Viacom Tax Move Eyed

Viacom’s plan to unload its cable systems to a minority-controlled firm came under heavy scrutiny in Congress Jan. 27 as lawmakers questioned the merits of a Federal Communications Commission program designed to boost minority ownership in mass media.

At issue is an FCC tax certificate program that allows cablers and broadcasters to avoid or defer taxation through the sale of properties to minority-owned companies.

Broadcasters should take note of Viacom’s problems, since the tax certificate has played a key role in many deals lately. Fox has partnered with John Oxendine, a black broadcaster, to buy TV stations, hoping the lure of a tax break would encourage sellers. Tribune Broadcasting has entered into a similar venture with Quincy Jones and is already in the process of buying two TV stations.

In the case of Viacom, the company announced Jan. 20 it is selling its cable systems for $2.3 billion to a partnership consisting of Sacramento media exec Frank Washington and cable giants Tele-Communications Inc. and Intermedia Partners.

Testimony revealed Jan. 27 that Viacom could avoid or defer as much as $640 million in taxes in the transaction, with the federal treasury’s loss estimated in the $460 million range.

Lawmakers expressed open hostility to the FCC program at the hearing, and zeroed in on the Viacom deal as an example of “corporate welfare” that hurts taxpayers. Viacom execs and Washington declined to attend the hearing.

Rep. Nancy Johnson (R-Conn.), who chaired the hearing, and Rep. Wally Herger (R-Calif.) agreed it is “not the minority that benefits” from the FCC transactions, but rather stockholders of the large company that unloads media properties.

Rep. Robert Matsui (D-Calif.) said that if Congress nixes the FCC program, it should be applied retroactively to ban the Viacom transaction.

Under the Viacom deal, Washington reportedly will invest slightly more than $2 million of his own money in exchange for a 20% stake as controlling general partner of the deal.

Herger criticized the portion of the FCC rule that allows the minority to sell out his stake after one year. “I can’t believe anyone ever set up a program to work like this,” he said.

FCC general counsel William Kennard conceded the tax certificate program has flaws, but he reminded lawmakers that Congress passed a law barring the FCC from revising its rules. Kennard also defended the merits of the program, claiming that minorities would be shut out of many media ownership prospects without benefit of tax certificates.

Also defending the deal was Rep. Jim McDermott (D-Wash.), who questioned why Republicans are “zeroing in on this deal” when it refuses to spell out how much the “Contract With America” will cost. Congress “could pick up a helluva lot more money” by limiting tax benefits for mergers and acquisitions and oil and gas companies, he said.

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