Financial Issues Subcommittee Recommendation to the

Federal Communications Commission's

**Advisory Committee on Diversity for Communications in the Digital
Age**

May 25, 2004

**[Recommendation on a Tax Incentive Program]{.underline}**

Be it resolved that the Advisory Committee on Diversity for
Communications in the Digital Age urges the adoption of a Federal
program that would use the deferral of Federal capital gains tax
liability as an incentive to make available to socially and economically
disadvantaged persons and businesses the opportunity to acquire assets
necessary to enter the broadcasting and telecommunications marketplace.

Background

Former Section 1071 of the Internal Revenue Code, which gave the FCC the
discretion to issue tax certificates for reasons that served the public
interest, was repealed in 1995. Such tax certificates were issued by the
FCC to companies that sold broadcast, wireless and other telecom
properties to minority-owned businesses. Such certificates, when issued,
would allow the recipient to defer or "roll over" the capital gains from
the sale of the property, provided the gain was reinvested in a
\"like-kind\" property within two years of the sale to the
minority-owned businesses.

This policy, while it was in effect, gave minority-owned businesses a
great advantage in bidding on available properties because they could
effectively compete with non-minority-owned bidders by reducing their
offer by the amount of the capital gain tax to be deferred. This
promoted minority ownership, having led to the sale of over 200
broadcast properties to minorities in 17 years. Those properties
constituted about 2/3 of all minority-owned stations. Another advantage
of the policy was that it allowed venture capital funds, SSBICs and
MSBICs to defer the capital gain incurred on investments made to
minority-owned broadcast and telecommunications companies.

However, the old policy had certain shortfalls. First, there was no
limit placed on the amount of capital gains that could be deferred.
Second, the criteria for minority ownership used the then-existing FCC
definition of voting control, which was open to abuse through the
establishment of minority-owned "fronts", although there was no evidence
that such fronts were commonplace. In the end, one high-profile tax
certificate case, involving the proposed purchase of the Viacom cable
systems by a company in which an African-American owned a majority of
the voting control but a small minority of the equity, and which would
have deferred \$440-\$640 million in capital gains taxes, led the new
leadership in the House to call for the repeal Section 1071.

Since then, there have been repeated attempts to reintroduce tax
certificate legislation, including bills which focus on small and
disadvantaged businesses and which would close the loopholes that
brought criticism to the old 1071 policy. These new bills are
characterized as "tax deferral" bills to avoid the "tax certificate"
nomenclature with which the earlier program was associated.

Despite repeated attempts and apparently universal support for the
proposal by the FCC (including Chairman Powell), business, trade groups
and public interest groups, no bill has moved to a committee vote or
even a hearing.

**[Advantage of a Tax Deferral Program]{.underline}**

Tax deferral legislation would create a mechanism which allows broadcast
and telecom companies to defer capital gains on the sale of media and
telecom properties to qualified small and disadvantaged businesses.
Likewise, qualified venture capital investors could defer the capital
gains on equity investments in small and disadvantaged media and telecom
properties.

Small and disadvantaged businesses would see a real benefit because they
could compete for properties more effectively. Moreover, they would
benefit because the tax deferral would increase the amount of equity
capital available to such businesses.[^1] Moreover, the program is not a
government "hand out" because, in most cases, the capital gains would be
deferred even without the tax deferral program because of the common use
of qualified \"like-kind\" exchanges[^2]

The various bills that have been introduced in Congress have sought to
close the loopholes that were abused in the earlier tax certificate
program by placing caps on the amount of capital gains that can be
deferred, and requiring a certain level of minority equity investment
(to deter the use of minority \"straw men\") or requiring the businesses
to qualify under approved small business criteria. Moreover, the
proposed bills would create a class of beneficiaries that are both
socially and economically disadvantaged, thereby avoiding constitutional
concerns.

Currently, without the tax deferral incentive, small and disadvantaged
businesses are at a great disadvantage because companies that sell off
properties are more likely to swap the properties with other large
businesses in order to take advantage of a tax free exchange. As such,
the tax revenue is still deferred, only the small and disadvantaged
businesses secure no benefit.

The concept of a tax deferral program is supported by mainstream
businesses because it lowers business tax burdens. The NAB and civil
rights organizations support the legislation as well. As such, the
program enjoys the full support of business and civil rights interests.

[^1]: Interestingly, the real beneficiaries of this program would be
    larger group owners of broadcast and telecommunications properties
    which would have another method of deferring capital gains taxes,
    thereby decreasing their tax burden. Small and disadvantaged
    businesses see the benefit as a secondary effect of the tax
    deferral.

[^2]: Which was ultimately used the Viacom cable transaction mentioned
    above after the parties were denied a minority tax certificate.