Erwin Krasnow, a partner at D.C. law firm Garvey Schubert Barer, penned a column for RBR + TVBR in January 2010 on the subject of the minority tax certificate. Given the renewed discussion on the topic seen across Washington this week, we are pleased to again share with readers Krasnow’s take on how their use until 1995 was a “positive incentive.” He also hints at how the current administration may, or may not, respond to calls to bring the minority tax certificate back.
There are two types of FCC regulation: “Jewish mother” and “positive incentive.”
The all-too-familiar “Jewish mother approach” relies on raised eyebrows, guilt and punishment.
“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 to minority-controlled companies.
The policy was adopted by the FCC in 1978 in response to a petition for rulemaking filed by the NAB.
Before 1978, minorities owned 40 out of 8,500 broadcast stations.
Tax certificates gave minority entrepreneurs increased access to the market for broadcast and cable properties, gave them a chip at the bargaining table, and opened doors at financial institutions that had been closed. During the 15 years of the policy’s existence, the issuance of minority tax certificates resulted in the acquisition by minorities of 288 radio stations, 43 television stations, and 31 cable systems.
The vast majority of major-market minority broadcasters used tax certificates to attract initial investors, to purchase a broadcast station, or to sell a broadcast property to another minority. According to a study by the National Association of Black Owned Broadcasters (NABOB), the vast majority of major-market minority broadcasters used tax certificates to attract initial investors, to purchase a broadcast station, or to sell a broadcast property to another minority.
Yet in 1995, Congress terminated the program — spurred by Viacom’s plan to sell its cable systems to a minority-led group for $2.3 billion and use the tax certificate to defer more than $400 million in federal taxes and as much as $200 million in state taxes.
One reason for the repeal was to help pay the costs of restoring a popular health-care tax deduction for farmers and the self-employed. Some members of Congress who wanted to keep the tax certificate were effectively forced to vote against it in order to be on record as favoring the health-care deduction. Also, many members of Congress were concerned about perceived abuses in the FCC’s administration of the program and the magnitude of the Viacom deal’s potential drain on the Treasury.
(Ironically, Viacom subsequently did a tax-free exchange with a non-minority buyer.)
During the intervening years, there have been repeated attempts to reinstate the minority tax certificate. In the late 2000s, Rep. Charles Rangel (D-N.Y.) and Sen. Robert Menendez (D-N.J.) introduced bills designed to close the loopholes cited by critics of the repealed minority tax certificate policy, including limits on the amount of capital gains that could be deferred, a stricter definition of voting control, and penalties for short-term flipping of properties.
The bills also extended tax benefits to owners of telecommunications properties, as well as broadcast and cable properties. To avoid the “tax certificate” nomenclature with which the previous program was associated, the bills were characterized as “tax deferral” legislation.
The bills, however, did not limit benefits to minorities.
In order to meet potential constitutional concerns, the proposed legislation restricted the use of tax credits to companies that sell to socially and economically disadvantaged entities.
It is curious that despite the broad support of tax deferral legislation by the FCC, the NAB, major broadcasters, and consumer groups, no Congressional hearings have been held since the repeal of minority tax certificates.
Moreover, no tax deferral bills have been introduced in this Congress.
The Bottom Line: Court decisions pose virtually insurmountable hurdles to the passage of legislation that limit benefits to minorities.
In 2010, a time of record deficit-spending, “unless a persuasive case could be made by supporters that reinstatement would be an economic stimulus by creating jobs, the odds of Congress passing tax deferral legislation to benefit socially disadvantaged businesses were slim,” Krasnow notes, looking back at the closing words of his original column.
The same conclusion holds today: Unless job creation is the focal point of the return of a minority tax certificate, any fruitful discussion and any hope of its revival is all but futile.
RBR + TVBR
Erwin Krasnow is co-chair of the Communications Group at Garvey Schubert Barer and while General Counsel of the NAB, he prepared the association’s petition for rulemaking requesting that the FCC expand the tax certificate policy to include minority ownership. He also served as a member of the FCC’s Advisory Committee on Alternative Financing for Minority Opportunities in Telecommunications.