The Potential Tax Benefit to Donald Sterling of a Forced Sale of the Clippers

As tax attorney, Steve Moskowitz discusses on his weekly segment as the legal analyst on Comcast TV, the NBA is trying to take the Clippers away from Donald Sterling (as well as his estranged wife); forcing them to sell, in spite of the fact that neither owner wishes to do so.

From a tax perspective, Steve believes that if the NBA is successful, Donald Sterling may be eligible for a tax break via Internal Revenue Code (IRC) 1033: Involuntary Conversion.

Involuntary conversion is a process where a taxpayer is involuntarily forced to dispose of property that has been stolen, condemned, destroyed or repossessed, and another piece of property or cash is received in lieu of the property.

Under IRC 1033, Involuntary Conversions, a taxpayer can avoid any tax on any realized gain to the extent that the taxpayer reinvests the compensation for conversion in a like kind replacement property. Realized gain is not recognized if the total amount reinvested equals or exceeds the amount realized.

Donald would have two years from the time of conversion (here, the forced sale) to buy the replacement or replacements; and he would not have to buy an American basketball team. For example, he could buy a foreign soccer team or form an entity and start a new team. The bottom line here is with tax planning Donald could legally avoid taxation on his profits that he would otherwise be taxed upon.