MINORITY TAX CERTIFICATES POISED FOR RETURN?

From nearly 20 years, from 1978 to 1995, the minority tax certificate was the most popular and effective tool for increasing the ranks of minority TV and radio station owners.

Under the program, sellers of broadcast stations to minorities were able to defer capital gains taxes so long as they invested the proceeds in other media properties.

Tax-free sales. What could be better? Established broadcasters benefited. Minorities benefited. The injustice of minorities being shut out when the government was giving licenses away during the first 50 years of broadcasting was finally addressed.

Prior to the certificate, minorities owned just 40 of 8,500 broadcast stations, according to an analysis by communications attorney Erwin Krasnow.

With the coming of the certificate, minorities were able to acquire 288 radio stations, 43 TV stations and 31 cable systems. (The certificate program was extended to cable in 1982).

But the certificate may have been too much of a good thing. Some of the minority buyers turned out to be fronts for non-minorities, and the amounts of the deferred taxes start running into some serious money.

In 1995, Viacom announced that it was selling its cable systems to an investment group headed by Frank Washington for $2.3 billion and that, because Washington was black, it would defer as much as $400 million using the tax certificate, even though Washington had only a small amount of his own money in the deal.

Such excesses coupled with a new Republican majority in Congress skeptical of race-based programs led to Congress killing the certificate in 1995.

Ever since it went away, advocates of greater diversity in broadcast ownership have looked for opportunities to bring it back, albeit with new limits and restrictions to guard against abuse.

The program is needed because minority ownership of broadcast stations has stalled at about 3 percent, the same it was in the mid-1990s. Ownership of stations by women is only a couple of percentage points higher.

Now, with Democrats back in control of Congress and broadcasters seeing increased minority and female ownership as a pre-condition of relaxing broadcast ownership rules, there is renewed hope and interest in resurrecting the tax certificate on Capitol Hill.

In the House, the key player is Charles Rangel (D-N.Y.) the powerful chairman of the Ways and Means Committee, through which all tax legislation must pass.

He has already written and introduced a bill (H.R.3003) that would provide tax incentives to encourage minority ownership of broadcast stations and other telecommunications properties.

But he is looking for plenty of support from the industry and from interest groups, aware that any initiative that cuts into government revenue will not be an easy sell to other lawmakers.

“When the communications community and minority community are interested in going forward, he would be happy to provide the leadership,” says a Rangel aide.

That support is building, and may be close to a critical mass.

The FCC has repeatedly called for Congress to restore the certificate. In fact, in its most recent triennial report to Congress, the certificate was its only legislative recommendation.

House Telecommunications Subcommittee Chairman Ed Markey (D-Mass.) is in. "He believes the FCC should use the regulatory tools currently at its disposal to try to boost minority ownership, in addition to suggesting that Congress change tax law,” says a Markey staffer.

The NAB is on board. In a letter to Rangel last summer, NAB President David Rehr said the trade group believes “the time is ripe for Congress to take action, in particular by providing tax incentives to those selling broadcast stations to members of minority groups and women.”

And groups and companies like the Minority Media and Telecommunications Council (MMTC), Clear Channel Communications, the National Association of Black Owned Broadcasters, Spanish Broadcasting System, Verizon, News Corp. and ABC have already met to discuss strategies for bringing back the certificate.

The program was a “win-win for both sides and we need to reinstitute that,” says Henry Rivera, chairman of the MMTC chairman and of the FCC’s Advisory Committee on Diversity for Communications in the Digital Age

“I think everybody feels that the tax certificate is the right thing to do,” says communications lawyer Toni Cook Bush of Skadden, Arps, who is advising some of the interested parties. “It’s really a matter of coming up with something that everybody likes.”

Communications lawyer Greg Skall of Wombly Carlyle heads up an MMTC tax certificate restoration task force.

"Our task is to come up with legislation that provides for good station sales opportunities and  an opportunity to get them financed and do that legally within the construct of what the Supreme Court has laid out,” says Skall.

Complicating the revival of certificate is the Supreme Court's 1995 Adarand ruling that effectively barred licensing preferences for minorities and women.

But advocates believe they can get around Adarand by making the beneficiaries small businesses, perhaps financially disadvantaged ones.

The Rangel bill would permit a taxpayer to defer up to “$50 million of the gain from the sale of the assets or stock of a telecommunications business to certain small businesses that own 10 or fewer broadcast stations.”

It also “limits to three the number of such purchases by any qualifying small business and requires the recapture of such deferred gain for any telecommunications business resold within five years." Rangel’s bill also allows the Small Business Administration to guarantee loans made to small businesses for the purchase of a telecommunications company.

Rep. Bobby Rush (D-Ill.) has his own version of a tax certificate bill (H.R. 600). It would permit the “exclusion from gross income of 50 percent of the gain from the sale or exchange of stock, held for more than five years, in an eligible purchaser engaged in a telecommunications business.”

According to Rush’s bill, an eligible purchaser is defined as "any economically and socially disadvantaged business as designated by the Secretary of the Treasury using specified criteria; or (2) a corporation or partnership which, following the sale of a telecommunications business, owns substantially all of the assets of such business and is at least 5 percent owned by the Telecommunications Development Fund established under the Communications Act of 1934. “

"The goal is for the interested parties to come to an agreement and then work with both Rangel and Rush,” says Bush.

In its legislative recommendation, the FCC urges Congress to “adopt a new tax incentive program that would authorize the provision of tax advantages to eligible companies involved in the sale of communications businesses to small firms, including those owned by women and minorities.”

The FCC would also extend the certificate to “sellers of communications properties who offer financing to small firms.”

To safeguard against abuses, the FCC proposes “restrictions on the size of the eligible purchasing firm, a minimum holding period for the purchased firm and a cap on the total value of eligible transactions."

Most broadcast lobbyists, lawyers and interest groups agree with NAB’s Rehr that the “time is ripe” for the return of the certificate.

But that doesn’t mean it will overcome all political and legal hurdles.

As MMTC Executive Director David Honing likes to point out, “the time has been ripe for years and years.”