Embroiled Clippers Owner Sterling’s Battle with Capital Gains

May 9, 2014
Last week’s sanctions by the NBA against Donald Sterling-prompted by a recording of him running afoul with a string of racist remarks-were both definitive and sweeping. NBA Commissioner Adam Silver banned Sterling for life, and almost in the same breath pressed for the league’s owners to force him to sell the team. At least three-quarters of the league’s owners (22 of the total 29, not counting Sterling himself) would have to agree to be able to drive him out.
Should this minimum vote be reached, Sterling will pay more than just the maximum $2.5 million fine imposed by the NBA for violating its rules. Next to the capital gains taxes Sterling might owe from a sale, the $2.5 million will shrink in comparison. Of course, how big his check to the IRS might be will depend on the team’s ultimate selling price.
Sports analysts and mainstream media are estimating the Clippers could go for anywhere from $575 million to $1 billion or even more. Not only is ownership a profitable investment with growth expected to shoot upward still, but the prestige that comes with being part of the elite owners club could set off an all-out bidding war among the billionaire set. Already, Floyd Mayweather Jr. and Oprah Winfrey (with partners Larry Ellison and David Geffen) have reportedly voiced interest, among others.
If the Clippers sell at the $1 billion mark, federal capital gains would come in at 20 percent and state at 13.3 percent. Since Sterling purchased the team for $12.5 million back in 1981, capital gains would take $329 million right from the top of his $987.5 million profit. That would leave Sterling and his heirs with $671 million.
There’s no arguing that this would be a mega-return on Sterling’s investment but if he were able to keep the ball in his court by passing ownership on to heirs after his death, he could avoid the $329 million in capital gains entirely. That’s because his heirs would benefit from a step-up basis, requiring them to pay capital gains only on any increase in value from the time they received ownership to the time they sold.
There are other factors at play here, too. Because Sterling is no stranger to litigation, we can reasonably assume that he will fight the NBA to try and stop a forced sale. Should he lose that battle, he may take the IRS to court and argue that under IRS Code 1033 he doesn’t have to pay capital gains because the sale is an “involuntary conversion.”
Even with the many variables and complexities of this situation, it’s easy to see the massive impact capital gains taxes can make on an investment. To learn more about how capital gains taxes can affect your personal or business assets, contact Talley and Company today.