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Weekly UpdatesI. INTRODUCTION
There are two types of Federal Communications Commission (FCC or Commission) regulation: "Jewish mother" and positive incentive. The all-too-familiar Jewish mother approach relies on raised eyebrows, guilt, and punishment, whereas positive incentive is permissive and offers rewards to encourage certain types of behavior. The minority tax certificate policy was an example of the latter. It used the market-based incentive of deferral of capital gains to encourage the owners of broadcast and cable properties to sell them to minorities. Tax certificates also were issued to investors who provided start-up capital of minority-controlled companies.
Congress eliminated tax certificates in the spring of 1995 and less than one year later enacted the Telecommunications Act of 1996 (1996 Act or Act).(1) This Act ushered in a new era in the broadcast industry---one where increased consolidation of ownership of broadcast stations has resulted in limited opportunities for minority entrepreneurs to own broadcast properties and to compete meaningfully in the broadcast industry.(2) Minority entrepreneurs also continue to face difficulties competing in the telecommunications industry largely as a result of their continued inability to acquire access to sufficient capital to compete in the provision of wireless and other communications services.(3) These circumstances have led to calls for the reestablishment of the FCC's Minority Tax Certificate Program--a mechanism that prior to its elimination by Congress in 1995, enabled significant numbers of minorities to purchase broadcast and cable properties. Indeed, one of the main proponents of this program has been FCC Chairman William E. Kennard, the first African American to head the FCC.(4)
This Article first examines the history and benefits of the FCC's previous minority tax certificate program and the reasons why Congress eliminated it in 1995. The Article suggests ways in which a new tax certificate program could be developed to address those concerns.(5) In short, the Authors believe that the tax certificate program is worth restoring, especially in light of the erosion of the number of minority-owned stations and cable properties and the goal of enabling minorities to benefit from the ownership opportunities presented by the Telecommunications Act of 1996.
II. THE HISTORY AND BENEFITS OF THE FCC'S MINORITY TAX CERTIFICATE PROGRAM
A. The Minority Tax Certificate Program: A Method of Fostering Program Diversity
The FCC's tax certificate policy was based on former section 1071 of the Internal Revenue Code, which empowered the Commission to certify that a sale or exchange of property is "necessary or appropriate to effectuate a change in policy of, or the adoption of a new policy by, the Commission with respect to the ownership and control of radio broadcasting stations...."(6) Congress enacted this section in 1943 in response to the FCC's adoption that same year of so-called "multiple ownership rules."(7) These rules limited the number of broadcast stations that a company could own in a single market and nationwide. "Section 1071 was originally designed to lessen the hardship imposed on broadcasters who were forced to divest stations under the multiple ownership rules."(8)
In the late 1970s, the FCC sought to create new opportunities for minority ownership in broadcasting. Several organizations, including the National Association of Broadcasters (NAB), National Telecommunications and Information Administration (NTIA), the National Black Media Coalition, and the Congressional Black Caucus, met in 1977 under the auspices of the FCC to address the underrepresentation of minorities in broadcasting. That year, the NAB filed a Petition for Rule Making urging the FCC to extend its tax certificate policy to promote minority ownership.(9)
Under this program, a seller could acquire a tax certificate under two circumstances: (1) when an owner of a broadcast or cable property desired to sell to a minority purchaser, and (2) when an investor that contributed "start-up" capital to a minority-controlled entity operating a broadcast or cable property sold an interest in that company. The tax certificate enabled the seller in either case to defer the payment of federal income taxes otherwise due if: (a) the proceeds were reinvested in appropriate "qualified replacement property" and/or (b) to the extent any of the gain attributable to the ownership interest sold, the seller elected to reduce the tax basis of appropriate depreciable property (whether or not used in connection with a broadcasting or cable business) owned immediately after the sale acquired within the same taxable year of the sale. This program allowed sellers to defer the payment of taxes to encourage the sale or investment in minority controlled companies operating a broadcast or cable property. The seller's anticipated tax savings also enabled the minority company to negotiate for a reduction in the purchase price.
Moreover, the Commission concluded that "affecting programming by means of increased minority ownership--as is also the case both with respect to [its] equal employment opportunity and ascertainment policies--avoids direct government intrusion into programming decisions."(11) The Commission reached similar conclusions in extending the program to cable television in 1982.
Thus, the Commission viewed the Minority Tax Certificate Program not simply as a method of increasing minority ownership of broadcast and cable facilities, but as a nonintrusive method of encouraging the diversity of ideas and viewpoints in both broadcast and cable programming.
B. The Minority Tax Certificate Program: A Successful Tool for Increasing Minority Participation in the Communications Industry
On close examination, it is quite clear that the FCC's Minority Tax Certificate Program fulfilled the goals intended by the Commission. Indeed, the program apparently worked so well that Congress itself instructed the Commission to consider tax certificates as a method of ensuring opportunities for minorities and other entrepreneurs in spectrum-based services subject to competitive bidding.(13)
For the taxpayers that sold their broadcast or cable property, the program allowed a deferral of taxes on any gain from the sale that otherwise would have been due to the Internal Revenue Service (IRS).(14) In addition, the certificates permitted taxpayers to diversify a portfolio of assets on a tax-free basis.(15)
At the same time, this program made it easier for minority entrepreneurs to
purchase broadcast and cable properties by providing them with a bargaining chip by which they could negotiate a reduction in purchase price.(16) As a result, this program opened doors at financial institutions that previously had been closed to minority entrepreneurs.(17)
More importantly, the FCC's Minority Tax Certificate Program was an effective and nonintrusive tool in increasing the number of minority owners in the broadcast and cable industries that, in turn, furthered what Congress itself once called "the Nation's policy favoring diversity in the expression of views in the electronic media."(18) Prior to the adoption of the minority tax certificate policy in 1978, minorities owned only 40 out of 8,500 broadcast stations. During the more than fifteen years of the policy's existence, the issuance of minority tax certificates resulted in the acquisition of 288 radio stations, 43 television stations, and 31 cable systems.(19) "According to a study by the National Association of Black Owned Broadcasters, the vast majority of major-market minority broadcasters used tax certificates to attract initial investors, to purchase a broadcast station or to sell a broadcast property to another minority."(20)
The success of the tax certificate program in fostering increased participation of minorities in the broadcast and cable industries apparently led Congress, in enacting the competitive bidding provisions of the Communications Act in 1993, to authorize the FCC to use the certificate as a tool to "ensure that small businesses, rural telephone companies, and businesses owned by members of minority groups and women are given the opportunity to participate in the provision of spectrum-based services."(21) Indeed, the FCC adopted tax certificates as a measure to ensure the participation of minorities and women in the provision of narrowband(22) and broadband PCS services(23) as well as other wireless services subject to competitive bidding.(24) In adopting the use of tax certificates in these and other wireless services, the Commission stated that this tool would reduce obstacles faced by minorities and women in accessing capital by "encourag[ing] investment in minority and women-owned companies."(25) Thus, it is clear that by 1995, tax certificates had proven to be a significantly successful tool in reducing obstacles to minority ownership in the communications industry.
C. The Decision to Kill the Minority Tax Certificate Program: To Pay for a New Tax Benefit or Eliminate a Perceived "Minority Preference" Program?
Despite the many public interest benefits of the FCC's Minority Tax Certificate Program, Congress repealed the program in 1995.(26) Several reasons played a role in Congress's decision. The primary reason members of Congress offered for eliminating the FCC's tax certificate program was that doing so was necessary to pay the costs of restoring a popular healthcare tax deduction for farmers and the self-employed.(27) However, the primary catalyst for the action was a plan by Viacom to sell its cable systems to a minority-led group for $2.3 billion and to use the tax certificate to defer $400 million in federal taxes and as much as $200 million in state taxes.(28) Many members of Congress voiced outrage at what they perceived was a giant tax loophole for big corporations. For example, in debating the repeal of the FCC tax certificate program, Senator Robert Dole described the program as a "tax break for millionaires."(29) Similarly, Senator Larry Pressler stated, "[w]hen the choice is between giving multibillion dollar corporations a tax break or giving small businesses, farmers and ranchers relief for health insurance coverage, the choice is clear."(30) Members of the House expressed similar sentiments. For example, Representative Sam Johnson called the Minority Tax Certificate Program a "voluntary, loosely-defined, unsupervised, open-ended tax giveaway entitlement program."(31)
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