Sale of Clippers Will Cost Sterlings Significant Income Taxes

By Robin C. Gilden

People who do not think that Donald Sterling is being impacted sufficiently by the NBA fine and being forced to sell the Los Angeles Clippers are not taking into account the significant federal and California income taxes that the Sterlings are going to be required to pay on the sale of the team. Assuming that (1) the stock of the Los Angeles Clippers is a capital asset in the hands of the Sterlings, (2) the Sterlings hold the stock as community property and (3) Donald Sterling is deemed to “materially participate” in the operations of the Los Angeles Clippers in 2014, there will be a federal income tax equal to 20% of the profits that the Sterlings earn on the sale and a California income tax equal to 13.3% of those profits. If neither of the Sterlings “materially participated” in the operation of the Clippers in 2014, an additional federal income tax equal to 3.8% of the profits from the sale will be imposed.

If the Sterlings had not been forced to sell the team, those taxes could have been avoided entirely. If the Sterlings were permitted to retain ownership of the Los Angeles Clippers until the earlier to die of Donald or Shelly, the Internal Revenue Code provides that the Sterlings’ adjusted tax basis in the stock of the Los Angeles Clippers would be “stepped-up” or increased to the fair market value of that asset on the date of death. A sale of the stock at that time would result in no gain and no taxes. By being forced to sell now, the Sterlings’ profits from the sale will be equal to the difference between the sales price and their current adjusted tax basis in the team. Their current tax basis in the team will equal what they paid for the team when purchased, subject to certain adjustments.

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