With all the excitement of the British Open and old-timer Darren Clarke's heroics behind us, spare a thought for South Africa's Retief Goosen and his bruising battle with the IRS.
Two-time US Open champion Goosen has lucrative endorsement agreements with eg Acushnet (makers of Titleist equipment), TaylorMade and Rolex. They use his name, face, image and likeness for advertising and marketing and he gets endorsement fees. Goosen reflected approximately 7% of his total endorsement income to be from a US source.
The IRS saw it differently. Endorsement fees and bonuses from certain sponsors should be personal services income in toto. And the IRS regarded a bigger slice of the endorsement fees to be from a US source. Uncle Sam demanded approximately $20,000 and $145,000 in respect of the "deficiencies" in years 2002 and 2003.
The million dollar question was whether Goosen's endorsement fees were solely royalty income (for the use of the golfer's image), solely personal services income (based on how well he swung the clubs and read the greens) or a combination of the two.
The Tax Court ruled in June this year (USA Tax Court 136 T.C. No.27 filed 9 June 2011; Retief Goosen, petitioner v. Commissioner of Internal Revenue, respondent). Judge Kroupa held that the endorsement fees and bonuses from the on-course endorsements (ie from the golf equipment and apparel sponsors) had to be allocated 50% to personal services income and 50% to royalty income - the golfer's off-course image as well as his on-course performance was important. The remainder of the royalty income was allocated as being from a US source in varying degrees: 50% in respect of the golf equipment / apparel manufacturers and Rolex endorsements, 70% in respect of video games sold in the USA and 92% in respect of golf trading cards sold almost exclusively in the USA. Insult to injury: it was also held that Goosen could not benefit under either the 1975 or 2001 USA/UK tax treaty.
Some other interesting (non-tax) observations from the Judge:
- The Acushnet agreement contained a "morals clause" under which the agreement could be terminated if Goosen "compromised his image" (ala Tiger Woods).
- TaylorMade valued Sergio Garcia's flash looks and maverick personality more than Goosen's cool "Iceman" demeanour - Garcia was paid substantially more despite his poorer performance record.
- Goosen's tax planning strategy had been devised by Mark McCormack's IMG which eg advised him to set up a Lichtenstein bank account for his non-UK income. This was the reason why Goosen could not benefit from the USA/UK tax treaties.
- Ironically, the UK tax authorities had earlier approved the IMG structure.
It seems that afterwards Goosen was his talkative self.
A golf publication quotes him saying: "I went up and did it for a week of bloody hell. It is no fun sitting in front of a judge, and she's screaming down everybody's throat. It's nerve-wracking. You feel like a criminal, but you're not."
Johan van der Walt