Donald Sterling’s reputation had a bad week, but his pocketbook has never looked better. The punishment meted out by NBA Commissioner Silver—the maximum league fine of $2.5 million—pales in comparison to the billion dollars Sterling stands to make from selling the Clippers. Ironically, the league’s nuclear option—a forced sale—could also end up lining Sterling’s pocketbook with millions in tax savings. Instead of his just deserts, will Sterling end up with a sweet tax treat?
First, there’s never been a better time for Sterling to sell, financially speaking. The Clippers have historically been regarded as one of the worst teams in all of professional sports. During the first 30 years of Sterling’s ownership (1981-2011), the Clippers won more games than they lost only twice. They made the playoffs just four times and managed to eke out only one playoff series win. But since 2011, they’ve made the playoffs every year and are even considered a fringe contender for the NBA title this season. Potential buyers can expect to see strong continued performance because the Clippers’ core is locked up through next year or beyond thanks to Chris Paul, Blake Griffin, DeAndre Jordan, and Coach Doc Rivers.
With this strong platform, the Clippers could sell for $1 billion. Just consider two other NBA teams—worse performers in much smaller markets—that sold in the past year: the Sacramento Kings ($534 million) and Milwaukee Bucks ($550 million). So Sterling, who paid only $12.5 million for the team back in the 1980s, may be able to lock in a 100-fold return on his investment.
If Sterling had voluntarily sold the team for $1 billion, he would have owed about $200 million in federal income tax and another $123 million in California state income tax. But thanks to a tax law that applies only to forced sales or other “involuntary conversions,” Sterling’s profits may all be tax-free.
Section 1033 of the tax code provides a special tax treatment for people whose property has been stolen, appropriated by the government (e.g. eminent domain), or otherwise “involuntarily converted.” The basic idea is that if you have received money because someone took your stuff away from you, you shouldn’t have to pay taxes since you didn’t enter into the transaction voluntarily.
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