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Golfer’s Tax Court Case Tests Principle That Image Is Everything

The international golfers at this week's U.S. Open in Bethesda, Maryland, will be watching for two-time champion Retief Goosen on the leaderboard. Photographer: Chris Ratcliffe/Bloomberg
The international golfers at this week's U.S. Open in Bethesda, Maryland, will be watching for two-time champion Retief Goosen on the leaderboard. Photographer: Chris Ratcliffe/Bloomberg

June 16 (Bloomberg) -- The international golfers at this week’s U.S. Open in Bethesda, Maryland, will be watching for two-time champion Retief Goosen on the leaderboard. Their lawyers will be studying Goosen’s U.S. Tax Court decision.

The South African native challenged the Internal Revenue Service’s analysis of the endorsement income he earned from such companies as Electronic Arts Inc., Adidas AG and Rolex Group. The case will affect golfers, tennis players and pop stars from around the world who tour in the U.S., license their images for advertising and hawk perfumes, cars, and jewelry.

The June 9 case provides the first clear judicial guidelines for how such endorsement income should be taxed, and it focused on how much Goosen earned because of his image and how much he earned based on his performance. It’s also a reminder that the IRS is paying attention to how high-profile performers earn money, said Lucy Lee, an attorney at Caplin & Drysdale in Washington.

“They’re watching what clubs are being used, what logo’s being displayed on the bags, the uniforms, and they’re taking notes,” said Lee, whose clients include female Korean golfers.

The court issued a mixed decision in Goosen’s case, resolving some issues in the golfer’s favor and deciding some questions the way the government wanted. It’s unclear from the decision how much money, if any, Goosen will owe the IRS.

‘Flash’ Over ‘Cool’

The biggest near-term effect of the Goosen case will be felt by fellow golfer Sergio Garcia, who has a similar case pending in Tax Court and is also playing in this week’s U.S. Open tournament at Congressional Country Club. In her opinion, Tax Court judge Diane Kroupa compared Goosen with Garcia, noting that endorsers valued Garcia’s “flash, looks and maverick personality” over Goosen’s “cool, ‘Iceman’ demeanor,” despite Goosen’s better on-course record. Robert Hudson, a partner at Baker & McKenzie LLP in Miami and one of Garcia’s attorneys, declined to comment.

The distinction between image and performance matters for tax purposes because royalty income derived from an athlete’s image is typically taxed more lightly under tax treaties than “personal services income.” Such income is subject to the regular U.S. tax rates, which top out at 35 percent.

Goosen’s endorsers included Adidas, which makes TaylorMade golf clubs, and Acushnet Co., the maker of Titleist golf balls, which is being sold by Fortune Brands Inc. He also had off-course endorsement agreements with Rolex, video-game maker Electronic Arts and Upper Deck Co., a maker of trading cards.

The TaylorMade contract included a base endorsement fee of $400,000 a year, plus bonuses based on tournament victories and international rankings. To receive the base fee, Goosen had to play in at least 20 PGA Tour events and 11 European Tour events, according to the court ruling.

Personal Services Income

When he filed his tax returns for 2002 and 2003, the years in between his two U.S. Open victories, Goosen had contended that his on-course endorsement income was half royalty and half personal services. The IRS said it all should have been considered personal services income because Goosen was required to play in golf tournaments and use the companies’ products, and determined that Goosen owed the government $164,698 for the two years in question.

Kroupa examined the contracts, which included elements that made them appear to be royalties and other elements that made them appear to be payments for golf performance. For example, Goosen’s contract with Acushnet allowed the company to use his name and picture on advertisements for Titleist golf balls and gloves. It also required him to use the company’s equipment in tournaments and perform public relations work for the company.

The Tax Court judge ruled that the on-course endorsements should be treated as half royalty income and half personal services income, rather than determining that all of the income derives from his golf performance.

‘Publicity Rights’

The judge ruled against Goosen by determining that he should have treated more of his income as having been earned in the U.S.

Matthew Kadish, one of Goosen’s tax lawyers, said the case provides guidance on how to determine royalty income.

“It does establish that the publicity rights are a separately licensable intangible, and that it’s not all golf income based upon the facts,” said Kadish, a partner at Cleveland-based Kadish, Hinkel & Weibel.

Other athletes and entertainers should view the case as a guide for how to structure endorsement agreements and how to anticipate the IRS’s strategy, said Tony Nitti, a partner at the accounting firm of WithumSmith & Brown in Aspen, Colorado.

“Entertainers, athletes, nonresidents -- they’ve been waiting for something like this,” said Nitti, whose clients include entertainers who sell the rights to their likeness.

Nitti said Garcia, who is disputing $1.7 million in taxes related to endorsements, would benefit from the Goosen precedent that treats on-course endorsements partly as royalty income.

Little Wiggle Room

The court’s analysis of where Goosen earned his income, which relied on the U.S. share of Upper Deck’s trading card sales and Electronic Arts’ video game sales, doesn’t leave much room for argument with the IRS, Nitti said.

“That’s really the thing that comes out of this case that should scare some people,” he said.

The IRS has a team that focuses on overseas athletes and entertainers, and that group remains active, Lee said.

“These individuals and those associated with arranging their appearances in the U.S. and managing their financial affairs are typically high-income individuals,” says a page on the IRS web site explaining the program. “Because of this, it is important to ensure proper tax reporting and payment.”

To contact the reporter on this story: Richard Rubin in Washington at

To contact the editor responsible for this story: Mark Silva at

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