The U.S. Tax Court ruled against South African golfer Retief Goosen in a case last week involving the two-time U.S. Open champion’s royalty income, disagreeing with his claim that only 7 percent of it came from U.S. sources.
Goosen had endorsement agreements with a variety of sponsors, including Acushnet, TaylorMade, Izod, Upper Deck, Electronic Arts and Rolex. They were allowed to use his name, face and likeness in advertising and marketing campaigns worldwide, and he was paid a base endorsement fee by all the sponsors.
Acushnet, TaylorMade and Izod also pro-rated the base endorsement fee if he did not annually play in a specific number of golf tournaments, the court noted. The three companies also paid him a bonus if he achieved a specific finish in a PGA or European Tour tournament, or reached a specific spot on the World Golf Rankings.
Goosen characterized the endorsement fees and bonuses from Acushnet, TaylorMade and Izod as 50 percent services income and 50 percent royalty income on his nonresident federal income tax returns for 2002 and 2003. The endorsement fees from Upper Deck, Electronic Arts and Rolex were characterized as 100 percent royalty income.
The golfer reported approximately 7 percent of the total endorsement income as U.S. source income. The IRS, however, determined that he should have characterized the endorsement fees and bonuses from Acushnet, TaylorMade and Izod as 100 percent personal services income. The IRS also re-allocated a larger percentage of his endorsement fees as U.S. source income.
The Tax Court ruled on June 9 that the endorsement fees and bonuses Goosen had received from Acushnet, TaylorMade and Izod should be allocated 50 percent to personal services income and 50 percent to royalty income, and that the royalty income he had received from Acushnet, TaylorMade and Izod was 50 percent U.S.-source income effectively connected with a U.S. trade or business. The court also held that the royalty income he had received from Rolex was 50 percent U.S.-source income not effectively connected with a U.S. trade or business.
However, the royalty income he had received from Upper Deck was considered by the court to be 92 percent U.S.- source income not effectively connected with a U.S. trade or business. In addition, the royalty he received from Electronic Arts was deemed 70 percent U.S.-source income not effectively connected with a U.S. trade or business.
On top of that, the court ruled that Goosen should not benefit from any provision under either the 1975 or the 2001 income tax treaty between the United States and the United Kingdom.
