Tax Management Summary

By the Tax Management Editorial Staff
Washington, D.C.

On July 29, 2005, the Senate passed the conference agreement on the Energy Policy Act of 2005 (H.R. 6). The House passed the legislation on July 28, 2005. The Bill would extend through 2007 the §45 renewable electricity production credit and expand it to include wind, closed-loop biomass, open-loop biomass, geothermal, small irrigation power, landfill gas, and trash combustion production. The Bill would allow 50% expensing for liquid fuels refining facilities, affirm seven-year depreciation for natural gas gathering pipelines, and provide 15-year depreciation for gas distribution lines. Provisions designed to encourage everyday conservation and use of renewable energy resources provide tax credits for fuel cell vehicles, hybrids and advanced lean-burn technology vehicles, small agri-biodiesel producers, solar water heating property, qualified fuel cell power plants for businesses, and solar energy property.

The following is a discussion of the tax-related sections of the Bill.

TITLE XIII--ENERGY POLICY TAX INCENTIVES

The Bill would extend the availability of the §45 credit for two years for electricity produced from renewable resources, except for solar energy facilities described in §45(d)(4) and refined coal production facilities described in §45(d)(8). In addition, the Bill would extend the credit period to 10 years for all qualifying facilities placed in service after date of enactment, eliminating the five-year credit period to which some facilities are currently subject. Also, the definition of qualified energy resources that qualify for the credit would be expanded to include qualified hydropower production, although a qualified hydroelectric facility would be entitled to only 50% of the usual credit.

The Bill would also add Indian coal production facilities to the list of those facilities eligible for the credit. The credit would be available for sales of Indian coal to an unrelated party from a qualified facility beginning January 1, 2006, and ending December 31, 2012. The credit would be $1.50 per ton during 2006 - 2009 and would increase to $2.00 per ton in 2110 - 2012; the credit amount for Indian coal would also be adjusted for inflation in calendar years after 2006.

Effective as of date of enactment.

The Bill would allow cooperatives that are eligible for the §45 credit to elect to pass through any portion of the credit to their patrons. To be eligible for this election, the cooperative would have to be more than 50%-owned by agricultural producers or entities owned by agricultural producers. The election would be made on an annual basis and would be irrevocable once made.

Effective for taxable years of cooperatives ending after date of enactment.

The Bill would add new Code §54, providing a credit for holders of clean renewable energy bonds. To qualify for the credit, the bonds would have to be issued pursuant to an allocation by Treasury, and at least 95% of the proceeds must be used for capital expenditures on a qualified facility (determined under §45(d) without regard to the date placed in service). The amount of the credit would be the face amount of the bond, multiplied by a credit rate to be determined by Treasury. The credit rate would permit the issuance of the bonds without discount or any interest cost to the issuer. There would be a national limit of $800 million for such bonds, and no more than $500 million of the bonds may be allocated to finance projects for governmental borrowers.

Effective for bonds issued after December 31, 2005.

The Bill would repeal the sunset provisions of §501(c)(12)(C) and (H), which allow an mutual or cooperative electric company to treat income from the sale of electric transmission services, the sale of distribution services, nuclear decommissioning transactions, asset exchange or conversion transactions, and load loss transactions as member income.

Effective as of date of enactment.

The Bill would extend to December 31, 2007, the special treatment under §451(i) of gain on the sale or disposition of certain property used in providing electric transmission services.

Effective for transactions occurring after date of enactment.

The Bill would add §45J, providing a §38 business credit for electricity produced in the first eight years of operation of an advanced nuclear power facility. The credit would be equal to 1.8 cents times the kilowatt hours of electricity produced and sold to an unrelated person, but would be subject to a limitation based on the amount of the national megawatt capacity limitation allocated to the facility. The total national limitation would be 6,000 megawatts, which would be allocated as prescribed by the Secretary. The credit would be further limited to $125 million times 1/1,000 of the national megawatt capacity limitation allocated to the facility. To qualify for the credit, a facility must be of a design first approved by the Nuclear Regulatory Commission after 1993, and must be placed in service after the date of enactment and before 2021.

Effective for production in taxable years beginning after date of enactment.

The Bill would add, as §§48A and 48B, two new §46 investment credits for advanced coal projects and qualified coal gasification projects. The credit would be 20% for coal gasification projects using an integrated gasification combined cycle (IGCC) technology, and 15% for other advanced coal-based projects. The total credits available under §48A for qualifying advanced coal projects would be limited to $1.3 billion, with $800 million allocated to IGCC projects and the remaining $500 million to projects using other advanced coal-based generation technologies. The §48B credit for qualifying gasification projects would be limited to $350 million. Both credits would be allocated by the Secretary based on the amount invested.

Effective for periods after date of enactment, using rules similar to those of former §48(m) before its 1990 repeal.

The Bill would classify depreciable property used in the transmission of 69 or more kilovolts of electricity for sale as 15-year property for MACRS purposes and assign a 30-year class life for purposes of the alternative depreciation system.

Effective for property placed in service after April 11, 2005, except for property which is the subject of a binding contract or is under construction (for self-constructed property) on or before April 11, 2005.

The Bill would eliminate the rule that to be a certified pollution control facility such facility needs to be in operation before January 1, 1976, for any atmospheric pollution control facilities which is placed in service after April 11, 2005, and used in connection with an electric generation plant or other property which is primarily coal fired. The amortization period would be 84 months (rather than 60 months) for certified air pollution facilities used in connection with an electric generation plant which is primarily coal fired and which was not in operation before January 1, 1976.

Effective for facilities placed in service after April 11, 2005.

The Bill would repeal the cost of service requirement for deductible contributions to a nuclear decommissioning fund. Thus, all taxpayers, including unregulated taxpayers, would be allowed a deduction for amounts contributed to a qualified fund. The Bill would also permit contributions to a qualified fund for pre-1984 decommissioning costs.

The Bill also would repeal 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 would be permitted to accumulate an amount sufficient to cover the present value of 100% of a nuclear powerplant's estimated decommissioning costs in a qualified fund. The Bill would not change the requirement that contributions to a qualified fund not be deducted more rapidly than level funding.

The Bill would permit a taxpayer to make contributions to a qualified fund in excess of the ruling amount in one circumstance. Specifically, a taxpayer would be permitted to contribute up to the present value of total nuclear decommissioning costs with respect to a nuclear powerplant previously excluded under §468A(d)(2)(A). It is anticipated that an amount that would be 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 would be 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 would be permitted a deduction for any remaining deductible amounts at the time of transfer.

The Bill would require 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.

Effective for taxable years beginning after December 31, 2005.

The Bill would provide certain electric utility companies with an election to extend the NOL carryback period to five years for a portion of NOLs arising in 2003, 2004 and 2005. The election would be made during any taxable year ending after 2005 and before 2009 and would specify the loss to which it applies.

The election would apply to 20% of the taxpayer's qualifying investment during the prior taxable year. Rules similar to those for specified liability losses would apply and any unused portion of the loss year NOL would remain subject to current law carryover rules. A taxpayer would be limited to one election per taxable year for no more than one taxable year beginning in the same calendar year.

For calculating interest on overpayments, any overpayment resulting from a five-year NOL carryback election would be deemed not to have been made before the filing date for the taxable year in which the taxpayer made the election. The statute of limitations for refund claims and assessment of deficiencies would be extended.

The Treasury would prescribe the manner to make the election, with filing a refund claim as sufficient for making the election, provided the taxpayer attaches 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.

An investment would qualify for the extended carryback if it is a capital expenditure: (1) attributable to electric transmission property used by the taxpayer in the transmission at 69 or more kilovolts of electricity for sale; or (2) made by an electric utility company (as defined in the Public Utility Holding Company Act) and attributable to a certified pollution control facility, as defined in §169(d)(1) but without the requirement that the facility either be new or be used with a plant or other property in operation before January 1, 1976.

There would be no requirement that the qualifying investment property be placed in service in the year that the taxpayer incurs the capital expenditures, so long as the taxpayer is committed to the expenditures and to placing the property in service in the taxpayer's trade or business. The extended carryback would not cover expenditures that, at the taxpayer's choice, are refundable or subject to material modification that would not meet the requirements of this provision.

Effective for elections made in taxable years ending after December 31, 2005, and before January 1, 2009, with respect to NOLs arising in taxable years ending in 2003, 2004 and 2005.

The Bill would add a production credit for qualified facilities that produce coke or coke gas that were place in service before January 1, 1993, or after June 30, 1998, and before January 1, 2010. Coke and coke gas produced and sold during the period beginning on the later of January 1, 2006, or the date the facility is placed in service, and ending on the date which is four years after such period begins, would be eligible for the production credit. A facility that claimed a credit under §29(g) would not be eligible to claim the new credit for producing coke or coke gas.

The Bill would also require that the amount of credit-eligible coke produced could not exceed an average barrel-of-oil equivalent of 4,000 barrels per day. The $3.00 credit for coke and coke gas would be indexed for inflation with a 2004 base year. The Conferees also responded to the IRS moratorium on taxpayer-specific guidance concerning the §29 credit, stating that the IRS should consider issuing rulings and guidance on an expedited basis to those taxpayers who had pending ruling requests at the time that the IRS implemented the moratorium.

The Bill would make the credit for producing fuel from a nonconventional source part of the general business credit, moving the credit from §29 to new §45K, thereby making the general business limitations applicable. Any unused credits could be carried back one year and forward 20 years, except that the credit could not be carried back to a taxable year ending before January 1, 2006.

Effective for fuel produced and sold after December 31, 2005, in taxable years ending after such date. The redesignation of the provision is effective for credits determined under the 1986 Code for taxable years ending after December 31, 2005.

The Bill would allow businesses to irrevocably elect to expense 50% of the cost of qualified refinery property, with no limitation on the amount of the deduction. The deduction would be allowed in the taxable year in which the refinery is placed in service. The remaining 50% of the cost would remain eligible for regular cost recovery provisions. To qualify for the deduction: (1) original use of the property must commence with the taxpayer; (2) (i) construction must be pursuant to a binding construction contract entered into after June 14, 2005, and before January 1, 2008, (ii) in the case of self-constructed property, construction began after June 14, 2005, and before January 1, 2008, or (iii) the refinery is placed in service before January 1, 2008; (3) the property must be placed in service before January 1, 2012; (4) the property must meet certain production capacity requirements if it is an addition to an existing refinery; and (5) the property must meet all applicable environmental laws when placed in service. Certain types of refineries, including asphalt plants, would not be eligible for the deduction, and there is a special rule for sale-leasebacks of qualifying refineries. If the owner of the refinery is a cooperative, it may elect to allocate all or a part of the deduction to the cooperative owners, allocated on the basis of ownership interests.

Effective for qualifying refineries placed in service after date of enactment.

The Bill would provide that cooperatives that qualify for §179B expensing of capital costs incurred in complying with EPA sulfur regulations could elect to allocate all or part of the deduction to their owners, determined on the basis of their ownership interests. The election would be made on an annual basis and would be irrevocable once made.

Effective as if included in §338(a) of the American Jobs Creation Act of 2004.

The Bill would establish a 15-year recovery period for MACRS and a 35-year class life for alternative depreciation system for natural gas distribution lines.

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, and would not apply to property subject to a binding contract on or before April 11, 2005.

The Bill would establish a statutory seven-year recovery period for MACRS and a class life of 14 years for the alternative deprecation system for natural gas gathering lines. The Bill would also provide that no adjustment would be made to the allowable amount of depreciation for alternative minimum taxable income purposes.

The Bill would define a natural gas gathering line as the pipe, equipment, and appurtenances determined to be a gathering line by the Federal Energy Regulatory Commission (FERC) or used to deliver natural gas from the well-head or commonpoint to the point at which the gas first reaches: (1) a gas processing plant; (2) an interconnection with an interstate transmission line; (3) an interconnection with an intrastate transmission pipeline; or (4) a direct connection with a local distribution company, a gas storage facility, or an industrial consumer. Also, the Bill would require that the original use of the property begin with the taxpayer.

Effective for property placed in service after April 11, 2005, excluding property with respect to which the taxpayer or related party had a binding acquisition contract on or before April 11, 2005.

The Bill would create a safe harbor exception to the general rule that tax-exempt bond-financed prepayments violate the arbitrage restrictions. The term "investment type property" would not include a prepayment under a qualified natural gas supply contract. The Bill also would provide that such prepayments are not treated as private loans for purposes of the private business tests. Under the 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 would not be treated as the acquisition of investment-type property. A contract would be a qualified natural gas supply 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 would be needed to fuel transportation of the natural gas to the governmental utility. The testing period would be the five calendar year period immediately preceding the calendar year in which the bonds are issued. A retail customer would be one who does not purchase natural gas for resale. Natural gas used to generate electricity by a utility owned by a governmental unit would be counted as retail natural gas consumption if the electricity was sold to retail customers within the service area of the governmental electric utility.

The volume of gas permitted by the general rule would be reduced by natural gas otherwise available on the date of issuance. Specifically, the amount of natural gas permitted to be acquired under a qualified natural gas supply contract for any period would 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, would not be able 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.

The Bill would provide that 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.

The Bill would define a service area 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 would be limited to any area within a county contiguous to the area described in (1), above, in which retail customers of the utility are located if such area is not also served by another utility providing the same service.

The Bill would provide that 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.

The Bill would provide that a qualified natural gas supply contract is not nongovernmental output property for purposes of §141(d) . Section 141(d) would 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 §148. No inference would be intended regarding the application of §141(d) to prepayment contracts not covered by the statutory safe harbor or regulations.

The Bill would provide that in a number of states, joint action agencies serve as purchasing agents for their member municipal gas utilities. The Bill would intend 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 Bill'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 for obligations issued after date of enactment.

The Bill would increase the current 50,000-barrel-per-day limitation to 75,000. In addition, the Bill would change 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 would calculate average daily refinery runs by dividing total refinery runs for the taxable year by the total number of days in the taxable year.

Effective for taxable years ending after the date of enactment.

The Bill would provide an exclusive method of amortizing geological and geophysical expenses paid or incurred in connection with the domestic exploration for, or development of, oil or gas. Amortization would be allowed as a deduction ratably over a 24-month period using the half-year convention. If property to which such an expenditure relates is retired or abandoned during the 24-month period, no deduction would be allowed on account of the retirement or abandonment, however, the amortization deduction under this provision would continue.

Effective for amounts paid or incurred in taxable years beginning after the date of enactment.

The Bill would provide a formula-based tax deduction equal to the energy-efficient commercial building property expenditures made by the taxpayer if the expenditures reduce the energy and power consumption of a commercial building by 50%. The Bill would include property installed as part of interior lighting systems, heating, cooling, ventilation and hot water systems, or the building envelope, to the extent certified as energy efficient. The Bill would limit the deduction to $1.80 per square foot and would reduce the property basis by the amount of the deduction. The Act would allow a partial deduction for a building that does not meet the overall building requirement of a 50% energy savings.

Effective for property placed in service after December 31, 2005, and prior to January 1, 2008.

The Bill would provide a general business tax credit to contractors for the construction of qualified new energy-efficient homes if the homes achieve an energy savings of 50% over the 2003 International Energy Conservation Code. For manufactured homes, the required standard is a 30% energy savings. A $1,000 credit would be available for each manufactured home that is certified as having an annual heating and cooling energy consumption level that is at least 30% below the annual energy consumption level of a comparable dwelling unit, and $2,000 for a new home that has an annual heating and cooling energy consumption level that is at least 50% below the annual energy consumption level of a comparable dwelling unit.

Effective for homes whose construction is substantially completed after December 31, 2005, and which are purchased after December 31, 2005, and prior to January 1, 2008.

The Bill would provide a credit for 10% of the amount paid or incurred for the installation of qualified energy efficiency improvements to existing homes, plus the amount of the residential energy property expenditures paid or incurred during the taxable year. The Bill would limit the maximum credit for a taxpayer with respect to the same dwelling for all taxable years to $500, no more than $200 dollars of which may be attributable to expenditures on windows. The Bill also would limit residential energy property expenditures to $50 for each advanced main air circulating fan, $150 for each qualified natural gas, propane, or oil furnace or hot water boiler, and $300 for each item of energy efficient building property (including qualifying electric heat pump water heaters, electric heat pumps, geothermal heat pumps, central air conditioners, and natural gas, propane or oil water heaters).

The Bill would define qualified energy efficiency improvements as any energy efficient building envelope component that meets the prescriptive criteria established by 2000 International Energy Conservation Code and is installed in or on a U.S. dwelling unit (including certain manufactured homes) owned and used as the taxpayer's principal residence, first used by the taxpayer, and reasonably expected to remain in use for five or more years. The Bill would define building envelope components as: (1) insulation material or system specifically and primarily designed to reduce the heat loss or gain to a dwelling unit when installed; (2) exterior windows (including skylights); (3) exterior doors; and (4) any metal roof that has appropriate pigmented coatings.

The Bill would include certain expenditures for labor costs as eligible expenditures, it does not require certification of expenditures. The Bill also would require the basis of the property to be reduced by the amount of the credit. The Bill would impose certain limitations for property financed by subsidized energy financing or grant programs. The Bill also would apply special proration rules for jointly owned property, condominiums, and cooperative housing corporations, and where less than 80% of the property is used for nonbusiness purposes.

Effective for property placed in service after December 31, 2005, and before January 1, 2008.

The Bill would provide a credit for the eligible production of certain energy-efficient dishwashers, clothes washers, and refrigerators.

The credit for dishwashers would apply to dishwashers produced in 2006 and 2007 that meet the Energy Star standards for 2007. The credit amount would equal $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 would equal $100 for clothes washers manufactured in 2006 and 2007 that meet the requirements of the Energy Star program in effect for clothes washers in 2007.

The credit for refrigerators would be based on energy savings and the 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% energy saving and that are manufactured in 2006 receive a $75 credit. Refrigerators that achieve a 20% to 25% energy saving receive a $125 credit if manufactured in 2006 or 2007. Refrigerators that achieve at least a 25% energy saving receive a $175 credit if manufactured in 2006 or 2007.

Appliances eligible for the credit would include only those that exceed the average amount of production from the three prior calendar years for each category of appliance. Eligible production of refrigerators would be production that exceeds 110% of the average amount of production from the three prior calendar years.

A dishwasher would be defined as any 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 would be 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 refrigerators eligible for the $75 credit.

The credit allowed in a taxable year for all appliances may not exceed 2% 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 would be part of the general business credit.

Effective for appliances produced after December 31, 2005, and prior to January 1, 2008.

The Bill would provide a 30% nonrefundable personal tax credit, not to exceed $2,000, for individuals for the purchase of qualified photovoltaic property and qualified solar water heating property used exclusively for residential purposes other than heating swimming pools and hot tubs. At least half of the energy used by the solar water heating property must be derived from the sun. The Bill would also provide a 30% credit for the purchase of qualified fuel cell power plants, not to exceed $500 for each 0.5 kilowatts of capacity. The power plant must have an electricity-only generation efficiency of greater than 30% and generate at least 0.5 kilowatts of electricity. The power plant must also be installed on or in connection with a dwelling unit located in the United States and that is used by the taxpayer as a principal residence.

The Bill would require the depreciable basis of the property to be reduced by the amount of the credit. Expenditures for labor costs would be included in eligible expenditures. Certain equipment safety requirements would have to be met to qualify for the credit and special proration rules would apply for jointly owned property, condominiums, and cooperative housing corporations, and where less than 80% the property is used for nonbusiness purposes.

Effective for periods after December 31, 2005, and before January 1, 2008.

The Bill would provide for a 30% business energy credit for the purchase of qualified fuel cell power plants for businesses, not to exceed $500 for each 0.5 kilowatts of capacity. The power plant must have an electricity-only generation efficiency of greater than 30% and generate at least 0.5 kilowatts of electricity. In addition, the Bill would provide for a 10% credit for the purchase of qualifying stationary microturbine power plants, including secondary components located between the existing infrastructure for fuel delivery and the existing infrastructure for power distribution. The system must have an electricity-only generation efficiency of not less that 26% at International Standard Organization conditions and a capacity of less than 2,000 kilowatts. The credit would be limited to the lesser of 10% of the basis of the property or $200 for each kilowatt of capacity.

The energy credits would be part of the general business credit and the taxpayer's basis in the property would be reduced by the amount of the credit claimed.

Effective for periods after December 31, 2005 and before January 1, 2008, for property placed in service in taxable years ending after December 31, 2005.

The Bill would provide that the energy credit percentage will be 30% for equipment that uses solar energy to generate electricity to heat or cool a structure, to illuminate the inside of a structure using fiber-optic distributed sunlight or to provide solar process heat and qualified fuel cell property. In the case of any other energy property the percentage is 10%. The Bill makes permanent the provision that provides that property used to generate energy for the purposes of heating a swimming pool is not eligible solar property.

With respect to the provision addressing the heating of swimming pools, the Bill would be effective for periods after December 31, 2005. The increase in the credit rate and the provision related to fiber-optic distributed sunlight would be effective for periods after December 31, 2005, and before January 1, 2008, for property placed in service in taxable years ending after December 31, 2005.

The Bill would add a new nonrefundable personal credit equal to the sum of the new qualified fuel cell motor vehicle credit, the new advanced lean burn technology motor vehicle credit, the new qualified hybrid motor vehicle credit, and the new qualified alternative fuel motor vehicle credit.

The amount of the new qualified fuel cell motor vehicle credit would depend on the weight of the vehicle and range from $8,000 ($4,000 if placed in service after 2009) to $40,000. If the new qualified fuel cell motor vehicle which is a passenger automobile or light truck, the amount of the credit is increased if certain fuel efficiencies are met based on the 2002 model year city fuel economy for specified weight classes. A new qualified fuel cell motor vehicle would be defined as a motor vehicle: (1) which is propelled by power derived from one or more cells which convert chemical energy into electricity by combining oxygen and hydrogen fuel which is stored on board the vehicle in any form; (2) which, in the case of a passenger automobile or light truck, receives an EPA certification; (3) the original use commences with the taxpayer; (4) which is acquired for use or lease by the taxpayer and not for resale; and (5) is made by a manufacturer.

The new advanced lean burn technology motor vehicle credit would be 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, ranging from $400 to $2,400, and a conservation credit based on the estimated lifetime fuel savings of a qualifying vehicle compared to a comparable 2002 model year vehicle, ranging from $250 to $1,000. A qualifying advanced lean burn technology motor vehicle that incorporates direct injection, achieves at least 125% of the 2002 model year city fuel economy, and 2004 and later model vehicles meets or exceeds certain EPA emissions standards. A qualifying advanced lean burn technology motor vehicle must be placed in service before January 1, 2011.

The new qualified hybrid motor vehicle credit amount would be based on weight. Lighter vehicles (8,500 pounds or less) would produce a credit containing two components: the a fuel economy credit amount and a conservation amount. The fuel economy credit amount would range from $400 to $2,400, depending on the fuel efficiency exceeding 2002 standards. The conservation amount would be based on the estimated lifetime fuel savings of a qualifying vehicle compared to a comparable 2002 model year vehicle and range from $250 to $1,000. Heavy-duty hybrid vehicles would get a credit amount based on a certain percentage of the incremental cost of the hybrid over similar gas powered vehicles within a dollar limitation of such incremental cost. A qualifying hybrid vehicle is a motor vehicle that draws propulsion energy from onboard 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 automobile or light truck must have a maximum available power from the rechargeable energy storage system of at least 4%. In addition, the vehicle must meet or exceed certain EPA emissions standards.

The new qualified alternative fuel motor vehicle credit would be an amount equal to an applicable percentage multiplied by the incremental cost of any new qualified alternative fuel motor vehicle. A new qualified alternative fuel motor vehicle would be defined as a motor vehicle: (1) which is only capable of operating on an alternative fuel; (2) the original use of which commences with the taxpayer; (3) which is acquired by the taxpayer for use or lease, but nor for resale; and (4) which is made by a manufacturer. An alternative fuel would be compressed natural gas, liquefied natural gas, liquefied petroleum gas, hydrogen, and any liquid at least 85% of the volume of which consists of methanol. A different calculation, which would produce a lower credit amount, would apply to mixed-fuel vehicles.

The Bill would impose 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.

No credit would be allowed for any vehicle used outside of the United States. A taxpayer may elect not to take the credit.

The portion of the credit attributable to vehicles of a character subject to an allowance for depreciation would be treated as a portion of the general business credit; the remainder of the credit would be 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.

Under the Bill, the new qualified fuel cell motor vehicle credit would not apply to such vehicles purchased after December 31, 2014, the new advanced lean burn technology credit would not apply to such vehicles purchased after December 31, 2010, the new qualified hybrid motor vehicle credit would not apply to such vehicles purchased after December 31, 2010 (or December 31, 2009, for qualified hybrid motor vehicles weighing more than 8,500 pounds), and the new qualified alternative fuel vehicle credit would not apply to such vehicles purchased after December 31, 2010.

Effective for property placed in service after the December 31, 2005, in taxable years ending after such date.

The Bill would provide for a credit equal to 30% of the cost of any qualified alternative fuel vehicle refueling property installed to be used in a trade or business or at the taxpayer's principal residence. The credit would be limited to $30,000 for retail clean-fuel vehicle refueling property, and $1,000 for residential clean-fuel vehicle refueling property. The Bill would define such fuels as those defined under §179A(d), limited to any fuel at least 85% of the volume of which consists of ethanol, natural gas, compressed natural gas, liquefied natural gas, liquefied petroleum gas, and hydrogen, or any mixture of biodiesel and diesel fuel, determined without regard to any use of kerosene and containing at least 20% biodiesel. If the property is installed at the taxpayer's principal residence, §179A(d)(1) (requiring the property to be subject to an allowance for depreciation) does not apply.

The Bill would provide that the taxpayer's basis in the property be reduced by the amount of the credit and would disallow deductions under §179A for that property. The Bill would also provide that for property installed for or used by a tax-exempt entity, the taxpayer that installs the property may claim the credit. The Bill would disallow a credit for property used outside the United States. A taxpayer may elect not to take the credit.

Only the portion of the credit attributable to property subject to an allowance for depreciation would be treated as a portion of the general business credit; the remainder of the credit would be allowable to the extent of the excess of the regular tax (reduced by certain other credits) over the alternative minimum tax for the year.

Effective for property placed in service after December 31, 2005, and in the case of property relating to hydrogen, before January 1, 2015; and in the case of any other property, before January 1, 2010.

The Bill would reduce the motor fuel excise tax on certain mixtures of diesel-water fuel emulsion which contain at least 14% water from $0.243 per gallon to $0.197 per gallon for which the emulsion additive has been registered by a U.S. manufacturer with the Environmental Protection Agency. The Bill would also provide for a refund based on the incentive rate for which the producer could file quarterly if the producer can claim at least $750. If the producer cannot claim at least $750, the amount may be carried over to the next quarter or may be claimed as a credit on the income tax return if the producer cannot claim at least $750 by the end of the taxable year.

The Bill would also provide for a credit for certain diesel fuel used to produce such an emulsion. Further, the Bill would provide that any person who later separated taxable fuel from the diesel-water fuel emulsion would be treated as a refiner of taxable fuel.

Effective January 1, 2006.

The Bill would extend the income tax credit, excise tax credit, and payment provisions for biodiesel through December 31, 2008.

The Bill also would create a similar income tax credit, excise tax credit and payment system for renewable diesel; however, credit amounts would differ from those for biodiesel, and there would be no credit for small producers of renewable diesel. The Bill would define "renewable diesel" as diesel fuel derived from biomass (excluding petroleum oil, natural gas, coal, or any product thereof) using a thermal depolymerization process that meets certain registration and testing requirements. The Bill also would require that all producers of renewable diesel be registered with the Treasury Secretary.

Effective on the date of enactment for the extensions for biodiesel. Effective for fuel sold or used after December 31, 2005, for renewable diesel.

The Bill would add the "eligible small agri-biodiesel producer credit" to the list of credits that comprise the biodiesel fuels credit. The Bill would define the "eligible small agri-biodiesel producer credit" of any "eligible small agri-biodiesel producer" (i.e., any person who, at all times during the taxable year, has a productive capacity for agri-biodiesel not in excess of 60,000,000 gallons) as 10 cents for each gallon of "qualified agri-biodiesel production." The term "qualified agri-biodiesel production" would be defined as any agri-biodiesel, not to exceed 15,000,000 gallons, that: (1) the producer sells during the taxable year for use by the purchaser (a) in the production of a qualified biodiesel mixture in the purchaser's trade or business, (b) as a fuel in a trade or business, or (c) for sale at retail to another person who places the agri-biodiesel in that person's fuel tank; or (2) the producer uses or sells for any of such purposes. The Bill would provide aggregation rules for determining the 15,000,000 and 60,000,000 gallon limits, rules for applying the limits to passthrough entities, and rules for allocating productive capacity among multiple persons with interests in one facility, and would authorize anti-abuse regulations.

The Bill also would permit §1381(a) cooperative organizations to elect to apportion the eligible small agri-biodiesel producer credit among their patrons, and would set forth the election procedure.

The eligible small agri-biodiesel producer credit would sunset after December 31, 2008.

Effective for taxable years ending after the date of enactment.

The Bill would increase the maximum annual alcohol production capacity for an eligible small ethanol producer from 30 million gallons to 60 million gallons. The Bill would also modify the election by a cooperative to allocate the credit to its patrons by conditioning the validity of the election on the cooperative's mailing a written notice of the allocation to its patrons during the period beginning on the first day of the taxable year covered by the election and ending with the fifteenth day of the ninth month following the close of that taxable year.

Effective for taxable years ending after the date of the enactment.

The Bill would accelerate the termination date of §179A to December 31, 2005, from December 31, 2006.

The Bill would add a third component to the amount of the research credit: 20% of the "qualified energy research expenditures" (as defined under current law) that a taxpayer pays or incurs in carrying on a trade or business of the taxpayer during the taxable year (including as contributions) to an "energy research consortium." The Bill would define "energy research consortium" as under current law, but with the following additions: (1) the energy research consortium must be organized and operated primarily to conduct energy research and development in the public interest; (2) at least five unrelated persons must pay or incur amounts to the organization within the calendar year; and (3) no one person may pay or incur more than 50% of the total amounts that the research consortium receives during the calendar year.

The Bill also would repeal the 65% limitation under §41(b)(3) on contract research expenses paid to a university, a federal laboratory, or an "eligible small business" (i.e., any person with an average of no more than 500 employees during either of the two preceding calendar years, with respect to which the taxpayer does not own 50% or more of the stock by vote or value if the business is a corporation or 50% of the capital and profits interests if the business is not a corporation).

Effective for amounts paid or incurred after the date of enactment, in taxable years ending after that date.

The Bill would require that not later than 60 days from the date of enactment, the Secretary of the Treasury would be required to enter into an agreement with the National Academy of Sciences (NAS) under which the NAS would conduct a study to define and evaluate the health, environmental, security, and infrastructure external costs and benefits associated with the production and consumption of energy that are not or may not be fully incorporated into the market price of such energy, or into the federal tax or fee or other applicable revenue measure related to such production or consumption. The Bill further would require that not later than two years after the date on which such agreement is entered into, the NAS would be required to submit to Congress a report on the study conducted.

The Bill would direct the Secretary of the Treasury, with consultation of 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 materials. The study would be required to be submitted to Congress within one year of the date of enactment.

Effective of the date of enactment.

The Bill would reinstate the Oil Spill Liability Trust Fund tax, applicable April 1, 2006, or if later, 30 days after 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 Fund is less that $2 billion.

In general, a five-cent-per-barrel tax was imposed on crude oil received at a U.S. refinery and on imported petroleum products received for consumption, use, or warehousing. The Fund's tax applied after December 31, 1989, and before January 1, 1995. The tax was effective only if the unobligated balance in the Fund was less than $1 billion.

The Bill would suspend the tax during a calendar quarter if the Secretary estimates that, as of the close of the preceding calendar quarter, the unobligated balance in the Fund exceeds $2.7 billion. The tax terminates after December 31, 2014.

Effective April 1, 2006.

The Bill would extend until April 1, 2011, the Leaking Underground Storage Tank (LUST) Trust Fund tax of §4081(d)(3). The excise tax expired April 1, 2005.

The Bill would provide that no refunds, credits, or payments would be provided for the LUST Trust Fund tax except for fuels destined for export.

The LUST Fund would be available only for purposes of §9003(h) of the Solid Waste Disposal Act.

Effective in general on October 1, 2005.

The Bill would provide that, if multiple §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 §197 intangibles were a single asset. Thus, any gain on the sale or other disposition of the intangibles would be recaptured as ordinary income to the extent of ordinary depreciation deductions previously claimed on any of the §197 intangibles. The Bill would except from this rule any amortizable §197 intangible whose adjusted basis exceeds its fair market value.

The Conference Report provides the following example to illustrate present law and the Bill provision:

In Year 1, taxpayer T acquires two §197 intangible assets for a total of $45. Asset X is assigned a cost basis of $15, and asset Y is assigned a cost basis of $30. The allocation is irrelevant for amortization purposes, as T will be entitled to a total of $3 per year ($45 divided by 15 years).

In Year 6, the basis of X is $10 and the basis of Y is $20. T 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. T has claimed $5 of amortization, and therefore has $5 of recapture potential, with respect to X. T has claimed $10 of amortization, and therefore has $10 of recapture potential, with respect to Y.

Under present law, if the sale proceeds are allocated $15 to X and $30 to Y, the gain on assets X and Y 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 X and $20 to Y, the full $15 gain will be recognized with respect to X, and only $5 (full recapture potential with respect to X) will be recaptured as ordinary income. The remaining $10 of gain attributable to X will be treated as capital gain. No gain (and thus no recapture) will be recognized with respect to Y, and only $5 of the $15 recapture potential is recognized.

Under the Bill, T would calculate recapture as if assets X and Y 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 X and Y, the full $15 gain is recaptured as ordinary income.

Effective for dispositions of property after the date of enactment.

The Bill would add to the existing definition of a "super single tire" (which is eligible for a special rate of tax) a sentence clarifying that the term does not include any tire designed for steering.

The Bill would also require the IRS to report to the Congress on the amount of tax collected under §4071 for each class of taxable tire (e.g., biasply, super single, or other) for calendar year 2006 and the number of tires in each class on which tax is imposed during 2006. The IRS must submit the report to Congress by July 1, 2007.

Editor's Note: The Conference Report, but not the Bill language itself, further states that: (1) the IRS is directed to revise the Form 720, Quarterly Federal Excise Tax Return, to collect the information necessary to prepare the report; and (2) the report also must include total tire tax collections for an equivalent one-year period preceding October 22, 2004 (the date of enactment of the American Jobs Creation Act of 2004).

Effective as if included in §869 of the American Jobs Creation Act of 2004 (sales in calendar years beginning after November 21, 2004). Study requirement effective on the date of enactment.