[House Report 104-32]
[From the U.S. Government Publishing Office]
104th Congress Report
HOUSE OF REPRESENTATIVES
1st Session 104-32
_______________________________________________________________________
PERMANENT EXTENSION OF DEDUCTION FOR HEALTH INSURANCE COSTS OF SELF-
EMPLOYED INDIVIDUALS
_______
February 14, 1995.--Committed to the Committee of the Whole House on
the State of the Union and ordered to be printed
_______________________________________________________________________
Mr. Archer, from the Committee on Ways and Means, submitted the
following
R E P O R T
together with
DISSENTING VIEWS
[To accompany H.R. 831]
[Including cost estimate of the Congressional Budget Office]
The Committee on Ways and Means, to whom was referred the
bill (H.R. 831) to amend the Internal Revenue Code of 1986 to
permanently extend the deduction for the health insurance costs
of self-employed individuals, to repeal the provision
permitting nonrecognition of gain on sales and exchanges
effectuating policies of the Federal Communications Commission,
and for other purposes, having considered the same, report
favorably thereon with an amendment and recommend that the bill
as amended do pass.
CONTENTS
Page
I. Introduction.....................................................3
A. Purpose and Summary................................... 3
B. Background and Need for Legislation................... 3
C. Legislative History................................... 5
II. Explanation of the Bill..........................................7
A. Permanently Extend Deduction for Health Insurance Cost 7
of Self-Employed Individuals (sec. 1).
B. Repeal Special Rules Applicable to FCC-Certified Sales 8
of Broadcast Properties; Prohibit Nonrecognition of
Gain on Involuntary Conversions in Certain Related-
Party Transactions (secs. 2 and 3).
C. Interest and Dividend Test for Earned Income Tax 18
Credit (sec. 4).
III. Votes of the Committee..........................................20
IV. Budget Effects of the Bill......................................26
A. Committee Estimate of Budgetary Effects............... 26
B. Statement Regarding New Budget Authority and Tax 26
Expenditures.
C. Cost Estimate Prepared by the Congressional Budget 27
Office.
V. Other Matters To Be Discussed Under the Rules of the House......29
A. Committee Oversight Findings and Recommendations...... 29
B. Summary of Findings and Recommendations of the 29
Committee on Government Reform and Oversight.
C. Inflationary Impact Statement......................... 29
VI. Changes in Existing Law Made by the Bill, as Reported...........30
VII. Dissenting Views of the Honorable Charles B. Rangel and the 34
Honorable Harold E. Ford.
The amendment is as follows:
Strike section 4 of the bill and insert the following new
section:
SEC. 4. PHASEOUT OF EARNED INCOME CREDIT FOR INDIVIDUALS HAVING MORE
THAN $2,500 OF TAXABLE INTEREST AND DIVIDENDS.
(a) In General.--Section 32 of the Internal Revenue Code of
1986 is amended by redesignating subsections (i) and (j) as
subsections (j) and (k), respectively, and by inserting after
subsection (h) the following new subsection:
``(i) Phaseout of Credit for Individuals Having More Than
$2,500 of Taxable Interest and Dividends.--If the aggregate
amount of interest and dividends includible in the gross income
of the taxpayer for the taxable year exceeds $2,500, the amount
of the credit which would (but for this subsection) be allowed
under this section for such taxable year shall be reduced (but
not below zero) by an amount which bears the same ratio to such
amount of credit as such excess bears to $650.''
(b) Inflation Adjustment.--Subsection (j) of section 32 of
such Code (relating to inflation adjustments), as redesignated
by subsection (a), is amended by striking paragraph (2) and by
inserting the following new paragraphs:
``(2) Interest and dividend income limitation.--In
the case of a taxable year beginning in a calendar year
after 1996, each dollar amount contained in subsection
(i) shall be increased by an amount equal to--
``(A) such dollar amount, multiplied by
``(B) the cost-of-living adjustment
determined under section 1(f)(3) for the
calendar year in which the taxable year begins,
determined by substituting `calendar year 1995'
for `calendar year 1992' in subparagraph (B)
thereof.
``(3) Rounding.--If any amount as adjusted under
paragraph (1) or (2) is not a multiple of $10, such
dollar amount shall be rounded to the nearest multiple
of $10.''
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 1995.
I. INTRODUCTION
A. Purpose and Summary
H.R. 831, as amended: (1) extends permanently the 25-
percent deduction for health insurance costs of self-employed
individuals (sec. 1 of the bill); (2) repeals the provision
permitting nonrecognition of gain on sales and exchanges
effectuating policies of the Federal Communications Commission
(``FCC'') and prohibits nonrecognition of gain on involuntary
conversions in certain related-party transactions (secs. 2 and
3 of the bill); and (3) denies the earned income tax credit
(``EITC'') to individuals who have more than $3,150 of taxable
interest and dividend income and phases out the EITC for
individuals with more than $2,500 of taxable interest and
dividend income (sec. 4 of the bill).
B. Background and Need for Legislation
25-Percent Health Insurance Deduction for the Self-Employed
Under present law, an employer's contribution to a plan
providing health coverage for the employee and the employee's
spouse and dependents is excludable from the employee's income.
No equivalent exclusion applies in the case of self-employed
individuals (i.e., sole proprietors and partners in a
partnership).
However, prior law provided a deduction for 25 percent of
the amount paid for health insurance of a self-employed
individual and the individual's spouse and dependents. The 25-
percent deduction was also available to more than 2-percent
shareholders of S corporations. The 25-percent deduction was
originally enacted on a temporary basis in the Tax Reform Act
of 1986. The provision has been extended several times, but
expired at the end of 1993.
To provide greater equity between employees and self-
employed individuals, the bill extends permanently the 25-
percent deduction for health insurance costs of self-employed
individuals from its prior expiration.
Nonrecognition of Gain in FCC-Certified Sales and Exchanges
Code section 1071 was originally enacted in 1943 to help
the FCC implement a new policy that prohibited licensees from
owning more than one radio station per market. Congress
believed that the involuntary conversion rules (which generally
permitted gain on sales and other dispositions of involuntarily
converted property to be excluded from taxable income if the
proceeds were reinvested in property similar to the property
involuntarily converted) should be applied to FCC-ordered
divestitures, but that the rules needed to be liberalized
because the purchase of new radio property was difficult due to
wartime restrictions. Under section 1071, gain from the sale or
exchange of broadcast facilities may be deferred in cases where
the sale or exchange is certified by the FCC ``to be necessary
or appropriate to effectuate a change in a policy of, or the
adoption of a new policy by, the Commission with respect to the
ownership and control of radio broadcasting stations. * * *''
In 1978, the FCC announced a policy of promoting minority
ownership of broadcast facilities by offering tax certificates
to persons who voluntarily sell such facilities to minority
individuals or minority-controlled entities. Since that time,
the FCC has issued over 300 such tax certificates. Recent press
reports regarding the FCC's administration of section 1071,
both in terms of the types of properties eligible for tax
certificates and the size of the tax benefits granted, raise
significant questions about the operation of this provision.
The FCC tax certificate program has been the subject of a
number of news reports in the past several years. It was also
the subject of hearings on miscellaneous revenue proposals held
by the Subcommittee on Select Revenue Measures of the Committee
on Ways and Means in September, 1993. On January 17, 1995,
Chairman Archer issued a press release putting taxpayers on
notice that the Committee would immediately review the
operation of section 1071 to explore possible legislative
changes to section 1071, including the possibility of repeal.
The press release stated that any changes to section 1071 may
apply to transactions completed, or certificates issued by the
FCC, on or after the date of the announcement.
On Friday, January 27, 1995, the Subcommittee on Oversight
held a hearing to examine the operation and administration of
section 1071. Specifically, the Subcommittee examined: (1)
whether the FCC's 1978 policy was consistent with the
underlying intent of section 1071; (2) whether the FCC's
administration of section 1071 constituted an impermissible
exercise of legislative authority; (3) whether the tax
incentive provided in section 1071 was, in fact, fostering
minority ownership of broadcast facilities; and (4) whether the
FCC policy was a necessary or appropriate means of achieving
this goal.
Testimony provided at the Oversight Subcommittee's hearing
on this provision revealed significant problems in the
operation and administration of Code section 1071 by the FCC.
For example, the FCC's standards for qualification for the tax
certificate program are so vague that the provision is subject
to significant abuse. In addition, the FCC's expansion of the
types of transactions which qualify for tax certificates was
clearly inconsistent with the underlying intent of section
1071--to address the inability of owners who were required by
the FCC to divest radio properties to buy replacement property
during World War II. Moreover, the cost to taxpayers of the
FCC's tax certificate program has never been subject to any
systematic review.
In the course of its examination of section 1071, the
Committee also became aware of problems with the operation of
Code section 1033. Under interpretations issued by the IRS,
taxpayers are able to purchase replacement property from a
related party, thereby avoiding the need to buy ``new''
replacement property and, sometimes, effectively resulting in a
total tax forgiveness for the transaction.
In response to these and other concerns, the bill repeals
the provision permitting nonrecognition of gain on sales and
exchanges effectuating policies of the FCC and prohibits
nonrecognition of gain on involuntary conversions in certain
related-party transactions.
Limitations on Earned Income Tax Credit
Under current law, a taxpayer may have relatively low
earned income, and therefore may be eligible for the EITC, even
though he or she has significant interest and dividend income.
President Clinton's fiscal year 1996 budget contains a
legislative proposal to deny the EITC to individuals who have
more than $2,500 of taxable interest and dividend income.
To address this issue, the bill denies the EITC to
individuals who have more than $3,150 of taxable interest and
dividend income and phases out the EITC for individuals with
more than $2,500 of taxable interest and dividend income.
C. Legislative History
Committee Bill
H.R. 831 was introduced on February 6, 1995, by Messrs.
Archer, Matsui, and Thomas and Mrs. Johnson of Connecticut. The
bill as introduced contained four provisions: (1) extend
permanently the 25-percent deduction for health insurance costs
for self-employed individuals; (2) repeal the provision
permitting nonrecognition of gain on sales and exchanges
effectuating policies of the FCC; (3) provide that the
nonrecognition of gain on involuntary conversions is not to
apply if replacement property is acquired from a related
person; and (4) deny the EITC for individuals having more than
$2,500 of taxable interest and dividend income.
The Committee on Ways and Means marked up the bill on
February 8, 1995, and approved by voice vote one amendment by
Chairman Archer that denies the EITC to individuals who have
more than $3,150 of taxable interest and dividend income and
phases out the EITC for individuals with more than $2,500 of
taxable interest and dividend income.
Legislative Hearings
The Subcommittee on Health of the Committee on Ways and
Means held a public hearing on January 27, 1995, on the
deduction for health insurance costs of self-employed
individuals. The Subcommittee on Oversight of the Committee on
Ways and Means held a public hearing on January 27, 1995, on
the tax provisions relating to the nonrecognition of gain on
the sale or exchange of certain broadcast property (FCC tax
certificate program).\1\
\1\ The FCC tax certificate program was also the subject of
hearings on miscellaneous revenue proposals held by the Subcommittee on
Select Revenue Measures of the Committee on Ways and Means held on
September 8, 21, and 23, 1993. See, Joint Committee on Taxation,
``Description of Miscellaneous Revenue Proposals'' (JCS-12-93),
September 16, 1993, p. 71.
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Further, the Committee on Ways and Means held public
hearings on the Administration's fiscal year 1996 revenue and
budget proposals, beginning on February 7, 1995. One of the
Administration's revenue proposals is to deny the EITC for
individuals having more than $2,500 of taxable interest and
dividend income.
Notices of Committee Action
On January 17, 1995, Chairman Archer issued a release
announcing that the Committee would immediately review the
operation of section 1071 to explore possible legislative
changes to section 1071, including the possibility of repeal.
The announcement stated that any changes to section 1071 may
apply to transactions completed, or certificates issued by the
FCC, on or after the date of the announcement. On January 18,
1995, Chairman Johnson of the Subcommittee on Oversight of the
Committee on Ways and Means announced a Subcommittee hearing to
examine the operation and administration of Code section 1071.
The hearing was scheduled for January 27, 1995.
On January 23, 1995, Chairman Thomas of the Subcommittee on
Health of the Committee on Ways and Means issued a release
announcing a Subcommittee hearing on allowing self-employed
individuals to deduct a portion of their health insurance
premiums. The hearing was scheduled for January 27, 1995.
On January 30, 1995, Chairman Archer issued a release
announcing full Committee hearings on President Clinton's
fiscal year 1996 budget proposals under the jurisdiction of the
Committee. The hearings were scheduled to begin on February 7,
1995.
II. EXPLANATION OF THE BILL
A. Permanently Extend Deduction for Health Insurance Costs of Self-
Employed Individuals (sec. 1 of the bill and sec. 162(l) of the Code )
Present Law
Under present law, the tax treatment of health insurance
expenses depends on whether the taxpayer is an employee and
whether the taxpayer is covered under a health plan paid for by
the employee's employer. An employer's contribution to a plan
providing accident or health coverage for the employee and the
employee's spouse and dependents is excludable from an
employee's income. The exclusion is generally available in the
case of owners of a business who are also employees.
In the case of self-employed individuals (i.e., sole
proprietors or partners in a partnership) no equivalent
exclusion applies. However, prior law provided a deduction for
25 percent of the amount paid for health insurance for a self-
employed individual and the individual's spouse and dependents.
The 25-percent deduction was not available for any month if the
taxpayer was eligible to participate in a subsidized health
plan maintained by the employer of the taxpayer or the
taxpayer's spouse. In addition, no deduction was available to
the extent that the deduction exceeded the taxpayer's earned
income. The amount of expenses paid for health insurance in
excess of the deductible amount could be taken into account in
determining whether the individual was entitled to an itemized
deduction for medical expenses. The 25-percent deduction
expired for taxable years beginning after December 31, 1993.
For purposes of these rules, more than 2-percent
shareholders of S corporations are treated the same as self-
employed individuals. Thus, they were entitled to the 25-
percent deduction.
Other individuals who purchase their own health insurance
(e.g., someone whose employer does not provide health
insurance) can deduct their insurance premiums only to the
extent that the premiums, when combined with other unreimbursed
medical expenses, exceed 7.5 percent of adjusted gross income.
Reasons for Change
The 25-percent deduction for health insurance costs of
self-employed individuals was added by the Tax Reform Act of
1986 to reduce the disparity between the tax treatment of
owners of incorporated and unincorporated businesses (e.g.,
partnerships and sole proprietorships). The provision was
enacted on a temporary basis, and has been extended several
times since enactment.
The Committee believes it is appropriate to continue to
reduce the disparity between the tax treatment of health
insurance expenses of owners of incorporated and unincorporated
businesses. Further, the Committee believes that the pattern of
allowing the deduction to expire and then extending it creates
unneeded uncertainty for taxpayers. Thus, the Committee
believes the 25-percent deduction should be made permanent.
Explanation of Provision
The bill retroactively reinstates for 1994 the deduction
for 25-percent of health insurance costs of self-employed
individuals and extends the 25-percent deduction permanently.
Effective Date
The provision is effective for taxable years beginning
after December 31, 1993.
B. Repeal Special Rules Applicable to FCC-Certified Sales of Broadcast
Properties; Prohibit Nonrecognition of Gain on Involuntary Conversions
in Certain Related-Party Transactions (secs. 2 and 3 of the bill and
secs. 1071 and 1033 of the Code)
Background
Legislative Background of Code Section 1071
Code section 1071 was originally enacted as part of the
Revenue Act of 1943 to help the FCC implement a new policy that
prohibited licensees from owning more than one radio station
per market.\2\ Congress believed that the involuntary
conversion \3\ rules (which generally permitted gain on sales
of other dispositions of involuntarily converted property to be
excluded from taxable income if the proceeds were reinvested in
property similar to the property involuntarily converted)
should be applied to these transactions, but needed to be
liberalized for sales ordered by the FCC because, ``[d]ue to
wartime restrictions, the purchase of new radio property [would
have been] * * * difficult.'' \4\
\2\ Revenue Act of 1943, Pub. L. 78-235, sec. 123.
\3\ An involuntary conversion is generally defined by the Code to
occur only when property is compulsorily or involuntarily converted as
a result of its destruction, in whole or in part, by theft, seizure, or
requisition or condemnation or threat or imminence thereof. Code sec.
1033(a).
\4\ S. Rept. No. 627, 78th Cong., 1st Sess., 23 (1943).
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As initially reported by the Senate Committee on Finance in
1943, the provision would have allowed a rollover where the
sale or exchange of the property was required by the FCC as a
condition of the granting of an application.\5\ However, the
conference report stated that because ``the Commission does not
order or require any particular sale or exchange, it has been
deemed more appropriate to provide that the election, subject
to other conditions imposed, shall be available upon
certification by the Commission that the sale or exchange is
necessary or appropriate to effectuate the policies of the
Commission with respect to ownership or control of radio
broadcasting stations.'' \6\
\5\ S. Rept. No. 627, 78th Cong., 1st Sess., 23, 53-54 (1943).
\6\ H. Rept. No. 1079, 78th Cong., 2d Sess., 49-50 (1943).
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In 1954, this provision was adopted as section 1071 of the
1954 Code without change. In adopting the provision, Congress
noted that the term ``radio broadcasting'' has an ``established
meaning in the industry and in the administration of the
Federal Communications Act which is sufficiently comprehensive
to include telecasting [i.e., television].'' \7\
\7\ S. Rept. No. 1622, 83rd Cong. 2d Sess., 429 (1954).
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In 1958, Code section 1071 was amended to provide that the
tax certificates should be granted only when the FCC certified
that a disposition was necessary or appropriate to effectuate a
change in the policy of, or the adoption of a new policy by,
the FCC.\8\ Congress was concerned that taxpayers had ``on
occasion purchased additional facilities in excess of the
maximum number of facilities permitted under then existing FCC
rules, and then obtained a certification from the FCC that the
disposition of the older facility was necessary or appropriate,
thereby obtaining tax deferment on the gain from the sale.''
\9\ In response to this practice, the FCC announced that in the
future it would grant tax certificates only where the
disposition was required because of a change in FCC policy or
rules with respect to the ownership and control of broadcast
facilities.\10\ In adopting the 1958 changes, Congress agreed
that ``the announced policy of the FCC in the Federal Register
is a desirable way of eliminating these voluntary transactions
from the application of Code section 1071.'' \11\
\8\ Technical Amendment Act of 1958, Pub. L. 85-866, sec. 52.
\9\ S. Rept. No. 1983, 85th Cong., 2d Sess., 73-74 (1957).
\10\ FCC Policy for Tax Certificates, 21 Fed. Reg. 7831 (Oct. 13,
1956).
\11\ H. Rept. No. 775, 85th Cong., 1st Sess., 29-30 (1957).
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The term ``radio broadcasting'' was expanded to include
cable television in 1973.\12\ The use of FCC tax certificates
was recently expanded in connection with the auction of
personal communications services (see discussion below).
\12\ Rev. Rul. 73-73, 1973-1 C.B. 371.
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FCC Administration of Tax Certificate Program
FCC tax certificate program
Multiple ownership policy
The FCC originally adopted multiple ownership rules in the
early 1940s.\13\ These rules prohibited broadcast station
owners from owning more than one station in the same service
area, and, generally, more than six high frequency (radio) or
three television stations. Owners wishing to acquire additional
stations had to divest themselves of stations they already
owned in order to remain in compliance with the FCC's rules.
\13\ 5 Fed. Reg. 2382 (June 26, 1940) (multiple ownership rules for
high frequency broadcast stations); 5 Fed. Reg. 2284 (May 6, 1941)
(multiple ownership rules for television stations).
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In November 1943, the FCC adopted a rule that prohibited
duopolies (ownership of more than one station in the same
city).\14\ After these rules were adopted, owners wishing to
acquire additional stations in excess of the national ownership
limit had to divest themselves of stations they already owned
in order to remain in compliance with the FCC's rules. After
Code section 1071 was adopted in 1943, in some cases, parties
petitioned the FCC for tax certificates pursuant to Code
section 1071 when divesting themselves of stations. These
divestitures were labeled ``voluntary divestitures'' by the
FCC. When the duopoly rule was adopted, 35 licensees that held
more than one license in a particular city were required by the
rule to ``involuntarily'' divest themselves of one of the
licenses.\15\
\14\ 8 Fed. Reg. 16065 (Nov. 23, 1943).
\15\ FCC Announces New Policy Relating to Issuance of Tax
Certificates, 14 FCC2d 827 (1956).
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Minority ownership policy
In 1978, the FCC announced a policy of promoting minority
ownership of broadcast facilities by offering an FCC tax
certificate to those who voluntarily sell such facilities
(either in the form of assets or stock) to minority individuals
or minority-controlled entities.\16\ The FCC's policy was based
on the view that minority ownership of broadcast stations would
provide a significant means of fostering the inclusion of
minority views in programming, thereby serving the needs and
interests of the minority community as well as enriching and
educating the non-minority audience. The FCC subsequently
expanded its policy to include the sale of cable television
systems to minorities as well.\17\
\16\ Minority Ownership of Broadcasting Facilities, 68 FCC2d 979
(1978).
\17\ Minority Ownership of Cable Television Systems, 52 R.R.2d 1469
(1982).
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``Minorities,'' within the meaning of the FCC's policy,
include ``Blacks, Hispanics, American Indians, Alaska Natives,
Asians, and Pacific Islanders.'' \18\ As a general rule, a
minority-controlled corporation is one in which more than 50
percent of the voting stock is held by minorities. A minority-
controlled limited partnership is one in which the general
partner is a minority or minority-controlled, and minorities
have at least a 20-percent interest in the partnership.\19\ The
FCC requires those who acquire broadcast (or cable) properties
with the help of the FCC tax certificate policy to hold those
properties for at least one year.\20\ An acquisition can
qualify even if there is a pre-existing agreement (or option)
to buy out the minority interests at the end of the one-year
holding period, providing that the transaction is at arm's-
length.
\18\ 52 R.R.2d at n. 1.
\19\ Commission's Policy Regarding the Advancement of Minority
Ownership in Broadcasting, Policy Statement, and Notice of Proposed
Rulemaking, 92 FCC2d 853-855 (1982).
\20\ See Amendment of Section 73.3597 of the Commission's Rules
(Applications for Voluntary Assignments or Transfers of Control), 57
R.R.2d 1149 (1985).
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In 1982, the FCC further expanded its tax certificate
policy for minority ownership. At that time, the FCC decided
that, in addition to those who sell properties to minorities,
investors who contribute to the stabilization of the capital
base of a minority enterprise would be entitled to a tax
certificate upon the subsequent sale of their interest in the
minority entity.\21\ To qualify for an FCC tax certificate in
this circumstance, an investor must either (1) provide start-up
financing that allows a minority to acquire either broadcast or
cable properties, or (2) purchase shares in a minority-
controlled entity within the first year after the license
necessary to operate the property is issued to the minority. In
these situations, the status of the divesting investor and the
purchaser of the divested interest is irrelevant, because the
goal is to increase the financing opportunities available to
minorities.
\21\ Commission Policy Regarding the Advancement of Minority
Ownership in Broadcasting, 92 FCC2d 849 (1982).
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Since fiscal year 1988, in appropriations legislation, the
Congress has prohibited the FCC from using any of its
appropriated funds to repeal, to retroactively apply changes
in, or to continue a reexamination of its comparative
licensing, distress sale and tax certificate policies.\22\ This
limitation has not prevented an expansion of the existing
program.\23\
\22\ Pub. L. No. 100-202 (1987).
\23\ The appropriations restriction ``does not prohibit the agency
from taking steps to create greater opportunity for minority
ownership.'' H. Conf. Rep. No. 103-708, 103d Cong. 2d Sess. 40 (1994).
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Personal communications services ownership policy
In 1993, Congress provided for the orderly transfer of
frequencies, including frequencies that can be licensed
pursuant to competitive bidding procedures.\24\ The FCC has
adopted rules to conduct auctions for the award of more than
2,000 licenses to provide personal communications services
(``PCS''). PCS will be provided by means of a new generation of
communication devices that will include small, lightweight,
multi-function portable phones, portable facsimile and other
imaging devices, new types of multi-channel cordless phones,
and advanced paging devices with two-way data capabilities. The
PCS auctions (which began last year) will constitute the
largest auction of public assets in American history and are
expected to generate billions of dollars for the United States
Treasury.\25\
\24\ Omnibus Budget Reconciliation Act of 1993, P.L. 103-66, Title
VI.
\25\ Fifth Report and Order, 9 FCC Rcd 5532 (1994).
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In their proposed rules, the FCC has designed procedures to
ensure that small businesses, rural telephone companies and
businesses owned by women and minorities have ``the opportunity
to participate in the provision'' of PCS, as Congress directed
in 1993.\26\ To help minorities and women participate in the
auction of the PCS licenses, the FCC took several steps
including a 15-percent bidding credit, a reduced upfront
payment requirement, a flexible installment payment schedule,
and an extension of the tax certificate program for businesses
owned by minorities and women.\27\
\26\ Omnibus Budget Reconciliation Act of 1993, P.L. 103-66,
section 6002(a).
\27\ Installment payments are available to small businesses and
rural telephone companies.
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The tax certificate program for PCS will be extended in
three ways: (1) initial investors (who provide ``start-up''
financing or purchase interests within the first year after
license issuance) in minority and woman-owned PCS businesses
will be eligible for FCC tax certificates upon the sale of
their investments; (2) holders of PCS licenses will be able to
obtain FCC tax certificates upon the sale of the business to a
company controlled by minorities and women; and (3) a cellular
operator that sells its interest in an overlapping cellular
system to a minority or a woman-owned business to come into
compliance with the FCC PCS/cellular cross-ownership rule will
be eligible for a tax certificate.\28\
\28\ Tax certificates also have been employed as a means of
encouraging fixed microwave operators to relocate from spectrum
allocated to emerging technologies. See, Third Report and Order and
Memorandum Opinion and Order, 8 FCC Rcd 6589 (1993). An AM expanded
band policy also is available, but has never been used. Review of the
Technical Assignment Criteria for the AM Broadcast Service, 6 FCC Rcd
6273 (1991).
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FCC interpretation of tax certificate program
The standards for FCC tax certification have been
progressively loosened over time. As noted above, in 1956, the
FCC's construction of the term ``necessary or appropriate'' in
Code section 1071 led it to require a showing of the
involuntary nature of the divestiture.\29\ However, in 1970,
the FCC lessened the required showing to a ``causal
relationship'' between the divestiture and the specific FCC
policy, as a condition for the issuance of a certificate.\30\
Subsequently, the FCC determined that voluntary divestitures
that effectuate specific ownership policies are
``appropriate,'' and eliminated the ``causal relationship''
requirements.\31\ Further, in adopting the minority ownership
policy described above, the FCC stated that ``originally tax
certification was used to remove the hardship of involuntary
transfer as a result of divesture imposed by the Commission's
multiple ownership rules. Now, however, tax certificates are
routinely approved in voluntary sales. * * *'' \32\
\29\ FCC Announces New Policy Relating to Tax Certificates, 14
FCC2d 827 (1956).
\30\ Issuance of Tax Certificates, 19 RR 1831 (1970).
\31\ In re Issuance of Tax Certificates, 59 FCC2d 91 (1976).
\32\ Minority Ownership of Broadcasting Facilities, 68 FCC2d 979
(1978).
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Other FCC minority ownership programs
Apart from the FCC tax certificate program, there are other
programs administered by the FCC to foster minority ownership.
The FCC awards comparative merit in licensing proceedings to
minority applicants in the interest of promoting minority
entrepreneurship.\33\ In addition, the FCC's distress sale
policy allows broadcasting licensees whose licenses have been
designated for revocation hearing, prior to the commencement of
a hearing, to sell their station to a minority-owned or
controlled entity, at a price ``substantially'' below its fair
market value.\34\ A licensee whose license has been designated
for hearing would ordinarily be prohibited from selling,
assigning or otherwise disposing of its interest, until the
issues have been resolved in the licensee's favor.
\33\ Commission Policy Regarding the Advancement of Minority
Ownership in Broadcasting, 92 FCC2d 849 (1982).
\34\ Id.
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Effectiveness of FCC minority ownership programs
FCC tax certificate program
The FCC reports that it has issued 390 tax certificates
since 1978.\35\ Of that total, the FCC has issued 330 tax
certificates under the minority ownership program \36\ (an
additional 18 certificates have been issued to parties
contributing start-up capital to a minority-controlled entity
to acquire broadcast or cable properties).\37\ Thus, minority
ownership transfers have represented almost 90 percent of total
tax certificate transfers over the past 16 years. The majority
(about 80 percent) of license transfers relating to minority
ownership tax certificates involve radio properties, as would
be expected because most outstanding licenses are for
radio.\38\
\35\ Statement of William E. Kennard, General Counsel of the FCC,
before the Subcommittee on Oversight of the Committee on Ways and
Means, January 27, 1995.
\36\ Id.
\37\ Letter from William E. Kennard, General Counsel of the FCC, to
Kenneth J. Kies, Chief of Staff of the Joint Committee on Taxation,
dated February 7, 1995.
\38\ Statement of William E. Kennard, General Counsel of the FCC,
before the Subcommittee on Oversight of the Committee on Ways and
Means, January 27, 1995.
---------------------------------------------------------------------------
The average sales price for the transactions in which tax
certificates were granted was $3.5 million for radio, and $38
million for television.\39\ No average sales price information
is available for cable system sales, although the average sales
prices is expected to be much larger.\40\ No information is
available concerning the lost revenue associated with the
transactions for which the FCC has issued tax certificates in
minority ownership transfers because the FCC does not take into
account the amount of lost tax revenue in determining whether
to issue a tax certificate. Moreover, the FCC does not request
any such information as part of the application process, nor
does it request any showing that the amount of the tax benefit,
which at least initially accrues to the non-minority seller
generally, is in any way transferred economically to the
minority-owned or controlled purchaser in the form of a reduced
purchase price to the minority purchaser.
\39\ Id.
\40\ Id.
---------------------------------------------------------------------------
The 330 license transfers reported over the past 16 years
do not reflect net additions to the number of licenses held by
minority persons, because some of the certificate transfers
under the minority ownership program represent sales from one
minority person to another minority person. In addition, as
indicated below, in many cases the minority buyers have
subsequently sold their interests. Thus, it is not possible to
determine the extent to which the tax certificate program has
increased the absolute level of minority ownership of broadcast
properties.
The FCC has very little data on the extent to which FCC tax
certificates foster ``real'' minority ownership of broadcast
stations. The FCC's records show that four of 40 television
licenses have been transferred by a minority-controlled entity
after the license was acquired in a tax certificate
transaction.\41\ The average holding period for these four
licenses prior to transfer was 2.25 years. In radio, 130 of 183
(71 percent) stations acquired in tax certificate transactions
during the period 1979-1992 for which the FCC has data were
sold at the close of 1992. The average holding period was 3.5
years. The FCC was unable to provide data on the number of
cable licenses acquired in tax certificate transactions and the
average holding period prior to transfer.
\41\ Letter from William E. Kennard, General Counsel of the FCC, to
Kenneth J. Kies, Chief of Staff of the Joint Committee on Taxation,
dated February 7, 1995.
---------------------------------------------------------------------------
Recent news reports suggest that FCC tax certificates are
not fostering ``real'' minority ownership of broadcast
stations.\42\ In some instances, a minority investor purports
to control the buyer (often a limited partnership or other
syndication) but effectively lacks real control due to the
small economic interest of the minority investor. In other
instances, minority buyers are reported to have resold the
broadcast property (or their interest in the property) shortly
after the original sale.
\42\ ``Viacom Deal's Big Tax Break Concerns FCC,'' Washington Post,
January 11, 1995; ``FCC Minority Program Spurs Deals--and Questions,''
Washington Post, June 3, 1993; ``How the Rich Get Richer,'' Forbes, May
15, 1989.
---------------------------------------------------------------------------
FCC minority ownership programs
There is no data that documents the overall effectiveness
of the FCC minority ownership programs (including the tax
certificate program) or the effectiveness of any particular FCC
minority ownership program. Moreover, some recently published
analysis has questioned both the appropriateness and
effectiveness of the program.\43\
\43\ ``Color TV: Diversity-Mongering at the FCC,'' The New
Republic, Vol. 211; No. 25, p. 9 (December 19, 1994).
---------------------------------------------------------------------------
Some limited empirical data exists on minority ownership of
broadcast facilities generally. The National Telecommunications
and Information Administration reports that minority persons
hold 2.9 percent of all broadcast licenses.\44\ This is an
increase from the 1978 level estimated at 0.5 percent, but is
lower than a peak of 3.0 percent attained in the mid-1980s.
These ownership numbers, however, do not measure the extent of
equity investments, but rather attempt to measure ``control''
of the broadcast and cable television properties. As discussed
above, ``control'' has been found by the FCC to exist in the
context of a purchase of a license by a partnership where the
minority general partner owns as little as 20 percent of the
total equity in the purchasing partnership, and that ownership
interest may be subject to further financial conditions that
may further weaken the minority's influence.
\44\ National Telecommunications and Information Administration,
United States Department of Commerce, Analysis and Compilation of
Minority-Owned Commercial Broadcast Stations, 1994.
---------------------------------------------------------------------------
Moreover, the percentages probably overstate the degree of
minority ownership in broadcasting as the percentage of
minority ownership in large markets is less than the national
percentage would suggest. In addition, the percentages are also
not weighted by the dollar value of outstanding broadcast
licenses.
Present Law
Tax treatment of a Seller of Broadcast Property
General tax rules
Under generally applicable Code provisions, the seller of a
business, including a broadcast business, recognizes gain to
the extent the sale price (and any other consideration
received) exceeds the seller's basis in the property. The
recognized gain is then subject to the current income tax
unless the gain is deferred or not recognized under a special
tax provision.
Special rules under Code section 1033
Under Code section 1033, gain realized by a taxpayer from
certain involuntary conversions of property is deferred to the
extent the taxpayer purchases property similar or related in
service or use to the converted property. The replacement
property may be acquired directly or by acquiring control of a
corporation (generally, 80 percent of the stock of the
corporation) that owns replacement property.
Only involuntary conversions that result from destruction,
theft, seizure, or condemnation (or threat or imminence
thereof) are eligible for deferral under Code section 1033. In
addition, the term ``condemnation'' refers to the process by
which private property is taken for public use without the
consent of the property owner but upon the award and payment of
just compensation, according to a ruling by the Internal
Revenue Service (IRS).\45\ Thus, for example, an order by a
Federal court to a corporation to divest itself of ownership of
certain stock because of anti-trust rules, is not a
condemnation (or a threat or imminence thereof), and the
divestiture is not eligible for deferral under this
provision.\46\
\45\ Rev. Rul. 58-11, 1958-1 C.B. 273.
\46\ Id.
---------------------------------------------------------------------------
In addition, under rulings issued by the IRS to taxpayers,
property (stock or assets) purchased from a related person may,
in some cases, qualify as property similar or related in
service or use to the converted property.\47\ Thus, in certain
circumstances, related taxpayers may obtain significant (and
possibly indefinite) tax deferral without any additional cash
outlay to acquire new properties.
\47\ See, e.g., PLR 8132072, PLR 8020069. Private letter rulings do
not have precedential authority and may not be relied upon by any
taxpayer other than the taxpayer receiving the ruling but are some
indication of IRS administrative practice.
---------------------------------------------------------------------------
Special rules under Code section 1071
Under Code section 1071, if the FCC certifies that a sale
or exchange of property is necessary or appropriate to
effectuate a change in a policy of, or the adoption of a new
policy by, the FCC with respect to the ownership and control of
``radio broadcasting stations,'' a taxpayer may elect to treat
the sale or exchange as an involuntary conversion. The FCC is
not required to determine the tax consequences of certifying a
sale or to consult with the IRS about the certification
process.\48\ No other provision of the Internal Revenue Code
grants a Federal agency or any other party the type of complete
discretion conveyed to the FCC by section 1071. Moreover, no
other tax provision is either drafted or administered in a
manner which conveys tax benefits solely on the basis of racial
classification.\49\
\48\ The FCC allows sellers applying for FCC certificates in cable
transactions to delete both the sales price and the number of
subscribers from the transaction documents submitted with the request
for the certificates.
\49\ The only possible exception to this rule are various
provisions applicable to American Indian tribes, although these
provisions are clearly distinguishable due to the fact that they
generally emanate from the separate nation status of American Indians
reflected, at least in part, in the rights conveyed on American Indians
by treaties with the U.S. government.
---------------------------------------------------------------------------
Under Code section 1071, the replacement requirement in the
case of FCC-certified sales may be satisfied by purchasing
stock of a corporation that owns broadcasting property, whether
or not the stock represents control of the corporation. In
addition, even if the taxpayer does not reinvest all the sales
proceeds in similar or related replacement property, the
taxpayer nonetheless may elect to defer recognition of gain if
the basis of depreciable property that is owned by the taxpayer
immediately after the sale or that is acquired during the same
taxable year is reduced by the amount of deferred gain.
Tax Treatment of a Buyer of Broadcast Property
Under generally applicable Code provisions, the purchaser
of a broadcast business, or any other business, acquires a
basis equal to the purchase price paid. In an asset
acquisition, a buyer must allocate the purchase price among the
purchased assets to determine the buyer's basis in these
assets. In a stock acquisition, the buyer takes a basis in the
stock equal to the purchase price paid, and the business
retains its basis in the assets. This treatment applies whether
or not the seller of the broadcast property has received an FCC
certificate exempting the sale transaction from the normal tax
treatment.
Reasons for Change
Testimony provided at the Oversight Subcommittee's January
27, 1995, hearing, and documents reviewed pursuant to the
Subcommittee's examination, revealed serious tax policy
problems with this provision of the Internal Revenue Code.
Moreover, the Subcommittee's review revealed serious problems
in the operation and administration of Code Section 1071 by the
FCC. As an initial matter, the FCC's progressive loosening of
the standards for issuing tax certificates went far beyond what
Congress originally contemplated for administration of the
provision. Congress originally intended Code section 1071 to
alleviate the burden of taxpayers who had been forced to sell
their radio stations under difficult wartime circumstances. The
FCC has interpreted the provision to permit the FCC to grant
unlimited tax benefits for routine and voluntary sales of a
wide range of communication properties.
In addition, the FCC's standards for issuing tax
certificates have been so vague that the program appears to
have been subject to significant abuse. For example, the FCC's
definition of ``control'' for purposes of its minority
ownership policies provides little guarantee that a minority
will effectively manage a broadcast property after the sale of
property has been certified. Moreover, the FCC does not require
continuing minority ownership as condition of receiving an FCC
certificate and, in many cases, the minority ownership or
control has been merely transitory. For example, with respect
to radio station transactions receiving tax certificates during
the period 1979-1992 and for which the FCC was able to supply
data, approximately 71 percent of such stations were no longer
held by the original minority purchaser at the close of 1992.
Further, the FCC's interpretation and administration of the
tax certificate program has not been supervised by the IRS, or
any other government body that could evaluate the tax cost of
the program. Also, the FCC's tax certificate program has not
been subject to any systematic review of its total cost to the
taxpayers. In granting tax certificates, the FCC does not take
into account the size of the potential tax benefit involved.
Indeed, neither the FCC nor the IRS request information
concerning the magnitude of the tax benefit granted in
determining whether to issue tax certificates. The FCC also
does not request any showing or representation that the amount
of the tax benefits, which at least initially accrue to the
non-minority seller generally, is in any way reflected in the
form of a lower purchase price to the minority-owned or
controlled purchaser. As a result, it is possible that, in many
cases, the entire tax benefit accrues to the non-minority
seller.
From a tax policy perspective, the Oversight Subcommittee's
review revealed serious deficiencies in section 1071. No other
provision of the Internal Revenue Code conveys the level of
discretion to a Federal government agency (or any other party
for that matter) in any way comparable to the discretion
conveyed on the FCC by section 1071. Thus, section 1071 grants
the authority to the FCC to administer what is, in effect, an
open-ended entitlement program with no constraints imposed to
limit the extent to which the FCC may utilize the provision.
Moreover, no other provision, either by its statutory terms or
through its administration, conveys tax benefits solely on the
basis of racial status.
Finally, the benefits of the FCC certificate program have
not been quantified in any meaningful manner. As noted above,
tax certificates have been issued for sales of broadcast
property to ``minority controlled'' entities that do not appear
to have fostered significant minority ownership of broadcast
stations. Because the FCC generally requires only one year of
minority ownership or control to qualify for a tax certificate,
section 1071 has frequently resulted in only transitory
minority ownership of broadcast properties, i.e., in many cases
the granting of the tax certificate has not resulted in
achieving the objective of minority ownership or control.
As a result of these considerations, the Committee
concluded that the tax cost of the FCC tax certificate program
far outweighs any demonstrated benefit of the program. The
Committee also concluded that the section is completely
inconsistent with sound tax policy. The Committee therefore is
repealing the provision.
In the course of its deliberations, the Committee also
became aware of problems with the operation of Code section
1033. Under interpretations issued by the IRS, taxpayers are
able to purchase replacement property from a related party,
thereby avoiding the need to buy ``new'' replacement property
and, sometimes, effectively resulting in a total tax
forgiveness for the transaction. The Committee intends that, in
the future, taxpayers be required to buy replacement property
only from unrelated persons in order to receive the special tax
treatment under section 1033.
Explanation of Provisions
Repeal of Code Section 1071 (sec. 2 of the bill)
The bill repeals Code section 1071. Thus, a sale or
exchange of broadcast properties would be subject to the same
tax rules applicable to all other taxpayers engaged in the sale
or exchange of a business.
Modification of Code Section 1033 (sec. 3 of the bill)
In addition, under the bill, a taxpayer may not defer gain
under Code section 1033 when the replacement property or stock
is purchased from a related person. For purposes of the bill, a
person is treated as related to another person if the
relationship between the persons would result in a disallowance
of losses under the rules of Code section 267 or 707(b).
Effective Dates
Repeal of Code Section 1071
The repeal of section 1071 is effective for (1) sales or
exchanges on or after January 17, 1995 (the date of Chairman
Archer's press release), and (2) sales or exchanges before that
date if the FCC tax certificate with respect to the sale or
exchange is issued on or after that date. The provision does
not apply to taxpayers who have entered into a binding written
contract (or have completed a sale or exchange pursuant to a
binding written contract) before January 17, 1995, and who have
applied for an FCC tax certificate by that date. A contract is
treated as not binding for this purpose if the sale or exchange
pursuant to the contract (or the material terms of the
contract) were contingent on January 16, 1995, on issuance of
an FCC tax certificate. A sale or exchange would not be
contingent on January 16, 1995, on issuance of an FCC tax
certificate if the tax certificate had been issued by the FCC
by that date.
Modification of Code Section 1033
The prohibition against nonrecognition of gain in certain
related-party transactions applies to replacement property or
stock acquired on or after February 6, 1995 (the date of
introduction of H.R. 831).
C. Interest and Dividend Test for Earned Income Tax Credit (sec. 4 of
the bill and sec. 32 of the Code)
Present Law
Eligible low-income workers are able to claim a refundable
earned income tax credit (EITC). The amount of the credit an
eligible taxpayer may claim depends upon whether the taxpayer
has one, more than one, or no qualifying children and is
determined by multiplying the credit rate by the taxpayer's
earned income up to an earned income threshold. The maximum
amount of the credit is the product of the credit rate and the
earned income threshold. For taxpayers with earned income (or
adjusted gross income, if greater) in excess of the phaseout
threshold, the credit amount is reduced by the phaseout rate
multiplied by the amount of earned income (or adjusted gross
income, if greater) in excess of the phaseout threshold. The
credit is not allowed if earned income (or adjusted gross
income, if greater) exceeds the phaseout limit. There is no
additional limitation on the amount of interest and dividend
income that the taxpayer may receive.
The parameters for the EITC depend upon the number of
qualifying children the taxpayer claims. For 1995 the
parameters are as follows:
------------------------------------------------------------------------
Two or more
qualifying One qualifying No qualifying
children-- child-- children--
------------------------------------------------------------------------
Credit rate (in percent) 36.00 34.00 7.65
Phaseout rate (in
percent)............... 20.22 15.98 7.65
Earned income threshold. $8,640 $6,160 $4,100
Maximum credit.......... $3,110 $2,094 $314
Phaseout threshold...... $11,290 $11,290 $5,130
Phaseout limit.......... $26,673 $24,396 $9,230
------------------------------------------------------------------------
The earned income threshold and the phaseout threshold are
indexed for inflation; because the phaseout limit depends on
those amounts, the phaseout rate, and the credit rate, the
phaseout limit will also increase if there is inflation. Earned
income consists of wages, salaries, other employee
compensation, and net self-employment income.
The credit rates and phaseout rates for the EITC change
over time under present law. For 1996 and after, the credit
rate will be 40 percent and the phaseout rate will be 21.06
percent for taxpayers with two or more qualifying children. The
credit rate and the phaseout rate for taxpayers with one
qualifying child or no qualifying children will be the same as
those listed in the table above.
In order to claim the EITC, a taxpayer must either have a
qualifying child or must meet other requirements. A qualifying
child must meet a relationship test, an age test, and a
residence test. In order to claim the EITC without a qualifying
child, a taxpayer must not be a dependent and must be over age
24 and under age 65.
Reasons for Change
Under present law, a taxpayer may have relatively low
earned income, and therefore may be eligible for the EITC,
despite also having significant interest and dividend income.
The Committee believes that the EITC should be targeted to
families with the greatest need. Therefore, the Committee
believes that it is inappropriate to allow the EITC to
taxpayers with significant interest and dividend income.
Explanation of Provision
Under the bill, a taxpayer is not eligible for the EITC if
the aggregate amount of interest and dividends includible in
his or her income for the taxable year exceeds $3,150. The
otherwise allowable EITC amount is phased out ratably for
taxpayers with aggregate taxable interest and dividend income
between $2,500 and $3,150. For taxable years beginning after
1996, the $2,500 threshold and the $650 size of the phaseout
will be indexed for inflation, with rounding to the nearest
multiple of $10.
Effective Date
The provision is effective for taxable years beginning
after December 31, 1995.
III. VOTES OF THE COMMITTEE
In compliance with clause 2(l)(2)(B) of rule XI of the
Rules of the House of Representatives, the following statements
are made concerning the votes of the Committee in its
consideration of the bill, H.R. 831.
Motion to Report the Bill
The bill, H.R. 831, as amended, was ordered favorably
reported by voice vote on February 8, 1995, with a quorum
present.
Votes on Amendments
The Committee defeated an amendment (9 yeas and 27 nays)
offered by Mr. Jacobs to strike the bill's proposed repeal of
Code section 1071 (FCC tax certificate program) and replace the
provision with a reinstatement of the prior law withholding tax
on interest from sources within the United States paid to
foreign persons, effective for interest paid on or after
January 17, 1995. The roll call vote was as follows:
YEAS NAYS
Mr. Rangel Mr. Archer
Mr. Stark Mr. Crane
Mr. Jacobs Mr. Thomas
Mr. Ford Mr. Shaw
Mrs. Kennelly Mrs. Johnson
Mr. Coyne Mr. Bunning
Mr. McDermott Mr. Houghton
Mr. Lewis Mr. Herger
Mr. Neal Mr. McCrery
Mr. Hancock
Mr. Camp
Mr. Ramstad
Mr. Zimmer
Mr. Nussle
Mr. Johnson
Ms. Dunn
Mr. Collins
Mr. Portman
Mr. English
Mr. Ensign
Mr. Christensen
Mr. Gibbons
Mr. Matsui
Mr. Levin
Mr. Cardin
Mr. Kleczka
Mr. Payne
The Committee defeated an amendment (10 yeas and 25 nays)
offered by Mr. Ford of Tennessee to strike the bill's proposed
repeal of Code section 1071 (FCC tax certificate program) and
replace it with a provision to disallow expense treatment for
intangible drilling and development costs, effective for costs
incurred on or after January 17, 1995. The roll call vote was
as follows:
YEAS NAYS
Mr. Gibbons Mr. Archer
Mr. Rangel Mr. Crane
Mr. Stark Mr. Thomas
Mr. Jacobs Mr. Shaw
Mr. Ford Mrs. Johnson
Mrs. Kennelly Mr. Bunning
Mr. Coyne Mr. Houghton
Mr. McDermott Mr. McCrery
Mr. Lewis Mr. Hancock
Mr. Neal Mr. Camp
Mr. Ramstad
Mr. Zimmer
Mr. Nussle
Mr. Johnson
Ms. Dunn
Mr. Collins
Mr. Portman
Mr. English
Mr. Ensign
Mr. Christensen
Mr. Matsui
Mr. Levin
Mr. Cardin
Mr. Kleczka
Mr. Payne
The Committee defeated an amendment (15 yeas and 21 nays)
offered by Mr. McDermott to replace the repeal of Code section
1071 with an en bloc amendment relating to the FCC tax
certificate program and a provision from the President's fiscal
year 1996 budget proposal to tax the unrealized appreciation of
assets held by citizens of the United States who renounce their
U.S. citizenship. The roll call vote was as follows:
YEAS NAYS
Mr. Gibbons Mr. Archer
Mr. Rangel Mr. Crane
Mr. Stark Mr. Thomas
Mr. Jacobs Mr. Shaw
Mr. Ford Mrs. Johnson
Mr. Matsui Mr. Bunning
Mrs. Kennelly Mr. Houghton
Mr. Coyne Mr. Herger
Mr. Levin Mr. McCrery
Mr. Cardin Mr. Hancock
Mr. McDermott Mr. Camp
Mr. Kleczka Mr. Ramstad
Mr. Lewis Mr. Zimmer
Mr. Payne Mr. Nussle
Mr. Neal Mr. Johnson
Ms. Dunn
Mr. Collins
Mr. Portman
Mr. English
Mr. Ensign
Mr. Christensen
The Committee defeated an amendment (10 yeas and 26 nays)
offered by Mr. Rangel to strike section 2 of the bill (relating
to the FCC tax certificate program). The roll call vote was as
follows:
YEAS NAYS
Mr. Gibbons Mr. Archer
Mr. Rangel Mr. Crane
Mr. Stark Mr. Thomas
Mr. Jacobs Mr. Shaw
Mr. Ford Mrs. Johnson
Mrs. Kennelly Mr. Bunning
Mr. Coyne Mr. Houghton
Mr. McDermott Mr. Herger
Mr. Lewis Mr. McCrery
Mr. Neal Mr. Hancock
Mr. Camp
Mr. Ramstad
Mr. Zimmer
Mr. Nussle
Mr. Johnson
Ms. Dunn
Mr. Collins
Mr. Portman
Mr. English
Mr. Ensign
Mr. Christensen
Mr. Matsui
Mr. Levin
Mr. Cardin
Mr. Kleczka
Mr. Payne
The Committee defeated an amendment (15 yeas and 20 nays)
offered by Messrs. Cardin and Neal to increase the deduction
for health insurance costs of the self-employed to 80 percent
for 1995 and 1996, and to sunset the deduction after 1996. The
roll call vote was as follows:
YEAS NAYS
Mr. Gibbons Mr. Archer
Mr. Rangel Mr. Crane
Mr. Stark Mr. Thomas
Mr. Jacobs Mr. Shaw
Mr. Ford Mrs. Johnson
Mr. Matsui Mr. Bunning
Mrs. Kennelly Mr. Houghton
Mr. Coyne Mr. Herger
Mr. Levin Mr. McCrery
Mr. Cardin Mr. Hancock
Mr. McDermott Mr. Camp
Mr. Kleczka Mr. Ramstad
Mr. Lewis Mr. Zimmer
Mr. Payne Mr. Nussle
Mr. Neal Mr. Johnson
Ms. Dunn
Mr. Collins
Mr. Portman
Mr. English
Mr. Christensen
The Committee defeated an amendment (9 yeas and 27 nays)
offered by Mr. Ford to strike the bill's repeal of Code section
1071 and replace it with a repeal of percentage depletion for
oil and gas wells, effective for periods on or after January
17, 1995. The roll call vote was as follows:
YEAS NAYS
Mr. Gibbons Mr. Archer
Mr. Rangel Mr. Crane
Mr. Stark Mr. Thomas
Mr. Jacobs Mr. Shaw
Mr. Ford Mrs. Johnson
Mrs. Kennelly Mr. Bunning
Mr. Coyne Mr. Houghton
Mr. McDermott Mr. Herger
Mr. Lewis Mr. McCrery
Mr. Hancock
Mr. Camp
Mr. Ramstad
Mr. Zimmer
Mr. Nussle
Mr. Johnson
Ms. Dunn
Mr. Collins
Mr. Portman
Mr. English
Mr. Ensign
Mr. Christensen
Mr. Matsui
Mr. Levin
Mr. Cardin
Mr. Kleczka
Mr. Payne
Mr. Neal
The Committee defeated an amendment (14 yeas and 20 nays)
offered by Mr. McDermott to provide that employees not eligible
to participate in an employer-subsidized health plan would be
eligible to deduct 25 percent of their health insurance
premiums. The roll call vote was as follows:
YEAS NAYS
Mr. Gibbons Mr. Archer
Mr. Stark Mr. Crane
Mr. Jacobs Mr. Thomas
Mr. Ford Mr. Shaw
Mr. Matsui Mrs. Johnson
Mrs. Kennelly Mr. Bunning
Mr. Coyne Mr. Houghton
Mr. Levin Mr. McCrery
Mr. Cardin Mr. Hancock
Mr. McDermott Mr. Camp
Mr. Kleczka Mr. Ramstad
Mr. Lewis Mr. Zimmer
Mr. Payne Mr. Nussle
Mr. Neal Mr. Johnson
Ms. Dunn
Mr. Collins
Mr. Portman
Mr. English
Mr. Ensign
Mr. Christensen
The Committee defeated an amendment (14 yeas and 21 nays)
offered by Mr. Ford to impose a 6-month moratorium on issuance
of FCC tax certificates. A report would be required by the
Department of the Treasury to the Committee on Ways and Means
by July 8, 1995, with recommendations for reform of Code
section 1071. The roll call vote was as follows:
YEAS NAYS
Mr. Gibbons Mr. Archer
Mr. Stark Mr. Crane
Mr. Jacobs Mr. Thomas
Mr. Ford Mr. Shaw
Mr. Matsui Mrs. Johnson
Mrs. Kennelly Mr. Bunning
Mr. Coyne Mr. Houghton
Mr. Levin Mr. Herger
Mr. Cardin Mr. McCrery
Mr. McDermott Mr. Hancock
Mr. Kleczka Mr. Camp
Mr. Lewis Mr. Ramstad
Mr. Payne Mr. Zimmer
Mr. Neal Mr. Nussle
Mr. Johnson
Mr. Dunn
Ms. Collins
Mr. Portman
Mr. English
Mr. Ensign
Mr. Christensen
The Committee defeated an amendment (13 yeas and 22 nays)
offered by Mr. Stark to remove the current time limitations on
COBRA health insurance continuation benefits. The roll call
vote was as follows:
YEAS NAYS
Mr. Gibbons Mr. Archer
Mr. Rangel Mr. Crane
Mr. Stark Mr. Thomas
Mr. Ford Mr. Shaw
Mr. Matsui Mrs. Johnson
Mrs. Kennelly Mr. Bunning
Mr. Coyne Mr. Houghton
Mr. Levin Mr. Herger
Mr. Cardin Mr. McCrery
Mr. McDermott Mr. Hancock
Mr. Kleczka Mr. Camp
Mr. Lewis Mr. Ramstad
Mr. Neal Mr. Zimmer
Mr. Nussle
Mr. Johnson
Ms. Dunn
Mr. Collins
Mr. Portman
Mr. English
Mr. Ensign
Mr. Christensen
Mr. Payne
The Committee defeated an amendment (15 yeas and 21 nays)
offered by Mr. Rangel to strike section 3 of the bill (relating
to nonrecognition of gain on involuntary conversions not to
apply if replacement property is acquired from a related
person). The roll call vote was as follows:
YEAS NAYS
Mr. Gibbons Mr. Archer
Mr. Rangel Mr. Crane
Mr. Stark Mr. Thomas
Mr. Jacobs Mr. Shaw
Mr. Ford Mrs. Johnson
Mr. Matsui Mr. Bunning
Mrs. Kennelly Mr. Houghton
Mr. Coyne Mr. Herger
Mr. Levin Mr. McCrery
Mr. Cardin Mr. Hancock
Mr. McDermott Mr. Camp
Mr. Kleczka Mr. Ramstad
Mr. Lewis Mr. Zimmer
Mr. Payne Mr. Nussle
Mr. Neal Mr. Johnson
Ms. Dunn
Mr. Collins
Mr. Portman
Mr. English
Mr. Ensign
Mr. Christensen
IV. BUDGET EFFECTS OF THE BILL
A. Committee Estimate of Budgetary Effects
In compliance with clause 7(a) of rule XIII of the Rules of
the House of Representatives, the following statement is made
concerning the effects on the budget of this bill, H.R. 831, as
reported.
The bill, as amended, is estimated to have the following
effects on budget receipts (and outlays) for fiscal years 1995-
2000:
Estimated Budget Effects of H.R. 831 as Reported by the Committee on Ways and Means
[Fiscal years 1995-2000--in millions of dollars]
----------------------------------------------------------------------------------------------------------------
Provision Effective 1995 1996 1997 1998 1999 2000 1995-00
----------------------------------------------------------------------------------------------------------------
1. Extend 25% self-employed
health deduction permanently.. 1/1/94 -487 -398 -435 -484 -536 -584 -2,925
2. Repeal section 1071 (FCC tax
certificate program).......... 1/17/95 334 411 135 135 170 201 1,386
3. Modify section 1033 (non-
recognition of gain on
involuntary conversions not to
apply to related persons) \1\. 2/6/95 11 27 36 49 67 99 289
4. Deny earned income tax
credit to individuals with
interest and dividend income
greater than $2,500 (phaseout
between $2,500 and $3,150 )\2\ 1/1/96 ........ 14 285 308 318 335 1,260
--------------------------------------------------------------------------------
Total.................... ......... -142 54 21 8 19 51 10
----------------------------------------------------------------------------------------------------------------
\1\ This estimate includes adjustment to account for interaction with the repeal of section 1071.
\2\ Included in this estimate are decreases in EITC outlays of $12 million for FY 1996, $231 million for FY
1997, $246 million for FY 1998, $256 million for FY 1999, and $269 million for FY 2000.
Note.--Details may not add to totals due to rounding.
Source: Joint Committee on Taxation.
B. Statement Regarding New Budget Authority and Tax Expenditures
In compliance with subdivision (B) of clause 2(l)(3) of
rule XI of the Rules of the House of Representatives, the
Committee states that the outlay portion of the interest and
dividend limitation on the EITC involves decreased budget
authority (amounts shown above in IV.A).
The Committee further states that the extension of the
deduction for health insurance costs of self-employed
individuals involves increased tax expenditures (amounts shown
above in IV.A), and that the revenue-increasing provisions
(repeal of FCC tax certificate program under Code section 1071,
involuntary conversion provision for related persons under Code
section 1033, and the receipts portion of the interest and
dividend limitation on the EITC) involve reductions in tax
expenditures (amounts shown above in IV.A).
C. Cost Estimate Prepared by the Congressional Budget Office
In compliance with subdivision (C) of clause 2(l)(3) of
rule XI of the Rules of the House of Representatives, requiring
a cost estimate prepared by the Congressional Budget Office,
the following report prepared by CBO is provided. The Committee
agrees with the estimate prepared by CBO.
U.S. Congress,
Congressional Budget Office,
Washington, DC, February 14, 1995.
Hon. Bill Archer,
Chairman, Committee on Ways and Means,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office and the
Joint Committee on Taxation (JCT) have reviewed H.R. 831, as
ordered reported by the House Committee on Ways and Means on
February 8, 1995. The JCT estimates that this bill would
increase the deficit by $142 million in fiscal year 1995 and
decrease the deficit by $10 million over fiscal years 1995
through 2000.
H.R. 831 would make permanent the 25 percent deduction for
health insurance costs of self-employed individuals that
expired after December 31, 1993. The deduction would be
effective for taxable years beginning after December 31, 1993.
To offset the revenue loss from extending the deduction,
the bill would repeal the provision of the Internal Revenue
Code that permits nonrecognition of gain on sales and exchanges
effectuating policies of the Federal Communications Commission
and would prohibit nonrecognition of gain on involuntary
conversions in certain related-party transactions. Also, the
bill would deny the earned income tax credit to individuals
having more than $2,500 of interest and dividend income. The
budget effects of the bill are shown below.
Budget Effects of H.R. 831
[By fiscal year, in millions of dollars]
------------------------------------------------------------------------
1995 1996 1997 1998 1999 2000
------------------------------------------------------------------------
Estimated revenues
\1\.............. -142 42 -210 -238 -237 -218
Estimated outlays. 0 -12 -231 -246 -256 -269
Net increase (+)
or decrease (-)
in deficit....... 142 -54 -21 -8 -19 -51
------------------------------------------------------------------------
\1\ Positive changes refer to an increase in revenues.
Section 252 of the Balanced Budget and Emergency Deficit
Control Act of 1985 sets up pay-as-you-go procedures for
legislation affecting receipts or direct spending through 1998.
Because H.R. 831 would affect receipts, pay-as-you-go
procedures would apply to the bill. These effects are
summarized in the table below.
Pay-as-You-Go Considerations
[By fiscal years, in millions of dollars]
------------------------------------------------------------------------
1995 1996 1997 1998
------------------------------------------------------------------------
Changes in Receipts. -142 42 -210 -238
Changes in Outlays.. 0 -12 -231 -246
------------------------------------------------------------------------
If you wish further details, please feel free to contact me
or your staff may wish to contact Melissa Sampson at 226-2720.
Sincerely,
James L. Blum
(For Robert D. Reischauer, Director).
V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE
A. Committee Oversight Findings and Recommendations
With respect to subdivision (A) of clause 2(l)(3) of rule
XI of the Rules of the House of Representatives (relating to
oversight findings), the Committee advises that it was as a
result of the Committee's oversight activities concerning the
deduction for health insurance costs of self-employed
individuals, the trends in the administration and operation of
the FCC's tax certificate program (under Code section 1071),
the nonrecognition of gain on involuntary conversions (under
Code section 1033) where replacement property is acquired from
a related person, and the availability of the EITC for
individuals with significant amounts of unearned income from
taxable interest and dividends that the Committee concluded
that it is appropriate to enact the provisions contained in the
bill as amended. (See also Parts I.B and I.C of this report for
a discussion of the background of the bill and the legislative
history and hearings held on the provisions included in the
bill).
B. Summary of Findings and Recommendations of the Committee on
Government Reform and Oversight
With respect to subdivision (D) of clause 2(l)(3) of rule
XI of the Rules of the House of Representatives, the Committee
advises that no oversight findings or recommendations have been
submitted to this Committee by the Committee on Government
Reform and Oversight with respect to the provisions contained
in this bill.
C. Inflationary Impact Statement
In compliance with clause 2(l)(4) of rule XI of the Rules
of the House of Representatives, the Committee states that the
provisions of the bill are not expected to have an overall
inflationary impact on prices and costs in the operation of the
national economy. As indicated above (in Part IV of this
report), the bill is projected to be deficit neutral over
fiscal years 1995-2000.
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED
In compliance with clause 3 of rule XIII of the rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, existing law in which no change is
proposed is shown in roman):
INTERNAL REVENUE CODE OF 1986
Subtitle A--Income Taxes
CHAPTER 1--NORMAL TAXES AND SURTAXES
Subchapter A--Determination of Tax Liability
* * * * * * *
PART IV--CREDITS AGAINST TAX
* * * * * * *
Subpart C--Refundable Credits
* * * * * * *
SEC. 32. EARNED INCOME.
(a) * * *
* * * * * * *
(i) Phaseout of Credit for Individuals Having More Than
$2,500 of Taxable Interest and Dividends.--If the aggregate
amount of interest and dividends includible in the gross income
of the taxpayer for the taxable year exceeds $2,500, the amount
of the credit which would (but for this subsection) be allowed
under this section for such taxable year shall be reduced (but
not below zero) by an amount which bears the same ratio to such
amount of credit as such excess bears to $650.
[(i)] (j) Inflation Adjustments.--
(1) In general.--In the case of any taxable year
beginning after 1994, each dollar amount contained in
subsection (b)(2)(A) shall be increased by an amount
equal to--
(A) such dollar amount, multiplied by
(B) the cost-of-living adjustment determined
under section 1(f)(3), for the calendar year in
which the taxable year begins, by substituting
``calendar year 1993'' for ``calendar year
1992''.
[(2) Rounding.--If any dollar amount after being
increased under paragraph (1) is not a multiple of $10,
such dollar amount shall be rounded to the nearest
multiple of $10 (or, if such dollar amount is a
multiple of $5, such dollar amount shall be increased
to the next higher multiple of $10).]
(2) Interest and dividend income limitation.--In the
case of a taxable year beginning in a calendar year
after 1996, each dollar amount contained in subsection
(i) shall be increased by an amount equal to--
(A) such dollar amount, multiplied by
(B) the cost-of-living adjustment determined
under section 1(f)(3) for the calendar year in
which the taxable year begins, determined by
substituting ``calendar year 1995'' for
``calendar year 1992'' in subparagraph (B)
thereof.
(3) Rounding.--If any amount as adjusted under
paragraph (1) or (2) is not a multiple of $10, such
dollar amount shall be rounded to the nearest multiple
of $10.
[(j)] (k) Coordination With Certain Means-Tested
Programs.--For purposes of--
(1) the United States Housing Act of 1937,
(2) title V of the Housing Act of 1949,
(3) section 101 of the Housing and Urban Development
Act of 1965,
(4) section 221(d)(3), 235, and 236 of the National
Housing Act, and
(5) the Food Stamp Act of 1977,
any refund made to an individual (or the spouse of an
individual) by reason of this section, and any payment made to
such individual (or such spouse) by an employer under section
3507, shall not be treated as income (and shall not be taken
into account in determining resources for the month of its
receipt and the following month).
* * * * * * *
Subchapter B--Computation of Taxable Income
* * * * * * *
PART VI--ITEMIZED DEDUCTIONS FOR INDIVIDUALS AND CORPORATIONS
* * * * * * *
SEC. 162. TRADE OR BUSINESS EXPENSES.
(a) * * *
* * * * * * *
(l) Special Rules for Health Insurance Costs of Self-
Employed Individuals.--
(1) * * *
* * * * * * *
[(6) Termination.--This subsection shall not apply to
any taxable year beginning after December 31, 1993.]
* * * * * * *
Subchapter O--Gain or Loss on Disposition of Property
Part I. Determination of amount and recognition of gain or
loss.
* * * * * * *
[Part V. Changes to effectuate F.C.C. policy.]
* * * * * * *
PART III--COMMON NONTAXABLE EXCHANGES
* * * * * * *
SEC. 1033. INVOLUNTARY CONVERSIONS.
(a) * * *
* * * * * * *
(i) Nonrecognition Not To Apply if Replacement Property
Acquired From Related Person.--Subsection (a) shall not apply
if the replacement property or stock acquired is acquired from
a related person. For purposes of the preceding sentence, a
person is related to another person if the relationship between
such persons would result in a disallowance of losses under
section 267 or 707(b).
[(i)] (j) Cross References.--
(1) For determination of the period for which the taxpayer has
held property involuntarily converted, see section 1223.
(2) For treatment of gains from involuntary conversions as
capital gains in certain cases, see section 1231(a).
(3) For one-time exclusion from gross income of gain from
involuntary conversion of principal residence by individual who
has attained age 55, see section 121.
* * * * * * *
[PART V--CHANGES TO EFFECTUATE F.C.C. POLICY
[Sec. 1071. Gain from sale or exchange to effectuate policies of F. C.
C.
[SEC. 1071. GAIN FROM SALE OR EXCHANGE TO EFFECTUATE POLICIES OF F.C.C.
[(a) Nonrecognition of Gain or Loss.--If the sale or
exchange of property (including stock in a corporation) is
certified by the Federal Communications Commission to be
necessary or appropriate to effectuate a change in a policy of,
or the adoption of a new policy by, the Commission with respect
to the ownership and control of radio broadcasting stations,
such sale or exchange shall, if the taxpayer so elects, be
treated as an involuntary conversion of such property within
the meaning of section 1033. For purposes of such section as
made applicable by the provisions of this section, stock of a
corporation operating a radio broadcasting station, whether or
not representing control of such corporation, shall be treated
as property similar or related in service or use to the
property so converted. The part of the gain, if any, on such
sale or exchange to which section 1033 is not applied shall
nevertheless not be recognized, if the taxpayer so elects, to
the extent that it is applied to reduce the basis for
determining gain or loss on sale or exchange of property, of a
character subject to the allowance for depreciation under
section 167, remaining in the hands of the taxpayer immediately
after the sale or exchange, or acquired in the same taxable
year. The manner and amount of such reduction shall be
determined under regulations prescribed by the Secretary. Any
election made by the taxpayer under this section shall be made
by a statement to that effect in his return for the taxable
year in which the sale or exchange takes place, and such
election shall be binding for the taxable year and all
subsequent taxable years.
[(b) Basis.--
[For basis of property acquired on a sale or exchange treated
as an involuntary conversion under subsection (a), see section
1033(b).]
* * * * * * *
VII. DISSENTING VIEWS OF THE HONORABLE CHARLES B. RANGEL AND THE
HONORABLE HAROLD E. FORD
We dissent from reporting H.R. 831 because of both
procedural and substantive reasons. We are concerned that the
bill was rushed to consideration without appropriate hearings
on all of the provisions in the bill, without a report from the
Subcommittee on Oversight on a provision reviewed by the
Subcommittee, and without sufficient time to review the bill
itself. We are also very concerned about the repeal of section
1071 of the Internal Revenue Code, that the repeal is
retroactive, whether the repeal will result in the revenue
anticipated, the impact such repeal will have on the ability of
minorities to participate in the broadcast business as owners
and operators and the statement such repeal makes about the
nation's commitment to social justice.
We are particularly concerned that this bill represents the
driving of a wedge within our society between people based on
racial and ethnic grounds. It disturbs us that this bill may
represent a trend to legislatively undo statutory and other
means for providing opportunity for minorities previously
denied by either overt or benign discrimination. We fear that
this bill could represent this Congress's first step in
dismantling the efforts to assure that minorities can truly
have equal opportunity in the American society. With this
report the Committee has moved to again close the door on
minorities keeping them out of the mainstream of America. It is
insensitive to the aspirations of the African-American,
Hispanic, Native American and Asian communities.
While the Chair was within the rules of the Committee and
the House to have brought this bill to the Committee in the
manner it was, the action left the Committee with very little
time or assistance in reviewing its provisions. The members of
the Committee were given only one day's notice of markup of
this bill. The markup notice and agenda issued the previous
week distinctly excluded any of the provisions of this bill.
Committee rules require a 2-day layover of bills reported
from a subcommittee to give the members of the Committee a
chance to review the legislation before voting on the measure.
If that standard is appropriate where a subcommittee acts, it
is even more necessary when there has been no subcommittee mark
up or the subcommittee report on the matter has not been
issued. Instead, the Chair gave the Committee a mere 24 hours
to prepare for the mark up of the legislation.
While we can understand the need to move quickly on the
provision for the extension of the deduction of health
insurance costs of the self-employed because tax filing dates
are soon upon us, we cannot understand the rush to repeal
section 1071 of the Internal Revenue Code other than to
retroactively impact a completely legal transaction that the
majority for whatever reasons does not favor.
We are very concerned that the Committee and the House is
moving forward on provisions in this bill without the benefit
of full committee hearings. The Committee has not heard
witnesses on the matter of the deduction of their health
insurance by the self employed. In fact, the Chair of the
Subcommittee on Health vigorously and successfully opposed any
changes to the health insurance provisions of the bill on the
grounds that there have not been hearings. Nor, has the
Committee had hearings on the matters of involuntary
conversions and the changes in the provisions of the Earned
Income Tax Credit. We have moved forward without the benefit of
the public's view on the impact of both of these changes in tax
law.
What most concerns us with the reporting of this
legislation is the movement of the Committee to begin to undo
the progress this nation has made to provide opportunity for
minorities to fully participate in the economy and social
fabric of our nation. We fear that this is part of a national
movement expressed in part by the Majority Leader of the other
body and by actions in the states such as the petition movement
in California, to undo the efforts of affirmative action to
fulfill the promise of America for all of its citizens.
We want to believe it is not a considered effort to deny
the rights of minorities. Indeed, members of the majority
indicated all they want to do is to remove preferences from the
tax code and to make the code color blind. However, in the face
of a tax code that is replete with tax preferences, and as an
American who has seen and lived racial prejudice in a society
that in many ways remains so, we cannot interpret the intention
of the majority as anything but a response to the fears of
Americans about race and equal opportunity.
Many in the majority have strong views about tax
preferences and about how they are administered. They believe
the tax code should be cleansed of preferences. In this
context, we can appreciate the opposition to this tax
preference. We are concerned about the Majority starting its
reform with this preference. Why is the majority not offering
the Committee a more complete list of preferences to be
repealed?
Admittedly section 1071 creates a preference. But, it is
not much different than any other preference which is designed
to achieve a public policy goal. Its goal is to effectuate
Federal Communications Commission (FCC) policies about
diversity ownership of broadcast licenses. The original impetus
was the FCC policy to prevent monopoly ownership of broadcast
facilities in a community. The FCC instituted a policy to force
sales to break up monopolies. Section 1071 provided relief for
owners forced to sell. Since 1978 this policy has been
broadened to provide tax benefits for voluntary sales. The
basis of such relief is similar to the proposal to compensate
property owners inhibited by environmental regulations.
By the late 1960s the FCC came to the conclusion that
diversity in ownership among the many racial and ethnic groups
was an important goal if the scarce airwaves were to serve all
Americans. However, despite all of the Commission's efforts to
achieve diversity there was not much success. Though African
Americans and Hispanics together represent about 20% of the
population, by 1978 when the FCC adopted the minority
preference rule minorities held less than 1% of the broadcast
licenses.
The need for diversity was and still is clear. This member,
an African American, grew up in segregated America where the
only impressions from the media of African Americans and
Hispanics were negative role models of savage African natives
saved from their ignorance by a white man in a loin cloth or
shuffling Black slaves or Amos 'n Andy or Mexicans sneering or
in perpetual siesta. Up through the 1960s and into the 1970s it
was difficult for minorities to view TV or listen to the radio
and find positive role models. The need to present positive
role models for our young continues to plague minority
communities. The need to express our views among ourselves and
to the larger community remains difficult. The need to develop
economic independence remains great, yet for years entire
minority communities had no electronic media outlet for their
views or for their entrepreneurs to advertise products and
services to their own communities.
Thus, in 1978 the FCC adopted the current policy to provide
tax certificates to those who sold broadcast properties to
minorities.\1\
\1\ ``Statement of Policy on Minority Ownership of Broadcasting
Facilities,'' 68 FCC 2d 979 (1978).
The Supreme Court upheld the preference in Metro Broadcasting v.
FCC, 497 U.S. 547 (1990). The Court looked at the Congressional action
and came to the conclusion that Congress was very clear about support
for the program.
---------------------------------------------------------------------------
Some argue that there might be better ways to encourage
minority ownership. But, the history indicates otherwise. This
is the best way. The FCC had tried other means, but they were
not successful.
The FCC expanded the rule during in 1982 to include the
sale of cable systems.\2\
\2\ ``Statement of Policy on Minority Ownership of CATV Systems,''
52 R.R. 2d 1452 (1982), See also, ``Commission Policy Regarding the
Advancement of Minority Ownership in Broadcasting,'' 92 FCC 2d 849
(1982).
---------------------------------------------------------------------------
Despite the application of section 1071 since 1978 the
proportion of licenses in minority hands has only climbed to
about 3%. There have been about 330 licenses transfers (260-
radio; 40 TV; and 30 cable) where the preference was a factor.
During the same period there have been over 15,000 license
transactions. Over half of the licenses transferred pursuant to
the preference are still in minority control.
It is clear the preference was enacted by Congress to
provide the FCC with a tool to manage the airwaves that belong
to all Americans. An important responsibility of the FCC is to
assure that all Americans have reasonable access to the
airwaves. The preference of section 1071 allows the FCC to
fulfill this responsibility.
It is not unlike a preference designed by Congress to
assure energy independence. Congress has for many years
sustained oil depletion allowances, deductions for intangible
drilling costs and exceptions to the alternative minimum tax
for oil drilling to assure that the nation will have an
adequate supply of oil. It matters not that in economic terms
all that these preferences do is encourage drilling at lower
breakeven points. Should the price of oil be higher than the
cost of drilling the savings from the preference does not go to
the consumer, but the oil drilling entrepreneur.
Is it important for the nation to be energy independent at
the expense of lost tax revenues that flow to well-off energy
companies and individual investors? Congress has consistently
answered yes. Is it important at the expense of lost tax
revenues to insure among the scarce airwaves that there be
representation of as many of America's diverse communities. We
believe the answer is also yes.
There is concern about agency other than the Internal
Revenue Service deciding who gets a tax preference. There are
several provisions in the code that cede authority to define
preferences to an agency other than the IRS. For example, the
code clearly allows a taxpayer to take a credit for the
rehabilitation of a property listed on the national register of
historic sights. However, it is the Department of the Interior
that sets the regulations and decides whether a property is on
the historic register and, therefore, eligible for an historic
rehabilitation credit.
Why is there a need for a tax preference to encourage
minority ownership of broadcast properties. Congress has been
quite clear that it wants to provide tax relief in order that
where the FCC found it:
* * * necessary or appropriate to effectuate a change
in policy of, or the adoption of a new policy of the
Commission with respect to ownership and control of
radio broadcasting stations (radio being used
generically to apply to TV and cable as well). IRC
Sec. 1071.
There was considerable testimony given at the hearings of
the Subcommittee on Oversight indicating that without the
preference it was difficult, if not impossible for minorities
to secure broadcast properties.
Percy Sutton testified he worked for seven years looking
for financing and the opportunity to buy his first station,
WLIB. This station satisfied a market previously unrecognized
in New York--African-American talk radio.
Raul Alercon testified that his family fled from Cuba after
losing their radio stations to Castro. They were determined to
start again in America. They used the preference and began a
chain of Spanish language radio stations that includes the
fifth most popular FM station in the New York market. Prior to
the Alercon family's investment no one in the radio business
thought of the potential profit in serving the large Hispanic
market in New York. There was no Spanish language FM station in
New York even though there was money to be made until the
preference made it possible for the Alercon Family to start
their station.
There is evidence that minorities often do not get a break
on the price of broadcast properties because of the preference.
That is not the issue. The problem was never price. The
majority of transactions involve entrepreneurs who have
struggled to enter the broadcast business. They have always
been willing to pay market prices. The average radio
transaction has about $3.5 million, television transaction
about $38 million. The issue has always been access to a closed
society of broadcast entrepreneurs. The Subcommittee heard
several witnesses indicate until this preference was
established those who sold and brokered radio and TV stations
would not open their doors to minorities. Now with the
preference minorities are noticed in the market place.
The Subcommittee heard evidence that there were abuses with
the use of the preference. There are many including minority
broadcasters who believe the FCC should be allowed to make
changes to improve the program.\3\ They believe that reforms
that will insure the goal of diversity are truly achieved are
in order.
\3\ Congress has barred the FCC from changing its rules
implementing the preference. Pub. L. No. 100-202. 101 Stat. 1329.
---------------------------------------------------------------------------
Though the average holding period has been five years, and
over 100 licenses transferred to minorities over the sixteen
years the preference has been in effect are still in the same
hands. There have been transactions where the minority sold out
within a year. A longer holding period may be in order.
Most transactions involve true minority ownership and
control. However, there have been transactions where the
minority's interest in the profits and equity of the property
was not truly in conformity with the FCC rules. Rules to better
define ownership and control are in order.
Some of the properties held by minorities have not resulted
in diversity of format or opportunities for minorities to work
in broadcasting. Consideration should be given to requiring
intentions to provide diversity and opportunity.
We are concerned about the retroactive features of the bill
reported by the Committee. They go significantly beyond any
retroactive features of recent legislation in that they are
clearly designed to ``rifle shot'' at one particular
transaction. It is not in the nature of this House to pass
legislation that is retroactively directed at one taxpayer
involved a particular transaction. This House has in recent
years become reluctant to pass any legislation that is a
``rifle shot'' directed in favor of any taxpayer. It should be
as reluctant to pass such legislation designed to deny a tax
preference.
The bill was introduced on February 6, 1995, yet the
amendments made by section 2 apply to sales and transactions on
or after January 17, 1995. The Chair of the Committee and the
sponsor of the bill justifies this effective date by citing the
press release from the Committee of January 17, 1995,
announcing a review of section 1071 and the hearing of the
Subcommittee on Oversight on January 27, 1995, quoting the
Chair, ``Any changes to section 1071 may apply to transactions
completed, or certificates issued by the FCC, on or after
today, January 17, 1995.''
There is no question what the intention of the Chair is in
including the January 17, 1995 effective date in this
legislation. It clearly is to stop section 1071 from applying
to the largest transaction even benefiting by section 1071. The
Chair was aware as of January 17, as many who read the business
press, that the Viacom Company had recently announced an
intention to enter into an agreement to sell its cable
television systems for approximately $2.3 billion to a
partnership of Mitgo Corp., a company wholly owned by Frank
Washington, an African American, and affiliates of InterMedia
Partners. The agreement was signed on January 20, 1995, and is
contingent upon the FCC granting the certificates necessary for
claiming the benefits of section 1071.
While there may be other transactions pending as of this
date, there was no evidence of these transactions presented to
the Committee.
There is no question that this retroactive effective date
is directed as one earnest African American businessman. This
man has built a successful cable business. He intends to
increase its size to achieve economies of scale to effectively
complete in what other committees of this House have found to
be an extraordinarily dynamic and competitive business. But,
despite his entrepreneurial efforts well within the law, the
majority of the Committee has decided that he has become too
successful.
We are concerned that the message of this legislation to
minorities in this nation is that when you become too
successful it will not matter whether you played by the rules--
you will be allowed to go so far.
We are concerned that the way this legislation is directed
at the Viacom deal it is unlikely that the revenue estimates of
the Joint Committee on Taxation can be sustained.
A significant part of the revenue anticipated from the
repeal of section 1071 is assumed to be the revenue lost from
the Viacom transaction. A revenue estimate assumes a baseline
of activities that will be altered by the legislation in
question. How can the baseline include the Viacom transaction
when it has become moot. If the legislation is enacted as
reported, then there is no contract between Viacom and the
Mitgo Corp.-InterMedia Partners partnership. The agreement was
contingent upon securing the FCC certificate for section 1071
treatment. It is rank speculation to assume in the baseline
what Viacom will do if the agreement is voided. There is also
no evidence of what tax impact will be on Viacom or any other
taxpayer who might purchase the cable properties. The facts are
clear that most transfers of cable properties are done through
some tax deferred arrangement. In fact, it was reported in the
Wall Street Journal on the morning of the day this bill was
reported that Time Warner was purchasing cable properties from
Cablevision in a transaction that it intended to be a tax free
or deferred reorganization.\4\
\4\ Wall Street Journal, February 8, 1995 at A3.
C.B. Rangel.
Harold E. Ford.