II

106TH CONGRESS

2D SESSION S. 3235

To amend the Internal Revenue Code of 1986 to provide for a deferral

of tax on gain from the sale of telecommunications businesses in specific

circumstances or a tax credit and other incentives to promote diversity

of ownership in telecommunications businesses.

IN THE SENATE OF THE UNITED STATES

OCTOBER 25 (legislative day, SEPTEMBER 22), 2000

Mr. MCCAIN (for himself and Mr. BURNS) introduced the following bill; which

was read twice and referred to the Committee on Finance

A BILL

To amend the Internal Revenue Code of 1986 to provide

for a deferral of tax on gain from the sale of telecommunications businesses in specific circumstances or

a tax credit and other incentives to promote diversity

of ownership in telecommunications businesses.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Telecommunications

5 Ownership Diversification Act of 2000’’.
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1 SEC. 2. FINDINGS AND PURPOSES.

2 (a) FINDINGS.—The Congress makes the following

3 findings:

4 (1) Current trends in the telecommunications

5 industry show that there is increasing convergence

6 among various media, including broadcasting, cable

7 television, and Internet-based businesses, and that

8 these media are providing competing sources of

9 news, information, and entertainment.

10 (2) This convergence and competitiveness will

11 continue, and therefore it should be recognized in

12 both telecommunications and tax policy.

13 (3) Notwithstanding these trends, diversifying

14 the ownership of telecommunications facilities re15 mains a pre-eminent public interest concern.

16 (4) A market-based, voluntary system of invest17 ment incentives is the most effective, lawful, and

18 economically sound means of facilitating entry into

19 the telecommunications industry.

20 (5) Opportunities for new entrants to partici21 pate in the telecommunications industry have sub22 stantially decreased since the end of the Federal

23 Communications Commission’s tax certificate policy

24 in 1995, particularly in light of the increase in tax25 free like-kind exchanges despite the most robust pe26 riod of transfers of radio and television stations in
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1 history. Small businesses, and businesses owned or

2 controlled by members of minority groups or by

3 women, have been at a particular disadvantage, as

4 indicated by their historic under representation as

5 owners of telecommunications facilities.

6 (6) Access to and cost of capital has been a

7 substantial obstacle to new entry into telecommuni8 cations by small businesses and businesses owned or

9 controlled by members of minority groups and by

10 women who want to be long-term, active participants

11 in the telecommunications industry, because they do

12 not currently own properties that can be utilized in

13 like-kind exchanges, they are either unable to secure

14 financing from lending institutions and equipment

15 manufacturers at all, or else cannot secure financing

16 terms as advantageous as those offered to large in17 dustry participants.

18 (7) Telecommunications facilities owned by new

19 entrants may not be as attractive to investors be20 cause their start-up costs are often high, their rev21 enue streams are uncertain, and their profit margins

22 are unknown.

23 (8) It is consistent with the public interest, and

24 with the pro-competition policies of the Tele25 communications Act of 1996, to provide incentives
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1 that will facilitate the ability of existing owners of

2 converging telecommunications media to transact

3 business so as to improve their ability to compete,

4 while the reinvestment of gains realized from such

5 transactions will also facilitate the acquisition of

6 telecommunications facilities by small businesses, es7 pecially those owned or controlled by members of mi8 nority groups and by women, thereby diversifying

9 the ownership of telecommunications facilities.

10 (9) Permitting sellers of telecommunications fa11 cilities to defer taxation of gains from transactions

12 involving small businesses and businesses owned or

13 controlled by members of minority groups and by

14 women, and resulting from investments in capital

15 funds whose stated purpose is to provide capital for

16 such entities, will further the development of a com17 petitive and diverse United States information dis18 tribution economy without governmental intrusion in

19 private investment decisions.

20 (10) The public interest would not be served by

21 attempts to diversify the ownership of telecommuni22 cations businesses by small businesses or businesses

23 owned or controlled by minorities and women

24 through any approach that would involve the use of

25 mandated set-asides or quotas.
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1 (b) PURPOSE.—The purpose of this Act is to facili2 tate voluntary, pro-competitive transactions involving con3 verging telecommunications media that will promote diver4 sification in, and broaden the participation in, the tele5 communications industry by small businesses, and busi6 nesses owned or controlled by members of minority groups

7 and women.

8 SEC. 3. NONRECOGNITION OF GAIN ON QUALIFIED SALES

9 OF TELECOMMUNICATIONS BUSINESSES.

10 (a) IN GENERAL.—Subchapter O of chapter 1 of the

11 Internal Revenue Code of 1986 (relating to gain or loss

12 on disposition of property) is amended by inserting after

13 part IV the following new part:

14 ‘‘PART V—CERTAIN SALES OF

15 TELECOMMUNICATIONS BUSINESSES

‘‘Sec. 1071. Nonrecognition of gain on certain sales of telecommunications businesses.

16 ‘‘SEC. 1071. NONRECOGNITION OF GAIN ON CERTAIN SALES

17 OF TELECOMMUNICATIONS BUSINESSES.

18 ‘‘(a) IN GENERAL.—In the case of any qualified tele19 communications sale, at the election of the taxpayer, such

20 sale shall be treated as an involuntary conversion of prop21 erty within the meaning of section 1033.

22 ‘‘(b) LIMITATION ON AMOUNT OF GAIN ON WHICH

23 TAX MAY BE DEFERRED.—The amount of gain on any

24 qualified telecommunications sale which is not recognized
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1 by reason of this section shall not exceed $250,000,000

2 per transaction and shall not exceed $83,333,333 per tax3 able year. Excess amounts can be carried forward in fu4 ture years subject to the annual limit.

5 ‘‘(c) QUALIFIED TELECOMMUNICATIONS SALE.—For

6 purposes of this section—

7 ‘‘(1) IN GENERAL.—The term ‘qualified tele8 communications sale’ means any sale to an eligible

9 purchaser of—

10 ‘‘(A) the assets of a telecommunications

11 business, or

12 ‘‘(B) stock in a corporation if, immediately

13 after such sale—

14 ‘‘(i) the eligible purchaser controls

15 such corporation, and

16 ‘‘(ii) substantially all of the assets of

17 such corporation are assets of 1 or more

18 telecommunications businesses.

19 ‘‘(d) SPECIAL RULES.—

20 ‘‘(1) IN GENERAL.—In applying section 1033

21 for purposes of subsection (a) of this section, stock

22 of a corporation operating a telecommunications

23 business, whether or not representing control of such

24 corporation, shall be treated as property similar or
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1 related in service or use to the property sold in the

2 qualified telecommunications sale.

3 ‘‘(2) ELECTION TO REDUCE BASIS RATHER

4 THAN RECOGNIZE REMAINDER OF GAIN.—If—

5 ‘‘(A) a taxpayer elects the treatment under

6 subsection (a) with respect to any qualified tele7 communications sale, and

8 ‘‘(B) an amount of gain would (but for

9 this paragraph) be recognized on such sale

10 other than by reason of subsection (b),

11 then the amount of gain described in subparagraph

12 (B) shall not be recognized to the extent that the

13 taxpayer elects to reduce the basis of depreciable

14 property (as defined in section 1017(b)(3)) held by

15 the taxpayer immediately after the sale or acquired

16 in the same taxable year. The manner and amount

17 of such reduction shall be determined under regula18 tions prescribed by the Secretary.

19 ‘‘(3) BASIS.—For basis of property acquired on

20 a sale or exchange treated as an involuntary conver21 sion under subsection (a), see section 1033(b).

22 ‘‘(e) RECAPTURE OF TAX BENEFIT IF TELE23 COMMUNICATIONS BUSINESS RESOLD WITHIN 3 YEARS,

24 ETC.—
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1 ‘‘(1) IN GENERAL.—If, within 3 years after the

2 date of any qualified telecommunications sale, there

3 is a recapture event with respect to the property in4 volved in such sale, then the purchaser’s tax imposed

5 by this chapter for the taxable year in which such

6 event occurs shall be increased by 20 percent of the

7 lesser of the consideration furnished by the pur8 chaser in such sale or the dollar amount specified in

9 subsection (b).

10 ‘‘(2) EXCEPTION FOR REINVESTED AMOUNTS.—

11 Paragraph (1) shall not apply to any recapture event

12 which is a sale if—

13 ‘‘(A) the sale is a qualified telecommuni14 cations sale, or

15 ‘‘(B) during the 60-day period beginning

16 on the date of such sale, the taxpayer is the

17 purchaser in another qualified telecommuni18 cations sale in which the consideration fur19 nished by the taxpayer is not less that the

20 amount realized on the recapture event sale.

21 ‘‘(3) RECAPTURE EVENT.—For purposes of this

22 subsection, the term ‘recapture event’ means, with

23 respect to any qualified telecommunications sale—

24 ‘‘(A) any sale or other disposition of the

25 assets or stock referred to in subsection (c)(1)
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1 which were acquired by the taxpayer in such

2 sale, and

3 ‘‘(B) in the case of a qualified tele4 communications sale described in subsection

5 (c)(1)(B)(ii)—

6 ‘‘(i), any sale or other disposition of a

7 telecommunications business by the cor8 poration referred to in such subsection, or

9 ‘‘(ii) any other transaction which re10 sults in the eligible purchaser business not

11 having control (as defined in subsection

12 (c)(4)) of such corporation.

13 ‘‘(f) DEFINITIONS.—For purposes of this section—

14 ‘‘(1) ELIGIBLE PURCHASER.—The term ‘eligible

15 purchaser’ means—

16 ‘‘(A) the Telecommunications Development

17 Fund established under section 714 of the

18 Communications Act of 1934 (47 U.S.C. 614),

19 or any wholly-owned affiliate of that Fund;

20 ‘‘(B) an entity or individual that is a tele21 communications business after the purchase

22 and before the purchase is—

23 ‘‘(i) a broadcasting station providing

24 television services and having not more

25 than 5 percent of market share as deter-
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1 mined by the Federal Communications

2 Commission’s clearance data;

3 ‘‘(ii) a radio station having a market

4 share below 10 percent of advertising reve5 nues in the relevant local market and own6 ership of less than 50 radio stations na7 tionally; or

8 ‘‘(iii) any other telecommunications

9 business having no more than 5 percent of

10 national subscribers; and

11 meets the control requirement of paragraph (4); or

12 ‘‘(C) An entity qualified under section 851

13 and that more than 50 percent of its gross in14 come is derived from equity investment in enti15 ties that qualify under paragraph (1)(B).

16 ‘‘(2) TELECOMMUNICATIONS BUSINESS.—The

17 term ‘telecommunications business’ means—

18 ‘‘(A) substantially all the assets of a facil19 ity engaged in electronic communications, in20 cluding a cable system (as defined in section

21 602(7) of the Communications Act of 1934 (47

22 U.S.C. 532(7)), a radio station (as defined in

23 section 3(35) of that Act (47 U.S.C. 153(35)),

24 a broadcasting station providing television serv25 ice (as defined in section 3(49) of that Act (47
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1 U.S.C. 153(49)), a provider of direct broadcast

2 satellite service (as defined in section 335(b)(5)

3 of that Act (47 U.S.C. 335(b)(5)), a provider

4 of video programming (as defined in section

5 602(20) of that Act (47 U.S.C. 602(20)); a

6 provider of commercial mobile services (as de7 fined in section 332(d)(1) of that Act (47

8 U.S.C. 332(d)(1)), a telecommunications carrier

9 (as defined in section 3(44) of that Act (47

10 U.S.C. 153(44)), a reseller of telecommuni11 cations service or commercial mobile service; a

12 multichannel multipoint distribution service;

13 ‘‘(B) stock possessing at least 80 percent

14 of the total combined voting power of all classes

15 of stock entitled to vote and at least 80 percent

16 of the total number of shares of all other class17 es of stock of a corporation substantially all of

18 the assets of which consist, directly or indi19 rectly, of assets described in subparagraph (A);

20 and

21 ‘‘(C) 80 percent or more of the total inter22 est in the capital and profits of a partnership

23 substantially all of the assets of which consist,

24 directly or indirectly, of assets described in sub25 paragraph (A).
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1 ‘‘(3) PURCHASE.—The taxpayer shall be consid2 ered to have purchased a property if, but for sub3 section (d), the unadjusted basis of the property

4 would be its cost within the meaning of section

5 1012.

6 ‘‘(4) CONTROL.—

7 ‘‘(A) INDIVIDUALS.—For purposes of para8 graph (1)(B), an individual who meets the re9 quirements of paragraph (5) also meets the re10 quirements of this paragraph.

11 ‘‘(B) ENTITIES.—For purposes of para12 graph (1)(B), an entity meets the requirement

13 of this paragraph if the requirements of sub14 paragraph (C), (D), or (E) are satisfied.

15 ‘‘(C) 30-PERCENT TEST.—The require16 ments of this subparagraph are satisfied if—

17 ‘‘(i) with respect to any entity which

18 is a corporation, individuals who meet the

19 requirements of paragraph (5) own 30 per20 cent or more in value of the outstanding

21 stock of the corporation, and more than 50

22 percent of the total combined voting power

23 of all classes of stock entitled to vote of the

24 corporation; and
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1 ‘‘(ii) with respect to any entity which

2 is a partnership, individuals who meet the

3 requirements of paragraph (5) own 30 per4 cent or more of the capital interest and the

5 profits interest in the partnership, and

6 more than 50 percent of the total com7 bined voting power of all classes of part8 nership interests entitled to vote.

9 ‘‘(D) 15-PERCENT TEST.—The require10 ments of this subparagraph are satisfied if—

11 ‘‘(i) with respect to any entity which

12 is a corporation—

13 ‘‘(I) individuals who meet the re14 quirements of paragraph (5) own 15

15 percent or more in value of the out16 standing stock of the corporation, and

17 more than 50 percent of the total

18 combined voting power of all classes

19 of stock entitled to vote of the cor20 poration; and

21 ‘‘(II) no other person owns more

22 than 25 percent in value of the out23 standing stock of the corporation; and

24 ‘‘(ii) with respect to any entity which

25 is a partnership—
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1 ‘‘(I) individuals who meet the re2 quirements of paragraph (5) own 15

3 percent or more of the capital interest

4 and profits interest of the partner5 ship, and more than 50 percent of the

6 total combined voting power of all

7 classes of partnership interests enti8 tled to vote; and

9 ‘‘(II) no other person owns more

10 than 25 percent of the capital interest

11 and profits interest of the partner12 ship.

13 ‘‘(E) PUBLICLY-TRADED CORPORATIONS

14 TEST.—The requirements of this subparagraph

15 are satisfied if, with respect to a corporation

16 the securities of which are traded on an estab17 lished securities market—

18 ‘‘(i) individuals who meet the require19 ments of paragraph (5) own 50 percent or

20 more of the total combined voting power of

21 all classes of stock entitled to vote of the

22 corporation; and

23 ‘‘(ii) the stock owned by those individ24 uals is not subject to any agreement, ar25 rangement, or understanding which pro-
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1 vides for, or relates to, the voting of the

2 stock in any manner by, or at the direction

3 of, any person other than an eligible indi4 vidual who meets the requirements of para5 graph (5), or the right of any person other

6 than one of those individuals to acquire the

7 voting power through purchase of shares

8 or otherwise.

9 ‘‘(F) CONSTRUCTIVE OWNERSHIP.—In ap10 plying subparagraphs (C), (D), and (E), the fol11 lowing rules apply:

12 ‘‘(i) Stock or partnership interests

13 owned, directly or indirectly, by or for a

14 corporation, partnership, estate, or trust

15 shall be considered as being owned propor16 tionately by or for its shareholders, part17 ners, or beneficiaries.

18 ‘‘(ii) An individual shall be considered

19 as owning stock and partnership interests

20 owned, directly or indirectly, by or for his

21 family.

22 ‘‘(iii) An individual owning (otherwise

23 than by the application of clause (ii)) any

24 stock in corporation shall be considered as

25 owning the stock or partnership interests
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1 owned, directly or indirectly, by or for his

2 partner.

3 ‘‘(iv) An individual owning (otherwise

4 than by the application of clause (ii)) any

5 partnership interest in a partnership shall

6 be considered as owning the stock or part7 nership interests owned, directly or indi8 rectly, by or for his partner.

9 ‘‘(v) The family of an individual shall

10 include only his brothers and sisters

11 (whether by the whole or half blood),

12 spouse, ancestors, and lineal descendants.

13 ‘‘(vi) Stock or partnership interests

14 constructively owned by a person by reason

15 of the application of clause (i) shall, for

16 the purposes of applying clause (i), (ii),

17 (iii), or (iv), be treated as actually owned

18 by that person, but stock constructively

19 owned by an individual by reason of the

20 application of clause (ii), (iii), or (iv) shall

21 not be treated as owned by that individual

22 for the purpose of again applying any of

23 those clauses in order to make another the

24 constructive owner of the stock or partner25 ship interests.
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1 ‘‘(5) INDIVIDUALS.—An individual is described

2 in this paragraph if that individual is—

3 ‘‘(A) a United States citizen; or

4 ‘‘(B) a United States citizen who is—

5 ‘‘(i) a woman;

6 ‘‘(ii) a Black or African American;

7 ‘‘(iii) a Latino or Hispanic American;

8 ‘‘(iv) an Asian American, Native Ha9 waiian, or other Pacific Islander; or

10 ‘‘(v) an American Indian, Alaskan In11 dian, American Eskimo, or an Aluet.

12 ‘‘(g) EFFECTIVE DATE.—The amendments made by

13 this section apply with respect to a sale described in sec14 tion 1071(a) of the Internal Revenue Code of 1986 (as

15 added by this section) of a telecommunications business

16 or any equity interest on or after the date of enactment

17 of this Act.’’.

18 SEC. 4. TELECOMMUNICATIONS BUSINESS CREDIT.

19 (a) IN GENERAL.—Subpart E of part IV of sub20 chapter A of chapter 1 of the Internal Revenue Code of

21 1986 (relating to rules for computing investment credit)

22 is amended by inserting after section 48 the following:

23 ‘‘SEC. 48A. TELECOMMUNICATIONS BUSINESS CREDIT.

24 ‘‘For purposes of section 46, there is allowed as a

25 credit against the tax imposed by this chapter for any tax-
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1 able year an amount equal to 10 percent of the taxable

2 income of any taxpayer that at all times during that tax3 able year—

4 ‘‘(1) is a local exchange carrier (as defined in

5 section 3(44) of the Communications Act of 1934

6 (47 U.S.C. 153(44)));

7 ‘‘(2) is not a Bell operating company (as de8 fined in section 3(4) of that Act (47 U.S.C.

9 153(4))); and

10 ‘‘(3) is headquartered in an area designated as

11 an empowerment zone by the Secretary of Housing

12 and Urban Development.’’.

13 (b) CONFORMING AMENDMENTS.—

14 (1) AMENDMENT OF SECTION 46.—Section 46

15 of such Code (relating to amount of credit) is

16 amended by—

17 (A) striking ‘‘and’’ in paragraph (2);

18 (B) striking ‘‘credit.’’ in paragraph (3) and

19 inserting ‘‘credit; and’’; and

20 (C) adding at the end the following:

21 ‘‘(4) the telecommunications business credit.’’.

22 (2) CLERICAL AMENDMENTS.—

23 (A) The analysis for part III of subchapter

24 O of chapter 1 of such Code is amended by

25 adding at the end thereof the following:

‘‘1046. Sale of telecommunications business.’’.
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1 (B) The table of sections for Subpart E of

2 part IV of subchapter A of chapter 1 of such

3 Code is amended by inserting after the item re4 lating to section 48 the following:

‘‘48A. Telecommunications business credit.’’.

5 (c) TECHNICAL AND CONFORMING CHANGES.—The

6 Secretary of the Treasury shall, within 150 days after the

7 date of enactment of this Act, submit to the Committee

8 on Ways and Means of the House of Representatives and

9 the Committee on Finance of the Senate, a draft of any

10 technical and conforming changes in the Internal Revenue

11 Code of 1986 which are necessary to reflect throughout

12 the Code the changes in the substantive provisions of the

13 Code made by subsection (a) of this section.

14 SEC. 5. EXCLUSION OF 50 PERCENT OF GAIN.

15 Section 1202 of the Internal Revenue Code of 1986

16 (relating to 50-percent exclusion for gain from certain

17 small business stock) is amended—

18 (1) by striking subsection (a) and inserting the

19 following:

20 ‘‘(a) 50-PERCENT EXCLUSION.—

21 ‘‘(1) TAXPAYERS NOT CORPORATIONS.—In the

22 case of a taxpayer other than a corporation, gross

23 income does not include 50 percent of any gain from

24 the sale or exchange of qualified small business

25 stock held for more than 5 years.
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1 ‘‘(2) CERTAIN TELECOMMUNICATIONS INVEST2 MENTS BY CORPORATIONS AND INVESTMENT COMPA3 NIES.—Gross income does not include 50 percent of

4 any gain from the sale or exchange of stock in an

5 eligible purchaser (as defined in section 1071(f)(1))

6 engaged in a telecommunications business (as de7 fined in section 1071(f)(2)) held for more than 5

8 years.’’;

9 (2) by striking subparagraphs (A) and (B) of

10 subsection (b)(1) and inserting the following:

11 ‘‘(A) in the case of gain from the sale or

12 exchange of qualified small business stock held

13 for more than 5 years—

14 ‘‘(i) $10,000,000 reduced by the ag15 gregate amount of eligible gain taken into

16 account by the taxpayer under subsection

17 (a) for prior taxable years and attributable

18 to dispositions of stock issued by such cor19 porations; or

20 ‘‘(ii) 10 times the aggregate adjusted

21 bases of qualified small business stock

22 issued by such corporations and disposed

23 of by the taxpayer during the taxable year;

24 ‘‘(B) in the case of gain from the sale or

25 exchange of stock in an eligible purchaser en-
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1 gaged in a telecommunications business for

2 more than 5 years—

3 ‘‘(i) $20,000,000 reduced by the ag4 gregate amount of eligible gain taken into

5 account by the taxpayer under subsection

6 (a) for prior taxable years and attributable

7 to dispositions of stock issued by an eligi8 ble purchaser engaged in a telecommuni9 cations business; or

10 ‘‘(ii) 15 times the aggregate adjusted

11 bases of stock of an eligible purchaser en12 gaged in a telecommunications business

13 issued by such eligible purchaser and dis14 posed of by the taxpayer during the tax15 able year.’’;

16 (3) by striking ‘‘years.’’ in subsection (b)(2)

17 and inserting ‘‘years or any gain from the sale or ex18 change of stock in an eligible purchaser engaged in

19 a telecommunications business held for more than 5

20 years.’’; and

21 (4) by striking ‘‘ ‘$10,000,000’.’’ in subsection

22 (b)(3)(A) and inserting ‘‘ ‘$10,000,000’, and para23 graph (1)(B) shall be applied by substituting

24 ‘$10,000,000’ for ‘$20,000,000’.’’.
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1 SEC. 6. EFFECTIVE DATE.

2 (a) TAXABLE YEARS.—The amendments made by

3 section 4 shall apply to taxable years beginning after June

4 30, 2000.

5 (b) SALES.—The amendments made by section 5

6 shall apply to sales after June 30, 2000.

7 SEC. 7. BIENNIAL PROGRAM AUDITS BY GAO.

8 No later than January 1, 2003, and no less fre9 quently than every 2 years thereafter, the Comptroller

10 General shall audit the administration of sections of the

11 Internal Revenue Code of 1986 added or amended by sec12 tion 3 of this Act, and issue a report on the results of

13 that audit. The Comptroller General shall include in the

14 report, notwithstanding any provision of section 6103 of

15 the Internal Revenue Code of 1986 to the contrary—

16 (1) a list of eligible purchasers (as defined in

17 section 1071(g)(1) of such Code) and any other tax18 payer receiving a benefit from the operation of sec19 tion 48A, 167, 197, 1044, 1046, 1202, or 1244A of

20 such Code as that section was added or amended by

21 section 3 of this Act; and

22 (2) an assessment of the effect the amendments

23 made by section 3 of this Act have had with respect

24 to increasing new entry into the telecommunications

25 industry by small businesses and businesses owned
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1 or controlled by members of minority groups and

2 women.

Æ