The value of the tax certificate.

• Author: Ofori, Kofi Asiedu

1. INTRODUCTION

   In 1995, Congress repealed section 1071 of the Internal Revenue Code, which allowed the Federal Communications Commission (FCC or Commission) to issue a certificate to sellers of communications-related property to defer the gain realized upon a sale if that sale comported with a particular public policy goal. The repeal of the so-called "tax certificate" was linked to a proposed sale by Viacom of a multimillion dollar cable television system to a minority buyer.(1) Thus, it was widely reported that legislative action was directed against the "minority tax certificate." Given the reporting about the tax certificate, it would have been easy to conclude that the minority tax certificate was another government affirmative action program for rich media barons. It is no wonder then, that after little debate, the minority tax certificate was swiftly repealed.

   In addition to the mischaracterization of the tax certificate as a minority preference policy, concern was expressed during the 1995 Senate heatings on tax certificates about lost tax revenues. Tax certificates were perceived by some members of Congress as an unjustifiable subsidy for big business. Senator Dole testified, "[I]t seems to me when we are cutting all of these Federal programs, as I said earlier, we should take a careful look. Even though I sympathize with the goals, I cannot sympathize with somebody walking off with a half a billion dollars in the transaction."(2) Senator Dole (Republican-Kansas) appears to have overlooked the cost to the public interest, in terms of reduced competition and reduced diversity of expression, that can be associated with the repeal of tax certificates.(3)

   In 1998, under a new Chairman of the FCC, the first African American to hold that office, there was renewed interest in the tax certificate. This renewed interest coincided with an unprecedented concentration of ownership in the radio industry. Recent interest in reviving the tax certificate is to be applauded. However, in order to fully understand why the tax certificate was good public policy, it is important to keep in mind the range of uses for the tax certificate. To gain this understanding, it is useful to briefly explore the statute's origin.

2. TAX CERTIFICATES AS A PUBLIC POLICY TOOL

   1. Tax Certificates for Involuntary Transfers

      In 1943, the FCC, which was not even a decade old, decided, with the help of the U.S. Supreme Court,(4) that it was a bad idea for the Radio Corporation of America (RCA) to operate two radio networks. The concern was grounded in two related concepts firmly rooted in those progressive values that dominated U.S. public policies around the time of the Great Depression. Those two concepts, well articulated by the Supreme Court on many occasions, are the evils of monopoly or conversely the importance of fair competition,(5) and the First Amendment virtues of diverse communications sources.(6) The impetus for tax certificates was the need to contend with ownership trends in the nascent broadcast industry that were incompatible with the public interest values of competition and diversity.

      In 1939, the Commission commenced an investigation into the monopolistic practices of powerful radio networks. The findings of the Chain Broadcasting Report are disturbingly similar to conditions in today's marketplace:

      The record evidences a definite trend toward concentration of ownership of radio stations. Eighty-seven of [the radio owners] ... received in 1938 approximately 52 percent of the total business of all commercial broadcasting stations. To the extent that the ownership and control of radio-broadcast stations falls into fewer and fewer hands, whether they be network organizations or other private interests, the free dissemination of ideas and information, upon which our democracy depends, is threatened.(7) The Chain Broadcasting Report led to the promulgation of FCC regulations that forced David Sarnoff, President of RCA, to divest the National Broadcasting Company (NBC) "blue network."(8) The property was sold to Edward J. Noble, the Lifesaver candy king, and eventually became the American Broadcasting Company (ABC).(9) The 1941 FCC Commissioners and their colleagues in Congress may have been "can do" Roosevelt progressives, but they were not unmindful of the harm their new policy would cause the powerful and newly minted "General Sarnoff."(10) Congress felt some obligation to soften the blow of the forced divestiture, and thus tax certificates were born. These certificates permitted the General and other broadcast monopolists to defer any capital gain realized from the "involuntary" sale of their properties.(11)

      The initial use of the tax certificate was, in some ways, recognition that the government was still sorting out the proper method for regulating the dynamic broadcasting industry. There were, after all, no rules in place to prevent RCA from establishing two networks when the Chain Broadcasting Report was begun. Indeed, the right of the federal government to regulate the "ether" had been established for only a dozen years.(12) Thus, as the young FCC found its regulatory feet, it often found itself creating new limits where none existed before.

   2. Tax Certificates for Voluntary Transfers

      Later tax certificates were used not only to soften the hardship of involuntary sales, but also to encourage voluntary compliance with FCC policies. Broadcast owners were granted certificates for divesting properties in order to voluntarily come into compliance with FCC regulations. Many of these broadcasters had been granted a permanent waiver of the rules in consideration of their long-standing service to the community of license. In other words, though their ownership of potentially competing media properties violated Commission rules, their stations were considered "grandfathered." Tax certificates were issued "where there [was] a causal relationship between the change in Commission policy and the sale of the broadcast facilities and the sale does effectuate the new policy."(13)

      A variety of Commission rules, such as prohibiting the same-market common ownership of television and radio stations and the cross-ownership of broadcast and newspaper operations, fit this category.(14) Much like the earlier policies that forced divestiture, these new policies were also prompted by the concern for diversity of expression and the need for fair competition within the local community of license. An estimated 177 tax certificates were issued as incentives to comply with Commission policy unrelated to minority ownership.(15)

   3. Tax Certificates to Encourage Sales to Minorities

      In 1978, the Commission decided to use tax certificates to encourage sales to minorities. The Commission expressed frustration that "the views of racial minorities continue to be inadequately represented in the broadcast media ... ownership of broadcast facilities by minorities[, in addition to equal employment opportunity rules and ascertainment policies,] is another significant way of fostering inclusion of minority views in the area of programming."(16) Though the focus was on promoting the expression of "minority views" (with the note that other "clearly definable groups, such as women, may be able to demonstrate that they are eligible for similar treatment"),(17) the policy was firmly in keeping with the long-standing use of tax certificates to promote diversity of expression over the public airwaves. Indeed, as the Supreme Court noted in affirming two other mechanisms to enhance minority ownership, "Just as a `diverse student body' contributing to a `robust exchange of ideas' is a `constitutionally permissible goal' on which a race-conscious university admissions program may be predicated, the diversity of views and information on the airwaves serves important First Amendment values."(18)

      In assessing the value of tax certificates, their use to encourage sales to minorities is especially instructive because there were other policies also directed to this particular end. For example, the Commission permitted "licensees whose licenses have been designated for revocation hearing, or whose renewal applications have been designated for heating on basic qualification issues, but before the heating is initiated, to transfer or assign their license at a `distress sale' price to" minorities;(19) and the Commission announced that minority ownership and participation in management would be considered a "plus" in a...