The Value of the Tax Certificate

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I. 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In 1995, Congress repealed section 1071 of the Internal Revenue Code, which allowed the Federal Communications Commission (FCC or Commission) to issue a certificate to sellers of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 It is no wonder then, that after little debate, the minority tax certificate was swiftly repealed.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.

II. TAX CERTIFICATES AS A PUBLIC POLICY TOOL

A. 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. …