Sale of Los Angeles Clippers Carries Enormous Capital Gains Tax Bill

Shelley Sterling, the wife of Donald Sterling, has accepted an offer to sell the Los Angeles Clippers to Steve Ballmer for $2 billion dollars.  However, the financial windfall for the Sterling family brings with it a very large tax bill.

Donald Sterling bought the Los Angeles Clippers in 1981 for $12.5 million.  As the team is a long-term capital asset, when the Sterlings sell the team, they must pay capital gains tax on the difference between the original purchase price and the sales price.  That difference of $1.9875 billion results in the Sterlings owing the IRS a capital gains tax of $662 million.

The sale of the team comes after the release of racist remarks by Donald Sterling on April 26, 2014.  Only three days after the remarks went public, NBA Commissioners Adam Silver announced that he would move for the 29 other NBA owners to vote to force Sterling to sell the team.  Silver and the other owners asserted that they had the power to force a sale of the team because Sterling’s racist remarks harmful to the financial well-being of the Clippers and the NBA as a whole.

The NBA set the date of June 3 for the owners to vote on the forced sale.  If at least 75 percent of the owners voted for the forced sale, the league would gain control of the team and would be responsible for negotiating the sale price.

Donald Sterling and his attorney asserted that they did not intend to sell the team.  However, Shelley Sterling, seeing that they had roughly one month to sell the team or lose the authority to negotiate the sale themselves, took steps to make the sale happen.

The Sterling Family Trust holds ownership of the Clippers, with Donald and Shelley Sterling each being equal trustees who needed consent of the other to carry out any actions.  However, the language within the trust states that if either Donald or Shelley Sterling become mentally incapacitated, the other becomes the sole trustee.

Two neurologists gave Donald Sterling an extensive exam in May.  They concluded that he was showing symptoms of Alzheimer’s, which made him mentally unfit to continue in his role as trustee.  Therefore, Shelley Sterling became capable of selling the team without the approval of Donald Sterling.

Although Path to Sale in Place, the Path May not be a Smooth One

On Friday, the NBA accepted Steve Ballmer’s proposal to buy the team, so in theory all that remains is for at least 75 percent of the 29 other NBA owners to approve the sale.  However, the road to completing the sale may not be clear.

In the sale agreement between the Sterling Family Trust and Steve Ballmer, Shelley Sterling included a commitment that the Sterlings would not sue the NBA regarding the sale of the team.  However, on Friday, Donald Sterling sued the NBA for $1 billion for violating antitrust laws, breach of contract, and violating Donald Sterling’s constitutional rights.

According to Donald Sterling’s attorney Max Blecher, he was not aware of the language in the trust regarding the commitment not to sue the NBA and he would have to review it before he could comment on how the lawsuit would proceed.

In addition, although physicians declared Donald Sterling incapacitated regarding handling his duties as a trustee, he could appeal that ruling under California law.  In the event he won the appeal and regained his role as a trustee, he could refuse to approve the sale of the team to Ballmer.

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by Mark Johnston

Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.