified 
     recyclable materials, and thus equipment used to process such 
     materials are not qualified recycling equipment.
       For the purposes of (1), qualified recycling equipment 
     includes equipment that is utilized at commercial or public 
     venues, including recycling collection centers, where the 
     equipment is utilized to sort or process qualified recyclable 
     materials for such purpose. For the purpose of (2), only the 
     cost of each piece of equipment as exceeds $400,000 is 
     eligible for the credit.
       Effective date.--The credit applies to amounts paid or 
     incurred during the taxable year for qualified recycling 
     equipment placed in service or leased in taxable years 
     beginning after December 31, 2005.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision. The conference agreement directs the 
     Secretary of the Treasury, in consultation with the Secretary 
     of Energy, to conduct a study to determine and quantify the 
     energy savings achieved through the recycling of glass, 
     paper, plastic, steel, aluminum, and electronic devices, and 
     to identify tax incentives that would encourage recycling of 
     such material. The study is to be submitted to Congress 
     within one year of the date of enactment.
       Effective date.--The provision is effective on the date of 
     enactment.
     6. Five-year carryback of net operating losses for certain 
         electric utility companies (sec. 1546 of the Senate 
         amendment, sec. 1311 of the conference agreement, and 
         sec. 172 of the Code)


                              Present Law

       A net operating loss (``NOL'') is, generally, the amount by 
     which a taxpayer's allowable deductions exceed the taxpayer's 
     gross income. A carryback of an NOL generally results in the 
     refund of Federal income tax for the carryback year. A 
     carryover of an NOL reduces Federal income tax for the 
     carryover year.
       In general, an NOL may be carried back two years and 
     carried over 20 years to offset taxable income in such years. 
     Under present-law ordering rules, NOLs generally are first 
     applied to the earliest of the taxable years to which the 
     loss may be carried.
       Different rules apply with respect to NOLs arising in 
     certain circumstances. For example, a three-year carryback 
     applies with respect to NOLs (1) arising from casualty or 
     theft losses of individuals, or (2) attributable to 
     Presidentially declared disasters for taxpayers engaged in a 
     farming business or a small business. A five-year carryback 
     period applies to NOLs from a farming loss (regardless of 
     whether the loss was incurred in a Presidentially declared 
     disaster area). Special rules also apply to real estate 
     investment trusts (no carryback), specified liability losses 
     (10-year carryback), and excess interest losses (no carryback 
     to any year preceding a corporate equity reduction 
     transaction).
       Section 202 of the Job Creation and Worker Assistance Act 
     of 2002 (``JCWAA'') provided a temporary extension of the 
     general NOL carryback period to five years (from two years) 
     for NOLs arising in taxable years ending in 2001 and 2002. In 
     addition, the five-year carryback period applies to NOLs from 
     these years that qualify under present law for a three- year 
     carryback period (i.e., NOLs arising from casualty or theft 
     losses of individuals or attributable to certain 
     Presidentially declared disaster areas).
       A taxpayer can elect to forgo the five-year carryback 
     period. The election to forgo the five-year carryback period 
     is made in the manner prescribed by the Secretary of the 
     Treasury and must be made by the due date of the return 
     (including extensions) for the year of the loss. The election 
     is irrevocable. If a taxpayer elects to forgo the five-year 
     carryback period, then the losses are subject to the rules 
     that otherwise would apply under section 172 absent the 
     provision.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provides a temporary extension of the 
     NOL carryback period to five years for NOLs of certain 
     electric utility companies arising in taxable years ending in 
     2003, 2004, and 2005 (``eligible NOLs''). Regardless of the 
     taxable year in which an eligible NOL arose, refund claims 
     resulting from the extended carryback period can be made 
     during any taxable year ending after December 31, 2005, and 
     before January 1, 2009. However, the amount of the refund 
     claimed during any one taxable year may not exceed the amount 
     of the electric utility company's investment in electric 
     transmission property and pollution control facilities 
     (``qualifying investment'') in the preceding taxable year. 
     The present-law NOL carryover ordering rules apply. Taxpayers 
     may elect to forgo the five-year carryback period provided 
     under the provision if an election is filed before January 1, 
     2009.
       Effective date.--The Senate amendment provision is 
     effective for refund claims resulting from net operating 
     losses generated in taxable years ending in 2003, 2004, and 
     2005.


                          Conference Agreement

       The conference agreement follows the Senate amendment, with 
     the following modifications. The conference agreement 
     provides an election for certain electric utility companies 
     to extend the carryback period to five years for a portion of 
     NOLs arising in 2003, 2004, and 2005 (``loss years''). The 
     election may be made during any taxable year ending 
     after December 31, 2005, and before January 1, 2009 
     (``election years''). An electing taxpayer must specify to 
     which loss year the election applies.
       The portion of the loss year NOL to which the election may 
     apply is limited to 20 percent of the amount of the 
     taxpayer's qualifying investment in the taxable year prior to 
     the year in which the election is made (the ``qualifying 
     investment limitation''). Rules similar to those applicable 
     to specified liability losses apply, and any remaining 
     portion of the loss year NOL remains subject to the present 
     law NOL carryover rules. Only one election may be made in any 
     election year, and elections may not be made for more than 
     one election year beginning in the same calendar year. Thus, 
     for example, a taxpayer with two short taxable years 
     beginning in calendar year 2006 is eligible to make an 
     election under this provision in only one of those two short 
     taxable years. Once an election has been made with respect to 
     a loss year, no subsequent election is available with respect 
     to that loss year.
       For purposes of calculating interest on overpayments, any 
     overpayment resulting from a five-year NOL carryback elected 
     under this provision is deemed not to have been made prior to 
     the filing date for the taxable year in which the election is 
     made. The statute of limitations for refund claims, and that 
     for assessment of deficiencies, are also extended.
       An election under this provision is made in such manner as 
     the Secretary may prescribe. However, the conferees expect 
     that the filing of a refund claim will be considered 
     sufficient for making the election, provided that the 
     taxpayer attaches to the refund claim a statement specifying 
     the election year, the loss year, and the amount of 
     qualifying investment in electric transmission property and 
     pollution control facilities in the preceding taxable year.
       Under the conference agreement, an investment in electric 
     transmission property qualifies if it is a capital 
     expenditure made by the taxpayer which is attributable to 
     electric transmission property used by the taxpayer in the 
     transmission at 69 or more kilovolts of electricity for sale.
       An investment in pollution control equipment qualifies if 
     it is a capital expenditure, made by an electric utility 
     company (as defined in the Public Utility Holding Company Act 
     as in effect on the day before the date of enactment of the 
     provision), which is attributable to a facility which will 
     qualify as a certified pollution control facility, generally 
     as defined under section 169(d)(1) but without regard to the 
     requirements therein that the facility be new or that it be 
     used in connection with a plant or other property in 
     operation before January 1, 1976.
       The conferees recognize that a significant amount of time 
     may be required between the date of a capital expenditure for 
     electric transmission property or pollution control equipment 
     and the date the property is placed in service. Accordingly, 
     there is no requirement that the transmission property or 
     pollution control facilities be placed in service in the year 
     in which the capital expenditures are incurred. However, it 
     is intended that qualifying investment under the provision 
     includes only capital expenditures to which the taxpayer is 
     committed and with respect to property which the taxpayer 
     intends to ultimately place in service in the taxpayer's 
     trade or business. Under the conference agreement, capital 
     expenditures which, at the taxpayer's option, are refundable 
     or subject to material modification in a manner which would 
     not meet the requirements of the provision, may not be taken 
     into account. For example, if a taxpayer makes a cash deposit 
     with respect to a contract for the purchase of electric 
     transmission property, and the contract contains an option 
     (or there is otherwise an understanding) under which the 
     taxpayer may subsequently apply the deposit to the purchase 
     of equipment other than electric transmission property, the 
     deposit is not included in the taxpayer's qualifying 
     investment. This rule is intended as an anti-abuse rule and 
     should be interpreted to prevent a taxpayer from taking into 
     account capital expenditures to which the taxpayer is not 
     permanently committed.
       Effective date.--The conference agreement provision is 
     effective for elections made in taxable years ending after 
     December 31, 2005, and before January 1, 2009, with respect 
     to net operating losses arising in taxable years ending in 
     2003, 2004, and 2005.
     7. Qualifying pollution control equipment credit (sec. 1547 
         of the Senate amendment)


                              Present Law

       There is no tax credit for investment in pollution control 
     equipment. An investment credit is available for investment 
     in certain energy property.


                            Senate Amendment

       The Senate amendment provides an investment credit for 
     qualifying pollution control equipment. The credit is an 
     amount equal to 15 percent of the basis of qualifying 
     pollution control equipment placed in service at a qualifying 
     facility during the taxable year. Qualifying pollution 
     control equipment means any technology that is installed in 
     or on a qualifying facility to reduce air emissions of any 
     pollutant regulated by the Environmental Protection Agency 
     under the

[[Page S9141]]

     Clean Air Act, including thermal oxidizers, scrubber systems, 
     vapor recovery systems, low nitric oxide burners, flair 
     systems, bag houses, cyclones, and continuous emission 
     monitoring systems. A qualifying facility is a facility that 
     produces not less than 1,000,000 gallons of ethanol during 
     the taxable year. For depreciation purposes, the basis of 
     qualifying pollution control equipment is reduced by 50 
     percent of the amount of the credit.
       In the case of property constructed over a period of two or 
     more years, a taxpayer may elect to claim the credit on the 
     basis of qualified progress expenditures made during the 
     period of construction before the property is completed and 
     placed in service.
       Effective date.--The credit applies to periods after the 
     date of enactment in accordance with the transitional rules 
     set forth in 48(m) (as in effect before its repeal).


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     8. Credit for production of coal owned by Indian tribes (sec. 
         1548 of the Senate amendment)


                              Present Law

       Present law provides two income tax incentives for 
     businesses operating within Indian reservations: (1) 
     accelerated depreciation with respect to certain non-gaming 
     property used in a trade or business within an Indian 
     reservation (sec. 168(j)); and (2) a nonrefundable income 
     tax credit to employers on the first $20,000 of qualified 
     wages and health care costs paid to certain members of 
     Indian tribes (or their spouses) who work on or near an 
     Indian reservation and who earn less than $30,000 per year 
     (adjusted for inflation beginning in 1993) (sec. 45A). 
     Both credits expire after December 31, 2005.
       Present law does not provide a credit for the production of 
     coal from coal reserves owned by an Indian tribe.


                               House Bill

       No provision.


                            Senate Amendment

       The provision establishes a credit for ``Indian coal'' sold 
     to an unrelated person. Indian coal is defined as coal 
     produced from coal reserves that on June 14, 2005, were owned 
     by a Federally recognized tribe of Indians or are held in 
     trust by the United States for a tribe or its members.
       The amount of the credit equals $1.50 per ton for coal sold 
     in 2006 through 2009 and $2.00 per ton for coal sold after 
     2009. The credit is indexed for inflation after 2006, is part 
     of the general business credit (sec. 38), and is allowed 
     against the alternative minimum tax.
       Effective date.--The provision applies to Indian coal sold 
     after December 31, 2005, and before January 1, 2013.


                          Conference Agreement

       The conference agreement generally follows the Senate 
     amendment with some modifications. Under the conference 
     agreement, the credit for Indian coal is added by modifying 
     Code section 45, rather than by amending Code section 38 and 
     creating new Code section 45N. As a result, some technical 
     aspects of the credit are changed. These technical aspects 
     are described in section A.9. of this report along with 
     descriptions of other modifications to Code section 45.
     9. Replacement stoves meeting environmental standards in non-
         attainment areas (sec. 1549 of the Senate amendment)


                              Present Law

       There is no present law tax credit relating to stoves.


                               House Bill

       No provision.


                            Senate Amendment

       The provision provides a $500 credit for the replacement of 
     a non-compliant wood stove with a solid fuel burning stove 
     that complies with the Environmental Protection Agency's 
     (''EPA'') emission performance standards. In general, a non-
     compliant wood stove is any wood stove purchased prior to 
     June 30, 1992. Stoves produced after June 30, 1992 must 
     comply with EPA's Standards of Performance for Residential 
     Wood Heaters. The credit is only available for replacements 
     that occur in areas designated by the EPA as nonattainment 
     areas for particulate matter less than 2.5 micrometers in 
     diameter or nonattainment areas for particulate matter less 
     than 10 micrometers in diameter.
       Effective date.--The credit applies to solid fuel burning 
     stoves purchased after the date of enactment and before 
     January 1, 2009.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     10. Exemption for bulk beds from excise tax on retail sale of 
         heavy trucks and trailers (sec. 1550 of the Senate 
         amendment)


                              Present Law

       The Code imposes a 12-percent excise tax on the first 
     retail sale of heavy trucks and trailers (chassis and 
     bodies). Under present law, the tax on the first retail sale 
     of automobile truck bodies does not apply to any body 
     primarily designed: (1) to process or prepare seed, feed, or 
     fertilizer for use on farms; (2) to haul feed, seed, or 
     fertilizer to and on farms; (3) to spread feed, seed, or 
     fertilizer on farms; (4) to load or unload feed, seed, or 
     fertilizer on farms; or (5) for any combination of the 
     foregoing.
       The IRS has issued various rulings in this area. In Revenue 
     Ruling 69-579, the IRS found that a truck body used primarily 
     for hauling animal and poultry feed to and unloading it on 
     farms qualified for exemption because the built-in equipment 
     was elaborate and expensive. Thus, the IRS concluded that the 
     nature of the unloading systems made it impractical to 
     purchase the bodies for use other than in hauling feed, seed, 
     or fertilizer to and unloading it on farms.
       In 1975, the IRS ruled as not exempt a dump truck designed 
     for and used primarily in hauling grain and sugar beets from 
     the field to points on or off the farm but which may also be 
     used to haul feed or fertilizer from a distribution point 
     over the highway to the farm. The ruling concluded that 
     bodies that are used for the general hauling of feed, seed, 
     or fertilizer over the highway are subject to the tax unless 
     they have specific features that indicate they are primarily 
     designed to haul feed, seed, or fertilizer to and on farms. 
     In this case, although feed and fertilizer were among the 
     commodities that the dump truck could be used for, it did not 
     have specific features to indicate that it was primarily 
     designed to haul feed, seed, or fertilizer to and on farms.
       In 1990, the IRS issued a technical advice memorandum 
     (``the 1990 TAM'') that concluded that a type of truck bought 
     by farmers to haul seed potatoes, sugar beets, grain, and 
     other farm products qualified for exemption. Each model had a 
     full-length, powered conveyor belt that was designed to 
     support and unload the cargo; a powered rear discharge door 
     to control the discharge rate of the cargo; and a standard 
     universal motor mount to which an electric drive could be 
     mounted. In that ruling, the IRS noted the special unloading 
     equipment was elaborate and expensive, added substantially to 
     the cost and weight of each body, and limited its load-
     carrying capabilities.
       In 1999, the IRS revoked the 1990 TAM prospectively, noting 
     that the exemption was not intended to cover truck bodies 
     designed for general use, even if capable of hauling feed, 
     seed, or fertilizer to and on farms. The IRS noted that the 
     sales literature indicated that the body was designed to be 
     versatile for hauling potatoes, beets, and small grains. The 
     IRS also observed that unlike the bodies described in Rev. 
     Rul. 69-579, which would not be purchased for use other than 
     in hauling feed, seed, or fertilizer, the bodies at issue are 
     designed for general hauling of farm cargo. Further, the IRS 
     found that the presence of a conveyor belt was equally useful 
     for unloading a crop at market as it is for unloading feed, 
     etc. on a farm. Thus, the IRS concluded that the truck body 
     was not primarily designed for an exempt purpose.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment exempts bulk beds used for 
     transporting farm crops to and on farms from the excise tax 
     on the retail sale of heavy trucks and trailers if sold to a 
     person who certifies to the seller that such person is 
     actively engaged in the trade or business of farming and the 
     primary use of the bulk bed is to haul to and on farms farm 
     crops grown in connection with such trade or business. The 
     Senate amendment provides for the recapture of the tax from 
     the purchaser upon resale of within two years of the first 
     retail sale, or if such purchaser makes substantial nonexempt 
     use of the article.
       Effective date.--The provision is effective for sales after 
     September 30, 2005.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     11. National Academy of Sciences study (sec. 1551 of the 
         Senate amendment and sec. 1352 of the conference 
         agreement)


                              Present Law

       Present law does not provide for a study of the health, 
     environmental, security, and infrastructure external costs 
     that may be associated with the use and production of energy.


                               House Bill

       No provision.


                            Senate Amendment

       The provision requires the Secretary of Treasury to enter 
     into an agreement, within 60 days, with the National Academy 
     of Sciences to conduct a study to define and evaluate the 
     health, environmental, security, and infrastructure external 
     costs and benefits associated with production and consumption 
     of energy that are not or may not be fully incorporated into 
     the price of such activities, or into the Federal tax or fee 
     or other applicable revenue measure related to such 
     activities. The results of the study are to be submitted to 
     Congress within two years of the agreement.
       Effective date.--The provision is effective on the date of 
     enactment.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     12. Income tax exclusion for certain fuel costs of rural 
         carpoolers (sec. 1552 of the Senate amendment)


                              present law

       Under present law, qualified transportation benefits are 
     excludable from gross income and wages for employment tax 
     purposes. Qualified transportation benefits are: (1) 
     transportation in a commuter highway vehicle if such 
     transportation is in connection with travel between the 
     employee's residence and place of employment (``van 
     pooling''); (2) transit passes; and (3) qualified

[[Page S9142]]

     parking. For purposes of the exclusion for van pooling 
     benefits, a commuter highway vehicle is any highway vehicle: 
     (1) the seating capacity of which is at least six adults 
     (excluding the driver); and (2) at least 80 percent of the 
     mileage use of which can reasonably be expected to be (a) for 
     purposes of transporting employees in connection with travel 
     between their residences and their place of employment and 
     (b) on trips during which the number of employees transported 
     for such purposes is at least one-half of the adult seating 
     capacity of such vehicle (not including the driver).
       The maximum amount of qualified parking that is excludable 
     from income and wages is $200 per month (for 2005). The 
     maximum amount of transit passes and van pooling benefits 
     that are excludable from income and wages per month is $105 
     (for 2005). These dollar amounts are indexed for inflation.


                               house bill

       No provision.


                            senate amendment

       The Senate amendment establishes a new qualified 
     transportation fringe benefit. Employer reimbursement for 
     certain fuel costs (up to $50 per month) of employees who 
     meet rural carpool requirements are excluded from a 
     taxpayer's gross income (but not wages) as a qualified 
     transportation fringe benefit. To be eligible for the 
     benefit, the employee must: (1) reside in a rural area; (2) 
     not be eligible for transit or vanpooling benefits provided 
     by the employer; (3) use the employee's vehicle when 
     traveling between the employee's residence and place of 
     employment; and (4) for at least 75 percent of the total 
     mileage of such travel, be accompanied by one or more 
     employees of the same employer. In addition, the premises of 
     the employer must be located in an area that is not 
     accessible by a transit system designed primarily to provide 
     daily work trips within a local commuting area.
       Effective date.--The Senate amendment is effective for 
     expenses incurred on or after the date of enactment and 
     before January 1, 2007.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     13. Three-year applicable recovery period for depreciation of 
         qualified energy management devices (sec. 1553 of the 
         Senate amendment)


                              present law

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


                               house bill

       No provision.


                            senate amendment

       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 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. Additionally, the original use of the energy 
     management device must commence with the taxpayer, and the 
     purchase must be subject to a binding contract entered into 
     after June 23, 2005, and only if there was no written binding 
     contract entered into on or before such date.
       Effective date.--The provision applies to taxable years 
     ending after December 31, 2005, for property placed in 
     service after the December 31, 2005 and prior to January 1, 
     2008.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     14. Exception from volume cap for certain cooling facilities 
         (sec. 1554 of the Senate amendment)


                              present law

     Tax-exempt bonds
       In general
       Interest on bonds issued by State and local governments 
     generally is excluded from gross income for Federal income 
     tax purposes if the proceeds of the bonds are used to finance 
     direct activities of these governmental units or if the bonds 
     are repaid with revenues of the governmental units. Interest 
     on State or local bonds to finance activities of private 
     persons (``private activity bonds'') is taxable unless a 
     specific exception is contained in the Code (or in a non-Code 
     provision of a revenue Act). The term ``private person'' 
     generally includes the Federal Government and all other 
     individuals and entities other than States or local 
     governments.
       Qualified private activity bonds
       Private activity bonds are eligible for tax-exemption if 
     issued for certain purposes permitted by the Code 
     (``qualified private activity bonds''). The definition of a 
     qualified private activity bond includes an exempt facility 
     bond, or qualified mortgage, veterans' mortgage, small issue, 
     redevelopment, 501(c)(3), or student loan bond. The 
     definition of exempt facility bond includes bonds issued to 
     finance local district heating and cooling facilities.
       The issuance of most qualified private activity bonds is 
     subject (in whole or in part) to annual State volume 
     limitations (``State volume cap''). For calendar year 2005, 
     the State volume cap is the greater of $80 per resident or 
     $239 million. Exceptions are provided for bonds issued to 
     finance certain governmentally owned facilities (airports, 
     ports, high-speed intercity rail, and solid waste disposal) 
     and bonds which are subject to separate local, State, or 
     national volume limits (public/private educational 
     facilities, enterprise zone facility bonds, and qualified 
     green building/sustainable design projects).


                               house bill

       No provision.


                            senate amendment

       The Senate amendment provides an exception from the State 
     volume cap for certain qualified private activity bonds 
     issued to finance certain local district heating or cooling 
     facilities. Specifically, State volume cap does not apply to 
     bonds issued to finance local district heating or cooling 
     facilities that are designed to access deep water cooling 
     sources for building air conditionings if the aggregate face 
     amount of bonds issued with respect to such a facility is not 
     more than $75 million.
       Effective date.--The provision applies to projects placed 
     in service after the date of enactment and before July 1, 
     2008.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.

                     E. Revenue Raising Provisions

     1. Treatment of kerosene for use in aviation (sec. 1561 of 
         the Senate amendment)


                              Present Law

       In general, aviation-grade kerosene is taxed at a rate of 
     21.8 cents per gallon upon removal of such fuel from a 
     refinery or terminal (or entry into the United States) and on 
     the sale of such fuel to any unregistered person unless there 
     was a prior taxable removal or entry of such fuel. Aviation-
     grade kerosene may be removed at a reduced rate, either 4.3 
     or zero cents per gallon, if the aviation fuel is removed 
     directly into the fuel tank of an aircraft for use in 
     commercial aviation or for a use that is exempt from the tax 
     imposed by section 4041(c) (other than by reason of a prior 
     imposition of tax), or is removed or entered as part of an 
     exempt bulk transfer. These taxes are credited to the Airport 
     and Airway Trust Fund. If taxed aviation-grade kerosene is 
     used for a nontaxable use, a claim for credit or refund may 
     be made. Such claims are paid from the Airport and Airway 
     Trust Fund to the general fund of the Treasury. All other 
     removals and entries of kerosene used for surface 
     transportation are taxed at the diesel tax rate of 24.3 cents 
     per gallon, and these taxes are credited to the Highway Trust 
     Fund. If aviation-grade kerosene is taxed upon removal or 
     entry but fraudulently diverted for surface transportation, 
     the taxes remain in the Airport and Airway Trust Fund, and 
     the Highway Trust Fund is not credited for the taxes on such 
     fuel.
       A special rule of present law addresses whether a removal 
     from a refueler truck, tanker, or tank wagon may be treated 
     as a removal from a terminal for purposes of determining 
     whether aviation-grade kerosene is removed directly into the 
     wing of an aircraft for use in commercial aviation, and so 
     eligible for the 4.3 cents per gallon rate. For the special 
     rule to apply, a qualifying truck, tanker, or tank wagon must 
     be loaded with aviation-grade kerosene from a terminal: (1) 
     that is located within a secured area of an airport, and (2) 
     from which no vehicle licensed for highway use is loaded with 
     aviation fuel, except in exigent circumstances identified by 
     the Secretary in regulations. In order to qualify for the 
     special rule, a refueler truck, tanker, or tank wagon must: 
     (1) be loaded with fuel for delivery only into aircraft at 
     the airport where the terminal is located; (2) have storage 
     tanks, hose, and coupling equipment designed and used for the 
     purposes of fueling aircraft; (3) not be registered for 
     highway use; and (4) be operated by the terminal operator 
     (who operates the terminal rack from which the fuel is 
     unloaded) or by a person that makes a daily accounting to 
     such terminal operator of each delivery of fuel from such 
     truck, tanker, or tank wagon.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment imposes the kerosene tax rate of 24.3 
     cents per gallon upon the entry or removal of aviation-grade 
     kerosene and on the sale of such fuel to any unregistered 
     person unless there was a prior taxable removal or entry of 
     the fuel. In general, the present law reduced rates for 
     removals of aviation-grade kerosene directly into the fuel 
     tank of an aircraft apply. In addition, under the provision, 
     the rate of tax is 21.8 cents per gallon if kerosene is 
     removed (1) directly into the fuel tank of an aircraft for 
     use in aviation other than commercial aviation and (2) from 
     refueler trucks, tankers, and tank wagons that are loaded 
     with fuel from a terminal that is located in an airport, 
     without regard to whether the terminal is located in a 
     secured area of the airport, as long as all the other 
     requirements of the present law special rule related to such 
     trucks, tankers, and wagons are met. The provision clarifies 
     that the rate of tax upon removal of kerosene is zero if the 
     removal is from a refueler truck, tanker, or tank wagon that 
     meets all of the requirements of present law, including the 
     security requirement, the kerosene is delivered directly into 
     the fuel tank of an aircraft, and the kerosene is exempt from 
     the tax imposed by section 4041(c) (other than by prior 
     imposition of tax).

[[Page S9143]]

       The Senate amendment provides that amounts may be claimed 
     as credits or refunds for kerosene that is taxed at the 24.3 
     cents per gallon rate and used for aviation purposes. If 
     kerosene is used for noncommercial aviation, the amount is 
     2.5 cents; if kerosene is used for commercial aviation, the 
     amount is 20 cents; if kerosene is used for a use that is 
     exempt from tax (as determined under present law), the amount 
     is 24.3 cents. Present law rules with respect to claims 
     apply, except for claims with respect to kerosene used in 
     noncommercial aviation, which are payable to the ultimate 
     vendor only. To be eligible to receive a payment, a vendor 
     must be registered and must show either that the price of the 
     fuel did not include the tax and the tax was not collected 
     from the purchaser, the amount of tax was repaid to the 
     ultimate purchaser, or the written consent of the purchaser 
     to the making of the claim was filed with the Secretary.
       Under the Senate amendment, all taxes collected at the 24.3 
     cents per gallon rate (under section 4081) initially are 
     credited to the Highway Trust Fund. The provision requires 
     the Secretary to transfer at least monthly from the Highway 
     Trust Fund into the Airport and Airway Trust Fund amounts 
     equivalent to 21.8 cents per gallon for claims made with 
     respect to kerosene used for noncommercial aviation purposes 
     and 4.3 cents per gallon for claims made with respect to 
     kerosene used for commercial aviation purposes. The provision 
     requires that transfers be made on the basis of estimates by 
     the Secretary, with proper adjustments to be made 
     subsequently to the extent prior estimates were in excess of 
     or less than the amounts required to be transferred. 
     Transfers are required to be made with respect to taxes 
     received on or after October 1, 2005, and before October 1, 
     2011. The provision provides that the Airport and Airway 
     Trust Fund does not make payments with respect to kerosene 
     that is taxed at the 24.3 cents per gallon rate and used for 
     aviation purposes.
       Effective date.--The Senate amendment is effective for 
     fuels or liquids removed, entered, or sold after September 
     30, 2005.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     2. Repeal of ultimate vendor refund claims with respect to 
         farming (sec. 1562 of the Senate amendment)


                              Present Law

     In general--ultimate purchaser refunds for nontaxable uses
       In general, the Code provides that if diesel fuel or 
     kerosene on which tax has been imposed is used by any person 
     in a nontaxable use, the Secretary is to refund (without 
     interest) to the ultimate purchaser the amount of tax 
     imposed. The refund is made to the ultimate purchaser of the 
     taxed fuel by either income tax credit or refund payment. Not 
     more than one claim may be filed by any person with respect 
     to fuel used during its taxable year. However, there are 
     exceptions to this rule.
       An ultimate purchaser may make a claim for a refund payment 
     for any quarter of a taxable year for which the purchaser can 
     claim at least $750. If the purchaser cannot claim at least 
     $750 at the end of quarter, the amount can be carried over to 
     the next quarter to determine if the purchaser can claim at 
     least $750. If the purchaser cannot claim at least $750 at 
     the end of the taxable year, the purchaser must claim a 
     credit on the person's income tax return.
       As discussed below, these ultimate purchaser refund rules 
     do not apply to diesel fuel or kerosene used on a farm. The 
     Code precludes the ultimate purchaser from claiming a refund 
     for such use. Instead, the refund claims are made by 
     registered vendors as described below.
     Special vendor rule for use on a farm for farming purposes
       In the case of diesel fuel or kerosene used on a farm for 
     farming purposes, refund payments are paid to the ultimate, 
     registered vendors (``registered ultimate vendor'') of such 
     fuels. Thus a registered ultimate vendor that sells undyed 
     diesel fuel or undyed kerosene to any of the following may 
     make a claim for refund: (1) the owner, tenant, operator of a 
     farm for use by that person on a farm for farming purposes; 
     and (2) a person other than the owner, tenant, or operator of 
     a farm for use by that person on a farm in connection with 
     cultivating, raising or harvesting. The registered ultimate 
     vendor is the only person who may make the claim with respect 
     to diesel fuel or kerosene used on a farm for farming 
     purposes. The purchaser of the fuel cannot make the claim for 
     refund.
       Registered ultimate vendors may make weekly claims if the 
     claim is at least $200 ($100 or more in the case of 
     kerosene). If not paid within 45 days (20 days for an 
     electronic claim), the Secretary is to pay interest on the 
     claim.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment repeals ultimate vendor refund claims 
     in the case of diesel fuel or kerosene used on a farm for 
     farming purposes. Thus, refunds for taxed diesel fuel or 
     kerosene used on a farm for farming purposes would be paid to 
     the ultimate purchaser under the rules applicable to 
     nontaxable uses of diesel fuel or kerosene.
       Effective date.--The provision is effective for sales after 
     September 30, 2005.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     3. Refunds of excise taxes on exempt sales of taxable fuel by 
         credit card (sec. 1563 of the Senate amendment)


                              Present Law

       Under the rules in effect prior to 2005, in the case of 
     gasoline on which tax had been paid and sold to a State or 
     local government, to a nonprofit educational organization, 
     for supplies for vessels or aircraft, for export, or for the 
     production of special fuels, the wholesale distributor that 
     sold such gasoline was treated as the only person who paid 
     the tax and thereby was the proper claimant for a credit or 
     refund of the tax paid. A ``wholesale distributor'' included 
     any person, other than an importer or producer, who sold 
     gasoline to producers, retailers, or to users who purchased 
     in bulk quantities and accepted delivery into bulk storage 
     tanks. A wholesale distributor also included any person who 
     made retail sales of gasoline at 10 or more retail motor fuel 
     outlets.
       Under a special administrative exception to these rules, a 
     sale of gasoline charged on an oil company credit card issued 
     to an exempt person described above is not considered a 
     direct sale by the person actually selling the gasoline to 
     the ultimate purchaser if the seller receives a reimbursement 
     of the tax from the oil company (or indirectly through an 
     intermediate vendor). Thus, the person that actually paid the 
     tax, in most cases the oil company, is treated as the only 
     person eligible to make the refund claim.
       The American Jobs Creation Act of 2004 (``AJCA'') modified 
     the pre-existing statutory rules with respect to certain 
     sales. Under AJCA, if a registered ultimate vendor purchases 
     any gasoline on which tax has been paid and sells such 
     gasoline to a State or local government or to a nonprofit 
     educational organization, for its exclusive use, such 
     ultimate vendor is treated as the only person who paid the 
     tax and thereby is the proper claimant for a credit or refund 
     of the tax paid. However, AJCA did not change the special 
     administrative oil company credit card rule described above.
       In addition, under AJCA, refund claims made by such an 
     ultimate vendor may be filed for any period of at least one 
     week for which $200 or more is payable. Any such claim must 
     be filed on or before the last day of the first quarter 
     following the earliest quarter included in the claim. The 
     Secretary must pay interest on refunds unpaid after 45 days. 
     If the refund claim was filed by electronic means, and the 
     ultimate vendor has certified to the Secretary for the most 
     recent quarter of the taxable year that all ultimate 
     purchasers of the vendor are certified for highway exempt use 
     as a State or local government or a nonprofit educational 
     organization, refunds unpaid after 20 days must be paid with 
     interest.
       In the case of diesel fuel or kerosene used in a nontaxable 
     use, the ultimate purchaser is generally the only person 
     entitled to claim a refund of excise tax. However, in the 
     case of diesel fuel or kerosene used on a farm for farming 
     purposes or by a State or local government, aviation-grade 
     kerosene, and certain nonaviation-grade kerosene, an ultimate 
     vendor may claim the refund if the ultimate vendor is 
     registered and bears the tax (or receives the written consent 
     of the ultimate purchaser to claim the refund).


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment replaces the oil company credit card 
     rule with a new set of rules applicable to certain credit 
     card sales. The new rules apply to all taxable fuels. Under 
     the Senate amendment, if a purchase of taxable fuel is made 
     by means of a credit card issued to an ultimate purchaser 
     that is either a State or local government or, in the case of 
     gasoline, a nonprofit educational organization, for its 
     exclusive use, a credit card issuer who is registered and who 
     extends such credit to the ultimate purchaser with respect to 
     such purchase shall be the only person entitled to apply for 
     a credit or refund if the following two conditions are met: 
     (1) such registered person has not collected the amount of 
     the tax from the purchaser, or has obtained the written 
     consent of the ultimate purchaser to the allowance of the 
     credit or refund; and (2) such registered person has either 
     repaid or agreed to repay the amount of the tax to the 
     ultimate vendor, has obtained the written consent of the 
     ultimate vendor to the allowance of the credit or refund, or 
     has otherwise made arrangements that directly or indirectly 
     provide the ultimate vendor with reimbursement of such tax. 
     It is anticipated that such indirect arrangements may consist 
     of the contractual undertaking of the relevant oil company to 
     the credit card issuer that it will pay the amount of the tax 
     to the ultimate vendor, and the corresponding contractual 
     undertaking of the oil company to the ultimate vendor.
       If a credit card issuer is not registered, or if either 
     condition (1) or (2) described above is not met (or if the 
     ultimate purchaser is not exempt), then the credit card 
     issuer is required to collect an amount equal to the tax from 
     the ultimate purchaser and only an (exempt) ultimate 
     purchaser may claim a credit or payment from the IRS. Thus, 
     tax-paid fuel shall not be sold tax free to an exempt entity 
     by means of a credit card unless the credit card issuer is 
     registered. An unregistered credit card issuer that does not

[[Page S9144]]

     collect an amount equal to the tax from the exempt entity is 
     liable for present-law penalties for failure to register.
       A credit card issuer entitled to claim a refund under the 
     provision is responsible for collecting and supplying all the 
     appropriate documentation currently required from ultimate 
     vendors. The present-law refund amount and timing rules 
     applicable to ultimate vendors, including the special rules 
     for electronic claims, apply to refunds to credit card 
     issuers under the provision.
       The Senate amendment also conforms present-law penalty 
     provisions to the new rules.
       The Senate amendment does not change the present-law rules 
     applicable to non-credit card purchases.
       Effective date.--The provision is effective for sales after 
     December 31, 2005.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     4. Recertification of exempt status (sec. 1564 of the Senate 
         amendment)


                              Present Law

       If gasoline is sold to any person for an exempt use, an 
     ultimate purchaser that has borne the tax is entitled to 
     claim a refund. However, a registered ultimate vendor is the 
     appropriate person to claim a refund of Federal excise taxes 
     on gasoline sold to a State or local government or to a 
     nonprofit educational organization.
       In general, in order to claim a refund of Federal excise 
     taxes on gasoline (and on other articles subject to 
     manufacturers excise taxes under Chapter 32 of the Code) sold 
     to a State or local government or to a nonprofit educational 
     organization, for its exclusive use, a claimant must submit a 
     statement indicating that it possesses evidence of the exempt 
     use giving rise to the overpayment of tax. Such evidence 
     consists of a certificate executed and signed by the ultimate 
     purchaser, and must identify the article, show the name and 
     address of the ultimate purchaser, and state the exempt use 
     made or to be made of the article. In the case where the 
     certificate sets forth the use to be made of the article, 
     rather than its actual use, it must show that the ultimate 
     purchaser has agreed to notify the claimant if the article is 
     not in fact used as specified in the certificate.
       However, if the article to which the claim relates has 
     passed through a chain of sales from the claimant to the 
     ultimate purchaser, a certificate executed and signed by the 
     ultimate vendor is sufficient to document the exempt use. The 
     ultimate vendor certificate must contain the exempt sales 
     information, and a statement that it possesses the ultimate 
     purchaser certificates and will forward them to the claimant 
     within three years from the date of the statement. An 
     ultimate vendor statement may be made covering no more than 
     12 consecutive calendar quarters.
       In general, an ultimate purchaser is the proper party to 
     claim a refund of Federal excise tax on diesel fuel or 
     kerosene used by any person in a nontaxable use. However, in 
     the case of diesel or kerosene used by a State or local 
     government, the ultimate vendor is the proper person if such 
     vendor is registered and has borne the tax (or receives the 
     written consent of the ultimate purchaser to claim the 
     refund). A registered ultimate vendor claiming a refund under 
     this provision must provide a statement that it has in its 
     possession an unexpired exemption certificate of the 
     purchaser and that the claimant has no reason to believe any 
     information in the certificate is false.
       A State or local government includes any political 
     subdivision of a State, or the District of Columbia. A 
     nonprofit educational organization means an educational 
     organization which normally maintains a regular faculty and 
     curriculum and normally has a regularly enrolled body of 
     pupils or students in attendance at the place where its 
     educational activities are regularly carried on, and which 
     either is exempt from income tax under section 501(a) or is a 
     school operated as an activity of an organization described 
     in section 501(c)(3) which is exempt from income tax under 
     section 501(a).


                               House Bill

       No provision.


                            Senate Amendment

       Under the Senate amendment, additional documentation 
     requirements are imposed with respect to purchases of taxable 
     fuel and certain other articles on a nontaxable basis by 
     State or local governments and nonprofit educational 
     organizations and with respect to refunds or credits by any 
     person with respect to such purchases. The Senate amendment 
     covers Federal excise taxes on sales of liquids for use as a 
     fuel (including taxable fuels), compressed natural gas 
     (except if sold for use on school buses or intracity buses), 
     heavy trucks and trailers, recreational equipment (bows and 
     arrows, sport fishing equipment and firearms), and tires 
     (except for tires sold for use on qualified buses). The 
     Senate amendment does not cover Federal excise taxes on sales 
     of coal and vaccines.
       In addition to present-law documentation requirements, in 
     order for a State or local governmental entity to claim 
     exemption from tax on sales of such covered articles, or for 
     any person to claim a credit or refund based upon the State 
     or local governmental status of the purchaser of such 
     articles, the State must certify that the article is sold to 
     a State or local government for the exclusive use of a State 
     or local government. In the case of articles sold to a 
     qualified volunteer fire department, as defined in section 
     150(e)(2), the State must so certify, and the article must be 
     sold for the exclusive use of the qualified volunteer fire 
     department.
       In order for a nonprofit educational organization to claim 
     exemption from tax on such articles, or for any person to 
     claim a credit or refund of tax on such articles based upon 
     the nonprofit educational status of an organization, the 
     State in which such organization is providing educational 
     services must certify that such organization is in good 
     standing.
       For purposes of this provision, an Indian tribal government 
     is treated as a State. Consequently, it is intended that the 
     applicable Indian tribal government will provide the 
     certifications under this provision.
       It is intended that the certifications required under this 
     provision will be provided by exempt purchasers to the refund 
     claimants (in addition to documentation required under 
     present law), and that the IRS may require that such 
     certifications be submitted as part of the claims. The 
     Secretary may prescribe forms for such certifications.
       Effective date.--The provision is effective for all sales 
     after December 31, 2005.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     5. Reregistration in event of change in ownership (sec. 1565 
         of the Senate amendment)


                              Present Law

       Blenders, enterers, pipeline operators, position holders, 
     refiners, terminal operators, and vessel operators are 
     required to register with the Secretary with respect to fuels 
     taxes imposed by sections 4041(a)(1) and 4081. An assessable 
     penalty for failure to register is $10,000 for each initial 
     failure, plus $1,000 per day that the failure continues. A 
     non-assessable penalty for failure to register is $10,000. A 
     criminal penalty of $10,000, or imprisonment of not more than 
     five years, or both, together with the costs of prosecution 
     also applies to a failure to register and to certain false 
     statements made in connection with a registration 
     application. Treasury regulations require that a registrant 
     notify the Secretary of any change (such as a change in 
     ownership) in the information a registrant submitted in 
     connection with its application for registration within 10 
     days of the change. The Secretary has the discretion to 
     revoke the registration of a noncompliant registrant.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment requires that upon a change in 
     ownership of a registrant, the registrant must reregister 
     with the Secretary, as provided by the Secretary. A change in 
     ownership means that after a transaction (or series of 
     related transactions), more than 50 percent of the ownership 
     interests in, or assets of, a registrant are held by persons 
     other than persons (or persons related thereto) who held more 
     than 50 percent of such interests or assets before the 
     transaction (or series of related transactions). The 
     provision does not apply to a company, the stock of which is 
     regularly traded on an established securities market. The 
     penalties for failure to reregister are the same as the 
     present law penalties for failure to register. The provision 
     applies to changes in ownership occurring prior to, on, or 
     after the date of enactment.
       Effective date.--The Senate amendment is effective for 
     actions or failures to act after the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     6. Registration of operators of deep-draft vessels (sec. 1566 
         of the Senate amendment)


                              Present Law

       Blenders, enterers, pipeline operators, position holders, 
     refiners, terminal operators, and vessel operators are 
     required to register with the Secretary with respect to fuels 
     taxes imposed by sections 4041(a)(1) and 4081. Treasury 
     regulations define a vessel operator as any person that 
     operates a vessel within the bulk transfer/terminal system, 
     excluding deep-draft ocean-going vessels. Accordingly, 
     operators of deep-draft ocean-going vessels are not required 
     to register. A deep-draft ocean-going vessel is a vessel that 
     is designed primarily for use on the high seas that has a 
     draft of more than 12 feet.
       An assessable penalty for failure to register is $10,000 
     for each initial failure, plus $1,000 per day that the 
     failure continues. A non-assessable penalty for failure to 
     register is $10,000. A criminal penalty of $10,000, or 
     imprisonment of not more than five years, or both, together 
     with the costs of prosecution also applies to a failure to 
     register and to certain false statements made in connection 
     with a registration application.
       In general, gasoline, diesel fuel, and kerosene (``taxable 
     fuel'') are taxed upon removal from a refinery or a terminal. 
     Tax also is imposed on the entry into the United States of 
     any taxable fuel for consumption, use, or warehousing. The 
     tax does not apply to any removal or entry of a taxable fuel 
     transferred in bulk (a ``bulk transfer'') by pipeline or 
     vessel to a terminal or refinery if the person removing or 
     entering the taxable fuel, the operator of such pipeline or 
     vessel, and the operator of such terminal or refinery

[[Page S9145]]

     are registered with the Secretary as required by section 
     4101. Transfer to an unregistered party subjects the transfer 
     to tax.


                               House Bill

       No provision.


                            Senate Amendment

       Under the Senate amendment, an operator of deep-draft 
     ocean-going vessel is required to register with the Secretary 
     unless such operator uses such vessel exclusively for 
     purposes of the entry of taxable fuel. If a deep-draft ocean-
     going vessel is used as part of a bulk transfer, the operator 
     of such vessel must be registered in order for the bulk 
     transfer exemption to apply, except with respect to the entry 
     of taxable fuel, in which case, registration is not required.
       Effective date.--The Senate amendment is effective on the 
     date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     7. Reconciliation of on-loaded cargo to entered cargo (sec. 
         1567 of the Senate amendment)


                              Present Law

       The Trade Act of 2002 directed the Secretary to promulgate 
     regulations pertaining to the electronic transmission to the 
     Bureau of Customs and Border Patrol (``Customs'') of 
     information pertaining to cargo destined for importation into 
     the United States or exportation from the United States, 
     prior to such importation or exportation. The Department of 
     the Treasury issued final regulations on October 31, 2002. 
     The regulations require the advance and accurate presentation 
     of certain manifest information prior to lading at the 
     foreign port and encourage the presentation of this 
     information electronically. Customs must receive from the 
     carrier the vessel's Cargo Declaration (Customs Form 1302) or 
     the electronic equivalent within 24 hours before such cargo 
     is laden aboard the vessel at the foreign port.
       Certain carriers of bulk cargo, however, are exempt from 
     these filing requirements. Such bulk cargo includes that 
     composed of free flowing articles such as oil, grain, coal, 
     ore and the like, which can be pumped or run through a chute 
     or handled by dumping. Thus, taxable fuels are not required 
     to file the Cargo Declaration within 24 hours before such 
     cargo is laden aboard the vessel at the foreign port. Instead 
     the Cargo Declaration must be filed within 24 hours prior 
     arrival in the United States.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provides that not later than one year 
     after the date of enactment of this paragraph, the Secretary 
     of Homeland Security, together with the Secretary of the 
     Treasury, is to establish an electronic data interchange 
     system through which Customs shall transmit to the Internal 
     Revenue Service information pertaining to cargoes of taxable 
     fuels (as defined in section 4083) that Customs has obtained 
     electronically under its regulations adopted to carry out the 
     Trade Act of 2002 requirement. For this purpose, not later 
     than one year after the date of enactment, all filers of 
     required cargo information for such taxable fuels, as 
     defined, must provide such information to Customs through its 
     approved electronic data interchange system.
       Effective date.--The provision is effective upon date of 
     enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     8. Gasoline blend stocks and kerosene (sec. 1568 of the 
         Senate amendment)


                              Present Law

     In general
       A ``taxable fuel'' is gasoline, diesel fuel (including any 
     liquid, other than gasoline, which is suitable for use as a 
     fuel in a diesel-powered highway vehicle or train), and 
     kerosene. An excise tax is imposed upon (1) the removal of 
     any taxable fuel from a refinery or terminal, (2) the entry 
     of any taxable fuel into the United States, or (3) the sale 
     of any taxable fuel to any person who is not registered with 
     the IRS to receive untaxed fuel, unless there was a prior 
     taxable removal or entry. The tax does not apply to any 
     removal or entry of taxable fuel transferred in bulk to a 
     terminal or refinery if the person removing or entering the 
     taxable fuel, the operator of such pipeline or vessel, and 
     the operator of such terminal or refinery are registered with 
     the Secretary.
     Gasoline blend stocks
       Definition
       Under the regulations, ``gasoline'' includes all products 
     commonly or commercially known or sold as gasoline and are 
     suitable for use as a motor fuel, and that have an octane 
     rating of 75 or more. Gasoline also includes, to the extent 
     provided in regulations, gasoline blend stocks and products 
     commonly used as additives in gasoline. By regulation, the 
     Treasury has identified certain products as gasoline blend 
     stocks, however, the term ``gasoline blend stocks'' does not 
     include any product that cannot be blended into gasoline 
     without further processing or fractionation (``off-spec 
     gasoline'').
       Gasoline blend stock exemptions
       If certain conditions are met, the removal, entry, or sale 
     of gasoline blend stocks is not taxable. Generally, the 
     exemption from tax applies if a gasoline blend stock (1) is 
     not used to produce finished gasoline (2) is received at an 
     approved terminal or refinery, or (3) in bulk transfer to an 
     industrial user.
       Gasoline blend stocks not used to produce finished 
     gasoline.--Pursuant to Treasury regulation, no tax is imposed 
     on nonbulk removals from a terminal or refinery, or nonbulk 
     entries into the United States of any gasoline blend stocks 
     if (1) the person liable for the tax is a taxable fuel 
     registrant, and (2) such person does not use the gasoline 
     blend stocks to produce finished gasoline. In connection with 
     a sale, no tax is imposed on the nonbulk removal or entry if 
     (1) the person liable for the tax is a gasoline registrant 
     and (2) at the time of sale such party has an unexpired 
     certificate from the buyer, and has no reason to believe any 
     information in the certificate is false.
       Any sale (or resale) of a gasoline blend stock that was not 
     subject to tax on nonbulk removal or entry is taxable unless 
     the seller has an unexpired certificate from the buyer and 
     has no reason to believe that any information in the 
     certificate is false.
       The certificate to be provided by a buyer of gasoline blend 
     stocks contains a statement that the gasoline blend stocks 
     covered by the certificate will not be used to produce 
     finished gasoline, identifies the type (or types of blend 
     stocks) covered by the certificate and provides that the 
     buyer will not claim a credit or refund for any gasoline 
     covered by the certificate. The certificate is signed under 
     penalties of perjury by a person with authority to bind the 
     buyer. The certificate expires on the earliest of one year 
     from the effective date of the certificate, the date a new 
     certificate is provided to the seller or the date the seller 
     is notified by the IRS or the buyer that the buyer's right to 
     provide a certificate has been withdrawn.
       Gasoline blend stocks received at an approved terminal or 
     refinery.--Treasury regulations provide that tax is not 
     imposed on the removal or entry of gasoline blend stocks that 
     are received at a terminal or refinery if the person liable 
     for tax is a taxable fuel registrant, has an unexpired 
     notification certificate from the operator of the terminal or 
     refinery where the gasoline blend stocks are received; and 
     has no reason to believe that any information in the 
     certificate is false. A notification certificate is used to 
     notify another person of the taxable fuel registrant's 
     registration status.
       Bulk transfer to an industrial user.--Tax is not imposed if 
     upon removal of the gasoline blend stocks from a pipeline or 
     vessel, the gasoline blend stocks are received by a taxable 
     fuel registrant that is an industrial user. An industrial 
     user means any person that receives gasoline blend stocks by 
     bulk transfer for its own use in the manufacture of any 
     product other than finished gasoline.
       Refunds or credits for tax imposed on gasoline blend stocks 
           not used for producing gasoline
       If any gasoline blend stock or additive is not used by a 
     person to produce gasoline and that person establishes that 
     the ultimate use of the gasoline blend stock or additive is 
     not used to produce gasoline, then the Secretary is to pay 
     (without interest) to such person, an amount equal to the 
     aggregate amount of tax imposed on such person with respect 
     to such gasoline or blend stock.
       If gasoline is used in an off-highway business use, the 
     ultimate purchaser of the gasoline is entitled to a credit or 
     refund for the excise taxes imposed on the fuel. ``Off-
     highway business use'' means any use by a person in a trade 
     or business of such person otherwise than as a fuel in a 
     highway vehicle that meets certain requirements. Gasoline for 
     this purpose includes gasoline blend stocks.
       The Code also provides for a refund of tax for tax-paid 
     fuel sold to a subsequent manufacturer or producer if the 
     subsequent manufacturer or producer uses the fuel, for 
     nonfuel purposes, as a material in the manufacture or 
     production of any other article manufactured or produced by 
     him.
     Kerosene
       Definition of kerosene
       By regulation, kerosene is defined as the kerosene 
     described in ASTM Specification D 3699 (No. 1-K and No. 2-K), 
     ASTM Specification D 1655 (kerosene-type jet fuel), and 
     military specifications MIL-DTL-5624T (Grade JP-5) and MIL-
     DTL-83133E (Grade JP-8). Kerosene does not include any liquid 
     that is an excluded liquid.
       An ``excluded liquid'' is (1) any liquid that contains less 
     than four percent normal paraffins, or (2) any liquid that 
     has a distillation range of 125 degrees Fahrenheit or less, 
     sulfur content of 10 ppm or less, and minimum color of +27 
     Saybolt. These liquids are commonly known as ``mineral 
     spirits'' and are obtained by distillation of crude oil. 
     Mineral spirits are used for a wide variety of purposes, such 
     as in dry-cleaning fluids, paint thinners, varnishes, 
     photocopy toners, inks, adhesives, and as general purpose 
     cleaners and degreasers.
       Exemptions
       Diesel fuel and kerosene that is to be used for a 
     nontaxable purpose will not be taxed upon removal from the 
     terminal if it is dyed to indicate its nontaxable purpose. 
     Kerosene received by pipeline or vessel to satisfy a 
     feedstock purpose is exempt from the dyeing requirement. 
     Pursuant to Treasury regulations, nonbulk removals of 
     kerosene for a feedstock purpose by a registered feedstock 
     user also are exempt. The person receiving the kerosene must 
     be registered with the IRS and provide a certificate noting 
     that the kerosene will be used for a feedstock purpose

[[Page S9146]]

     in order for the exemption to apply. Pursuant to the 
     Treasury regulations, tax also does not apply upon the 
     removal or entry of kerosene if the person otherwise 
     liable for tax is a taxable fuel registrant and such 
     person uses the kerosene for a feedstock purpose.
       ``Feedstock purpose'' means the use of kerosene for nonfuel 
     purposes in the manufacture or production of any substance 
     (other than gasoline, diesel fuel or special fuels subject to 
     tax). Thus, for example, kerosene is used for a feedstock 
     purpose when it is used as an ingredient in the production of 
     paint and is not used for a feedstock purpose when it is used 
     to power machinery at a factory where paint is produced.
       Refunds and payments for nontaxable uses of kerosene
       If tax-paid kerosene is used by any person in a nontaxable 
     use, the Secretary is required to pay (without interest) to 
     the ultimate purchaser of such fuel an amount equal to the 
     aggregate amount of tax imposed on such fuel. For this 
     purpose, a nontaxable use is any use which is exempt from the 
     tax imposed by section 4041(a)(1) other than by reason of 
     prior imposition of tax. Claims relating to kerosene used on 
     a farm for farming purposes and by a State are made by 
     registered ultimate vendors. Claims relating to undyed 
     kerosene sold from a blocked pump or sold for blending with 
     heating oil to be used during periods of extreme or 
     unseasonable cold are also made by registered ultimate 
     vendors. Special rules apply with respect to aviation-grade 
     kerosene.
       The Code also provides for a refund of tax for tax-paid 
     fuel sold to a subsequent manufacturer or producer if the 
     subsequent manufacturer or producer uses the fuel, for 
     nonfuel purposes, as a material in the manufacture or 
     production of any other article manufactured or produced by 
     him.


                               House Bill

       No provision.


                            Senate Amendment

     Gasoline blend stocks
       The Senate amendment partially repeals exemptions provided 
     in Treas. Reg. sec. 48.4081-4, which, under certain 
     conditions, exempts from tax gasoline blend stocks that are 
     not used to produce finished gasoline or that are received at 
     an approved terminal or refinery. Under the Senate amendment, 
     tax is imposed on all nonbulk entries and removals of 
     gasoline blend stocks, regardless of whether they will be 
     used to produce finished gasoline or received at an approved 
     terminal or refinery. The Senate amendment does not change 
     the exemption for bulk transfers to registered industrial 
     users.
     Kerosene and mineral spirits
       The Senate amendment requires that with respect to fuel 
     entered or removed after September 30, 2005, the Secretary 
     shall not exclude mineral spirits from the definition of 
     kerosene. Thus, for entries and removals after September 30, 
     2005, mineral spirits are taxed and exempt from tax in the 
     same manner as kerosene.
       Effective date.--The provision is effective for fuel 
     removed or entered after September 30, 2005.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     9. Nonapplication of export exemption to delivery of fuel to 
         motor vehicles removed from United States (sec. 1569 of 
         the Senate amendment)


                              Present Law

       A ``taxable fuel'' is gasoline, diesel fuel (including any 
     liquid, other than gasoline, which is suitable for use as a 
     fuel in a diesel-powered highway vehicle or train), and 
     kerosene. An excise tax is imposed upon (1) the removal of 
     any taxable fuel from a refinery or terminal, (2) the entry 
     of any taxable fuel into the United States, or (3) the sale 
     of any taxable fuel to any person who is not registered with 
     the IRS to receive untaxed fuel, unless there was a prior 
     taxable removal or entry. The tax does not apply to any 
     removal or entry of taxable fuel transferred in bulk to a 
     terminal or refinery if the person removing or entering the 
     taxable fuel, the operator of such pipeline or vessel, and 
     the operator of such terminal or refinery are registered with 
     the Secretary.
       Special provisions under the Code provide for a refund of 
     tax to any person who sells gasoline to another for 
     exportation. Section 6421(c) provides ``If gasoline is sold 
     to any person for any purpose described in paragraph (2), 
     (3), (4), or (5) of section 4221(a), the Secretary shall pay 
     (without interest) to such person an amount equal to the 
     product of the number of gallons so sold multiplied by the 
     rate at which tax was imposed on such gasoline by section 
     4081.'' Section 4221 provides, in pertinent part, ``Under 
     regulations prescribed by the Secretary, no tax shall be 
     imposed under this chapter . . . on the sale by the 
     manufacturer. . . of an article . . . for export, or for 
     resale by the purchaser to a second purchaser for export. . . 
     but only if such exportation or use is to occur before any 
     other use . . .''
       It is the IRS administrative position that the exemption 
     from manufacturers excise tax by reason of exportation does 
     not apply to the sale of motor fuel pumped into a fuel tank 
     of a vehicle that is to be driven, or shipped, directly out 
     of the United States.
       A duty-free sales facility 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 facility 
     on which neither Federal duty nor Federal tax has been 
     assessed pending exportation from the customs territory of 
     the United States. The statutes covering duty-free facilities 
     do not contain any limitation on what goods may qualify for 
     duty-free treatment.
       The issue of whether fuel sold from a duty-free facility 
     and placed into the tank of an automobile that is then driven 
     out of the country is exported fuel has been litigated in 
     the courts. The cases involved the same operator of a 
     duty-free facility seeking a refund of excise tax. The 
     facility is near the Canadian border and is configured in 
     such a way that anyone leaving the facility must depart 
     the United States and enter into Canada. Both the Federal 
     Circuit and the Sixth Circuit Court of Appeals are in 
     accord with the IRS position and ruled that the operator 
     of the duty-free facility did not have standing to pursue 
     a claim for refund.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment reaffirms the long-standing IRS 
     position taken in Rev. Rul. 69-150 and restates present law 
     by amending the Code definition of export to exclude the 
     delivery of a taxable fuel into a fuel tank of a motor 
     vehicle that is shipped or driven out of the United States. 
     It also imposes a tax on the sale of taxable fuel at a duty-
     free sales enterprise unless there was a prior taxable 
     removal, or entry of such fuel.
       Effective date.--The provision applies to sales or 
     deliveries made after the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     10. Impose assessable penalty on dealers of adulterated fuel 
         (sec. 1570 of the Senate amendment)


                              Present Law

       Diesel fuel, gasoline, and kerosene are taxable fuels. 
     Diesel fuel is defined as (1) any liquid (other than 
     gasoline) which is suitable for use as a fuel in a diesel-
     powered highway vehicle or a diesel powered train, (2) 
     transmix, and (3) diesel fuel blend stocks identified by the 
     Secretary. As a defense to Federal and State excise tax 
     liability, some taxpayers have contended that certain diesel 
     fuel mixtures or additives do not meet the requirements of 
     (1) above because they are not approved as additives or 
     mixtures by the EPA. In addition, under present law, untaxed 
     fuel additives, including certain contaminants, may displace 
     taxed diesel fuel in a mixture.
       The Code provides that any person who, in connection with a 
     sale or lease (or offer for sale or lease) of an article, 
     knowingly makes any false statement ascribing a particular 
     part of the price of the article to a tax imposed by the 
     United States, or intended to lead any person to believe that 
     any part of the price consists of such a tax, is guilty of a 
     misdemeanor. Another Code provision provides that any person 
     who has in his custody or possession any article on which 
     taxes are imposed by law, for the purpose of selling the 
     article in fraud of the internal revenue laws or with design 
     to avoid payment of the taxes thereon, is liable for ``a 
     penalty of $500 or not less than double the amount of taxes 
     fraudulently attempted to be evaded.''


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment adds a new assessable penalty. Any 
     person other than a retailer who knowingly transfers for 
     resale, sells for resale, or holds out for resale for use in 
     a diesel-powered highway vehicle (or train) any liquid that 
     does not meet applicable EPA regulations (as defined in 
     section 45H(c)(3)) is subject to a penalty of $10,000 for 
     each such transfer, sale or holding out for resale, in 
     addition to the tax on such liquid, if any. Any retailer who 
     knowingly holds out for sale (other than for resale) any such 
     liquid, is subject to a $10,000 penalty for each such holding 
     out for sale, in addition to the tax on such liquid, if any.
       The penalty is dedicated to the Highway Trust Fund.
       Effective date.--The provision is effective for any 
     transfer, sale, or holding out for sale or resale occurring 
     after the date of enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     11. Oil Spill Liability Trust Fund (sec. 1571 of the Senate 
         amendment, sec. 1361 of the conference agreement, and 
         sec. 4611 of the Code)


                              Present Law

       Between December 31, 1989, and January 1, 1995, a five-
     cent-per-barrel tax was imposed on crude oil received at a 
     United States refinery and imported petroleum products 
     received for consumption, use, or warehousing, and any 
     domestically produced crude oil that is exported from the 
     United States if, before exportation, no taxes were imposed 
     on the crude oil. The tax was effective only if the 
     unobligated balance in the Fund was less than $1 billion. 
     Taxes received were credited to the Oil Spill Liability Trust 
     Fund. The Oil Spill Liability Trust Fund is used for several 
     purposes, including the payment of costs for responding to 
     and removing oil spills.


                               House Bill

       No provision.

[[Page S9147]]

                            Senate Amendment

       The Senate amendment reinstates the Oil Spill Liability 
     Trust Fund tax. The tax applies on April 1, 2006, or if 
     later, the last day of any calendar quarter for which the 
     Secretary estimates that, as of the close of that quarter, 
     the unobligated balance in the Oil Spill Liability Trust Fund 
     is less than $2 billion.
       The tax will be suspended during a calendar quarter if the 
     Secretary estimates that, as of the close of the preceding 
     calendar quarter, the unobligated balance in the Oil Spill 
     Liability Trust Fund exceeds $3 billion. The tax terminates 
     after December 31, 2014.
       Effective date.--The provision is effective on the date of 
     enactment.


                          Conference Agreement

       The conference agreement follows the Senate amendment with 
     the following modification. The tax will be suspended during 
     a calendar quarter if the Secretary estimates that, as of the 
     close of the preceding calendar quarter, the unobligated 
     balance in the Oil Spill Liability Trust Fund exceeds $2.7 
     billion.
     12. Leaking Underground Storage Tank Trust Fund (sec. 1562 of 
         the Senate amendment, sec. 1362 of the conference 
         agreement, secs. 4041, 4081(d), 4082, 9508, and new sec. 
         6430 of the Code)


                              Present Law

       The Code imposes an excise tax, generally at a rate of 0.1 
     cents per gallon, on gasoline, diesel, kerosene, and special 
     motor fuels (other than liquefied petroleum gas and liquefied 
     natural gas). The taxes are deposited in the Leaking 
     Underground Storage Tank (``LUST'') Trust Fund. The tax 
     expires on October 1, 2005.
       Diesel fuel and kerosene that is to be used for a 
     nontaxable purpose will not be taxed upon removal from the 
     terminal if it is dyed to indicate its nontaxable purpose.
       The Code requires the LUST Trust Fund to reimburse the 
     General Fund for certain refund and credit claims related to 
     the nontaxable use of fuel (only to the extent attributable 
     to the LUST Trust fund financing rate).


                               House Bill

       No provision.


                            Senate Amendment

       Under the Senate amendment, the LUST Trust Fund tax is 
     extended at the current rate through September 30, 2011. 
     Further, all fuel, including dyed fuel, is subject to the 
     LUST tax and no refund or claim for payment in the case of 
     otherwise nontaxable use (other than exports) is permitted 
     for such fuel. Under the provision, the LUST Trust Fund is no 
     longer required to reimburse the General Fund for claims and 
     credits related to the nontaxable use of fuel.
       Effective date.--The provision is generally effective for 
     fuel entered, removed or sold after September 30, 2005. The 
     extension of the trust fund tax is effective October 1, 2005.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     13. Clarification of tire excise tax (sec. 1573 of the Senate 
         amendment, sec. 1364 of the conference agreement, and 
         sec. 4072(e) of the Code)


                              Present Law

       The Code imposes an excise tax on highway tires with a 
     rated load capacity exceeding 3,500 pounds, generally at a 
     rate of 9.45 cents per 10 pounds of excess. Biasply tires and 
     super single tires are taxed at a rate of 4.725 cents for 
     each 10 pounds of rated load capacity exceeding 3,500 pounds. 
     A super single tire is a single tire greater than 13 inches 
     in cross section width designed to replace two tires in a 
     dual fitment.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment subjects super single tires to a tax 
     of 8 cents per 10 pounds of excess rated load capacity over 
     3,500 pounds. It redefines super single tire to be a single 
     tire greater than 17.5 inches in cross section width designed 
     to replace two tires in a dual fitment.
       Effective date.--The provision is effective for sales after 
     September 30, 2005.


                          Conference Agreement

       The conference agreement clarifies that the definition of 
     super single tire does not include tires designed to serve as 
     steering tires. It is understood that steering axles are not 
     equipped with a dual fitment. Therefore, tires classified as 
     steering tires are not ``designed to replace two tires in a 
     dual fitment.'' To the extent there is any perceived 
     ambiguity in the present law definition, the conferees wish 
     to clarify that steering tires are not included within the 
     definition of super single tire eligible for the special rate 
     of tax. Under the conference agreement, a ``super single 
     tire'' is a single tire greater than 13 inches in cross 
     section width designed to replace two tires in a dual 
     fitment, but such term does not include any tire designed for 
     steering.
       With respect to the one-year period beginning on January 1, 
     2006, the IRS is required to report to the Congress on the 
     amount of tax collected during such period for each class of 
     taxable tire (e.g. biasply, super single, or other) and the 
     number of tires in each such class on which tax is imposed 
     during such period. The report must be submitted no later 
     than July 1, 2007. The IRS is directed to revise the Form 
     720, Quarterly Federal Excise Tax Return, to collect the 
     information necessary to prepare the report. The report is 
     also to include total tire tax collections for an equivalent 
     one-year period preceding the date of enactment of the 
     American Jobs Creation Act of 2004.
       Effective date.--The provision regarding the definition of 
     a super single tire is effective as if included in section 
     869 of the American Jobs Creation Act of 2004. The study 
     requirement is effective on the date of enactment.
     14. Modify recapture of section 197 amortization (sec. 1363 
         of the conference agreement and sec. 1245 of the Code)


                              Present Law

       Taxpayers are entitled to recover the cost of amortizable 
     section 197 intangibles using the straight-line method of 
     amortization over a uniform life of fifteen years. With 
     certain exceptions, amortizable section 197 intangibles 
     generally are purchased intangibles held by a taxpayer in the 
     conduct of a business.
       Gain on the sale of depreciable property must be recaptured 
     as ordinary income to the extent of depreciation deductions 
     previously claimed, and the recapture amount is computed 
     separately for each item of property. Section 197 
     intangibles, because they are treated as property of a 
     character subject to the allowance for depreciation, are 
     subject to these recapture rules.


                               House Bill

       No provision.


                            Senate Amendment

       No provision.


                          Conference Agreement

       Under the conference agreement, if multiple section 197 
     intangibles are sold (or otherwise disposed of) in a single 
     transaction or series of transactions, the seller must 
     calculate recapture as if all of the section 197 intangibles 
     were a single asset. Thus, any gain on the sale (or other 
     disposition) of the intangibles is recaptured as ordinary 
     income to the extent of ordinary depreciation deductions 
     previously claimed on any of the section 197 intangibles.
       The following example illustrates present law and the 
     conference agreement:
       Example.--In year 1, a taxpayer acquires two section 197 
     intangible assets for a total of $45. Asset A is assigned a 
     cost basis of $15 and asset B is assigned a cost basis of 
     $30. The allocation is irrelevant for amortization purposes, 
     as the taxpayer will be entitled to a total of $3 per year 
     ($45 divided by 15 years).
       In year 6, the basis of A is $10 and the basis of B is $20. 
     Taxpayer sells the assets for an aggregate sale price of $45, 
     resulting in gain of $15. The character of this gain depends 
     on the recapture amount, which depends in turn on the 
     relative sales prices of the individual assets. Taxpayer has 
     claimed $5 of amortization, and therefore has $5 of recapture 
     potential, with respect to A. Taxpayer has claimed $10 of 
     amortization, and therefore has $10 of recapture potential, 
     with respect to B.
       Under present law, if the sale proceeds are allocated $15 
     to A and $30 to B, the gain on assets A and B will be $5 and 
     $10, respectively. These amounts match the recapture 
     potential for each asset, so the full amount of the gain will 
     be recaptured as ordinary income. However, if the sale 
     proceeds instead are allocated $25 to A and $20 to B, the 
     full $15 gain will be recognized with respect to A, and only 
     $5 (full recapture potential with respect to A) will be 
     recaptured as ordinary income. The remaining $10 of gain 
     attributable to A will be treated as capital gain. No gain 
     (and thus no recapture) will be recognized with respect to 
     Asset B, and only $5 of the $15 recapture potential is 
     recognized.
       Under the conference agreement, the taxpayer calculates 
     recapture as if assets A and B were a single asset. For 
     purposes of the calculation, the proceeds are $45 and the 
     gain is $15. Because a total of $15 of amortization has been 
     claimed with respect to assets A and B, the full $15 gain is 
     recaptured as ordinary income.
       Effective date.--The conference agreement is effective for 
     dispositions of property after the date of enactment.


                       F. 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 have ``widespread applicability'' to 
     individuals or small businesses.

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