When a probate judge cleared the way for the $2 billion sale of the Clippers not only Shelly Sterling came away as a winner. Donald and Shelly’s silent partners, the federal and California governments, were also in for their share of the sale. The Internal Revenue Service and the California Franchise Tax Board will reap a windfall for Donald’s racist comments to his mistress.

Sterling originally bought the Clippers in 1981 for $12 million. At the current maximum federal capital gain tax rate of 25% the sale should generate almost a half a billion dollars for the IRS coffers. In addition, the FTB should get over $200 million, given California’s top tax rate of 12.30%. California, unlike the federal government, does not have a lower rate for capital gain income. That should pay for about 100 yards of Jerry Brown’s bullet train to nowhere.

That is not Donald Sterling’s only tax problem. Sterling also reportedly lavished his girlfriend, V. Stiviano, with a series of gifts including a Ferrari, two Bentleys, a Range Rover and a $1.4 million apartment. Under established federal case law, payments to mistresses are considered “gifts” subject to gift taxes paid by the giver and not compensation income for “services rendered” taxable to the recipient. Currently, every taxpayer has a life time exemption of $5,340,000. Meaning the first $5,340,000 of gifts given are not subject to gift or estate taxes. One wonders whether Donald Sterling reported the gifts to the IRS and whether Shelly agreed to “split” the gift to lower the hit on each of their lifetime exemptions for gift tax.

Lastly, NBA Commissioner Adam Silver fined Sterling $2.5 million. The tax question is whether the fine, if ever paid, would be deductible as a business expense or not deductible as a personal expense. I would argue that it would be a business expense as it is related to the Sterling’s basketball business, but the IRS may think otherwise. In either case Sterling’s silent partners will get their share of proceeds of the sale or Sterling will be in even deeper water.

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About Pietro E. Canestrelli

Pietro E. Canestrelli is a California tax attorney with the Temecula law office of Reid & Hellyer. He holds an advanced legal degree in tax law, making him a top tax lawyer in Riverside, San Bernardino, San Diego, Orange County and Los Angeles. Pietro has experience in litigation with tax authorities.

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