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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.

We’ve invited Brian Wynne of Bond Beebe, a Maryland Accounting Firm, to share some insights on FATCA in light of the upcoming June 30 deadline.  For more great posts on taxes, estates, accounting, and finance, check out their blog: It’s Taxing.

flagsWe’ve been talking with our clients quite a bit the past few years regarding the push surrounding foreign financial reporting and the associated penalties if you don’t comply.  The Foreign Account Tax Compliance Act (FATCA) requires that you disclose all ownership of US assets in foreign accounts.  This requirement is in place both for individual taxpayers and for foreign financial institutions (which can report your holdings, even if you do not) and carries significant penalties for non-compliance – up to 50% of the value of the interest, and criminal charges may apply.

There is a deadline on the horizon: FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR) is due to the U.S. Department of Treasury by June 30.  In this post, we’ll provide a high-level explanation FATCA, including what types of assets you need to disclose and what forms are required.

What is FATCA and What Do I Need to Disclose?

Any person or entity subject to the jurisdiction of the United States (including individuals, corporations, partnerships, trusts, and estates) with a financial interest in, or signature or other authority over, bank accounts, securities, or other financial accounts having a value exceeding $10,000 in a foreign country, must report this relationship.

Wait- what exactly does that mean?  Bottom line, if you are a US citizen who owns any foreign asset(s) valued at over $10,000, you must report it to the Treasury Department; the IRS threshold for reporting is $50,000.

This requirement doesn’t stop at anything that you yourself own.  You also have to file if you have direct or indirect control over a foreign or domestic entity (a company, a partnership, a trust) with foreign financial accounts, even if you yourself do not have foreign account(s). For example, a corporate-owned foreign account would require filings by the corporation and by the individual corporate officers with signature authority.

This requirement isn’t exactly new – you should have been reporting these assets since the 2012 tax year.  However, the IRS requirement for foreign financial institutions to report these assets will go into effect on May 5, 2014, which means that these banks will be required to disclose your assets, even if you haven’t.

What is a Foreign Financial Asset?

Not sure if what you own/have interest in counts as a foreign financial asset?  Here is a guide to help you determine whether or not (and what) you need to disclose:

  • Bank accounts (savings, checking, deposit) and brokerage accounts that are held at a financial institution outside the US.
  • Stocks, bonds, and other securities issued by a foreign individual or entity
  • Any interest in a foreign corporation, partnership, estate or trust
  • Any financial instrument that is issued by a non-US person, as well as any swap or similar agreement

Note that if you have a foreign investment that is held by a US-based account, it does not need to be reported. In addition, foreign real estate, currency, and directly-held tangible assets do not need to be disclosed.

What Forms Do I Have to File for FATCA?

IRS tax forms regarding FATCA are due when your income tax return is due, including extensions. If you fall into one of the below categories, or if you have any direct or indirect foreign interests, you may be required to file applicable IRS forms:

  • You are an individual or entity with ownership of foreign financial assets and meet the specified criteria (Form 8938);
  • You are an officer, director or shareholder with respect to certain foreign corporations (Form 5471);
  • You are a foreign-owned U.S. corporation or foreign corporation engaged in a U.S. trade or business (Form 5472);
  • You are a U.S. transferor of property to a foreign corporation (Form 926);
  • You are a U.S. person with an interest in a foreign trust (Forms 3520 and 3520-A), or;
  • You are a U.S. person with interests in a foreign partnership (Form 8865).

The threshold for disclosing foreign assets to the IRS is $50,000 (total value of the assets).  You’ll also need to file FinCEN Report 114 (formerly Form TD F 90-22.1) with Department of the Treasury on or before June 30th for any foreign assets that are valued at $10,000 or above.

What Happens if I Don’t Report Foreign Assets?

There are significant penalties for failing to file these forms.  Failure to file IRS Form 8938 can result in a $10,000 penalty, with an additional $10,000 penalty for every 30 day period that it is not filed, up to a maximum penalty of $50,000. Failure to file with the Treasury can elicit a penalty of up to $10,000 per non-willful violation.  Willful violations can elicit penalties that are the greater of $100,000 or 50% of the amount in the account for each violation.

The IRS Offshore Voluntary Disclosure Program provides an opportunity to become compliant while eliminating criminal exposure and reducing the civil penalties you may face.  More details about this program are available on the IRS website.

As foreign financial institutions prepare to report all accounts held by US citizens and the government continues to ramp up its efforts to curb foreign tax evasion, it’s essential that you disclose your foreign assets.  Talk with your CPA to make sure you are in compliance regarding this tricky tax issue.

Brian Wynne, CPA is a Principal at Bond Beebe Accountants & Advisors who specializes in tax preparation and planning for high-net-worth individuals.  He can be reached at wynne@bbcpa.com or 301.272.6019.   

 

#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…

Gaming-Expo-MA

Hollywood is the movie production capital of the United States. Bollywood is Hollywood’s Indian counterpart.

So what exactly is Vollywood? It could refer to whichever region becomes the video game production capital of our country. New tax policy, not any video game cheats, is what could help Austin, Texas gain this title of Vollywood. Continue Reading…

Every tax year stands on its own, and by the time you start figuring your taxes in April it’s usually too late to do much about it. That’s why a quick check-up before year end is a great idea and although there’s no shortage of tax advice about moves you should make, that doesn’t mean you should be paralyzed.

First of all, you must consider your own circumstances. Focus on what’s most important to you and what has the biggest bottom-line effect. If you need ideas, here are three of the best ones that we can provide: 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…