Goosen v. Commissioner
2011 U.S. Tax Ct. LEXIS 28, 136 T.C. 547, 136 T.C. No. 27 (2011)
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Rule of Law:
When a non-resident alien athlete's endorsement agreement requires both the performance of services and the use of their name and likeness, the income should be allocated between personal services income and royalty income. The royalty portion of that income is sourced to the location where the athlete's name and likeness are used.
Facts:
- Retief Goosen, a professional golfer and citizen of South Africa, resided in the United Kingdom during the years at issue.
- Goosen's global profile, particularly in the United States, rose dramatically after he won the 2001 U.S. Open golf tournament.
- Goosen hired IMG to manage his career, which directed him to enter employment contracts with two IMG-controlled entities, ESP for U.K. income and ETO for non-U.K. income, as part of a tax planning strategy.
- Goosen entered into several worldwide endorsement agreements with companies including TaylorMade, Izod, Acushnet, Rolex, Upper Deck, and Electronic Arts.
- The 'on-course' agreements with TaylorMade, Izod, and Acushnet required Goosen to use the companies' products during tournaments and make promotional appearances, in addition to licensing the use of his name and likeness.
- The on-course agreements contained clauses that would prorate Goosen's endorsement fees if he failed to compete in a specified minimum number of tournaments.
- The 'off-course' agreements with Rolex, Upper Deck, and Electronic Arts primarily licensed Goosen's name and likeness for use on products like watches, trading cards, and video games, without requiring on-course performance.
- Sponsors valued Goosen for his professional and 'gentlemanly' image, and some contracts included 'morals clauses' allowing termination if he compromised his image.
Procedural Posture:
- The Internal Revenue Service (Respondent) audited the U.S. Nonresident Alien Income Tax Returns of Retief Goosen (Petitioner) for the 2002 and 2003 tax years.
- Following the audit, Respondent determined deficiencies in Goosen's income tax, concluding he had underreported U.S.-source income from his worldwide endorsement agreements.
- Respondent issued a statutory notice of deficiency to Goosen.
- Goosen timely filed a petition in the United States Tax Court, a trial-level court, to challenge the Respondent's determinations.
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Issue:
For a non-resident alien athlete, should income from worldwide endorsement agreements that require both playing in tournaments and licensing the use of name and likeness be characterized as part personal services and part royalty income for U.S. tax purposes?
Opinions:
Majority - Kroupa, Judge
Yes. Income from endorsement agreements that require both services and the use of an athlete's name and likeness must be allocated between personal services income and royalty income. The record shows that sponsors paid Goosen for both his services—playing in tournaments, making appearances, and testing products—and for the valuable right to use his name, image, and likeness in worldwide marketing. The requirement to play in a minimum number of tournaments to receive the full fee demonstrates that the services were not merely ancillary. At the same time, testimony and the nature of the marketing efforts revealed that Goosen's public image and brand had significant independent value to the sponsors. Because both components were equally important, the court allocated the income from the on-course endorsements 50% to personal services and 50% to royalties. The court then sourced the royalty portion to the U.S. based on where the name and likeness were used, using product sales data where available and its 'best judgment' where it was not.
Analysis:
This case provides a critical framework for the tax treatment of endorsement income earned by non-resident athletes, establishing that such income is often of a dual character. It rejects an all-or-nothing approach, requiring an allocation between personal services and royalties when both are significant components of an agreement. The decision also demonstrates the court's willingness to make its own factual determination and allocation (e.g., the 50/50 split) when an agreement fails to provide a reasonable basis. This places a burden on athletes and sponsors to create defensible allocations within their contracts to avoid having a less favorable one imposed by a court.
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