[Senate Report 104-168]
[From the U.S. Government Publishing Office]



                                                       Calendar No. 225
104th Congress                                                   Report
                                 SENATE

 1st Session                                                    104-168
_______________________________________________________________________


 
                INTERCITY PASSENGER RAIL ACT OF 1995

                                _______


                November 3, 1995.--Ordered to be printed

_______________________________________________________________________


    Mr. Roth, from the Committee on Finance, submitted the following

                              R E P O R T

                         [To accompany S. 1395]

    The Committee on Finance, reported an original bill (S. 
1395) to amend the Internal Revenue Code of 1986 to provide for 
the establishment of an intercity passenger rail trust fund, 
and for other purposes, having considered the same, reports 
favorably thereon without amendment and recommends that the 
bill do pass.

                                CONTENTS

                                                                   Page
 I. Legislative Background and Summary................................1
        A. Legislative Background................................     1
        B. Summary...............................................     2
II. Explanation of the Bill...........................................2
        A. Establishment of Intercity Passenger Rail Trust Fund 
            and Transfer of Motor Fuels Tax Revenues (sec. 2)....     2
        B. Disallow Interest Deduction for Corporate-Owned Life 
            Insurance Policy Loans (sec. 3)......................     4
III.Budget Effects of the Bill........................................7

        A. Committee Estimates...................................     7
        B. Budget Authority and Tax Expenditures.................     9
        C. Consultation with Congressional Budget Office.........     9
IV. Vote of the Committee.............................................9
 V. Regulatory Impact.................................................9
VI. Changes in Existing Law Made by the Bill, as Reported............10

                 I. LEGISLATIVE BACKGROUND AND SUMMARY

                       a. legislative background

    The Committee on Finance marked up an original bill (the 
``Intercity Passenger Rail Act of 1995'') on November 2, 1995, 
and ordered the bill favorably reported by voice vote.
     In a related legislative matter, the Committee marked up 
S. 1318 (the ``Amtrak and Local Rail Revitalization Act of 
1995'') on November 2, 1995, and ordered S. 1318 favorably 
reported by striking Title X (revenue provisions).

                               b. summary

     The bill includes provisions relating to (1) establishment 
of a new Intercity Passenger Rail Trust Fund (``Rail Trust 
Fund'') funded by revenues attributable to 0.5 cent per gallon 
of the highway motor fuels taxes and (2) disallowance of 
interest deductions on corporate-owned life insurance policy 
loans. (The latter provision is the same as included in the 
Senate-passed amendment to H.R. 2491.)

                      II. EXPLANATION OF THE BILL

a. establishment of intercity passenger rail trust fund and transfer of 
 motor fuels tax revenues (sec. 2 of the bill and new sec. 9512 of the 
                                 Code)

                              Present Law

     Present law imposes Federal excise taxes totaling 18.4 
cents per gallon on gasoline and special motor fuels and 24.4 
cents per gallon on diesel fuel. These taxes are comprised of 
multiple component rates, part of which are dedicated to 
financing Federal trust fund programs. In general, component 
tax rates that fund Federal trust fund programs are only 
imposed on transportation uses that benefit from the programs. 
A 4.3-cents-per-gallon rate (5.55 cents per gallon in the case 
of rail) is imposed as a general revenue deficit reduction tax. 
This deficit reduction component rate applies generally to all 
transportation modes subject to any other component rate.
     In general, the gasoline, special motor fuels, and diesel 
fuel excise taxes do not apply to non-transportation uses of 
these fuels. Off-highway business uses are included within this 
exemption: uses such as on-farm equipment operation and 
operation of other off-highway business equipment such as oil-
drilling equipment. Use as heating oil also is exempt. (Most 
fuel commonly referred to as heating oil is diesel fuel.) The 
tax also does not apply to fuel used by State and local 
governments, to exported fuels, and to fuel used in commercial 
shipping other than in the inland waterway system). Fuel used 
by intercity buses is partially exempt from the diesel fuel 
tax.
     The Federal Highway Trust Fund is financed with 14 cents 
per gallon of the gasoline and special motor fuels taxes 
attributable to highway motor vehicle use and 20 cents per 
gallon of those diesel fuel tax revenues. 1 The Highway 
Trust Fund program consists of two parts, funded through 
separate accounts within the Trust Fund: a highway program 
funded through the Highway Account and a mass transit program 
funded through the Mass Transit Account. Two cents per gallon 
of the fuels tax revenues dedicated to the Highway Trust Fund 
are deposited in the Mass Transit Account; the balance of these 
revenues go to the Highway Account. 2
    \1\ The Highway Trust Fund also receives revenues from certain 
other excise taxes imposed primarily on heavy trucks. These revenues 
are deposited in the Highway Account of the Highway Trust Fund.
    \2\ Before October 1, 1995, only 1.5 cents per gallon went to Mass 
Transit Account.
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     Spending from the Highway Trust Fund is classified as 
domestic discretionary spending under the Budget Enforcement 
Act, and thereby subject to annual appropriation.

                        Explanation of Provision

     The bill establishes a new Intercity Passenger Rail Trust 
Fund (the ``Rail Trust Fund'') in the Trust Fund Code of the 
Internal Revenue Code. This Rail Trust Fund will be funded by 
revenues attributable to 0.5 cent per gallon of the excise 
taxes imposed on gasoline, special motor fuel, and diesel fuel 
used in highway motor vehicles. These revenues are deposited in 
the Highway Trust Fund's Mass Transit Account under present 
law.
     The Rail Trust Fund will receive these revenues only 
during the period January 1, 1996, through September 30, 2000. 
Taxes imposed on fuel before and after these dates will 
continue to be dedicated to the Highway Trust Fund's Mass 
Transit Account. In addition, revenues will not be deposited in 
the Rail Trust Fund during any fiscal year to the extent that 
the deposit is estimated to result in available revenues 3 
in the Mass Transit Account being insufficient to satisfy that 
year's estimated appropriation levels.
    \3\ Available revenues include the beginning cash balance in the 
account (after provision for outlays to liquidate prior unpaid 
appropriated amounts) plus estimated tax revenues and interest income 
for the fiscal year.
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     Monies in the Rail Trust Fund generally will be available 
to the Secretary of Transportation, to fund, on a reimbursement 
basis, capital expenditures incurred by the National Rail 
Passenger Corporation (``Amtrak''). However, an amount equal to 
one percent of each year's revenues times the number of States 
in which Amtrak did not provide service during the preceding 
year are reserved for use by those States to fund capital 
expenditures related to rail operations within the State. Each 
State qualifying for these funds will receive an equal portion 
of these revenues, also on a reimbursement basis by the 
Secretary of Transportation, for capital expenditures incurred.
     Spending from the Rail Trust Fund will not be subject to 
annual appropriation (i.e., is classified as direct spending 
under the Budget Enforcement Act) up to the following amounts:

                        [In millions of dollars]

Fiscal year:                                                      Amount
    1996..........................................................   131
    1997..........................................................   663
    1998..........................................................   667
    1999..........................................................   670
    2000..........................................................   672

     Amounts in the Rail Trust Fund in excess of these levels 
will be available for expenditure subject to appropriations 
(i.e., are classified as discretionary domestic spending under 
the Budget Enforcement Act).
     No later than October 1, 2000, the Secretary of the 
Treasury will determine the portion of the Rail Trust Fund that 
is required to satisfy all obligations incurred before October 
1, 2000. Excess revenues if any, are to be transferred to the 
Mass Transit Account of the Highway Trust Fund.

                             Effective Date

    The provision is effective on January 1, 1996.

b. disallow interest deduction for corporate-owned life Insurance (sec. 
                3 of the bill and sec. 264 of the Code)

                              Present Law

    No Federal income tax generally is imposed on a 
policyholder with respect to the earnings under a life 
insurance contract (``inside buildup'').4 Further, an 
exclusion from Federal income tax is provided for amounts 
received under a life insurance contract paid by reason of the 
death of the insured (sec. 101(a)). The policyholder may borrow 
with respect to the life insurance contract without affecting 
these exclusions, subject to certain limitations.
    \4\  This favorable tax treatment is available only if a life 
insurance contract meets certain requirements designed to limit the 
investment character of the contract (sec. 7702). Distributions from a 
life insurance contract (other than a modified endowment contract) that 
are made prior to the death of the insured generally are includible in 
income, to the extent that the amounts distributed exceed the 
taxpayer's basis in the contract; such distributions generally are 
treated first as a tax-free recovery of basis, and then as income (sec. 
72(e)). In the case of a modified endowment contract, however, in 
general, distributions are treated as income first, loans are treated 
as distributions (i.e., income rather than basis recovery first), and 
an additional ten percent tax is imposed on the income portion of 
distributions made before age 59\1/2\ and in certain other 
circumstances (secs. 72 (e) and (v)). A modified endowment contract is 
a life insurance contract that does not meet a statutory ``7-pay'' 
test, i.e., generally is funded more rapidly than seven annual level 
premiums (sec. 7702A).
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    The limitations on borrowing with respect to a life 
insurance contract under present law provide that no deduction 
is allowed for any interest paid or accrued on any indebtedness 
with respect to one or more life insurance policies owned by 
the taxpayer covering the life of any individual who (1) is an 
officer or employee of, or (2) is financially interested in, 
any trade or business carried on by the taxpayer to the extent 
that the aggregate amount of such debt with respect to policies 
covering the individual exceeds $50,000 (sec. 264(a)(4)).
    Further, no deduction is allowed for any amount paid or 
accrued on debt incurred or continued to purchase or carry a 
life insurance, endowment or annuity contract pursuant to a 
plan of purchase that contemplates the systematic direct or 
indirect borrowing of part or all of the increases in the cash 
value of the contract.5 An exception to the latter rule is 
provided, permitting deductibility of interest on bona fide 
debt that is part of such a plan, if no part of 4 of the annual 
premiums due during the first 7 years is paid by means of debt 
(the ``4-out-of-7 rule'') (sec. 264(c)(1)). Provided the 
transaction gives rise to debt for Federal income tax purposes, 
and provided the 4-out-of-7 rule is met,6 a company may 
under present law borrow up to $50,000 per employee, officer, 
or financially interested person to purchase or carry a life 
insurance contract covering such a person, and is not precluded 
under section 264 from deducting the interest on the debt, even 
though the earnings inside the life insurance contract (inside 
buildup) are tax-free, and in fact the taxpayer has full use of 
the borrowed funds.
    \5\ The statute provides that the $50,000 limitation applies only 
with respect to contracts purchased after June 20, 1986. However, 
additional limitations are imposed on the deductibility of interest 
with respect to single premium contracts (sec. 264(a)(2)), and on the 
deductibility of premiums paid on a life insurance contract covering 
the life of any officer or employee or person financially interested in 
a trade or business of the taxpayer when the taxpayer is directly or 
indirectly a beneficiary under the contract (sec. 264(a)(1)).
    \6\ Interest deductions are disallowed if any of the disallowance 
rules of section 264(a)(2)-(4) apply. The disallowance rule of section 
264(a)(3) is not applicable if one of the exceptions of section 264(c), 
such as the 4-out-of-7 rule (sec. 264(c)(1)) is satisfied. In addition 
to the specific disallowance rules of section 264, generally applicable 
principles of tax law apply.
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                        Explanation of Provision

    Under the bill, subject to an exception for key person 
insurance, no deduction is allowed for interest paid or accrued 
on any indebtedness with respect to one or more life insurance 
policies or annuity or endowment contracts owned by the 
taxpayer covering any individual who is (1) an officer or 
employee of, or (2) financially interested in any trade or 
business carried on by the taxpayer, regardless of the 
aggregate amount of debt with respect to policies or contracts 
covering the individual. 7
    \7\  The provision disallows the deduction for interest even if the 
deduction would not be disallowed under any other rule. Thus, for 
example, if a deduction would not be disallowed under section 264(a)(3) 
because the 4-out-of-7 rule is met, this provision nevertheless 
disallows the deduction.
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    An exception is provided retaining present law for interest 
on indebtedness with respect to life insurance policies 
covering up to 25 key persons. A key person is an individual 
who is either an officer or a 20-percent owner of the taxpayer. 
The number of individuals that can be treated as key persons 
may not exceed the greater of (1) five individuals, or (2) the 
lesser of 5 percent of the total number of officers and 
employees of the taxpayer, or 25 individuals. It is intended 
that employees be full-time employees, for this purpose. A 20-
percent owner is an individual who directly owns 20 percent or 
more of the total combined voting power of the corporation. If 
the taxpayer is not a corporation, a 20-percent owner is an 
individual who directly owns 20 percent or more of the capital 
or profits interest of the taxpayer. It is not intended that 
indirect ownership interests be attributed to an individual for 
this purpose. For determining who is a 20-percent owner, all 
members of a controlled group are treated as one taxpayer. The 
25-person limit may be allocated among members of the 
controlled group as provided in regulations. In the absence of 
such guidance, the 25-person limit is to be allocated among 
members of a group in a reasonable manner. Interest paid or 
accrued on debt with respect to a life insurance contract 
covering a key person is deductible only to the extent the rate 
of interest does not exceed Moody's Corporate Bond Yield 
Average--Monthly Average Corporates for each month interest is 
paid or accrued.
    In promulgating regulations or other guidance under the 
provision, it is anticipated that the Treasury Department will 
take into account the purpose of the provision to eliminate the 
deduction for interest on borrowing by businesses with respect 
to life insurance, endowment and annuity products covering 
persons in whom the taxpayer has an insurable interest. For 
example, it is not intended that a taxpayer should be able to 
circumvent the purpose of the provision by borrowing under a 
life insurance, endowment or annuity contract with respect to a 
director who is not also an officer of the taxpayer.

                             Effective Date

    With respect to debt incurred after December 31, 1995, no 
deduction is allowed for interest paid or accrued after 
December 31, 1995, except with respect to policies that satisfy 
the key person exception. In addition, as described below, a 
grandfather rule is provided with respect to certain interest 
on contracts purchased on or before June 20, 1986.
    With respect to debt incurred on or before December 31, 
1995, any otherwise deductible interest paid or accrued after 
October 13, 1995, and before January 1, 2001, is allowed to the 
extent the rate of interest does not exceed the lesser of (1) 
the borrowing rate specified in the contract as of October 13, 
1995, or (2) a percentage of Moody's Corporate Bond Yield 
Average--Monthly Average Corporates for each month the interest 
is paid or accrued. For interest paid or accrued after October 
13, 1995, and before January 1, 1997, the percentage of the 
Moody's rate is 100 percent; for interest paid or accrued in 
1997, the percentage is 95 percent; for 1998, the percentage is 
90 percent; for 1999, the percentage is 85 percent; for 2000, 
the percentage is 80 percent; and for 2001 and thereafter, the 
percentage is 0 percent.
    Any increase in the amount of debt under the policy on or 
after December 31, 1995 is treated as debt incurred on or after 
that date, and interest on the increased amount of debt is not 
allowed as a deduction under the phase-in of the interest 
disallowance rule described in the previous paragraph. Only 
interest that would have been allowed as a deduction but for 
the amendment made by the bill is allowed under the phase-in. 
Thus, for example, debt that is otherwise qualified debt under 
a life insurance policy cannot exceed the $50,000 limit of 
present-law section 264(a)(4), in order for interest on the 
debt to be allowed as a deduction under the phase-in. As 
another example, interest on debt that is disallowed as a 
deduction under present-law section 264(a)(3) because the 4-
out-of-7 rule is not satisfied (and none of the other sec. 
264(c) exceptions are satisfied) is not allowed under the 
phase-in.
    Any amount included in income during 1996, 1997, 1998, 
1999, 2000 or 2001, that is received under a contract described 
in the proposal on the complete surrender, redemption or 
maturity of the contract or in full discharge of the obligation 
under the contract that is in the nature of a refund of the 
consideration paid for the contract, is includable ratably over 
the first four taxable years beginning with the taxable year 
the amount would otherwise have been includable. Utilization of 
this 4-year income-spreading rule does not cause interest paid 
or accrued prior to January 1, 2001, to be nondeductible solely 
by reason of failure to meet the 4-out-of-7 rule. Similarly, 
utilization of this 4-year income-spreading rule does not cause 
interest paid or accrued prior to January 1, 2001, to be 
nondeductible solely by reason of causing the contract to be 
treated as a single premium contract within the meaning of 
section 264(b)(1) (i.e., a contract in which substantially all 
of the premiums are paid within 4 years after the date of 
purchase). In addition, the lapse of a contract after October 
13, 1995, due to nonpayment of premiums, does not cause 
interest paid or accrued prior to January 1, 2001, to be 
nondeductible solely by reason of causing the contract to be 
treated as a single premium contract within the meaning of 
section 264(b)(1) or by reason of failure to meet the 4-out-of-
7 rule.
    In the case of an insurance company, the unamortized 
balance of policy expenses attributable to a contract with 
respect to which the 4-year income-spreading treatment is 
allowed to the policyholder is deductible in the year in which 
the transaction giving rise to income-spreading occurs.
    The provision generally does not apply to interest on debt 
with respect to contracts purchased on or before June 20, 1986 
(thus continuing the effective date provision of the $50,000 
limitation enacted in the 1986 Act), except that interest on 
such contracts paid or accrued after October 13, 1995, is 
allowable only to the extent the rate of interest does not 
exceed Moody's Corporate Bond Yield Average--Monthly Average 
Corporates for the month the interest is paid or accrued.
    Under the provision, there is no inference as to the tax 
treatment of interest paid or accrued under present law.

                    III. BUDGET EFFECTS OF THE BILL

                         A. Committee Estimates

    In compliance with paragraph 11(a) of rule XXVI of the 
Standing Rules of the Senate, the following statement is made 
concerning the estimated budget effects of the bill as 
reported.

                                                   ESTIMATED BUDGET EFFECTS OF FINANCE COMMITTEE BILL                                                   
                                                        [By fiscal years, in millions of dollars]                                                       
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             Provision                      Effective          1996     1997     1998     1999     2000     2001     2002    1996-00   1996-02   1996-05
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1. Transfer to the Intercity         1/1/96................                                                                                             
 Passenger Rail Trust Fund 0.5                                                                                                                          
 cents/gallon of the excise taxes                                                                                                                       
 on all highway motor fuels \1\ \2\.                                                                                                                    
(9) No Revenue Effect                                                                                                                                   
2. Authorize direct spending from    DOE...................                                                                                             
 the Intercity Passenger Rail Trust                                                                                                                     
 Fund \3\.                                                                                                                                              
(9) Estimate to be Provided by the                                                                                                                      
 Congressional Budget Office                                                                                                                            
3. Disallow interest deduction for   ipoaa 10/13/95........      134      372      594      802      966    1,539    2,005     2,868     6,412    12,314
 corporate-owned life insurance                                                                                                                         
 policy loans; modify treatment of                                                                                                                      
 deferred acquisition costs for                                                                                                                         
 surrendered policies.                                                                                                                                  
      Net totals...................  ......................      134      372      594      802      966    1,539    2,005     2,868     6,412    12,314
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Estimate provided by the Congressional Budget Office.                                                                                               
\2\ Revenue transfer would apply to amounts received from January 1, 1996 through September 30, 2000. Transfer of revenues from the Mass Transit Account
  of the Highway Trust Fund to the Intercity Passenger Rail Trust Fund would have no revenue effect. The Congressional Budget Office has estimated that 
  the following amounts would be transferred: 1996: 543; 1997: 736; 1998: 751; 1999: 766; 2000: 781; 2001:--; 2002:--; 1996-00: 3,577; 1996-02: 3,577;  
  1996-05: 3,577.                                                                                                                                       
\3\ The provision would provide budget authority for new direct spending of $131 million in fiscal year 1996, $663 million in fiscal year 1997, $667    
  million in fiscal year 1998, $670 million in fiscal year 1999, and $672 million in fiscal year 2000.                                                  
                                                                                                                                                        
Legend for ``Effective'' column: bia=bonds issued after; ipoaa=interest paid or accrued after.                                                          
                                                                                                                                                        
Note.--Details may not add to totals due to rounding.                                                                                                   
                                                                                                                                                        
Source: Joint Committee on Taxation.                                                                                                                    

                B. Budget Authority and Tax Expenditures

Budget authority

    In compliance with section 308(a)(1) of the Budget Act, the 
Committee states that the bill involves new budget authority 
(as direct spending) from the new Rail Trust Fund of up to $131 
million in fiscal year 1996, $663 million in fiscal year 1997, 
$667 million in fiscal year 1998, $670 million in fiscal year 
1999, and $672 million in fiscal year 2000. Amounts in the Rail 
Trust Fund in excess of these levels will be available for 
expenditure subject to appropriations (as discretionary 
spending).

Tax expenditures

    In compliance with section 308(a)(2) of the Budget Act, the 
Committee states that the bill involves no new or increased tax 
expenditures.

            C. Consultation with Congressional Budget Office

    In accordance with section 403 of the Budget Act, the 
Committee advises that the Congressional Budget Office has not 
submitted a statement on this bill at the time of filing this 
report.

                       IV. VOTES OF THE COMMITTEE

    In compliance with paragraph 7(b) of rule XXVI of the 
Standing Rules of the Senate, the following is a listing of the 
votes taken during Committee markup of the bill.

Motion to report the bill

    The Committee ordered the bill favorably reported by voice 
vote (12 Members, a quorum, were present for this voice vote).

Votes on amendments

    The Committee defeated (by voice vote) an amendment by 
Senator Graham to redirect 2.5 cents per gallon of the Highway 
Trust Fund fuels tax revenue to deficit reduction.
    The Committee defeated (6 yeas and 13 nays) an amendment by 
Senator Grassley to make the new Rail Trust Fund subject to 
annual appropriations. The vote was as follows:
    Yeas--Dole (proxy), Grassley, Murkowski (proxy), Nickles, 
Gramm, and Graham.
    Nays--Roth, Chafee, Hatch (proxy), Simpson (proxy), 
Pressler, D'Amato (proxy), Moynihan, Baucus (proxy), Pryor 
(proxy), Rockefeller (proxy), Breaux (proxy), Conrad, and 
Moseley-Braun (proxy).

                          V. REGULATORY IMPACT

    Pursuant to paragraph 11(b) of rule XXVI of the Standing 
Rules of the Senate, the Committee makes the following 
statement concerning the regulatory impact that might be 
incurred in carrying out the bill as reported.

Impact on individuals and businesses

    Section 2 of the bill establishes a new Intercity Passenger 
Rail Trust Fund (``Rail Trust Fund'') in the Internal Revenue 
Code to be funded by revenues attributable to 0.5 cent per 
gallon of the existing excise taxes on highway motor fuels for 
the period January 1, 1996 through September 30, 2000. Thus, 
there will be no new tax impact on individuals or businesses.
    Section 3 of the bill disallows a deduction for interest 
corporate-owned life insurance policy loans. This provision 
will reduce the interest deduction of some business taxpayers 
that borrow with respect to life insurance policies (subject to 
the key person exception and the phase-in rule).

Impact on personal privacy and paperwork

    The bill will have no impact on personal privacy and little 
impact on taxpayer paperwork.

       VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

    In the opinion of the Committee, it is necessary in order 
to expedite the business of the Senate, to dispense with the 
requirements of paragraph 12 of Rule XXVI of the Standing Rules 
of the Senate (relating to the showing of changes in existing 
law made by the bill as reported by the Committee).

                                
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