Tax Court Divides Endorsement Income into Personal Service Or Royalty Earnings

The U.S. Tax Court decided that fees received by international pro-golfer Retief Goosen for so-called “on-course” endorsement deals constituted both personal service and royalty income. Goosen v. Commissioner of Internal Revenue, 136 T.C. No. 27. Goosen, a UK resident whose golf engagements have included some in the United States, entered into employment agreements with two companies controlled by his career and financial manager, IMG World Inc. Under this arrangement, Goosen's non-UK income was directed to European Tournament Organizers Ltd. (ETO), and his UK income to European Sports Promotions Ltd. (ESP). The U.S. Tax Court assessed tax underpayments against Goosen covering several years.

The court noted of Goosen's endorsement deals: “The TaylorMade, Izod and Acushnet endorsement agreements (collectively, the on-course endorsement agreements) required petitioner to wear or use [the companes'] products during golf tournaments. In contrast, the Rolex, Upper Deck [for trading cards] and Electronic Arts [for a video game] endorsement agreements (collectively, the off-course endorsement agreements) did not have this requirement.” Petitioner Goosen and the respondent tax commissioner agreed that the off-course endorsement income was royalty income. The on-course endorsement agreements didn't allocate the amount the companies would pay Goosen for personal services apart from the right to use the golfer's name and likeness. The tax court found: “Petitioner's endorsement income depended, however, on his playing in tournaments. The record shows that the performance of services and the use of name and likeness were equally important. We find that 50[%] of the endorsement fees petitioner received represented royalty income and 50[%] represented personal services income.”

The tax court then considered whether Goosen's U.S.-source royalty earnings were connected with a U.S. trade or business and thus subject to graduated tax rates. (The tax dispute parties had agreed that graduated tax rates applied to Goosen's U.S. personal service income from playing golf.) Here, the Tax Court concluded that Goosen's U.S. income from on-course endorsement deals “is effectively connected with a U.S. trade or business, and petitioner will be subject to the graduated tax rates applicable to U.S. residents.” However, the tax court determined that the off-course endorsement income “was not effectively connected with a U.S. trade or business. See sec. 1.864-4(c)(3)(ii), Example (2), Income Tax Regs. Accordingly, a flat 30[%] tax is imposed on petitioner's gross U.S.-source royalty income from the off-course endorsement agreements.”

Finally, the tax court held that Goosen couldn't utilize the double-tax-avoidance benefits of U.S.-UK tax treaties otherwise available for UK-received earnings, because his UK endorsement income was sent to ESP's bank account in Liechtenstein, rather than directly to his bank account in the United Kingdom.

The U.S. Tax Court decided that fees received by international pro-golfer Retief Goosen for so-called “on-course” endorsement deals constituted both personal service and royalty income. Goosen v. Commissioner of Internal Revenue , 136 T.C. No. 27. Goosen, a UK resident whose golf engagements have included some in the United States, entered into employment agreements with two companies controlled by his career and financial manager, IMG World Inc. Under this arrangement, Goosen's non-UK income was directed to European Tournament Organizers Ltd. (ETO), and his UK income to European Sports Promotions Ltd. (ESP). The U.S. Tax Court assessed tax underpayments against Goosen covering several years.

The court noted of Goosen's endorsement deals: “The TaylorMade, Izod and Acushnet endorsement agreements (collectively, the on-course endorsement agreements) required petitioner to wear or use [the companes'] products during golf tournaments. In contrast, the Rolex, Upper Deck [for trading cards] and Electronic Arts [for a video game] endorsement agreements (collectively, the off-course endorsement agreements) did not have this requirement.” Petitioner Goosen and the respondent tax commissioner agreed that the off-course endorsement income was royalty income. The on-course endorsement agreements didn't allocate the amount the companies would pay Goosen for personal services apart from the right to use the golfer's name and likeness. The tax court found: “Petitioner's endorsement income depended, however, on his playing in tournaments. The record shows that the performance of services and the use of name and likeness were equally important. We find that 50[%] of the endorsement fees petitioner received represented royalty income and 50[%] represented personal services income.”

The tax court then considered whether Goosen's U.S.-source royalty earnings were connected with a U.S. trade or business and thus subject to graduated tax rates. (The tax dispute parties had agreed that graduated tax rates applied to Goosen's U.S. personal service income from playing golf.) Here, the Tax Court concluded that Goosen's U.S. income from on-course endorsement deals “is effectively connected with a U.S. trade or business, and petitioner will be subject to the graduated tax rates applicable to U.S. residents.” However, the tax court determined that the off-course endorsement income “was not effectively connected with a U.S. trade or business. See sec. 1.864-4(c)(3)(ii), Example (2), Income Tax Regs. Accordingly, a flat 30[%] tax is imposed on petitioner's gross U.S.-source royalty income from the off-course endorsement agreements.”

Finally, the tax court held that Goosen couldn't utilize the double-tax-avoidance benefits of U.S.-UK tax treaties otherwise available for UK-received earnings, because his UK endorsement income was sent to ESP's bank account in Liechtenstein, rather than directly to his bank account in the United Kingdom.