Telcom tax break

McCain bill would aid minority, small-business buyers

Sen. John McCain (R-Ariz.) is trying to help minorities and small business get into the media business. Last week, the Commerce Committee's ranking member introduced legislation that would give owners of telecommunications properties incentive to sell to new and small-business owners by deferring their capital-gains taxes on the sales.

The bill addresses many policymakers' worry about consolidation's impact on media diversity.

The tax break is needed, McCain says, because small businesses generally must pay cash, while big media companies prefer tax-free stock swaps, which only large companies can arrange. "New entrants and small business lose out on opportunities to purchase telecom assets because they don't offer sellers the same tax treatment as their larger competitors," McCain said, adding, "Our tax laws should not make one bidder more attractive than another." Introduced in the waning days of the current session, McCain's bill is little more than a model for legislation that will be reintroduced in the next Congress.

His plan specifies that:

  • Up to $250 million in capital gains may be deferred over three years from any one transaction, $84 million in any one year.
  • Eligible purchasers must be new industry entrants, small businesses, and other socially and economically disadvantaged businesses as defined by Treasury.
  • The tax benefits can be recaptured by the government with a 20% penalty if the business is resold within three years, unless the second buyer qualifies as an eligible buyer.

McCain's bill is carefully crafted to avoid conflicts with court rulings barring racial preferences by the government. In 1995, for instance, the Supreme Court agreed with white-owned Adarand Contractors that preferential treatment for minorities is illegal unless a pressing societal wrong is being addressed.

A similar tax break in place until 1995 covered only broadcast and cable properties, but McCain's bill also grants breaks for sales of telephone and Internet businesses. Congress killed the previous program, created in 1975, after allegations of abuse.

The tax-recapture provision would block small owners from "flipping" the businesses to larger buyers without actually running them.

The 1975 program helped minority owners buy 288 radio stations, 43 TV stations and 31 cable companies. "The previous tax credit accounted for two-thirds of minority-owned stations," said David Honig, of the Minority Media Telecommunications Council. "This bill would accomplish almost as much."

FCC Chairman Michael Powell, who repeatedly has advocated reviving the tax credit, praised the bill. The National Association of Broadcasters and National Cable & Telecommunications Association endorsed it.

In the previous Congress, versions introduced by then-Senate Commerce Committee Chairman John McCain and House Commerce Committee ranking Democrat Charles Rangel died with little discussion. Still, Senate Minority Leader Trent Lott has praised the idea, and the Bush administration is reviewing it.