Golfer Bogies Endorsement Income

Professional golfer Retief Goosen split a decision with the IRS in the Tax Court that partly redetermined the character and source of his income from product endorsements.

Goosen is a native of South Africa and a nondomiciliary United Kingdom resident. He was well-known abroad before he won the 2001 U.S. Open tournament, after which his fame in the United States soared. The case involved his 2002 and 2003 nonresident alien U.S. tax returns, for which the IRS determined deficiencies totaling $164,698. In addition to base endorsement fees, Goosen received bonuses for participating in tournaments and ranking in them. An issue for the Tax Court was how to divide between payment for personal services and royalties the endorsement income Goosen received under contracts with companies marketing golf equipment and apparel. The court also addressed how much of those payments, plus others from producers of trading cards, watches and video games, was from sources in the United States.

Sponsors marketing golf equipment and apparel required Goosen to use or wear their products during golf tournaments. Goosen reported these “oncourse” endorsement fees and bonuses on his returns as half royalty income and half for personal services. He characterized as 100% royalty the other endorsement contracts, which did not require him to use or wear the sponsor’s products in tournaments (“off-course”). Goosen based the amount of U.S.-source personal services income from on-course fees and tournament bonuses on the proportion of days he played golf in the U.S. to the total days he played golf during the year. Overall, he allocated approximately 7% of his total endorsement income as U.S. source.

After an audit, the IRS reallocated the on-course endorsement fees as 100% personal services income and recalculated the U.S.-source portion of it by the number of U.S. tournaments he played divided by the number of tournaments he played worldwide. The IRS also reallocated Goosen’s tournament bonuses as U.S.-source income if they were in connection with a U.S. tournament and reallocated 25% of the off-course royalties as U.S. source.

After negotiations, Goosen and the IRS still disagreed on the relative proportions of personal services and royalty income from on-course endorsements and the amount of royalty income that was U.S.-source.

The Tax Court found that the endorsement agreements accorded substantial value to Goosen’s personal and professional image, rather than the de minimis amount the IRS had argued. The court decided the on-course agreements valued his image equally with his performance in tournaments and use of the companies’ products in them, so the court upheld Goosen’s 50-50 allocation for them between personal services and royalties. The income from personal services performed in the U.S. it considered U.S. source, and the royalty portion 50% U.S.- source income effectively connected with a U.S. trade or business.

Next, the court determined U.S. sourcing of off-course royalty income, noting that where use of an intangible asset is not exclusive to the U.S., parties must make a reasonable allocation. Since the parties presented little statistical evidence of where Goosen’s name and likeness were used in advertising and promotional materials, the court used evidence of where the companies sold their golf trading cards (92% U.S.) and video games (70% U.S.) and so allocated the royalties from them. The court allocated 50% of Goosen’s royalties from the maker of Rolex watches to the U.S.

The court then determined the relative portions of income taxable under graduated rates and the flat 30% rate applicable to certain types and sources of income reported by nonresident alien taxpayers. It further found that Goosen did not present sufficient evidence to show that the endorsement income was among amounts he remitted to U.K. bank accounts, and therefore he did not benefit from U.S.-U.K. tax treaties.

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