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Tax advice for Donald Sterling will save $323 million

May 25Jeff Matthews

As most of you know, I do not practice as a tax CPA.  In fact, I rely on other more qualified CPAs to prepare my personal returns.  Dr. Wayne Essex of Essex and Associates published a newsletter on May 8, 2014 that I enjoyed so I thought you might enjoy his message as well.

“My advice to Donald Sterling owner of the L.A. Clippers.

Donald Sterling’s reputation had a bad week last 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 close to a billion dollars Sterling stands to make from selling the Clippers. Ironically, the league’s nuclear option-a forced sale-ends up lining Sterling’s pocketbook with millions in tax savings. Instead of his just deserts, Sterling end up with a sweet tax treat.

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 will 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. …

There are several requirements that Sterling would have to satisfy in order to qualify for this tax benefit. One requirement that is likely to generate controversy with the Internal Revenue Service is that Sterling must use the sale proceeds to purchase “other property similar or related in service or use” to the converted property. The easiest way to satisfy the similarity requirement would be to purchase one or more other sports franchises. However, Sterling may find it difficult-to put it mildly-to find a willing seller, given his unpopularity.

Instead, Sterling could purchase other types of assets and argue that they are “similar or related in service or use” to him. Since the statute doesn’t actually define “similar” or “related,” Sterling’s lawyers would have ample room to argue that whatever investment property Sterling buys satisfies these vague criteria.

My advice is twofold:

1.) Do not fight the forced sale of the L.A. Clippers. It will save you $323 million in taxes as a § 1033 involuntary conversion.

2.) Get a different girlfriend, one that will not share private conversations with the world.”[1]

My thanks to Dr. Essex for his spin on this frustrating chapter in the L.A. Clippers legacy.

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[1] Newsletter from Dr. Wayne Essex, Essex and Associates dated May 8, 2014, entitled “This tax advice will save 323 million dollars in taxes”.

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