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Tax Court to Athletes: Image Isn't Everything But It's At Least 50%| Image by AFP/Getty Images via @daylife When LeBron James hits the court in Nike apparel does it make you like Nike more or less? What about David Beckham wearing (sort of) Armani underwear or Adidas sportswear? Do those endorsements make you want to go out and support those brands? Major labels seem to think so signing up a number of athletes celebrities and reality ��stars�� (like the Kardashian sisters and Paris Hilton) to wear their clothes model their extensions and flash their jewelry in exchange for cash. These endorsements can be the major source of income for some celebrities eclipsing their actual pay even though celebrity endorsements apparently aren��t worth what they used to be for the consumer. The issue of endorsements �C and their value �C hit the Tax Court this week courtesy of South African born golfer Retief Goosen. Goosen filed a court challenge to the IRS�� assessment of his endorsement income (downloads as a pdf). Goosen has lucrative endorsements for most of his golfing equipment. For example he has deals that require him to use TaylorMade golf clubs and golf bags (owned by Adidas) and Titleist golf balls and golf gloves (owned by Acushnet) while wearing Izod apparel during play. Off the golf course he endorses watches (Rolex) vacheron constantin royal eagle replica video games (Electronic Arts) and trading cards (Upper Deck). On Goosen��s tax returns he took the position that the off-course endorsements were classified as royalty income; the IRS agreed. However Goosen also took the position that the golf endorsements were a mix of royalty and personal services. This was more tax advantageous to him than the IRS�� position that it was solely personal services income. Under the Tax Code royalties are generally subject to more favorable tax treaty provisions; Goosen has a residence in England and as a non-domiciliary U.K. resident wanted to claim benefits under the U.S.-U.K. tax treaty. Personal services income is subject to regular U.S. income tax rates. Goosen��s basis for his argument is that sponsors paid him for the right to co-market and co-brand their products with his name and image. Traditionally courts have characterized these payments as royalties because the person has an ownership interest in that valuable right. The IRS however ulysse nardin replica watches took the position that Goosen was actually being paid for his services namely playing golf and using their products. To support their argument IRS pointed to the endorsement contracts Goosen signed which required Goosen to play in a certain number of golf games each year. U.S. Tax Court Judge Kroupa ruled in Goosen��s favor on this issue noting that Goosen��s ��accomplishments on the golf course made him famous though it was his image that made him marketable.�� Judge Kroupa seemed to focus on the idea that Goosen��s image �C that as a cool collected golf player �C mattered as much if not more than his ability to play golf. To support this notion Judge Kroupa pointed to a morals clause in the contracts that required Goosen to maintain a certain image and penalized the golfer if he compromised that image; the opinion noted that image is extremely important in certain sports arenas especially in golf. Of course Tiger Woods was cited as example when it was noted that Tiger lost many of his sponsorships after his series of affairs not simply because his game declined (which it did) but because ��sponsors determined that Mr. Woods�� image was no longer compatible with their products.�� In other words movado watches image matters and Goosen��s contracts contributed to the idea that a certain image matters at least in his case. And as a result the court agreed with Goosen that income received from those contracts could be classified as half royalty income and half personal services income. Goosen however didn��t win the entire round. While Goosen and the IRS both agreed that personal services income tournament bonuses and ranking bonuses should be considered US sourced they disagreed as to what portion of the royalty income from endorsement fees should be considered US sourced. Generally royalty income which is paid for the right to use intangible property (such as a likeness) is sourced where the property is used or is granted the privilege of being used. The courts can look to an allocation source inside a contract but in Goosen��s case Judge Kroupa determined that the allocation wasn��t specific enough (the contract used the term ��worldwide�� to refer to non-UK sources and it wasn��t narrowed further). That means that the courts have to look to outside evidence. That evidence wasn��t favorable to Goosen. In the case of the trading cards for example fake bell ross aeronavale watch Upper Deck sold 92% of its golf cards in the U.S. The video games that Goosen endorsed had a U.S. market share of 70%. While purchase statistics don��t always indicate the value of an intangible party in the U.S. they can be indicative of the allocation. In the case of the cards and video games Judge Kroupa noted that they were primarily marketed inside the U.S. as opposed to globally. Thus those sales percentages were held to represent the actual U.S. source income. With respect to the Rolex and ��on course�� royalty fees (as noted above) the court found it reasonable to attribute 50% as U.S. source. Goosen also lost his bid to have all of his income subject to the terms of the U.K./U.S. tax treaty. Goosen routed some of the income directly to the tax-friendly state of Liechtenstein rather than to his tax home in the U.K. Based on the evidence Judge Kroupa held that Goosen ��has not shown that he is eligible for any treaty benefits.�� So what does all of this mean going forward? I think it signifies a few things: Image matters. Not just on camera but in Tax Court. Contracts need to be specific. Despite the fact that we sometimes act like we own the world we don��t so ��worldwide�� does not equal U.S. You can��t do one way what you can��t do another. I know double negatives. But you and I �C and Judge Kroupa �C all know why Goosen chose to be paid in Liechtenstein. It��s either U.K. income or it��s U.S. income under the facts as presented. If you��re going to argue that it��s neither replica watches then no treaty applies. Finally athletes and stars all over the world who do business in the U.S. are calling their tax lawyers right now. Or at least they should be. 2 comments 2 called-out