I stumbled across an interesting piece this morning by Nick Lum on how Donald Sterling may actually benefit from a forced sale of the Los Angeles Clippers. The article can be found here. The author’s point is that if Donald Sterling has to sell the team by decree of the other owners, it is possible that he will save money in taxes. Sterling bought the team in 1981 for $ 12.5 million dollars. Some speculate that the fair market value of the team today is approximately $1 billion. So, if he sells the team now, Federal and California Income Tax on the sale will cost Sterling about $323 million. However, the author of the article argues that there may be a way out under Internal Revenue Code Section 1033 as a forced sale imposed by the NBA could be considered an involuntary conversion.
Internal Revenue Code Section 1033 states that if property (as a result of its destruction in whole or in part, theft, seizure, or requisition or condemnation or threat or imminence thereof) is compulsorily or involuntarily converted—Into property similar or related in service or use to the property so converted, no gain shall be recognized. In other words, no tax will be owed so long as he pours that sales proceeds into similar property. Personally, I think this argument has more holes than Swiss cheese. First of all, Mr. Sterling voluntarily entered into a contract with the NBA subjecting himself to its rules. Hard to argue involuntary conversion. Second, how is he going to find “similar property”? No sports league in its right mind would take his money at this point.
Having said all that, Sterling would be wise to fight a forced sale and by all indications he will. Why? Because income taxes are not the complete story. If he holds onto the Clippers until he passes away, the estate tax would be approximately $400 million. If his heirs then sell the team the next day, their income tax would be $0. On the other hand, if he sells the Clippers before he dies, he will owe income tax of approximately $323 million plus the estate tax on the leftover cash when he dies – an additional $280 million. So, if he sells now, total taxes are close to $600 million. If he fights to the bitter end, about $400 million.
As the great Terrell Owens used to say, “get your popcorn ready”. Sterling is going to fight this.
On a side note, I was recently on Money Matters with Dino on AM 1150. The show usually airs on Sundays at 7:00 am. The replay should be posted soon here. Go check it out if you would like to hear more commentary estate planning and contemporary financial planning issues of the day.