Individual Income Tax Insights: California Disallows Donald Sterling's Deduction for Clippers' Fine

Recent legislation from California disallows deductions for fines paid by owners of professional sports franchises imposed by those leagues on both personal and corporate income tax returns for taxable years starting on or after Jan. 1, 2014. As noted in the bill’s analysis, the change in law is partially a reaction to former Los Angeles Clippers’ owner Donald Sterling’s recent racist comments that led to a $2.5 million fine and a lifetime ban from the NBA.

“At the federal level, it is widely accepted that fines paid by professional athletes and team owners [to non-governmental organizations] are deductible as ‘ordinary and necessary business expenses,’” Andrew Appleby, an associate at Sutherland Asbill & Brennan, told Bloomberg BNA via e-mail. “There is a great deal of case law addressing what is an ‘ordinary and necessary business expense,’ and a fine paid to a league seems to fall pretty squarely within the definition,” said Appleby.

States, of course, are free to adopt their own tax provisions, although most states conform to the Internal Revenue Code to some extent. In general, California adopts IRC § 162. However, this legislation marks a departure from that rule. As far as similar treatment in other states, Appleby said he was “not aware of any other states that have laws that expressly disallow deductions for fines paid by athletes or team owners.”

California’s law changes nothing for professional sports athletes, who are still free to deduct fines as business expenses. “The distinction between owners and players is … interesting,” said Appleby. “It is relatively rare that a team owner gets fined, … which likely made it easier for politicians and the public to support this bill, and politically, team owners may be less likeable than a star quarterback or a point guard.”

However, from a revenue standpoint, California, the home of the most major professional sports teams, may be motivated to expand the scope of the law in the future. According to, total fines for NFL and NBA players last season approached $6 million while fines assessed to players of California teams was more than $700,000.

As the maxim goes, “deductions are a matter of legislative grace.” See New Colonial Ice Co. v. Helvering, 292, U.S. 435, 440 (1934). With the enactment of A.B. 877, California has put it sports team owners on notice regarding its treatment of this particular deduction.

*Continue the discussion on Bloomberg BNA's State Tax Group on LinkedIn: Should more states disallow deductions for fines paid by athletes and owners?

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By: William Olver

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