[Jack.Kerr]

Same Article, Different Consequences

Important tax law considerations: avoiding capital gain taxes

Sterling, who is 80 or 81 years old (his exact birthdate remains a mystery), has a key financial reason to fight the sale of the Clippers: to avoid capital gain taxes. This insight is from Robert Raiola senior manager in the Sports & Entertainment Group of the Accounting Firm O'Connor Davies, LLP. Sterling reportedly purchased the Clippers for $12.5 million in 1981. If he sold the team today, it would be worth at least $600 million, perhaps closer to $1 billion. Between federal and state capital gains taxes, Sterling would pay an approximately 33 percent tax rate on the difference between what he paid for the team and what he sold it for. For instance, if he sold the Clippers today for $1 billion, Sterling would pay capital gain taxes of 33 percent on a gain of $987.5 million. As a result, Sterling would owe Federal & state capital gain taxes of approximately $329 million.

If instead Sterling holds onto the Clippers and some time from now passes away ("Here, honey, drink your juice...." ), his family would inherit the team. The family would inherit the team with a value pegged to its fair market value. As Raiola stresses, the new value of the team would be crucial for purposes of capital gains tax. Here's why: if the family inherited the Clippers and then sold it, they would only pay a capitals gain tax on the difference between the value of the team when they inherited it and the value of it when sold. For instance, if the family inherited the team and it was worth $700 million and then they sold it for $800 million, they would only pay capital gain taxes on a gain of $100 million. In that instance, there would be a comparatively modest tax bill of $33 million.

If the Sterling family inherited the Clippers and simultaneously sold it, Raiola tells SI.com, they would pay no capital gains tax, but still have estate tax issues. However, a transaction could be structured whereby the employees of the Clippers organization could own a percentage of the team. In such case, the capital gain taxes on a sale could be partially or fully avoided.

These tax considerations make it more likely that Sterling will fight the NBA to hold onto the Clippers. Even if he ultimately loses a legal battle, the process of losing could take years to play out in court. At the risk of sounding macabre, Sterling may be motivated to wage a protracted legal battle in order to keep the team for as long as he lives.

Important family law considerations: what if Mrs. Sterling files for divorce?

Sterling and his wife, Shelly, are reportedly estranged but not divorced. One potential legal complication for the NBA would be if Mrs. Sterling filed for divorce before the NBA terminated her husband's ownership of the Clippers. California is a "community law" state, which means Mrs. Sterling would likely be entitled to half of her husband's assets. One of his key assets is obviously the Clippers. Mrs. Sterling could potentially use divorce court proceedings to slow down the NBA's ouster of her husband, as she would have a vested stake in any sale of the Clippers.

Could Sterling transfer ownership to Mrs. Sterling?

It is possible that Sterling could try to transfer ownership of the Clippers to Mrs. Sterling before the NBA ousts him. The NBA, however, would have to approve such a maneuver, as Mrs. Sterling would be subject to requirements the league uses to evaluate prospective owners. There is virtually no chance the NBA would approve Mrs. Sterling in this scenario as it would be a clear attempt to evade the NBA's discipline of her husband.