by Sheren Javdan
May 5, 2014
Los Angeles Clippers owner Donald Sterling, who was banned by the NBA for life last week for his racist remarks, might actually not have to pay as much in taxes as people might think. Sterling’s “forced sale” of the team might end up saving him millions of dollars in taxes.
In addition to a $2.5 million fine set as punishment by the NBA Commissioner Adam Silver, Sterling might be forced to sell his team. Sterling purchased the Clippers team in 1981 for $12.5 million. Today the Clippers are worth approximately $1 billion. Therefore, Sterling is facing a significant tax payment based on the capital gains from the sale of the team.
Jordan Weissman, contributor to Slate, configured that assuming Sterling earned $700 million in profit from selling the Clippers, he will owe 20% in federal capital gains taxes, approximately $200 million and an additional 13.3% in State income taxes at $123 million. For a total of $323 million in taxes.
This is where Sterling potentially gets lucky. Because Sterling did not volunteer to sell the Clippers, he might be eligible for a tax break that only applies to forced sales or “involuntary conversions.” As a result, Sterling’s profits from the Clippers may be tax free.
Section 1033 of the Tax Code provides “if property is compulsory or or involuntarily converted into … property similar or related in service or use to the property so converted, no gain shall be recognized.” Basically, should Sterling receive money as a result of the forced sale of the Clippers, he will not be responsible to pay taxes on any profit he makes.
In order to qualify for the tax break Sterling must use the profits recognized by the sale for the purchase of other properties that are “similar or related in service or use” of the original property. Meaning, Sterling will most likely need to find and purchase another sports team. He will have two years after the end of the tax year in which he made the gain (profited) to purchase a replacement property.
On the other spectrum, should the NBA only require a loss of ownership rather than a forced sale, Sterling may gift his interest in the Clippers to his wife Shelly under Section 2523 of the Tax Code.
With millions of dollars at stake for Donald Sterling, it is worth a shot to argue these points. Although Sterling’s reputation has diminished in value, his net worth and finances are alive and kicking.
If Sterling claimed benefits under Section 1033, the IRS would undoubtedly audit him. There’s no guarantee that he would ultimately prevail, but with hundreds of millions of dollars at stake, Sterling, a litigious and stingy attorney, would probably fight the case tooth-and-nail.
The events of the past week have likely increased the value of Sterling’s investment by tens of millions of dollars. On top of that, he may be able to save hundreds of millions in taxes if the NBA’s punishment of a “forced” sale is realized. While Sterling’s reputation has been permanently tarnished, his financial future has never looked brighter.