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Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

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Thursday, June 5, 2014

Is NBA Actually Doing Donald Sterling a Favor?

Sterling

Despite the bad press Donald Sterling endured while ousted by the NBA, a $2 billion sale to Microsoft’s Steve Ballmer does not put him in a bad position.  At first glance, Mr. Sterling could potentially lose a large portion of his outsize profit due to estate and income taxes.  However, Mr. Sterling may have a way around this mess of taxes.

If the S corporation structure applies to Mr. Sterling, he would have to pay taxes on the deal personally.  With a long-term capital gain rate of 20%, that is almost $400 million.  Furthermore, the State of California will collect taxes at 13.3% on the sale of over $264 million.  California does not give any break to long-term capital gain.  Both federal and state income taxes will total about $662 million, almost a third of the $2 billion sale price.

The sale may impact Mr. Sterling’s estate plan somewhat differently.  Mr. Sterling is suing the league and claiming $1 billion in damages, which he may try to report as capital gain and deduct the losses as ordinary.  Latest reports indicate Mr. Sterling is dropping his suit, which could mean that he will try to roll over his gain into other investments.  This is made possible by Section 1033 of the tax code, allowing an individual to defer taxes when property is taken involuntarily.  Since Mr. Sterling’s basis in the Clippers is only $12.5 million, that would be his basis in replacement investments.  Since there is a step up basis in the market upon death, this could mean his $662 million income tax bill disappears. 

See Robert Wood, Donald Sterling’s Last Laugh: Tax-Free $2 Billion Clippers Sale, Forbes, June 4, 2014. 

 

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