BILL ANALYSIS Ó AB 877 Page 1 CONCURRENCE IN SENATE AMENDMENTS AB 877 (Bocanegra and Jones-Sawyer) As Amended May 6, 2014 2/3 vote. Tax levy ---------------------------------------------------------------------- |ASSEMBLY: | |(January 27, |SENATE: |27-9 |(August 11, 2014) | | | |2014) | | | | ---------------------------------------------------------------------- (vote not relevant) ------------------------------------------------------------------------ |COMMITTEE VOTE: |7-1 |(August 27, 2014) |RECOMMENDATION: |concur | |(Rev. and Tax.) | | | | | ------------------------------------------------------------------------ Original Committee Reference: E. & R. SUMMARY : Disallows a deduction for any fine or penalty paid or incurred by an owner of a professional sports franchise, where that fine or penalty is assessed or imposed by the professional sports league that includes that franchise. The Senate amendments delete the Assembly version of this bill, and instead: 1)Provide that, for taxable years beginning on or after January 1, 2014, a deduction shall not be allowed for the amount of any fine or penalty paid or incurred by an owner of a professional sports franchise, where that fine or penalty is assessed or imposed by the professional sports league that includes that franchise. 2)Disallow a deduction under both the Personal Income Tax Law and the Corporation Tax Law. 3)Provide that this bill shall go into immediate effect as a tax levy. EXISTING LAW : 1)Allows various deductions in computing income subject to taxation. 2)Allows a deduction for ordinary and necessary business expenses, AB 877 Page 2 including a deduction for amounts paid or incurred for specified types of fines or penalties. AS PASSED BY THE ASSEMBLY , this bill revised the definition of a "voter verified paper audit trail." FISCAL EFFECT : According to the Senate Appropriations Committee, pursuant to Senate Rule 28.8, negligible state costs. COMMENTS : The author has provided the following statement in support of this bill: From Eddie DeBartolo, who was fined $1 million by the NFL [National Football League], to Donald Sterling, who was fined $2.5 million by the NBA [National Basketball Association], 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. National Basketball Association (NBA) fines. One of the most prominent team owners, Mark Cuban, has been fined by the NBA at least 20 different times for a total of $1.84 million. A large number of those fines were imposed for inappropriate interactions with referees or for criticizing their ability to make the right calls. One of the largest fines came in 2002 after the Mavericks lost to the San Antonio Spurs and Mark Cuban was quoted as saying "Ed Rush [Former NBA Referee] might have been a great ref, but I wouldn't hire him to manage a dairy queen." The comment cost Mark Cuban $500,000. In 2011, Micky Arison, owner of the Miami Heat, was fined $500,000 after making several lockout-related posts on his twitter account. Though most of the fines have been imposed because of comments made by team owners, a few have been imposed for actions not becoming an NBA owner. One such example came in 2001 when Mark Cuban was fined $100,000 for sitting on the floor during a game. AB 877 Page 3 Punishing everyone because of one person. As explained by the author, this bill is, in part, a response to the recent incendiary comments made by Donald Sterling, former owner of the Los Angeles Clippers. Donald Sterling was fined a record $2.5 million and was banned for life from the NBA for his racist comments. Clearly, Sterling's comment is inexcusable but is it necessary to change the law for every sports team owner in California? Distinction between government and private entities. Fines and penalties, with respect to sports team owners, are generally given for violations of rules, guidelines, or policies. Under federal and state law, a deduction is allowed for a fine or similar penalty paid to an entity, other than a government, as an ordinary and necessary business expense. It may be argued that the deductibility of a fine or penalty should be treated the same, regardless of whether the penalty is imposed by a private or government entity. However, as explained above, at least some of the fines incurred by professional sports team owners are imposed because of comments deemed inappropriate by a professional sports league. The First Amendment prevents a government entity from imposing fines based on speech. At least in this respect, there appears to be a distinction between many of the fines imposed by a professional sports league and government entities. Out of conformity. As noted above, California conforms to federal law with respect to the deductibility of fines and penalties. In general, state conformity with federal law promotes greater simplicity and eases administration of complex tax laws. By eliminating the deductibility of a fine or penalty, this bill would bring California out of conformity with federal law. Analysis Prepared by : Carlos Anguiano / REV. & TAX. / (916) 319-2098 FN: 0005533