To amend the Internal Revenue Code of 1986 to provide for a deferral of tax on gain from the sale of telecommunications businesses in specific circumstances or a tax credit and other incentives to promote diversity of ownership in telecommunications businesses.

January 30, 2003

Mr. MCCAIN introduced the following bill; which was read twice and referred to the Committee on Finance

To amend the Internal Revenue Code of 1986 to provide for a deferral of tax on gain from the sale of telecommunications businesses in specific circumstances or a tax credit and other incentives to promote diversity of ownership in telecommunications businesses.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

This Act may be cited as the `Telecommunications Ownership Diversification Act of 2003'.

SEC. 2. FINDINGS AND PURPOSES.

(a) FINDINGS- Congress makes the following findings:

(1) Current trends in the telecommunications industry show that there is increasing convergence among various media, including broadcasting, cable television, and Internet-based businesses, that provide news, information, and entertainment.

(2) This convergence will continue, and therefore, diversifying the ownership of telecommunications facilities remains a preeminent public interest concern that should be reflected in both telecommunications and tax policy.

(3) A market-based, voluntary system of investment incentives is an effective, lawful, and economically sound means of facilitating entry and diversification of ownership in the telecommunications industry.

(4) Opportunities for new entrants to participate and grow in the telecommunications industry have substantially decreased since the end of the Federal Communications Commission's tax certificate policy in 1995, particularly in light of the availability of tax-free like-kind exchanges, despite the most robust period of transfers of radio and television stations in history. During this time, businesses owned or controlled by socially disadvantaged individuals, including, but not limited to, members of minority groups and women, have continued to be underrepresented as owners of telecommunications facilities.

(5) Businesses owned or controlled by socially disadvantaged individuals are, and historically have been, economically disadvantaged in the telecommunications industry. For these businesses, access to and cost of capital are and have been substantial obstacles to new entry and growth. Consequently, diversification of ownership in the telecommunications industry has been limited.

(6) Telecommunications facilities owned by new entrants may not be attractive to investors because their start-up costs are often high, their revenue streams are uncertain, and their profit margins are unknown.

(7) It is consistent with the public interest and with the pro-competition policies of the Telecommunications Act of 1996 to provide incentives that will facilitate investments in, and acquisition of, telecommunications facilities by economically and socially disadvantaged businesses, thereby diversifying the ownership of telecommunications facilities.

(8) Increased participation by economically and socially disadvantaged businesses in the ownership of telecommunications facilities will enhance competition in the telecommunications industry. Permitting sellers of telecommunications facilities to defer taxation of gains from transactions involving economically and socially disadvantaged businesses, or certain small businesses supported by investments from the Telecommunications Development Fund that provides capital for such businesses, will further the development of a competitive and diverse United States telecommunications industry without governmental intrusion in private investment decisions.

(9) The public interest would not be served by attempts to diversify the ownership of telecommunications businesses through any approach that would involve the use of mandated set-asides or quotas.

(10) Today, the telecommunications industry is struggling to survive one of its most troubling times. Therefore, facilitating voluntary, pro-competitive transactions that will promote ownership of telecommunications facilities by economically and socially disadvantaged businesses and certain small businesses will aid in providing the investment and capital that is crucial to this sector.

(b) PURPOSE- The purpose of this Act is to facilitate voluntary, pro-competitive transactions that will promote ownership of telecommunications facilities by economically and socially disadvantaged businesses and certain small businesses.

SEC. 3. NONRECOGNITION OF GAIN ON CERTAIN QUALIFIED SALES OF TELECOMMUNICATIONS BUSINESSES.

(a) IN GENERAL- Subchapter O of chapter 1 of the Internal Revenue Code of 1986 (relating to gain or loss on disposition of property) is amended by inserting after part IV the following new part:

`PART V--CERTAIN SALES OF TELECOMMUNICATIONS BUSINESSES

`Sec. 1071. Nonrecognition of gain on certain sales of telecommunications businesses.

`SEC. 1071. NONRECOGNITION OF GAIN ON CERTAIN SALES OF TELECOMMUNICATIONS BUSINESSES.

`(a) IN GENERAL- For purposes of this subtitle, if a taxpayer elects the application of this section to a qualified telecommunications sale, such sale shall be treated as an involuntary conversion of property within the meaning of section 1033.

`(b) LIMITATION ON AMOUNT OF GAIN ON WHICH TAX MAY BE DEFERRED-

`(1) IN GENERAL- The amount of gain on any qualified telecommunications sale which is not recognized by reason of this section--

`(A) shall not exceed $250,000,000 per sale, and

`(B) shall not exceed 1/3 of such dollar amount per taxable year.

`(2) CARRYFORWARDS OF UNUSED AMOUNTS- If the amount of gain on any qualified telecommunications sale which is not recognized by reason of this section exceeds the limitation imposed by paragraph (1)(B) for the taxable year, such excess shall be carried to the succeeding taxable year and added to the amount allowable under this section for such taxable year.

`(c) QUALIFIED TELECOMMUNICATIONS SALE- For purposes of this section, the term `qualified telecommunications sale' means any sale to an eligible purchaser of--

`(1) the assets of a telecommunications business, or

`(2) stock in a corporation if, immediately after such sale--

`(A) the eligible purchaser controls (within the meaning of section 368(c)) such corporation, and

`(B) substantially all of the assets of such corporation are assets of 1 or more telecommunications businesses, or

`(3) an interest in a partnership if, immediately after such sale--

`(A) the eligible purchaser owns a partnership interest possessing--

`(i) at least 80 percent of the total combined voting power of all classes of partnership interests entitled to vote,

`(ii) control over the management of the partnership,

`(iii) at least 80 percent of the capital interests of the partnership, and

`(iv) a distributive share of at least 80 percent of each item of the partnership's income, gain, loss, deduction or credit, and

`(B) substantially all of the assets of such partnership are assets of 1 or more telecommunications businesses.

`(d) SPECIAL RULES-

`(1) IN GENERAL- In applying section 1033 for purposes of subsection (a), stock of a corporation or an interest in a partnership operating a telecommunications business, whether or not representing control of such corporation or partnership, shall be treated as property similar or related in service or use to the property sold in the qualified telecommunications sale.

`(2) ELECTION TO REDUCE BASIS RATHER THAN RECOGNIZE REMAINDER OF GAIN- If--

`(A) a taxpayer elects the treatment under subsection (a) with respect to any qualified telecommunications sale, and

`(B) an amount of gain would (but for this paragraph) be recognized on such sale under section 1033(a)(2)(A) in excess of the amount required to be recognized by reason of subsection (b),

then the amount of gain described in this subparagraph shall not be recognized to the extent that the taxpayer elects to reduce the basis of depreciable property (within the meaning of section 1017(b)(3)) held by the taxpayer immediately after the sale or acquired in the same taxable year. The manner and amount of such reduction shall be determined under regulations prescribed by the Secretary.

`(3) BASIS- For basis of property acquired on a sale or exchange treated as an involuntary conversion under subsection (a), see section 1033(b).

`(e) Recapture of Tax Benefit if Telecommunications Business Resold Within 3 Years, etc-

`(1) IN GENERAL- If, within 3 years after the date of any qualified telecommunications sale, there is a recapture event with respect to the property involved in such sale, then the purchaser's tax imposed by this chapter for the taxable year in which such event occurs shall be increased by an amount equal to the product of--

`(A) the highest marginal rate of income tax imposed on corporations under section 11, and

`(B) the lesser of--

`(i) the consideration furnished by the purchaser in such sale, or

`(ii) the dollar amount specified in subsection (b)(1)(A).

`(2) EXCEPTION FOR REINVESTED AMOUNTS- Paragraph (1) shall not apply to any recapture event which is a sale if--

`(A) the sale is a qualified telecommunications sale, or

`(B) during the 60-day period beginning on the date of such sale, the taxpayer is the

purchaser in another qualified telecommunications sale in which the consideration furnished by the taxpayer is not less than the amount realized on the recapture event sale.

`(3) RECAPTURE EVENT- For purposes of this subsection, the term `recapture event' means, with respect to any qualified telecommunications sale--

`(A) any sale or other disposition of the assets, stock, or partnership interest referred to in subsection (c) which were acquired by the taxpayer in such sale, and

`(B) in the case of a qualified telecommunications sale described in paragraph (2) or (3) of subsection (c)--

`(i) any sale or other disposition of a telecommunications business by the corporation or partnership referred to in such subsection, or

`(ii) any other transaction which results in the eligible purchaser ceasing to be an eligible purchaser, or ceasing to have control (as defined in subsection (c)(2)(A)) of such corporation or ownership of an interest in such partnership sufficient to satisfy the requirements of subsection (c)(3)(A).

`(f) DEFINITIONS AND SPECIAL RULES- For purposes of this section--

`(1) ELIGIBLE PURCHASER- The term `eligible purchaser' means--

`(A) any economically and socially disadvantaged business, or

`(B) any corporation or partnership if immediately following the purchase--

`(i) substantially all the assets of such corporation or partnership are assets of 1 or more telecommunications businesses, and

`(ii) the Telecommunications Development Fund established under section 714 of the Communications Act of 1934 (47 U.S.C. 614) or any wholly-owned affiliate of such Fund owns at least 5 percent of--

`(I) the stock in such corporation,

`(II) the partnership interest in such partnership, or

`(III) the indebtedness convertible into such stock or partnership interest.

`(2) ECONOMICALLY AND SOCIALLY DISADVANTAGED BUSINESS- The term `economically and socially disadvantaged business' means a person which is designated by the Secretary as an economically and socially disadvantaged business based on a determination that such person--

`(A) meets the control requirements of paragraph (6),

`(B) will be a telecommunications business after the purchase for which the eligibility determination is sought, and

`(C) before the purchase for which the eligibility determination is sought does not have--

`(i) attributable ownership interest in television broadcast stations having an aggregate national audience reach of more than 5 percent as defined by the Federal Communications Commission under section 73.3555(e)(2)(i) of title 47 of the Code of Federal Regulations as in effect on January 1, 2001,

`(ii) attributable ownership interest in--

`(I) more than 50 radio stations nationally, and

`(II) radio stations with a combined market share exceeding 10 percent of radio advertising revenues in the relevant market as defined by the Federal Communications Commission, or

`(iii) attributable ownership interest in any other telecommunications business having more than 5 percent of national subscribers of their respective service.

`(3) RELEVANT MARKET- The term `relevant market' means the local radio market served by the radio station or stations being purchased.

`(4) TELECOMMUNICATIONS BUSINESS- The term `telecommunications business' means a business which, as its primary purpose, engages in electronic communications and is regulated by the Federal Communications Commission pursuant to the Communications Act of 1934, including a cable system (as defined in section 602(7) of such Act (47 U.S.C. 522(7))), a radio station (as defined in section 3(35) of such Act (47 U.S.C. 153(35))), a broadcasting station providing television service (as defined in section 3(49) of such Act (47 U.S.C. 153(49))), a provider of direct broadcast satellite service (as defined in section 335(b)(5)(A) of such Act (47 U.S.C. 335(b)(5)(A))), a provider of video programming (as defined in section 602(20) of such Act (47 U.S.C. 522(20))), a provider of commercial mobile services (as defined in section 332(d)(1) of such Act (47 U.S.C. 332(d)(1))), a telecommunications carrier (as defined in section 3(44) of such Act (47 U.S.C. 153(44))), a provider of fixed satellite service, a reseller of the communications service or commercial mobile service, or a provider of multichannel multipoint distribution service.

`(5) PURCHASE- A taxpayer shall be considered to have purchased a property if, but for subsection (d)(2) and the application of section 1033(b), the basis of the property would be its cost within the meaning of section 1012.

`(6) CONTROL-

`(A) INDIVIDUALS- For purposes of paragraph (2)(A), an individual who meets the requirements of paragraph (7) also meets the requirements of this paragraph.

`(B) ENTITIES- For purposes of paragraph (2)(A), an entity meets the requirement of this paragraph if the requirements of subparagraphs (C), (D), or (E) are satisfied.

`(C) 30-percent test- The requirements of this subparagraph are satisfied if--

`(i) with respect to any entity which is a corporation, individuals who meet the requirements of paragraph (7) collectively own at least 30 percent in value of the outstanding stock of the corporation, and more than 50 percent of the total combined voting power of all classes of stock entitled to vote of the corporation, and

`(ii) with respect to any entity which is a partnership, individuals who meet the requirements of paragraph (7) collectively own at least 30 percent of the capital interests in the partnership, a distributive share of at least 30 percent of each item of the partnership's income, gain, loss, deduction, or credit, more than 50 percent of the total combined voting power of all partnership interests entitled to vote, and control over the management of the partnership.

`(D) 15-percent test- The requirements of this subparagraph are satisfied if--

`(i) with respect to any entity which is a corporation--

`(I) individuals who meet the requirements of paragraph (7) collectively own at least 15 percent in value of the outstanding stock of the corporation, and more than 50 percent of the total combined voting power of all classes of stock entitled to vote of the corporation, and

`(II) no other person owns more than 25 percent in value of the outstanding stock of the corporation, and

`(ii) with respect to any entity which is a partnership--

`(I) individuals who meet the requirements of paragraph (7) collectively own at least 15 percent of the capital interests in the partnership, a distributive share of at least 15 percent of each item of the partnership's income, gain, loss, deduction, or credit, more than 50 percent of the total combined voting power of all classes of partnership interests entitled to vote, and control over the management of the partnership, and

`(II) no other person owns more than 25 percent of the capital interests and profits interests in the partnership or a distributive share of more than 25 percent of any item of the partnership's income, gain, loss, deduction, or credit.

`(E) PUBLICLY-TRADED CORPORATION TEST- The requirements of this subparagraph are satisfied if, with respect to a corporation the securities of which are traded on an established securities market, individuals who meet the requirements of paragraph (7) collectively own more than 50 percent of the total combined voting power of all classes of stock entitled to vote of the corporation.

`(F) RESTRICTIONS ON AGREEMENTS CONCERNING VOTING OF STOCK OR PARTNERSHIP INTERESTS- For purposes of satisfying the requirements of subparagraph (C), (D), or (E), the stock or partnership interest relied upon to establish compliance shall not be subject to any agreement, arrangement, or understanding which provides for, or relates to, the voting of the stock or partnership interest in any manner by, or at the direction of, any person other than an eligible individual who meets the requirements of paragraph (7), or the right of any person other than 1 of those individuals to acquire the voting power through purchase of shares, partnership interests, or otherwise.

`(G) CONSTRUCTIVE OWNERSHIP- In applying subparagraphs (C), (D), (E), and (F), the constructive ownership rules of section 318 shall apply, but only if the interests for which constructive ownership is claimed are not owned, directly or indirectly, by individuals who do not meet the requirements of paragraph (7).

`(7) INDIVIDUALS- An individual meets the requirements of this paragraph if such individual is--

`(A) a United States citizen, and

`(B) a member of an economically or socially disadvantaged class determined by the

Secretary to be underrepresented in the ownership of the relevant telecommunications business.'.

(b) CONFORMING AMENDMENTS-

(1) Sections 1245(b)(5) and 1250(d)(5) of the Internal Revenue Code of 1986 are each amended--

(A) by inserting `section 1071 (relating to certain sales of telecommunications businesses) or' before section 1081', and

(B) by inserting `AND 1071' before `1081' in the heading thereof.

(2) The table of parts for subchapter O of chapter 1 of such Code is amended by inserting after the item relating to part IV the following new item:

`Part V. Certain sales of telecommunications businesses.'.

(c) EFFECTIVE DATE- The amendments made by this section shall apply to elections made with respect to any sale on or after the date of the enactment of this Act.

SEC. 4. TELECOMMUNICATIONS BUSINESS CREDIT.

(a) IN GENERAL- Subpart E of part IV of subchapter A of chapter 1 of the Internal Revenue Code of 1986 (relating to rules for computing investment credit) is amended by inserting after section 48 the following new section:

`SEC. 48A. TELECOMMUNICATIONS BUSINESS CREDIT.

`For purposes of section 46, there is allowed as a credit against the tax imposed by this chapter for any taxable year an amount equal to 10 percent of the taxable income of any taxpayer which at all times during such taxable year--

`(1) is a local exchange carrier (as defined in section 3(26) of the Communications Act of 1934 (47 U.S.C. 153(26))),

`(2) is not a Bell operating company (as defined in section 3(4) of such Act (47 U.S.C. 153(4))), and

`(3) is headquartered in an area designated as an empowerment zone by the Secretary of Housing and Urban Development.'.

(b) TRANSITIONAL RULE- Section 39(d) of the Internal Revenue Code of 1986 (relating to transitional rules) is amended by adding at the end the following new paragraph:

`(11) NO CARRYBACK OF SECTION 48A CREDIT BEFORE EFFECTIVE DATE- No portion of the unused business credit for any taxable year which is attributable to the telecommunications business credit determined under section 48A may be carried back to a taxable year ending on or before the date of the enactment of section 48A.'.

(c) CONFORMING AMENDMENTS-

(1) Section 46 of the Internal Revenue Code of 1986 (relating to amount of credit) is amended by striking `and' at the end of paragraph (2), by striking the period at the end of paragraph (3) and inserting `, and', and by adding at the end the following new paragraph:

`(4) the telecommunications business credit.'.

(2) The table of sections for subpart E of part IV of subchapter A of chapter 1 of such Code is amended by inserting after the item relating to section 48 the following new item:

`48A. Telecommunications business credit.'.

(d) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years ending after the date of the enactment of this Act.

SEC. 5. EXCLUSION OF 50 PERCENT OF GAIN.

(a) IN GENERAL- Section 1202 of the Internal Revenue Code of 1986 (relating to partial exclusion for gain from certain small business stock) is amended--

(1) by adding at the end of subsection (a) the following new paragraph:

`(3) CERTAIN TELECOMMUNICATIONS INVESTMENTS BY CORPORATIONS AND INVESTMENT COMPANIES- Gross income shall not include 50 percent of any gain from the sale or exchange of stock in an eligible purchaser (as defined in section 1071(f)(1)), engaged in a telecommunications business (as defined in section 1071(f)(4)) held for more than 5 years.',

(2) by striking subparagraphs (A) and (B) of subsection (b)(1) and inserting the following new subparagraphs:

`(A) in the case of gain from the sale or exchange of qualified small business stock held for more than 5 years--

`(i) $10,000,000 reduced by the aggregate amount of eligible gain taken into account by the taxpayer under subsection (a) for prior taxable years attributable to dispositions of stock issued by such corporation, or

`(ii) 10 times the aggregate adjusted bases of qualified small business stock issued by such corporation and disposed of by the taxpayer during the taxable year, and

`(B) in the case of gain from the sale or exchange of stock in an eligible purchaser engaged in a telecommunications business for more than 5 years--

`(i) $20,000,000 reduced by the aggregate amount of eligible gain taken into account by the taxpayer under subsection (a) for prior taxable years attributable to dispositions of stock issued by an eligible purchaser engaged in a telecommunications business, or

`(ii) 15 times the aggregate adjusted bases of stock of an eligible purchaser engaged in a telecommunications business issued by such eligible purchaser and disposed of by the taxpayer during the taxable year.',

(3) by striking `subparagraph (B)' in the last sentence of subsection (b)(1) and inserting `subparagraphs (A)(ii) and (B)(ii)',

(4) by striking `years.' in subsection (b)(2) and inserting `years or any gain from the sale or exchange of stock in an eligible purchaser engaged in a telecommunications business held for more than 5 years.', and

(5) by striking the period at the end of subsection (b)(3)(A) and inserting `, and paragraph (1)(B) shall be applied by substituting `$10,000,000' for `$20,000,000'.'.

(b) EFFECTIVE DATE- The amendments made by this section shall apply to sales on or after the date of the enactment of this Act.

SEC. 6. TECHNICAL AND CONFORMING AMENDMENTS; REGULATIONS.

(a) TECHNICAL AND CONFORMING AMENDMENTS- The Secretary of the Treasury shall, not later than 150 days after the date of the enactment of this Act, submit to the Committee on Ways and Means of the House of Representatives and the Committee on Finance of the Senate, a draft of any technical and conforming amendments of the Internal Revenue Code of 1986 which are necessary to reflect throughout such Code the amendments made by this Act.

(b) REGULATIONS- The Secretary of the Treasury, in consultation with the Federal Communications Commission, shall promulgate regulations to implement the amendments made by this Act not later than 90 days after the date of the enactment of this Act. The regulations shall provide for the determination by the Secretary of the Treasury as to whether an applicant is an `eligible purchaser' as defined in section 1071(f) of the Internal Revenue Code of 1986 (as added by section 3(a)). The regulations shall further provide that such determinations of eligibility shall be made not later than 45 calendar days after an application is filed with the Secretary of the Treasury. The regulations implementing section 1071(f)(7) of such Code (as added by section 3) shall be updated on an ongoing basis not less frequently than every 5 years.

SEC. 7. BIENNIAL PROGRAM AUDITS BY GAO.

Not later than January 1, 2005, and not later than 2 years thereafter, the Comptroller General of the United States shall audit the administration of the sections of the Internal Revenue Code of 1986 added or amended by this Act, and issue a report on the results of that audit. The Comptroller General shall include in the report, notwithstanding any provision of section 6103 of the Internal Revenue Code of 1986 to the contrary--

(1) a list of eligible purchasers (as defined in section 1071(f)(1) of such Code) and any other taxpayer receiving a benefit from the operation of section 48A or 1202 of such Code as such section was added or amended by this Act, and

(2) an assessment of the effect the amendments made by this Act have on increasing new entry and growth in the telecommunications industry by economically and socially disadvantaged businesses, and the effect of this Act on enhancing the competitiveness of the telecommunications industry.

END