BILL ANALYSIS �
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.