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Sorry for the post hiatus, but The Joy of Tax Law blog is back in action!


Former NBA Commissioner David Stern (center) and Los Angeles Clippers owner Donald Sterling (right) present a Putin jersey to Russian defense minister Sergei Ivanov during half-time between the Los Angeles Clippers and the CSKA Moscow on October 7, 2006 in Moscow, Russia. Copyright 2006 NBAE (Photo by Jennifer Pottheiser/NBAE via Getty Images)

Mr. Donald Sterling, soon to be the ex-owner of the Los Angeles Clippers, has created a lot of controversy 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 more wise 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.

Can Mr. Sterling write-off his $2.5 million fine?

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.’’

Would Mr. Sterling have to pay taxes for the NBA’s forced sale of his Clippers?

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.

JDKatz: Attorney's At LawJDKatz, P.C. is a full-service law firm focused on tax lawbusiness and transactional lawestate planning and elder law. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys, or visit http://www.jdkatz.com.

#HipsterTax

March 18, 2014 — Leave a comment

“Let’s be honest, taxes are not one of the most stimulating subjects around,” says Laughlin.  “So if you want to engage with young people you’ve got to give them something fun to engage in the conversation with. “

Up 6 percent from last year, nearly 27 million Americans have filed their 2013 taxes on their home computers. H&R Block has something to say about this new trend, and it has unveiled a new marketing campaign to get younger Americans to its offices and website for tax preparation help. Continue Reading…

Yesterday, President Obama did an interview with comedian Zach Galifianakis, on his show “Between Two Ferns,” where he tried to rally some much-needed support for Healthcare.gov. Surprisingly, the awkward interview video has become the number one site driving traffic to Healthcare.gov.

President Obama seems to be doing whatever he can these days to help muster support for his party ahead of the midterm elections. Unfortunately, Republican David Jolly won a closely watched U.S. House special election in Florida last night. Though Jolly was short on money, groups pooled money into one of the most expensive House races ever to hammer the ineffectiveness of the Affordable Care Act (ObamaCare) into voters’ minds for the win. Continue Reading…

They are invisible taxes that consumers don’t know they’re paying on cigarettes, alcohol, gambling, and pot. Thanks to accountingschoolguide.com, check out this infographic to see what things would look like in the absence of these sin taxes. Continue Reading…

According to Janet Larsen, Director of Research at Earth Policy Institute, there are more than 18,000 sharing bikes across the country in 34 official systems.

They provide as alternatives to private vehicles, taxis and mass transit. Many ride them in urban areas with the hope of reducing traffic congestion, noise, and air pollution. Bike share programs allow for individuals to rent a bike at one docking station, and they can return them to the same station or to a different docking station. Even with all the stated benefits, the IRS believes that these bike share programs are still taxable.

bike share infographic

Continue Reading…

PLANNING FOR BUSINESSES [Part 7/7]

Renewable Resources Credit

ATRA modified the Code Sec. 45 renewable electricity production tax credit for electricity produced from wind and other qualified facilities. ATRA replaced certain placed-inservice deadlines with new deadlines and revised certain definitions, including the term “municipal solid waste.” The amount of the credit varies depending on the type of technology. Continue Reading…

PLANNING FOR BUSINESSES [Part 6/7]

15-Year Recovery For Leasehold/Retail Improvements, Restaurant Property

ATRA extended through 2013 the 15-year recovery period for qualified leasehold improvements, qualified retail improvements and qualified restaurant property. To qualify for this accelerated recovery period, the qualifying property must be placed in service before January 1, 2014. Continue Reading…

PLANNING FOR BUSINESSES [Part 5/7]

Businesses seeking to maximize tax benefits through 2013 year-end tax planning may want to consider two general strategies:

  1. Use of traditional timing techniques for income and deductions; and
  2. Special consideration of significant tax incentives (known as tax extenders) scheduled to expire at the end of 2013. Continue Reading…

PLANNING FOR INDIVIDUALS [Part 4/7]

Same-Sex Marriage

On June 26, 2013, the U.S. Supreme Court struck down Section 3 of the Defense of Marriage Act in E.S. Windsor, 2013-1 ustc 50,400. The Court held that Section 3, which had defined marriage for federal purposes as the union of one man and one woman, was unconstitutional. Subsequently, the IRS announced a general rule in Rev. Rul. 2013-17 recognizing same-sex marriages nationwide. Continue Reading…

States are looking for more revenue, and Oregon has created a controversial revenue boosting plan which will tax resident motorists for the number of miles they drive as opposed to the amount of fuel they consume. Continue Reading…