BILL ANALYSIS Ó SENATE GOVERNANCE & FINANCE COMMITTEE Senator Lois Wolk, Chair BILL NO: AB 877 HEARING: 6/11/14 AUTHOR: Bocanegra FISCAL: Yes VERSION: 5/6/14 TAX LEVY: Yes CONSULTANT: Bouaziz INCOME AND CORPORATIONS TAXES: DENIAL OF DEDUCTION: FINES AND PENALTIES Prohibits professional sports franchise owners from deducting fines and penalties imposed by the professional sports league that includes that franchise. Background and Existing Law Current federal and state laws generally allow taxpayers engaged in a trade or business to deduct all expenses that are considered ordinary and necessary in conducting that trade or business, unless specifically excluded by statute. Under federal and state laws, a deduction is allowed for a fine or similar penalty paid to an entity, other than the government, as an ordinary and necessary business expense. Individuals are allowed to deduct ordinary and necessary expenses paid or incurred for the production of income and for the management, conservation, or maintenance of property held for the production of income. The expenses must not be a nondeductible personal living expense or exceed specific statutory limits. Proposed Law Assembly Bill 877 prohibits professional sports franchise owners from deducting fines and penalties imposed by the professional sports league that includes that franchise under the Personal Income Tax Law and Corporation Tax Law. As a tax levy, this bill would take effect immediately and applies to taxable years beginning on or after January 1, 2014. AB 877 -- 05/06/14 -- Page 2 State Revenue Impact Unknown. Comments 1. Purpose of the bill . According to the author, "From Eddie DeBartolo, who was fined $1 million by the NFL, to Donald Sterling, who was fined $2.5 million by the NBA, disciplinary fines and penalties for sports team owners should not be tax deductible. However, sports team owners can currently benefit from a loophole, which gives those sports team owners the ability to write off disciplinary fines as business expenses on their state income tax returns. Tax deductions for business expenses must be both 'ordinary and necessary,' and a disciplinary fine or penalty imposed by a professional sports league on a team owner of that league is neither ordinary nor necessary. AB 877 addresses this problem by closing this loophole, and it does so in a way that brings greater equity to the tax code. " 2. Compliance Complexity . If AB 877 becomes law, taxpayers could deduct some fines and penalties under federal law, but not under state law. While California does not always conform to federal tax law, conformity does ease compliance and makes filing less burdensome on taxpayers. 3. Rewarding poor behavior . In the case of sports teams owners, fines and penalties are generally given for violations of rules, guidelines, or policies previously agreed to. Why should fines and penalties imposed by a private entity be any different? Under current law, government imposed fines and penalties are not tax deductible. 4. Change for all to affect only one . AB 877 is a response to the recent fining of Donald Sterling, owner of the Los Angeles Clippers, for making comments widely condemned as racist. While his comments were inexcusable, is it necessary to change the entire law in this area for every sports team owner in California? Currently there are over 25 professional teams in California, all of which AB 877 -- 05/06/14 -- Page 3 would be subject to this change in law meant to punish only one individual. Assembly Actions Not relevant to the May 6, 2014 version of the bill. Support and Opposition (06/05/14) Support : California State Conference of the National Association for the Advancement of Colored People (California NAACP). Opposition : None received.