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Mr. Donald Sterling, soon to be the ex-owner of the Los Angeles Clippers, has created a lot of controversies the last couple of weeks. It all started when The National Basketball Association (NBA) got hold of a recording of Mr. Sterling telling his female friend that he did not want her to see her at the Los Angeles Clippers’ games with “black people.” The NBA has since banned Mr. Sterling from owning an NBA team for the rest of his life, fined him $2.5 million, and forced him to sell his Los Angeles Clippers.
After doing a little more research, Mr. Sterling could be duking it out with the NBA pretty soon, but he may also soon have to do the same with the Internal Revenue Service (IRS) to sort out some tax issues. He better be wiser with his next decisions because they will have serious tax repercussions, which could lead to a fine a lot bigger than the $2.5 million that the NBA set.
Donald Sterling faces a $2.5 million fine for his actions.
Currently, professional sports teams’ owners in California can write-off NBA fines as business expenses when doing their state income taxes.
Two Los-Angeles area Assembly members, Democrats Raul Bocanegra and Reggie Jones-Sawyer have proposed legislation, which would prevent team owners in California from writing these off as expenses in the future.
“Donald Sterling’s outrageous comments and historic fine should not be rewarded with a multimillion-dollar tax refund,’’ said Bocanegra, chairman of the Revenue and Taxation Committee. “This fine is intended as a punishment; it should not be used as a tax loophole.’’
Mr. Sterling acquired the Clippers in 1981 for $12.5 million.Today, the team’s value could be near $1 billion, but the capital gains tax and his losing of estate tax benefits could cause a pretty large tax bill for Mr. Sterling.
Vanderbilt University economist John Vrooman adds that the major North American professional sports leagues are cash cows, noting that ownership is “risk free… because of the market power [they] have over fans, media outlets and players.”
Slate writer, Jordan Weissman, figures that “if the 80-year-old Sterling earned a $700 million profit on the deal [sale of the Clippers], he would need to pay $233 million in taxes based on the 20 percent capital gains tax for high earners and California’s 13.3 percent state income tax rate. Meanwhile, the federal estate tax is 40 percent. So, lop $187 million off the top, for a total bill of $420 million.”
It is possible that Mr. Sterling’s lawyers may treat the sale as an involuntary conversion under Internal Revenue Code § 1033. This part of the IRC states that “where property is compulsorily or involuntarily converted – the owner can have nonrecognition of gain if he/she purchases replacement property (assuming of equal value).”
The owner has two years after that tax year to replace his property, which another entity involuntarily converted, in equal value.
Applied here, Mr. Sterling could note that the NBA forced him to sell his property, the Los Angeles Clippers, under § 1033.
Using the statute, Mr. Sterling could then purchase similar property: perhaps it could be another sports team? Though the NBA has banned him from owning another team in its league, there are plenty of other professional teams he could purchase. For example, Forbes suggests that Mr. Sterling could actually purchase a European soccer team.
Since the NBA has banned Mr. Sterling from owning another team in the league, he would want to argue that the replacement property does not just have to be a NBA team; he would want to prove that it could be any professional sports team. If this all worked out, he would not have to pay any taxes at the moment, but he would have to pay taxes if he were to sell it in the future or if he were to die.
Sterling’s exact tax burden will depend on how much he invested in the team after purchasing it, his estate planning, and other assorted details. The bottom line, though, is that by being forced to sell before he dies, Sterling and his heirs will almost certainly “end up paying a much higher overall effective tax rate,” adds Philip Holthouse, managing partner at the accounting firm Holthouse Carlin & Van Trigt.
Put all this aside; Mr. Sterling could also gift the team to his wife tax-free, under IRC § 2523.
Are there any other pending tax issues for Mr. Sterling? With the heightened attention on Mr. Sterling, there are stories emerging that he may also be guilty of tax evasion. A new USA Today report reveals that he and his sister, Marilyn Pizante, may have kept their childhood property and a property across the street in the names of their grandmother and mother even after both deid. The Sterlings’ mother died in the 80s, and their grandmother died in the 60s.
By not changing the names of the owners of the properties, the Sterlings were able to avoid reassessment, which would have increased their property taxes by thousands of dollars.
According to the report, “neither property has been reassessed since 1978 and would be worth today a combined $13,000 in property taxes. Since 2001, LA County has received 49 money orders in either women’s names, paying these property taxes.
Though a permanent ban from the NBA and a meager $2.5 million fine may not seem serious enough to punish Mr. Sterling for his recent actions, the NBA may be making his situation worse since he also will most likely have to deal with the IRS too. Stay tuned to see what the Sterlings do and what the tax effects are.
Also, I wonder if University of Chicago Law School alumnus and brand new NBA Commissioner, Adam Silver, even realized the reprecussions of his punishments. This is a lesson to all taxpayers: with every action, there is a reaction. It just seems like that most reactions in the United States involve the IRS.