McCain tax bill would save corporate contributors millions

Introduction

Republican presidential hopeful John McCain has talked at length about tax cuts that would benefit lower- and middle-income taxpayers. He has also said that most of those cuts would be financed by closing loopholes in the tax code that are enjoyed by those corporations flooding Washington with campaign contributions. What the Arizona senator doesn’t talk much about is a bill he proposed in October that would enrich a few of those well-heeled corporations — the large telecommunications firms that have bankrolled much of his political career.

On Oct. 8, McCain introduced a bill that, he said, would give large telecommunications firms a tax incentive for selling subsidiaries to minority-owned firms by deferring the taxes on capital gains earned in those sales for two years, potentially saving the large firms millions of dollars.

“Small businesses, and businesses owned or controlled by members of minority groups or by women, have been at a particular disadvantage,” read McCain’s bill, the Telecommunications Ownership Diversification Act.

McCain’s bill essentially resurrects a 17-year policy struck down by a newly Republican-led Congress in 1995 because it gave broadcasting and cable companies excessive capital gains tax breaks.

Several business and political leaders, notably William Kennard, chairman of the Federal Communications Commission, and Rep. Charles Rangel (D-N.Y.), have pressed hard for reinstatement since Congress did away with the FCC’s tax certificate program, which, like McCain’s bill, was aimed at giving television and radio companies tax incentives to do business with firms owned by minorities and non-minority women. Rangel has said he plans to propose companion legislation to McCain’s.

Viacom Deal Prompted Scrutiny

The effort to quash the program, which had been authorized through Internal Revenue Code Section 1071, was led by House Ways and Means Committee Chairman Bill Archer (R-Texas), who said that the program offered extreme capital gains tax benefits to large media firms. The Clinton administration estimated that the program would have cost taxpayers $1.5 billion over five years, but opposed outright repeal of the section.

Congressional scrutiny was prompted by a deal made by Viacom, which planned to sell some of its cable properties to a group that included a subsidiary of Tele-Communications, Inc. The deal was worth $2.3 billion and qualified for a tax break under Section 1071, as a private letter ruling from the IRS made clear.

Viacom happens to be McCain’s fourth-largest supporter, having contributed more than $61,750 during his career. Other potential beneficiaries are “Baby Bell” telecommunications company US West, a Denver-based telecommunications company, formed in 1984 after the breakup of AT&T that has given McCain more than $107,500 over his political career. Sale of subsidiaries is nothing new for US West, which itself announced a merger worth $65 billion with wireless communication service provider Qwest Communications late last year. In 1997, for example, US West sold Bellcore a networking software and training company to Science Applications International Corp., and reported a gain of $53 million from the deal in its 1998 annual report.

Another potential winner would be Bell South, McCain’s No. 6 donor, with $60,000 in contributions. BellSouth, like many of its competitors, has also sold subsidiaries in recent years, netting $155 million in July 1997 by dispensing with its ITT World Directories division.

Relationship with AT&T

AT&T is McCain’s No. 3 patron, with more than $72,000 in contributions. The senator’s relationship with AT&T goes well beyond his recent initiative: both his former legislative director, John W. Timmons, and Timmons’ wife, Paula a former aide on the Commerce Committee, which McCain chairs – are lobbyists for AT&T.

John Timmons said, however, he wasn’t aware that McCain had consulted any telecommunications executives before proposing the legislation. “That all came from a different angle,” Timmons said of the bill. “[McCain] had been working with some minority groups in order to do a program that would achieve those ends.”

An investment venture led by CBS Corp. chairman Mel Karmazin and Clear Channel Communications chairman L. Lowry Mays reportedly gave McCain the inspiration for his legislation. Both are investors in a private equity fund, managed by Chase Manhattan Bank, that aims to invest in minority-owned and -operated telecom firms. (Such funds would also qualify for tax breaks should McCain’s bill become law.) Although it currently has assets of $175 million, fund managers told Buy Outs magazine that the fund’s total value could soon top the $500 million mark. Karmazin, incidentally, recently joined the management team at Viacom when that company purchased CBS.

Sen. Conrad Burns (R-Mont.), who co-sponsored the legislation with McCain, also counts telecommunications companies among his top contributors in recent years, with AT&T giving the most ($33,000) from 1995 through September of last year, and Bell South being second ($26,300). US West, which has given Burns $8,300 during that time, was ranked 19th among Burns’ top supporters, according to a list compiled by the Center for Responsive Politics. The list of Burns’ top 20 supporters during that time also included eight other telecommunications firms. Staff members of the Commerce Committee said that no outside influences encouraged McCain’s promotion of the bill, which is before the Senate Finance Committee.

Bill Expands the Territory

A sampling by the Commerce Department’s Minority Business Development Agency found that minorities owned one-tenth of one percent of all telecommunications firms.

The bill expands the territory for eligibility covered under the old tax certificate program. At a conference earlier last year convened by the Rev. Jesse Jackson on financing minority broadcasting, FCC Chairman Kennard, a Democrat, said he wanted all disadvantaged groups to benefit from a revived tax incentive program that would include all kinds of communications companies.

“As the different communications industries converge where phone lines carry movies, cable lines carry phone calls and the airwaves carry both there has been a large movement to consolidation,” the Associated Press quoted Kennard as saying.

Last June, Kennard proposed his own tax-certificate program as a way of increasing diversity in media and telecommunications businesses. It would eliminate the capital gains tax for those deals, rather than deferring them, as McCain’s bill would do.

“This program wasn’t perfect,” Kennard acknowledged in a June 17 speech in New York. “It could have been improved. But before we could do anything, the program ran into partisan politics, and it was killed by Congress. The program was over.”

Others who have urged restoration of the program include Republican FCC Commissioner Michael Powell, Jim Winston, executive director of the National Association of Black-Owned Broadcasters, and Don Cornwell, an African American whose Granite Broadcasting owns 10 television stations. Cornwell said his company was created through the tax certificate program.

Rangel, ranking Democrat on the tax-writing House Ways and Means Committee, announced last July 30 that he planned to introduce his companion legislation along with Rep. Eliot L. Engel (D-N.Y.), a member of the Commerce Subcommittee on Telecommunications, Trade and Consumer Protection.

Was Difference Significant?

There is disagreement over whether the old program one of many the FCC administered to increase diversity in the broadcast industry significantly increased minority ownership of broadcast stations. Only 2.9 percent of all stations were owned by minorities in 1995, up from 0.5 percent when the program was started in 1978. But the latest figures since the program ended, from August 1998, show the percentage still at 2.9 percent.

The bulk of the increase came from the ownership of radio stations. Those 1995 figures actually represented a decrease from the mid-1980s, when the share of minority-owned stations peaked at 3 percent. Even those numbers may have been exaggerated. Congressional investigators found that the FCC considered groups in which minority investors held a 21 percent stake to qualify for tax certificates. Moreover, the program had allowed large corporations to use minority front men whose investments amounted to a tiny fraction of the purchase price to reap hundreds of millions of dollars in tax breaks.

In testimony before Archer’s committee in January 1995, then-chief of staff of the Joint Committee on Taxation Kenneth Kies said that “the tax benefit provided by Code Section 1071 is the ability to defer, in some cases permanently, what would otherwise be a current tax payment to later years. A long-term or indefinite deferral can constitute the equivalent of complete tax forgiveness.”

“There is no cap on the amount of tax benefit which accrues on a per transaction basis,” Kies said. “This raises concerns, particularly when considering a transaction like the proposed Viacom transaction, which appears to have the ability to confer a substantial tax benefit in the range of $440 million to $640 million if it were to receive an FCC tax certificate.”

The Viacom deal was approved because one of the purchasers in the group, a company called Mitgo Corp., was run by Frank Washington, an African American cable- company owner.

Washington had invested $1 million of his own money into the deal; the rest of the funds came from TCI. Yet since Washington had nominal control of the partnership of Mitgo and TCI, Viacom qualified for the tax break. When Congress killed the deal, Washington started a print-media business.

Times Mirror Saved $50 Million

Viacom is hardly an isolated example. In January 1994, the Wall Street investment firm of Donaldson, Lufkin and Jenrette bought four television stations from Times Mirror Corp. for $322 million. A minority investor in DLJ’s deal was a Cuban-American named Ibrahim Morales who invested, according to Forbes magazine, only $30,000 of his own money, or nearly one ten-thousandth of the stations’ total value. Because Morales was on board, Times Mirror was able to use the FCC program to save nearly $50 million in taxes. The partnership set up by Donaldson, Lufkin and Jenrette to buy the stations sold them less than a year later to Ronald Perelman’s New World Communications for $717 million. Morales, for his part, made at least $2 million, an investment return of more than 600 percent.

McCain’s bill would remedy that problem by preventing purchasers from reselling a telecommunications business they’d purchase for two years. His bill also places a $250 million cap on the tax relief from each sale.

“It’s kind of amusing,” Kies, now managing partner at Price Waterhouse Coopers’ Washington office, said. “$250 million of free income, but nothing more than that . . . the notion that McCain would actually entertain bringing back this type of thing is disgraceful.”

“There is no requirement that the tax benefit accrue, in whole or in part, to the minority-owned or -controlled purchaser,” Kies had said in his testimony. “In many transactions it is possible that the minority-owned or -controlled purchaser is paying full fair market value for the property acquired even though the seller may be receiving a substantial tax benefit over and above the sale price for the broadcast property.”

Addressing ‘Front Men’ Issue

The use of front men in these transactions to gain tax breaks is rare, according to Minority Media & Telecommunications Council Executive Director David Honig, but is something that the Congress should address before McCain’s bill moves forward.

“There should be hearings on this bill,” Honig, whose group advocates greater minority ownership in telecommunications and broadcasting, said. “It’s only fair to have the issue aired. . . . It’s not a perfect bill, but it’s a good piece of legislation.”

Honig added that the fraudulent activities of certain companies under the old tax certificate program changed the way large communications companies did business with minorities, and that McCain’s bill might not fully remedy that.

“Why would a company deal at arm’s length with a legitimate minority company when they can create their own?” Honig said.

“We never discussed this bill with any outside interests,” Commerce Committee Majority Staff Director Mark Buse said. “This bill was drafted solely to encourage more minorities to get involved in the [telecommunications] business.”

Whether it would do so is another story altogether. The Joint Committee on Taxation, in reviewing Section 1071’s effects on minority ownership of stations, found little evidence to suggest the program had been a great success. “[G]ranting a tax certificate does not guarantee that the transferred property remains under the control of minority persons for more than a short period of time,” the committee reported.

Kies, more than five years removed from the tax certificate debate, still thinks McCain’s bill would reinstate loophole-riddled tax policy.

“Based on the bad history of this thing, it isn’t a well thought out decision to bring it back,” he said.

McCain’s Position

As for McCain, he has dismissed suggestions that he has helped contributors through his chairmanship of the Commerce Committee.

“About 80 percent of all business in this country is somehow or another impacted by decisions made by the Commerce Committee, campaign spokesman Howard Opinsky has said. “So to . . . make a decision to not accept contributions from anybody who has anything to do with the Commerce Committee would mean that you would systematically make anyone who works for any corporation ineligible to give to your campaign.”