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.