Understanding the Minority Tax Certificate and its Potential for Promoting Diversity in Broadcast Ownership

An intense national conversation on racial justice and equity has been thrust upon the country by the events of the last week.  While our focus here on this blog is narrow, it is certainly worth looking at some of the issues that are within our broadcast world that are relevant to this conversation.  In recent days, for instance, FCC Commissioner Geoffrey Starks promoted more diversity in broadcast ownership, and an article in Radio Ink by the President of the National Association of Black Owned Broadcasters called for a revival of the minority tax certificate – a program ended decades ago over concerns about its cost to the government.  The tax certificate offers perhaps the most meaningful route to the goals sought by the Commissioner and is worth examination as, since its abolition so many years ago, its revival has been discussed so many times that it has become almost a cliché, with many not really understanding what it did and why it was effective.

The minority tax certificate was a program designed to provide broadcasters with an economic incentive to sell their stations to minority owners.  Rather than directly subsidizing the potential owners, the certificate instead gave a tax break to sellers that incentivized them to sell to the minority-owned business even if there were multiple bidders for their properties.  If the seller sold to a minority-owned business, the seller could take the proceeds from the sale and roll those proceeds over into a new media property without recognizing the taxable gain from the sale.  Unlike the typical like-kind exchange where the roll-over into a new property has to proceed within a few months of the sale, the tax certificate treated the sale as an involuntary sale (like the sale of a property because of a government’s exercise of eminent domain) under Section 1033 of the tax code, giving the seller several years to roll the proceeds over into a new purchase.  At that point, the new property would have the same tax basis as the old – meaning that no gain would be recognized until the sale of the new property.  This spurred many sales to minority companies by broadcasters looking not to get out of the business, but instead looking to realign their holdings or to move up into larger markets.  Several hundred radio and TV stations were purchased under this program in the last 20 years of the program’s existence.  Why was this seemingly successful program abandoned?

The program always had some critics who objected to the constitutionality of racial set asides or expressed fears of the “gaming” of the program by non-minority companies using minority “fronts” to exploit the tax benefits.  But the straw that appeared to break the camel’s back was the proposed mid-1990s sale of a major cable company to a minority-controlled buyer, where taxes of hundreds of millions of dollars would have been deferred upon the sale.  The prevalent attitude in Congress at the time seemed to be that companies that can make such a large acquisition were not the economically-disadvantaged companies that the program was meant to promote – and that the government would be giving up too much money by allowing this use of the certificate program.

Even though repealed, the idea of the tax certificate never went away – simply because it was likely the single most successful program that the FCC ever had at its disposal to promote meaningful diversity in the ownership of broadcast stations.  Suggestions for the revival of the program have been floated almost ever since.

There is currently a proposal pending in Congress by Congressman G.K. Butterfield and Senator Gary Peters to revive the program.  The pending bill establishes limits on the program to overcome some of the objections that existed to the program in the last century.  To overcome some of the constitutional objections, the bill apples to all “socially-disadvantaged individuals” – not just to businesses that are minority-owned.  To overcome the concerns about this program being exploited by big businesses that don’t need government assistance, the program proposes to cap the size of the sale that could take advantage of the certificate – a cap somewhere between $10 million and $50 million, as decided by the FCC after a rulemaking.  The bill also requires that socially-disadvantaged individuals be involved in the management of the stations acquired, and that the properties be held for at least three years to avoid the purchased stations quickly being turned over to non-qualifying businesses.

There does not seem to be any significant opposition to this bill.  Both minority organizations and the NAB have voiced their support.  But, as with so many other proposals for legislation when there are so many conflicting legislative priorities in Congress, it has not been moved to a fast track to passage.  Perhaps given today’s heightened attention to inclusion and diversity, this will be a time to move this legislation forward.

Courtesy Broadcast Law Blog