LIMITATIONS ON PERCENTAGE DEPLETION FOR OIL AND GAS.

SEC. 591. LIMITATIONS ON PERCENTAGE DEPLETION FOR OIL AND GAS. (a) In General.— Part I of subchapter I of chapter 1 (relating to natural resources) is amended by inserting after section 613 the following new section: “SEC. 613A. LIMITATIONS ON PERCENTAGE DEPLETION IN CASE OF OIL AND GAS WELLS. “(a) General Rule.— Except as otherwise provided in this section the allowance for depletion under section 611 with respect to any oil or gas well shall be computed without regard to section 613. “(b) Exemption for Certain Domestic Gas Wells.— “(1) In general.— The allowance for depletion under section 611 shall be computed in accordance with section 613 with respect to— “(A) regulated natural gas, “(B) natural gas sold under a fixed contract, and “(C) any geothermal deposit in the United States or in a possession of the United States which is determined to be a gas well within the meaning of section 613(b)(1)(A), and 22 percent shall be deemed to be specified in subsection (h) of section 613 for purposes of subsection (a) of that section. 89 STAT. 48 “(2) Definitions.— For purposes of this subsection— “(A) Natural gas sold under a fixed contract.— The term ‘natural gas sold under a fixed contract’ means domestic natural gas sold by the producer under a contract, in effect on February 1, 1975, and at all times thereafter before such sale, under which the price for such gas cannot be adjusted to reflect to any extent the increase in liabilities of the seller for tax under this chapter by reason of the repeal of percentage depletion for gas. Price increases after February 1, 1975, shall be presumed to take increases in tax liabilities into account unless the taxpayer demonstrates to the contrary by clear and convincing evidence. “(B) Regulated natural gas.— The term ‘regulated natural gas’ means domestic natural gas produced and sold by the producer, before July 1, 1976, subject to the jurisdiction of the Federal Power Commission, the price for which has not been adjusted to reflect to any extent the increase in liability of the seller for tax under this chapter by reason of the repeal of percentage depletion for gas. Price increases after February 1, 1975, shall be presumed to take increases in tax liabilities into account unless the taxpayer demonstrates the contrary by clear and convincing evidence. “(c) Exemption for Independent Producers and Royalty Owners.— “(1) In general.— Except as provided in subsection (d), the allowance for depletion under section 611 shall be computed in accordance with section 613 with respect to— “(A) so much of the taxpayer’s average daily production of domestic crude oil as does not exceed the taxpayer’s depletable oil quantity; and “(B) so much of the taxpayer’s average daily production of domestic natural gas us does not exceed the taxpayer’s depletable natural gas quantity; and the applicable percentage (determined in accordance with the table contained in paragraph (5)) shall be deemed to be specified in subsection (b) of section 613 for purposes of subsection (a) of that section. “(2) Average daily production.— For purposes of paragraph “(A) the taxpayer’s average daily production of domestic crude oil or natural gas for any taxable year, shall be determined by dividing his aggregate production of domestic crude oil or natural gas, as the case may be, during the taxable year by the number of days in such taxable year, and “(B) in the case of a taxpayer holding a partial interest in the production from any property (including an interest held in a partnership) such taxpayer’s production shall be considered to be that amount of such production determined by multiplying the total production of such property by the taxpayer’s percentage participation in the revenues from such property. In applying this paragraph, there shall not be taken into account any production of crude oil or natural gas resulting from secondary or tertiary processes (as defined in regulations prescribed by the Secretary or his delegate). “(3) Depletable oil quantity.— “(A) In general.— For purposes of paragraph (1), the taxpayer’s depletable oil quantity shall be equal to— 89 STAT. 49 “(i) the tentative quantity determined under the table contained in subparagraph (B), reduced (but not below zero) by “(ii) the taxpayer’s average daily secondary or tertiary production for the taxable year. “(B) Phase-out table.— For purposes of subparagraph (A)— “In the case of production during the calendar year: The tentative quantity in barrels is: 1975 2,000 1976 1,800 1977 1,600 1978 1,400 1979 1,200 1980 and thereafter 1,000 “(4) Daily depletable natural gas quantity.— For purposes of paragraph (1), the depletable natural gas quantity of any taxpayer for any taxable year shall be equal to 6,000 cubic feet multiplied by the number of barrels of the taxpayer’s depletable oil quantity to which the taxpayer elects to have this paragraph apply The taxpayer’s depletable oil quantity for any taxable year shall be reduced by the number of barrels with respect to which an election under this paragraph applies. Such election shall be made at such time and in such manner as the Secretary or his delegate shall by regulations prescribe. “(5) Applicable percentage.— For purposes of paragraph (1)— “In the case of production during the calendar year: The applicable percentage is: 1975 22 1976 22 1977 22 1978 22 1979 22 1980 22 1981 20 1982 18 1983 16 1984 and thereafter 15 “(6) Oil and natural gas resulting from secondary or tertiary processes.— “(A) In general.— Except as provided in subsection (d), the allowance for depletion under section 611 shall be computed in accordance with section 613 with respect to— “(i) so much of the, taxpayer’s average daily secondary or tertiary production of domestic crude oil as does not exceed the taxpayer’s depletable oil quantity (determined with regard to paragraph (3)(A)(ii)); and “(ii) so much of the taxpayer’s average daily secondary or tertiary production of domestic natural gas as does not exceed the taxpayer’s depletable natural gas quantity (determined without regard to paragraph (3)(A)(ii)); and 22 percent shall be deemed to be specified in subsection (b) of section 613 for purposes of subsection (a) of that section. “(B) Average daily secondary or tertiary production.— For purposes of this subsection— “(i) the taxpayer’s average daily secondary or tertiary production of domestic crude oil or natural gas for any taxable year shall be determined by dividing his aggregate production of domestic crude oil or natural gas, as89 STAT. 50 the case may he, resulting from secondary or tertiary processes during the taxable year by the number of days in such taxable year, and “(ii) in the case of a taxpayer holding a partial interest in the production from any property (including any interest held in any partnership) such taxpayer’s production shall be considered to be that amount of such production determined by multiplying the total production of such property by the taxpayer’s percentage participation in the revenues from such property. “(C) Termination.— This paragraph shall not apply after December 31, 1983. “(7) Special rules.— “(A) Production of crude oil in excess of depletable oil quantity.— If the taxpayer’s average daily production of domestic crude oil exceeds his depletable oil quantity, the allowance under paragraph (1)(A) with respect to oil produced during the taxable year from each property in the United States shall be that amount which bears the same ratio to the amount of depletion which would have been allowable under section 613(a) for all of the taxpayer’s oil produced from such property during the taxable year (computed as if section 613 applied to all of such production at the rate specified in paragraph (5) or (6), as the ease may be) as his depletable oil quantity bears to the aggregate number of barrels representing the average daily production of domestic crude oil of the taxpayer for such year. “(B) Production of natural gas in excess of depletable natural gas quantity.— If the taxpayer’s average daily production of domestic natural gas exceeds his depletable natural gas quantity, the allowance under paragraph (1)(B) with respect to natural gas produced during the taxable year from each property in the United States shall be that amount which hears the same ratio to the amount, of depletion which would have been allowable under section 613(a) for all of the taxpayers natural gas produced from such property during the taxable year (computed as if section 613 applied to all of such production at the rate specified in paragraph (5) or (6), as the case may be) as the amount of his depletable natural gas quantity in cubic feet bears to the aggregate number of cubic feet representing the average daily production of domestic natural gas of the taxpayer for such year. “(C) Taxable income from the property.— If both oil and gas are produced from the property during the taxable year, for purposes of subparagraphs (A) and (B) the taxable income from the property, in applying the 50-percent limitation in section 613(a), shall be allocated between the oil production and the gas production in proportion to the gross income during the taxable year from each. “(D) Partnerships.— In the case of a partnership, the depletion allowance in the case of oil and gas wells to which this subsection applies shall be computed separately by the partners and not by the partnership. “(E) Secondary or tertiary production.— If the taxpayer has production from secondary or tertiary recovery processes during the taxable year, this paragraph (under regulations prescribed by the Secretary or his delegate) shall be applied separately with respect to such production. 89 STAT. 51 “(8) Businesses under common control; members of the same family.— “(A) Component members of controlled group treated as one taxpayer.— For purposes of this subsection, persons who are members of the same controlled group of corporations shall be treated as one taxpayer. “(B) Aggregation of business entities under common control.— If 50 percent or more of the beneficial interest in two or more corporations, trusts, or estates is owned by the same or related persons (taking into account only persons who own at least 5 percent of such beneficial interest), the tentative quantity determined under the table in paragraph (3)(B) shall be allocated among all such entities in proportion to the respective production of domestic crude oil during the period in question by such entities. “(C) Allocation among members of the same family.— In the case of individuals who are members of the same family, the tentative quantity determined under the table in paragraph (3)(B) shall be allocated among such individuals in proportion to the respective production of domestic crude oil during the period in question by such individuals. “(D) Definition and special rules.— For purposes of this paragraph— “(i) the term ‘controlled group of corporations’ has the meaning given to such term by section 1563(a), except that section 1563(b)(2) shall not apply and except that ‘more than 50 percent’ shall be substituted for ‘at least 80 percent’ each place it appears in section 1563(a), “(ii) a person is a related person to another person if such persons are members of the same controlled group of corporations or if the relationship between such persons would result in a disallowance of losses under section 267 or 707(b), except that for this purpose the family of an individual includes only his spouse and minor children, “(iii) the family of an individual includes only his spouse and minor children, and “(iv) each 6,000 cubic feet of domestic natural gas shall be treated as 1 barrel of domestic crude oil. “(9) Transfer of oil or gas property.— “(A) In the case of a transfer (including the subleasing of a lease) after December 31, 1974 of an interest (including an interest in a partnership or trust) in any proven oil or gas property, paragraph (1) shall not apply to the transferee (or sublessee) with respect to production of crude oil or natural gas attributable to such interest, and such production shall not be taken into account for any computation by the transferee (or sublessee) under this subsection. A property shall be treated as a proven oil or gas property if at the time of the transfer the principal value of the property has been demonstrated by prospecting or exploration or discovery work. “(B) Subparagraph (A) shall not apply in the case of— “(i) a transfer of property at death, or “(ii) the transfer in an exchange to which section 351 applies if following the exchange the tentative quantity89 STAT. 52 determined under the table contained in paragraph (3)(B) is allocated under paragraph (8) between the transferor and transferee. “(10) Special rule for fiscal year taxpayers.— In applying this subsection to a taxable year which is not a calendar year, each portion of such taxable year which occurs during a single calendar year shall be treated as if it were a short taxable year, “(11) Certain production not taken into account.— In applying this subsection, there shall not be taken into account the production of natural gas with respect to which subsection (b) applies. “(d) Limitations on Application of Subsection (c).— “(1) Limitation based on taxable income.— The deduction for the taxable year attributable to the application of subsection (c) shall not exceed 65 percent of the taxpayer’s taxable income for the year computed without regard to— “(A) depletion with respect to production of oil and gas subject to the provisions of subsection (c), “(B) any net operating loss carryback to the taxable year under section 172, and “(C) any capital loss carryback to the taxable year under section 1212. If an amount is disallowed as a deduction for the taxable year by reason of application of the preceding sentence, the disallowed amount shall be treated as an amount allowable as a deduction under subsection (c) for the following taxable year, subject to the application of the preceding sentence to such taxable year. For purposes of basis adjustments and determining whether cost depletion exceeds percentage depletion with respect to the production from a property, any amount disallowed as a deduction on the application of this paragraph shall be allocated to the respective properties from which the oil or gas was produced in proportion to the percentage depletion otherwise allowable to such properties under subsection (c). “(2) Retailers excluded.— Subsection (c) shall not apply in the case of any taxpayer who directly, or through a related person, sells oil or natural gas, or any product derived from oil or natural gas— “(A) through any retail outlet operated by the taxpayer or a related person, or “(B) to any person— “(i) obligated under an agreement or contract with the taxpayer or a related person to use a trademark, trade name, or service mark or name owned by such taxpayer or a related person, in marketing or distributing oil or natural gas or any product derived from oil or natural gas, or “(ii) given authority, pursuant to an agreement or contract with the taxpayer or a related person, to occupy any retail outlet owned, leased, or in any way controlled by the taxpayer or a related person. “(3) Related person.— For purposes of this subsection, a person is a related person with respect to the taxpayer if a significant ownership interest in either the taxpayer or such person is held by the other, or if a third person has a significant ownership interest in both the taxpayer and such person. For purposes of the89 STAT. 53 preceding sentence, the term ‘significant ownership interest’ means— “(A) with respect to any corporation, 5 percent or more in value of the outstanding stock of such corporation, “(B) with respect to a partnership, 5 percent or more interest in the profits or capital of such partnership, and “(C) with respect to an estate or trust, 5 percent or more of the beneficial interests in such estate or trust. “(4) Certain refiners excluded.— If the taxpayer or a related person engages in the refining of crude oil, subsection (c) shall not apply to such taxpayer if on any day during the taxable year the refinery runs of the taxpayer and such person exceed 50,000 barrels. “(e) Definitions.— For purposes of this sect ion— “(1) Crude oil.— The term ‘crude oil’ includes a natural gas liquid recovered from a gas well in lease separators or field facilities. “(2) Natural gas.— The term ‘natural gas’ means any product (other than crude oil) of an oil or gas well if a deduction for depletion is allowable under section 611 with respect to such product. “(3) Domestic.— The term ‘domestic’ refers to production from an oil or gas well located in the United States or in a possession of the United States. “(4) Barrel.— The term ‘barrel’ means 42 United States gallons,” (b) Technical Amendments.— (1) Section 613(d) (relating to percentage depletion) is amended to read as follows: “(d) Denial of Percentage Depletion in Case of Oil and Gas Wells.— Except as provided in section 613A, in the case of any oil or gas well, the allowance for depletion shall be computed without reference to this section.” (2) Section 613(b) is amended— (A) by striking out subparagraph (A) of paragraph (1) and redesignating subparagraphs (B) and (C) as subparagraphs (A) and (B),respectively, (B) by striking out “(1)(C)” each place it appears in paragraphs (3), (4) and (7) and inserting in lieu thereof “(1)(B)”, and (C) by amending the last sentence of paragraph (7)— (i) by striking out “or” at the end of clause (A), (ii) by striking out the period at the end of clause (B) and inserting in lieu thereof “; or”, and (iii) by adding at the end thereof the following new clause: “(C) oil and gas wells.” (3) Section 703(a)(2) (relating to deductions not allowable to a partnership) is amended by striking out “and” at the end of subparagraph (E), by striking out the period at the end of subparagraph (F) and inserting in lien “, and”, and by adding at the end thereof the following new subparagraph: “(G) the deduction for depletion under section 611 with respect to oil and gas production subject to the provisions of section 613A(c).” (c) Effective Dates.— The amendments made by this section shall take effect on January 1, 1975, and shall apply to taxable years ending after December 31, 1974.