Capital Cities Communications Inc., American Broadcasting Cos. Inc., Gannett Co. Inc. and other media firms are saving millions of dollars by using a tax break for selling broadcast stations to minority investors.
The purpose of the incentive is to increase the relatively small number of minority-group members who own radio, television and cable stations. But the financial benefit of the provision goes to the station's seller, which almost always is a non-minority firm.
The tax break will save Capital Cities, which is in the process of acquiring ABC, as much as $53 million in taxes on a gain of $180 million from the sale of two television stations and one radio station, analysts estimate. The stations must be divested as a condition of the ABC acquisition.
The Capital Cities television station in Buffalo is being sold for $65 million to a group of investors, including former football star O. J. Simpson, basketball player Julius Erving, the musical Jackson brothers, former U.S. ambassador Donald E. McHenry, Essence Communications Inc. Chief Executive Edward Lewis and Philadelphia Coca-Cola Bottling Co. Chairman J. Bruce Llewellyn.
A corporation composed of 6,300 Alaskan Indians has agreed to pay $170 million for the Capital Cities television station in New Haven, Conn. And ABC's Detroit radio station is being sold for $14 million to a consortium of minority investors, including the current general manager of the station, Marcellus W. Alexander Jr., and John Robert E. Lee, an investor who owns a number of broadcast stations.
The tax benefit, which either postpones the payment of taxes on the gain from the sale of the station for three years or waives the taxes entirely if the money is reinvested in a media property, has been used in more than 82 transactions since it was created by the Federal Communications Commission in 1978. Gannett, for example, benefited from it a few years ago when it sold a Rochester, N.Y., station to a consortium of minority investors for $27 million.
It has helped such buyers as country singer Charley Pride and pop singer Stevie Wonder, as well as Potomac businessman Sharad K. Tak. Tak, a native of India, who owns four television stations in Wisconsin, recently bought, and then immediately sold, a television station in Anchorage, all with the aid of the tax provision, according to FCC records. Entertainer Bill Cosby also is hoping that the tax preference will help his company in its bid for 13 radio stations owned by RKO General.
There is little disagreement in the communications industry that members of minority groups are woefully under-represented in broadcasting and that measures should be taken to increase the proportion of minority-owned stations from the current 2 percent.
But FCC Chairman Mark Fowler, for one, worries that the tax preference could impinge on the rights of non-minority bidders for broadcast media. Others contend that a policy based solely on race, and not on need, is damaging to disadvantaged minority persons with less money than someone like Michael Jackson.
Some women broadcasters, who can't use the tax benefit, say it actually hurts their effort to increase female ownership of stations because it makes it harder for them to compete. Anyone who does not have a tax benefit on his side has to offer a higher price for a station to be on an equal footing with a minority bidder.
"Any time there is doubt financially, it will make a difference," said Nolanda Hill, a Texas broadcaster who recently bought Channel 50 in Washington. "It will cause them to look at that minority that ordinarily they wouldn't take a phone call from."
The tax provision was adopted by the FCC as part of a series of measures intended to increase minority participation in an industry historically dominated by white males. Other regulations give minority bidders the edge in otherwise equal competition for broadcast licenses, permit companies to own more stations if at least two of them are controlled by minority interests and permit minority firms to buy financially troubled stations that otherwise would have their licenses revoked.
"When the licenses were passed out in the '30s and '40s and '50s, minorities were so economically repressed they weren't around," said Henry Geller, formerly the FCC's general counsel and now director of the Washington Center for Public Policy. "Now, when they knock on the doors, the licenses are all taken up."
It's not clear to what extent the tax benefit -- which must be granted by the FCC after the purchase is arranged -- has increased the percentage of minority ownership. But some critics wonder whether adding to the profits of Capital Cities and ABC is the most effective method of raising minority participation in the broadcast industry.
"The best way to promote minority ownership is through policies which promote diversity of ownership in initial licensing, a vigilant policy toward denying renewal of licenses for errant broadcasters and a sensitivity to racism in the broadcasting industry," said Andrew Schwartzman of the Media Access Project. "The FCC's tax policy is a less-efficient, second-best way to achieve those laudable objectives," he said.
Dan Brenner, senior adviser to the FCC's Fowler, said the tax program, if carried to an extreme, can lead to problems of "constitutional fairness." Although Fowler does not oppose the tax break, he prefers such measures as encouraging banks and other financing sources to lend to minorities who have experience in broadcasting, Brenner said.
"We're trying to do what we can without rendering . . . a constitutional disaster," Brenner said.
The dilemma covers more than just the tax break and raises philosophical questions of how to balance improving minority representation with other priorities.
Communications lawyer Eric Bernthal described a court case in a small, western Michigan town where three local white residents applied for a license to run a new radio station. They were competing against a black woman from another area who, Bernthal said, had no plan to offer diverse programming but merely asked for the license based on preferences for minorities. She won, after numerous court battles.
"There can be a social benefit" to policies encouraging minority ownership, Bernthal said. "But when you get Michael Jackson coming in, or Alaskan Indians buying a station in Connecticut, and the policy denies the public tax dollars so that can happen, why are we helping them?"
The intent of the FCC in enacting the tax provision was to encourage a diversity of views in broadcasting. But Lee, the leader of the group buying the Detroit station and president of the National Association of Black Owned Broadcasters, said it imposes no obligation on minority station owners to emphasize minority issues or offer programming not available on white-owned stations in the community.
Congress seems to like the tax provision. Rep. Mickey Leland (D-Tex.) has introduced legislation to expand the preference to such other communications businesses as cellular radio, private-line radio and land-mobile services. The tax advantage enables members of minority groups to compete against the old-boy network prevalent in the broadcasting industry, Leland aide Larry Irving said.
The total amount of taxes deferred or forgiven for the companies selling stations is not known. Capital Cities appears to be the biggest beneficiary of the provision so far, according to an analysis by John S. Sanders, senior financial analyst with the broadcast appraisal firm of Frazier, Gross & Kadlec Inc. By Sanders' estimates -- the companies have not made information on the tax aspects of the sale public and officials declined comment on the figures -- Capital Cities is saving $36 million in taxes on the sale of the New Haven station alone.
The value of the tax break can be expected to increase if station values continue to rise as much as they have in the recent past, increasing the chances the provision will be used more often. In the last few years, the values of some broadcast stations have risen as much as 50 percent per year. All that increase would be taxed if the stations were sold without the tax benefit.