One of the comments made by those who favor the actions by the NBA against Sterling is that he isn’t being deprived of his property – he will get paid for his team; so what’s the problem? Setting aside all other issues with this action….
I believe even this statement doesn’t stand. I caveat by saying I have no idea how Sterling has set up his estate planning. However, if he sells an appreciated asset, he will be liable for tax on the gain. Then, when he dies, his estate will be liable for estate taxes.
However, if he dies while still owning the team, there is no gain on sale (because there is no sale), only estate taxes. My quick calculation, assuming he has a $1 billion gain in the Clippers, is that this difference amounts to over $160 MM to his estate. This assumes a 20% cap gains tax, 13% + California tax, and the 3% or whatever new Medicare / Obamacare tax on investment income.
There may be ways to shelter this, but I think it will mean his beneficiaries will not have direct control of the assets – for example, he could donate the Clippers to a charitable foundation before the sale. There may be others, I have no idea. But, what I have learned is that the only way around these issues are pay the tax or give it to charity before the transaction.
The best shelter is for Sterling to fight this until he (and even his wife) dies.
Friday, May 16, 2014
The Best Strategy for Donald Sterling is to Fight the NBA Until He (and Even His Wife) Dies
An investment banker friends emails:
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"One of the comments made by those who favor the actions by the NBA against Sterling is that he isn’t being deprived of his property – he will get paid for his team; so what’s the problem? "
ReplyDeleteWe don't even have to get into tax considerations to realize how flawed this logic is. An NBA franchise is a highly specialized and specific good. The potential number of buyers can probably be measured in two digits.
Anyone who has ever been involved in any sort of negotiation knows that the circumstances of both parties play a huge part in how the negotiation is conducted. You can probably negotiate a better deal for a car with someone who needs to sell their car tonight to bail their brother out of prison than someone who simply has an extra car but no particular urgency or need to sell it immediately.
Similarly, once the votes are tabulated and Sterling is "forced" to sell the team, how can he possibly get fair value for it? He will immediately be negotiating in a state of weakness.
I see a parallel here to imminent domain. Almost everyone would agree that imminent domain consists of someone being deprived of their property. Sure, they get "compensated" by the government, but everyone universally believes the compensation is too low. And why wouldn't it be? The government has all the power. You either accept what they tell you is "fair" or you get nothing. Sterling will be in a similar situation.
See also: Hawai'i.
ReplyDeleteThe statement that "Oh!...Don't worry...He's getting paid for it..." masks the Totalitarian aspect that can be found in one simple statement:
"I don't want to sell it".
A forced sale, whether selling a house to pay back property taxes to the county or otherwise, means simply that someone is compelling you to sell something you own that otherwise you would not sell. It is forced compensation. Others determine the value of the forced sale items. There is no market, you have no market in which to make an offer.
"That painting has been in the family for years and it means more to me than any monetary compensation".
"We price it at $20 and that's what you'll get for it...". Now...Have you packed up everything else yet? The Court says you have 12 hours to vacate or we're coming in."
Yeah. Great. "Don't worry. He's getting PAID for it." I feel better now.
CW
Two things. First, I read that a family trust owns the team, so I think the tax ramifications have already been dealt with.
ReplyDeleteSecond, the best way to counter the lowballing of his forced stake of the team is to open it up to the market. The NBA is a private group, and they are not just going to let anyone join their club. Jim Basille, the founder of Blackberry, has been trying for at least a decade to buy an NHL team. The NHL simply won't let him in because they know that he wants to move whatever team to Ontario, giving that province a third professional hockey team. Now if there are multiple suitors for the interest in the Clippers, then the Sterlings will likely realize a FMV for their interest in the team. If the league restricts the number of buyers, then the Sterlings will get the shaft. As long as there are at least two real potential buyers involved in the process, the Sterlings will do just fine.