The FCC's minority tax certificate program: a proposal for life after death.

• Author: Krasnow, Erwin G.

1. 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.

2. THE HISTORY AND BENEFITS OF THE FCC'S MINORITY TAX CERTIFICATE PROGRAM

   1. 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.

      In adopting this policy in 1978, the Commission concluded that: It is apparent that there is a dearth of minority ownership in the broadcast industry. Full minority participation in the ownership and management of broadcast facilities results in a more diverse selection of programming. In addition, an increase in ownership by minorities will inevitably enhance the diversity of control of a limited resource, the spectrum.(10) 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.

      As in broadcasting, adequate representation of minority views in cable television programming enhances the goal of diversified programming which is an objective of both the Communications Act of 1934 and of the First Amendment. Moreover, because cable television system operators exercise editorial discretion with respect for broadcast program selection and cable origination programming, insensitivity on their part to minority issues and viewpoints could undercut our continuing efforts to increase the diversity of viewpoints in programming.(12) 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.

   2. 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...