Our long, basketball nightmare might soon be over.
Los Angeles Clippers' owner Donald Sterling has reportedly agreed to allow his wife, Rochelle, to negotiate the forced sale of the team. In the weeks since NBA commissioner Adam Silver announced he was banning Sterling from the league for making racist comments, the owner had lawyered up and threatened a long legal battle, refusing to pay the $2.5 million fine that was part of his punishment.
Rochelle, who goes by Shelly, had embarked on a media campaign of her own, insisting that she did not share her husband’s views and floating the idea of assuming ownership of the team, which is held by the Sterling family trust, in the wake of Donald’s banishment. The NBA quickly put the kibosh on that idea, noting that the league’s constitution allows for the termination of all controlling owners’ interests when the principal ownership is voided. According to ESPN’s Romana Shelburne, Shelly currently holds a 50 percent interest in the team.
Shelly had good reasons for wanting to prolong this saga. The Sterlings could fetch anywhere from $575 million to $2 billion for the Clippers -- a hefty profit on a team purchased for $12.5 million in 1981. At 80 years old, Donald isn’t long for this earth, and if Shelly had been able to retain control of the team -- or at least postpone its sale -- until after his death, she and the three Sterling children would have saved a bundle in taxes.
As it stands, the Clippers’ sale will be subject to state and federal capital gains tax. California has the highest capital gains tax in the country at 13.3 percent, while the federal rate for long-term capital gains is 20 percent. If we take the consensus view that the Clippers will sell for around $1 billion, that works out to a little under $329 million in taxes. If -- as former NBA general manager (and Bloomberg View contributor) David Kahn believes -- the Clippers go for as much as $2 billion, the Sterlings would be on the hook for almost $662 million.
On the other hand, had Sterling managed to keep the Clippers until his death, his wife and kids may have saved a bundle. That’s because, despite the myth of “double taxation,” the estate tax effectually resets the initial purchase value of the asset to its fair market value when transferred to one’s heirs. Yes, the sale would still be subject to the federal estate tax, which, now at 40 percent after a $5.34 million exemption, is technically higher than the combined capital gains tax. But as we all know, the estate tax code is rife with loopholes that allow the rich to shield much, if not all, of their wealth from penalty. We don't know the exact makeup of the Sterling family's trusts, but here are some speculations from Gerry Beyer at the Wills, Trusts & Estate Profs Blog (c'mon, I know you have it bookmarked). Then there is this theory.
ESPN legal analyst Lester Munson offers a rather cynical, but not wholly unbelievable theory, that Donald Sterling might be shifting negotiations to his wife in order to further delay the process or to raise the issue of Shelly’s current ownership stake. She could be vying to maintain a minority interest. Or the Sterlings could have just decided to cut their losses -- you know, at least a half a billion dollars in profit after taxes -- and fade from the public eye. We’ll find out more as this continues to unfold leading up to the June 3 hearing, where Sterling will have to face his fellow owners.
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Kavitha A Davidson at email@example.com