ACTION
FROM THE COMMITTEE ON WAYS AND MEANS

Thomas Announces Committee Action on H.R. 1528, the “Taxpayer Protection and IRS Accountability Act of 2003,” and H.R. 1531, the “Energy Tax Policy Act of 2003”

H.R. 1528 would enhance measures passed previously by the U.S. House of Representatives to enhance taxpayer rights and improve tax administration.

The bill would reform penalty and interest provisions allowing individuals a first-time penalty waiver in cases where minor negligence results in a liability that is disproportionate and unreasonable. In addition, the bill would exclude from income interest paid to individual taxpayers by the Internal Revenue Service (IRS) and raise the safe harbor for failure to pay estimated tax from $1,000 to $1,600.

Other highlights in the bill include:

• A provision that would improve the fairness of IRS collection procedures by allowing taxpayers to enter into installment agreements for less than the full amount of their tax liability.
• A provision that would allow taxpayers to consult with the Taxpayer Advocate Service on a confidential basis.
• A provision that would increase the authorization for low-income taxpayer clinics.
• A provision that would make technical changes to ensure unemployed workers in all States are equally eligible for Federal extended unemployment benefits.
• A provision that would extend a 65-percent refundable tax credit for the purchase of health insurance to additional workers adversely affected by trade.

The proposal would provide a personal tax credit for the purchase of qualified photovoltaic property and qualified solar water heating property. The credit would be 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. This credit would be nonrefundable and cannot be used to heat swimming pools or hot tubs. The depreciable basis of the property would be reduced by the amount of the credit. The credit would apply to purchases in taxable years ending after December 31, 2003, and before January 1, 2007 (January 1, 2009, in the case of qualified photovoltaic property).

The proposal would extend the placed in service date for the production tax credit for wind and closed-loop biomass facilities placed in service after December 31, 1993, (December 31, 1992, in the case of closed-loop biomass facilities) and before January 1, 2007. The credit is currently set to expire at the end of 2003.

The proposal would not extend the current law credit for poultry waste. It would also add three new types of qualifying facilities: open-loop biomass, landfill gas facilities (electricity created by burning methane gas derived from the bio-degradation of municipal solid waste), and electricity produced by burning municipal solid waste.

The proposal would provide a non-refundable 10-percent credit for the purchase of fuel cell power plants for businesses and individuals, not to exceed $1,000 per half-kilowatt of capacity. For individuals, the qualified fuel cell power plant must be installed on or in connection with a principal residence. The taxpayer’s basis in the property would be reduced by the amount of the credit claimed. The credit would apply to purchases in taxable years ending after December 31, 2003, and before January 1, 2007.

The proposal would provide a 20-percent non-refundable credit, up to $2,000 per dwelling, for the purchase of qualified energy efficiency improvements to residences including (1) insulation materials, (2) exterior windows (including skylights) and doors, and (3) metal roofs with appropriate pigmented coating to reduce the heat loss or gain. The taxpayer’s basis in the property would be reduced by the amount of the credit. Expenses in excess of $1,000 would have to be certified to be eligible for the credit.

It also would provide a credit to an eligible contractor (up to $2,000 per dwelling) equal to the aggregate adjusted basis of all energy property installed in a qualified new energy-efficient home during construction, provided the home is at least 30 percent more efficient than a reference model. Energy efficient property would include insulation materials, exterior windows and doors, and metal roofs with appropriate pigmented coatings and any energy-efficient heating or cooling appliance. At least 10 percent of the improvements would have to be to the building envelope. The credit would apply to purchases made between January 1, 2004, and December 31, 2006.

The proposal would provide a 10-percent credit for the purchase of combined heat and power property. The CHP would be defined as one which (1) generates electricity and useful thermal energy in a single, integrated system, and (2) produces at least 20 percent of its total useful energy in the form of thermal energy and at least 20 percent in the form of electrical or mechanical power (or a combination thereof).

If a credit is taken on the CHP property, and the property would ordinarily have a depreciation class life of 15 years or less, the depreciation period for the property would be treated as having a 22-year class life. The credit would apply to property placed in service after December 31, 2003, and before January 1, 2007.

The proposal would allow nonbusiness energy credits to be taken against both regular tax and alternative minimum tax (AMT).

The 4.3 cents per gallon General Fund excise tax rates on diesel fuel used in trains and fuel used in barges operating on the designated inland waterways system would be repealed as of September 30, 2003.

The proposal would reduce the Federal excise tax rate on water-diesel emulsions from 24.3 cents per gallon to 19.66 cents per gallon so as to not tax the water content of the emulsions. It would apply to fuels sold after September 30, 2003.

The proposal would repeal the phased down reduction in the electric vehicle credit for 2004, 2005, and 2006. Thus, the proposal would provide that a taxpayer could claim the full 10-percent credit (up to a $4,000 maximum) for the purchase of qualified electric vehicles before January 1, 2007.

The proposal would repeal the phased down reduction in the allowable clean-fuel vehicle deduction for years 2004, 2005, and 2006. Thus, the proposal would provide that a taxpayer could claim a full deduction for allowable costs of clean-fuel vehicles purchased before January 1, 2007. Also would add new tax credits for fuel cell and advanced lean burn vehicles.

Revenue Procedure 87-56 includes two asset classes which might apply to natural gas gathering lines: asset class 46.0 provides a recovery period of 15 years and asset class 13.2 provides a recovery period of 7 years. To eliminate conflicted court decisions, the proposal would make clear that natural gas gathering lines are 7-year property, providing certainty to taxpayers. The provision would be effective after the date of enactment.

Revenue Procedure 87-56 provides that natural gas distribution pipelines are assigned a 20-year recovery period. This provision would move natural gas distribution pipelines from 20-year property (current law) to 15-year property. The provision would be effective after the date of enactment.

The proposal would move electricity transmission lines from 20-year property (current law) to

15-year property. The provision would be effective after the date of enactment.

The provision would permit small business refiners to expense up to 75 percent of the costs incurred in complying with the Highway Diesel Fuel Sulfur Control Requirements issued by the Environmental Protection Agency (EPA) in 2001. In addition, the proposal would allow the small refiners to claim a 5 cents credit for each gallon of low sulfur diesel fuel produced. The provision would be effective the date of enactment.

The provision would increase the current 50,000-barrel per day limitation to a 75,000-daily average test. The proposal would be effective for taxable years after December 31, 2001.

The proposal would provide tax relief for utilities selling transmission assets in response to FERC Order 2000. Under the proposal, utilities complying with this Order would be able to pay the resulting taxes ratably over 8 years. They would have to reinvest the proceeds of the sale in other "exempt utility property," within 4 years.

Under current law, only rate regulated utilities may deduct contributions to nuclear decommissioning funds. The provision would repeal this limitation. The proposal also would repeal the current law provision which does not allow deductions for pre-1984 decommissioning costs. Thus, all utilities would be permitted to accumulate an amount sufficient to cover the present value of 100 percent of a nuclear plant’s estimated decommissioning costs in a qualified fund. The proposal would be effective for taxable years beginning after December 31, 2003.

Under the proposal, income received by a rural electric cooperative from any "open access transaction" or from any "nuclear decommissioning transaction" would be excluded in determining whether a rural electric cooperative satisfies the 85-15 test for tax exemption. In addition, under the proposal, income received by a rural electric cooperative from a "load loss transaction" would be treated as income collected from members for the purpose of meeting the 85-15 test. A load loss transaction would be a wholesale or retail sale to make up for the loss of customers to other utilities. The provision would be effective after the date of enactment.

The proposal would clarify recently issued U.S. Department of the Treasury regulations on the use of tax exempt bonds by municipal gas agencies to secure a long-term pre-paid supply of natural gas. The proposal would create a safe harbor for pre-payments equal to a community’s recent average annual consumption. It also would establish a procedure allowing gas agencies to seek a higher safe harbor amount from Treasury when significant population growth and/or gas consumption is not reflected in historic averages.

The provision would allow coal companies that are part of a controlled group to pre-fund their coal premium liabilities. The present value of the company's obligations would be calculated by an actuary and certified by the U.S. Department of Labor. If the company's actual liability is ultimately larger than the certified amount, the parent company would remain liable for the difference.

The proposal would create a $3 per barrel credit for crude oil and a $0.50 per 1,000 cubic feet of natural gas from marginal wells. The credit would not be available for production if the price of oil exceeds $18 ($2 for natural gas), and it would be reduced proportionately for prices between $15 and $18 ($1.67 and $2 for natural gas). The credit would be able to be taken against both regular tax and AMT. The proposal would be effective for taxable years after 2003.

The current law provision, which limits percentage depletion deductions to no more than 65 percent of the taxpayer’s overall taxable income, would be suspended for taxable years beginning after December 31, 2003, and before January 1, 2007.

In addition, the proposal would extend through January 1, 2007, the current law provision, which permits taxpayers to take deductions in excess of 100 percent of the net income from a single marginal well. The provision is currently set to expire at the end of this year.

The proposal would allow delay rental payments incurred in connection with the development of oil or gas within the United States to be amortized over 2 years. The proposal would apply to properties rental payments paid or incurred in taxable years beginning after December 31, 2003.

The proposal would allow geological and geophysical costs incurred in connection with oil and gas exploration in the United States to be expensed over 2 years. The proposal would be effective for G&G; costs paid or incurred in taxable years beginning after December 31, 2003.

The proposal would permit taxpayers to claim a credit for the production of non-conventional fuels produced at wells placed in service after the date of enactment and before January 1, 2007. Qualifying fuels would be oil from shale or tar sands, and gas from geopressured brine, Devonian shale, coal seams, or a tight formation.

The value of the credit for these wells would be $3 for production in 2003 and would be indexed for inflation beginning in 2004. The credit would be able to be claimed for each of the first 4 years of production, but not for any production occurring after December 31, 2009. Existing section 29 wells (those drilled after December 31, 1979, and before January 1, 1993) would be eligible for 4 additional years of credit at the same level as new wells ($3 in 2003, indexed for inflation after that).

The proposal also would permit landfill gas sold to a third party from facilities placed in service after June 30, 1998, and before January 1, 2007, to be eligible for the credit, for 5 years from the date of enactment or the date the facility is placed in service (whichever is later). For those landfills subject to the EPA’s 1996 New Source Performance Standards/Emissions Guidelines, the credit would be reduced by one third.

Finally, no credit would be available for production in excess of a daily average of 200,000 cubic feet of gas.

The proposal would make the minimum tax limitation inapplicable to the new business energy credits added by the bill. The proposal would apply to taxable years beginning after December 31, 2001.

Taxpayers who pay intangible drilling or development costs (IDCs) in the development of domestic oil or gas production may elect to either expense or capitalize these amounts. If an election to expense IDCs is made, the taxpayer deducts the amount of the IDCs as an expense in the taxable year the cost is paid or incurred.

The difference between the amount of a taxpayer's IDC deduction and the amount which would have been currently deductible had IDCs been capitalized and recovered over a 10-year period is an item of tax preference for the AMT to the extent that this amount exceeds 65 percent of the taxpayer's net income from oil and gas properties for the taxable year. This preference applies to taxpayers other than integrated oil companies only to the extent that the failure to apply the preference would result in a reduction of the taxpayer's alternative minimum taxable income by more than 40 percent.

The proposal would remove the IDC as an AMT preference for taxable years beginning after December 31, 2003, and beginning before January 1, 2007.

Current tax code section 43 provides a 15-percent tax credit for certain tertiary recovery methods used on oil and gas property within the United States. The credit would phase out as the price of oil exceeds $28 (the figure for 1991, inflation adjusted after that).

The bill would allow the section 43 enhanced oil recovery credit to be taken against AMT in taxable years beginning in 2003, 2004, and 2005.

The provision would impose a 2-year moratorium on corporate inversions where the corporation has done little more than change its corporate residence for tax purposes.

A corporate inversion would be disregarded for U.S. tax purposes when 80 percent or more of the shareholders of the new foreign corporation were shareholders in the U.S. corporation. (After the inversion, the new foreign corporation would be taxed as a U.S. corporation.) The amendment would apply to inversions that occur between March 4, 2003, and December 31, 2004.