Archives For estate tax

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.

With a 5-4 decision, the Supreme Court struck down section 3 of the Defense of Marriage Act (DOMA), which required same-sex spouses to be treated as unmarried for purposes of federal law. The ruling, however, does not mean that states, which currently ban same-sex marriage, now have to permit it.

Though it is not considered tax law, the repeal of this particular legislation means there are new tax consequences. Same-sex couples should look into refiling their taxes, where applicable; the repeal of DOMA could mean more money from Uncle Sam.

With the help of the Wall Street Journal’s MarketWatch section, here are some of the important tax breaks now given to same-sex couples.

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JDKatz, P.C. is a full-service law firm focused on tax law and estate planning. 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.

State of The Estate Tax

July 26, 2012 — 1 Comment

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Senate Democrats, who are united in support of higher income tax rates for millionaires and billionaires, are fragmented due to disagreements on how to tax the estates of the wealthiest Americans.

Democrats including Mark Pryor of Arkansas and Mary Landrieu of Louisiana resisted a proposal from President Barack Obama to tax individual estates of more than $3.5 million — roughly three in 1,000 — at a top rate of 45 percent. The split among Democrats, who control the Senate, will give Republicans more influence on the issue after the Nov. 6 election.

As a result, when the Senate votes today on a bill to extend income tax cuts that expire Dec. 31, the proposal will not touch upon the estate tax issue.  Democratic leaders in the Senate chose instead to focus on an issue on which almost all of them agree: Obama’s plan to let income tax cuts expire for the top 2 percent. 

Democrats who balked at Obama’s proposal say they are worried about the effect of increasing the estate tax rate and lowering the per-person exemption to $3.5 million from $5.12 million for farms and small businesses. Not surprisingly, Republicans favor the $5.12 million exemption, which means a compromise on the issue would be more generous to estates than Obama’s plan. 

Democrats, who currently control 53 seats in the 100-member Senate, are trying to muster a majority for Obama’s plan to extend most of the income tax cuts first enacted in 2001 and 2003. Republicans can use Senate rules to require a 60-vote threshold, meaning that the income tax plan isn’t expected to advance. 

The politics of the estate tax center on two numbers: the per-person exemption and the top tax rate. The exemption matters most to business owners, farmers and ranchers who can use it to avoid estate tax liability. 

For billionaires, the rate is the priority. 

This year, the per-person exemption is $5.12 million and the top rate is 35 percent. Obama agreed to those parameters as part of a December 2010 deal with Senate Republicans that also extended expiring tax cuts and created a payroll tax cut. 

Under those numbers, which Republicans want to extend, 3,600 estates would pay taxes, or fewer than 0.2 percent of estates, according the nonpartisan Joint Committee on Taxation (JTC). 

Obama proposed a $3.5 million per-person exemption and a 45 percent top rate, returning to parameters that were in effect in 2009. That would require 7,200 estates, or about 0.3 percent, to pay taxes.

If Congress does nothing, as would be the case if the Democratic bill and no others became law, the exemption would drop to $1 million and the rate would rise to 55 percent. Under that regime, the tax would affect about 2 percent of estates, or 55,200, according to the JCT.

The U.S. is expected to collect $11 billion in estate and gift taxes in fiscal 2012, according to the Congressional Budget Office. Obama’s plan would raise $9 billion more, and allowing the $1 million exemption and 55 percent rate to take effect would raise an additional $22 billion beyond Obama’s proposal, according to JCT.

Backing Off 

Senate Majority leader Harry Reid, a Nevada Democrat, included Obama’s estate-tax proposal in the first draft of his bill. He then backed off after hearing objections from some Democrats. 

This is not to say that the Estate tax issue will not be dealt with it will just be addressed in a different piece of legislation.

The same dynamic occurred in April 2009, as 10 Senate Democrats joined Republicans in a test vote that showed majority support for a $5 million exemption and 35 percent top rate.

Small Businesses

Under current rules, the tax would affect about 200 small businesses and 100 farmers, according to the Joint Committee on Taxation. That would jump to 2,700 and 2,400, respectively, if Congress doesn’t act. The numbers under Obama’s proposal would be 400 and 300, respectively. 

Despite the death-tax rhetoric that has overwhelmed arguments for keeping the estate tax.  The tax reduces concentrated wealth, is relatively efficient because it doesn’t tax people as they earn, and affects only a few people. 

For those who wish to read the bills in their entirety the Senate Democrats’ bill is S. 3412 and the Republican proposal is S. 3413.

JDKatz, P.C. is a full-service law firm focused on tax law and estate planning. 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.

Robert Rauschenberg’s “Canyon” is a work of art that historians have studied and cherished for over fifty years. The piece was owned by Ileana Sonnabend, a New York art dealer, until she died in 2007 at the age of 92. Considering the myriad or works she owned, her estate was totaled at $876 million, however, the Canyon was priced at $0. This is due to the collage bearing a stuffed bald eagle, which prohibits the work from being legally sold. It would violate two federal laws protecting bald eagles and result in the seller and purchaser to spend some time in the federal penitentiary. Considering the item is invaluable, it became quite a surprise when the estate received a Notice of Deficiency last October for an additional $29 million in tax and an $11.7 million gross valuation misstatement penalty for not reporting the “Canyon.”

The IRS has a special committee of experts – the Art Advisory Panel – to appraise certain pieces of art. The Panel appraised “Canyon” for $65 million even though the piece of art cannot be legally sold. The IRS Director of Art Appraisal Services told the top art lawyer representing the estate that “there could be a market for the work, for example, a recluse billionaire in China who would like to buy it and hide it.”

This insight seems extremely esoteric and impractical. However, Stephanie Barron, senior curator of 20th-century art at the Los Angeles County Museum of Art, argued the group evaluated “Canyon” purely on its artistic value without any reference to the restrictions or laws associated with selling it. She furthered her argument by saying it is a “stunning” work of art that should have every right to be valued. Although a big hole in their argument is the fact that the eagle is not valued at all.

Ralph E. Lerner, the primary lawyer for the estate, has been arguing that the IRS has been trying to come up with different excuses to taxing the piece of art. At first “Canyon” was valued at $15 million by an auditor with an unsigned report. Then the estate received a $65 million assessment which was explained by the “billionaire in China” excuse.

“The government is saying we want $35 million in tax but if you sell it to get the money, we’ll put you in jail” said Lerner.

The Sonnabend estate appealed the tax bill in U.S. tax court but litigation will be delayed to see if the parties can negotiate a settlement. There are certain items the IRS can tax that have a certain black or illicit market value like stolen art, stolen jewels, artwork with a protected antiquity. However, this piece of art is not stolen or belonging to a foreign government, thus the IRS’s argument seems like an uphill battle. The estate also has an immaculate record in terms of tax law where $331 million has been paid to the federal government in estate tax and an additional $140 million to the state of New York.

JDKatz, P.C. is a full-service law firm focused on tax law and estate planning. 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.