Tax Court Determines U.S. Tax On Nonresident Golfer's Endorsement Income

Retief Goosen, (2011) 136 TC No. 27

The Tax Court has determined endorsement fees and bonuses that a United Kingdom (U.K.) resident and professional golfer received from worldwide endorsement agreements with various companies was part personal services income and part royalty income. The Court also held that a portion of the royalty income from all the endorsement agreements was U.S.-source income.

Background. A nonresident alien engaged in a trade or business in the U.S. during the tax year is generally subject to U.S. federal income tax on income that is effectively connected with the conduct of a trade or business within the U.S. (Code Sec. 864(b), Code Sec. 871(b)) Engaging in a U.S. trade or business includes any business activity in the U.S. that involves one's own physical presence. (Reg. §1.864-2) IRS and Goosen agreed that his golf play in the U.S. amounted to Goosen engaging in a U.S. trade or business.

Courts have repeatedly characterized payments for the right to use a person's name and likeness as royalties because the person has an ownership interest in the right. (Boulez, (1984) 83 TC 584)

Parties' positions. Goosen argued that the sponsors paid him for the right to co-market and co-brand their products with his name and likeness. On the other hand, IRS argued that the sponsors primarily paid Goosen to perform personal services, including playing golf and carrying or wearing the sponsors' products. IRS looked to the endorsement terms that prorate the fees if Goosen failed to play in a specific number of golf tournaments. It claimed that any income received for the use of his name and likeness was de minimis.

Facts. Retief Goosen, a U.K. resident and professional golfer, entered into endorsement agreements with sponsors Acushnet Company (Acushnet), TaylorMade Golf Company, Inc. (TaylorMade) and Izod Club, a division of Oxford Industries, Inc. (Izod), Upper Deck Company, LLC (Upper Deck), Montres Rolex S.A. (Rolex), and Electronic Arts Inc. (Electronic Arts). Goosen agreed to allow all sponsors to use his name, face, image and likeness in advertising and marketing campaigns worldwide. He also agreed to perform some services for the sponsors. The TaylorMade, Izod and Acushnet endorsement agreements (collectively, the on-course endorsement agreements) required Goosen to wear or use their products during golf tournaments. In contrast, the Upper Deck, Rolex, and Electronic Arts endorsement agreements (collectively, the off-course endorsement agreements) did not have this requirement.

All endorsement agreements paid Goosen a base endorsement fee. Acushnet, TaylorMade and Izod prorated Goosen's base endorsement fee if he did not annually play in a specified number of golf tournaments. They provided bonuses to Goosen for achieving a specific finish in a PGA or European Tour tournament or a specified ranking on the World Golf Rankings.

Goosen characterized the endorsement fees and bonuses from Acushnet, TaylorMade and Izod as 50% personal services income and 50% royalty income on his 2002 and 2003 nonresident Federal income tax returns. He characterized the endorsement fees from Upper Deck, Electronic Arts and Rolex as 100% royalty income. Goosen reported approximately 7% of the total endorsement income as U.S.-source income.

IRS agreed that the Upper Deck, Rolex, and Electronic Arts endorsement agreements yielded royalty income. On audit, IRS determined that Goosen should have characterized the Acushnet, TaylorMade and Izod endorsement fees and bonuses as 100% personal services income. IRS reallocated a larger percentage of all Goosen's endorsement fees as U.S.-source income.

Court's conclusion. The Tax Court held that the endorsement fees and bonuses that Goosen received from Acushnet, TaylorMade and Izod were part personal services income and part royalty income. It allocated 50% to personal services income and 50% to royalty income. It further held that the royalty income Goosen received from Acushnet, TaylorMade and Izod was 50% U.S.-source income effectively connected with a U.S. trade or business.

The Court reasoned that TaylorMade, Izod and Acushnet valued Goosen's image, and they paid substantial money for the right to use his name and likeness. However, the record also shows that the sponsors valued his play at tournaments. Goosen agreed to make promotional appearances at tournaments and to wear or use the sponsors' products. Further, the sponsors conditioned the full endorsement fee on Goosen playing in a specified number of tournaments. The sponsors could use his image in all of their advertising campaigns worldwide, but they would pay him only if he played golf. His tournament bonuses were based solely on how he performed in specific tournaments. The Court found that the income received from the on-course endorsement agreements was part royalty income and part personal services income.

The Tax Court held that the royalty income Goosen received from Rolex was 50% U.S.-source income not effectively connected with a U.S. trade or business. The royalty income Goosen received from Upper Deck was 92% U.S.-source income not effectively connected with a U.S.trade or business. The royalty received from Electronic Arts was 70% U.S.-source income not effectively connected with a U.S. trade or business.

Tax treaties. In addition, the Tax Court held that Goosen didn't benefit from any provision under the Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains, U.S.-U.K., Dec. 31, 1975 (1975 U.S.-U.K. tax treaty) or the Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains, U.S.-U.K., July 24, 2001, Tax Treaties (i.e., the '75 and 2001 U.S.-U.K. income tax treaties). The U.S.-U.K. tax treaties provide that the U.K. will tax a U.K. resident, non-domiciliary on non-U.K. source income only to the extent the income is remitted to or received in the U.K. In such a case, the U.S. may not subject the U.K. resident to tax on specified kinds of income to avoid double taxation. Goosen failed to show that his endorsement income (which was wired to Liechtenstein) had been remitted to or received in the U.K Accordingly, he wasn't eligible for benefits under the U.S.-U.K. tax treaties.

References: For nonresident alien individual engaged in a U.S. trade or business, see FTC 2d/FIN ¶O-10502; United States Tax Reporter ¶8644.01; TaxDesk ¶630,114; TG ¶30088.