Tax Court Determines Character, Source of Golfer’s Worldwide Endorsement Income

By Tony Nitti, CPA, MST

Foreign Income & Taxpayers

The U.S. Tax Court recently decided Goosen , a case with potentially far-reaching implications for foreign athletes who perform within the United States. In Goosen , the court examined the worldwide endorsement income earned by a nonresident professional golfer and held the following:

  • The taxpayer’s income derived from contracts requiring him to use and wear a sponsor’s products during tournament play was properly categorized as 50% personal services income and 50% royalty income;
  • The taxpayer understated the amount of U.S.-source royalty income generated from the endorsement contracts; and
  • A portion of the U.S.-source royalty income earned from the endorsement contracts was effectively connected with the taxpayer’s U.S. trade or business of playing golf.

While this decision leaves some unanswered questions, it instantly becomes the leading authority for determining both the character and the source of the endorsement income earned by international athletes.

The Nature of Endorsement Contracts

In sports such as golf and tennis, endorsement contracts are an industry-wide practice. Many contracts grant the right to market the name and likeness of the athlete to the sponsor while also requiring some level of personal services from the athlete. These agreements are referred to as “on-court” or “on-course” endorsement contracts and typically have the following characteristics:

  • The athlete is generally required to exclusively use or wear the sponsor’s products during play;
  • The athlete is required to make promotional appearances, participate in photo and filming days, and perform product testing;
  • The contract mandates that the athlete must play in a minimum number of tournaments;
  • The athlete grants the sponsor the right to use his or her name and likeness in promoting its products;
  • The contract provides for a flat fee to be paid to the athlete, which will be reduced on a pro-rata basis to the extent the athlete fails to participate in the required number of tournaments;
  • The contract provides incentives for success in certain tournaments or for achieving a certain world ranking during the contract term; and
  • The sponsor is permitted to terminate the contract if the athlete tests positive for drugs, commits a crime, or otherwise sullies his or her public image.

Some contracts, however, merely permit sponsors to market the athlete’s name and likeness in connection with their product, with no requirement that the athlete wear or use the product during play or perform any other personal services. These agreements are referred to as “off-court” or “off-course” endorsement contracts.

Taxation of Nonresident Athletes

In computing U.S. tax liability, a nonresident athlete must determine the character and source of the income generated by both on-court and off-court endorsement contracts.

Character of income: The Code treats personal service income and royalty income differently. As a result, a nonresident athlete must determine whether the income generated from an endorsement contract represents personal service income, royalty income, or a combination of both.

The U.S. generally taxes nonresident aliens only if they engage in a U.S. trade or business or receive U.S.-sourced fixed and determinable annual or periodic income (Sec. 871). When an athlete performs personal services within the United States, such as competing in tournaments or making personal appearances, the athlete is deemed to be engaged in a U.S. trade or business (Sec. 864(b)), and the income is considered effectively connected U.S.-source income (Sec. 864(c)). This income, after allowable deductions, is taxed at the same graduated rates that apply to U.S. citizens and residents (Sec. 871(b)).

Conversely, royalties and other annual or periodic income such as interest, rents, and dividends earned from U.S. sources are not considered to be effectively connected with a U.S. trade or business unless the activities of the taxpayer’s U.S. trade or business are a material factor in the realization of the royalty income (Regs. Sec. 1.864-4(c)(3)(i)). This type of income is taxed at a flat 30% withholding tax or lower treaty rate (Sec. 871(a)). In fact, many treaties provide that only a taxpayer’s country of residence may tax royalty income, allowing the royalty income to escape U.S. taxation entirely.

In the event royalty income is determined to be effectively connected with a U.S. trade or business, it will be taxed in the same manner as personal services: at graduated rates after applicable deductions.

Generally, off-court endorsement contracts are treated as having generated only royalty income. On-court contracts, however, routinely come under heavy scrutiny because they contain mixed elements of both the provision of services and the licensing of name and likeness rights. Due to the favorable tax treatment afforded royalty income under many treaties, taxpayers are motivated to characterize on-court endorsement income as royalty income, inviting close inspection by the IRS.

Source: Nonresident athletes must also determine the amount of their worldwide endorsement income that is U.S. sourced, a computation that is predicated on first determining the character of the income because personal service income and royalty income are sourced differently. Personal service income is sourced according to the location where the services are performed (Sec. 861(a)(3)). Royalty income, however, generally is sourced where the property is used or is granted the privilege of being used (Secs. 861(a)(4) and 862(a)(4)).

Prior Guidance

Prior to the Tax Court’s decision in Goosen , the leading authority on the characterization of endorsement income was Kramer , 80 T.C. 768 (1983). In that case, the court held that a professional tennis player’s endorsement income was properly classified as 30% personal service income and 70% royalty income. Unfortunately, since Kramer had been retired for 15 years prior to the year at issue, his endorsement contracts lacked many of the elements common in today’s on-course agreements. As a result, Kramer is of limited use as a current authority.

In 1994, the IRS published in its Market Segment Specialization Program Training Guide a section focusing on foreign athletes and entertainers. In a chapter titled “Characterization of Income for Professional Tennis Players,” the IRS conceded that “the characterization of endorsement income is not clear cut. The facts and circumstances of each situation will have to be evaluated to make a determination.”

The IRS did, however, advise its examiners to take an aggressive approach toward characterizing on-court endorsement income, stating that “the argument has been successfully made at the examination level that all endorsement income is personal service income since the tennis player is required by the endorsement contract to play tournament tennis to receive the income.”

This aggressive IRS position was evidenced in a Tax Court petition filed in 1997 by Swedish tennis star Stefan Edberg. While not all the facts are available, it appears Edberg had entered into several on-court endorsement contracts containing various royalty and personal services characteristics. The IRS challenged Edberg’s position that 50% of his on-court endorsement income was royalty income, arguing that all the income represented personal service income. While the case never went to trial, it established that the IRS will indeed attempt to characterize all on-court endorsement income as personal service income. (See Coneys, “To Tax or Not to Tax: Is a Non-Resident Tennis Player’s Endorsement Income Subject to Taxation in the United States?” 9 Fordham Intell. Prop. Media & Ent. L.J. 885 (September 2006).)

The chief counsel’s office also took this position in 2009 in a legal advice memorandum (AM 2009-005), which advised that the retainer fee and bonuses a sponsor pays an athlete as part of the typical on-court endorsement contract should be treated as exclusively compensation for services. In its analysis, the chief counsel stated that the terms of the contract are not determinative of whether a payment under an endorsement contract is for services or royalties. Rather, it is the parties’ performance under the contract that drives the characterization of the resulting income.

AM 2009-005 restated the IRS’s view that on-court endorsement income should be allocated between personal service income and royalty income only in rare cases. The chief counsel noted that in an on-court agreement, an athlete must compete to earn the fee, and the sponsor will decrease the payment on a pro-rata basis to the extent the athlete fails to play in a minimum number of events. Conversely, the retainer fee is not related to whether the sponsor uses the name and likeness of a player in connection with print or media advertising. The chief counsel expressed an unwillingness to treat any portion of on-court endorsement income as royalty income:

[C]ontractual payments that may be attributable to the performance of services and the use of a valuable intangible property right should be bifurcated between the two only where the amount in either category is not de minimis . . . . Taken as a whole, the terms of the typical on-court endorsement contract support the conclusion that it is a contract for services, and the amount of the retainer fee that the sponsor pays for the right to use the player’s name and likeness is de minimis . The retainer fee is exclusively tied to the player’s ability to compete in sporting activities. [AM 2009-005 at 13–14]

Despite this IRS guidance, prior to Goosen the IRS’s position that on-course endorsement income is exclusively personal service income had not been challenged in court.

Facts in Goosen

Retief Goosen was one of the world’s most accomplished and popular golfers. Prior to the years at issue (2002 and 2003), Goosen had already established himself as an elite talent, first as the leading winner on the European Tour during 2000, then as the champion of the 2001 U.S. Open, one of golf’s four prestigious major championship events.

Goosen’s success on both sides of the Atlantic gave him a global appeal few golfers could match. His spotless image and cool demeanor enhanced his marketability. In a gentlemen’s game, he was considered the consummate professional. During the years at issue, Goosen was party to six endorsement agreements: three on-course contracts and three off-course contracts.

Goosen, through his wholly owned corporation, licensed to TaylorMade, Izod, and Acushnet (owner of the Titleist brand, among others) the right to use his name and likeness on golf equipment, apparel, and golf balls, respectively. In addition to Goosen’s contractual obligation to use these products during play, he was also required to make personal appearances throughout the year and assist in product testing and development.

In exchange, each company agreed to pay Goosen a flat fee, tournament bonuses, and ranking bonuses. In the event Goosen failed to play in a predetermined minimum number of tournaments, the base fee would be reduced. The TaylorMade and Izod contracts also contained a morality clause, permitting the company to terminate the endorsement agreement in the event Goosen committed an act that materially reduced the value of his public image.

Goosen licensed to Rolex, the makers of luxury timepieces, the right to use his name and likeness in connection with the advertisement, promotion, and sale of their products on a worldwide basis. The agreement did not require that Goosen wear a Rolex during tournaments or even play golf in order to receive the endorsement fees.

In addition, Goosen licensed to Upper Deck and Electronic Arts—the makers of golf trading cards and golf-themed video games, respectively—the right to use his name and likeness in connection with the sale of their products on a worldwide basis.

Determination of Character and Source of Income

In preparing his 2002 and 2003 U.S. nonresident tax returns, Goosen treated the endorsement fees and bonuses from the on-course endorsements as 50% personal services income and 50% royalty income. Goosen determined that 3.4% of the royalty income was U.S. sourced, using a methodology that was not explained in the Tax Court opinion.

Goosen characterized the off-course endorsement income as 100% royalty income, treating 6.8% of the income from Rolex and Electronic Arts and 9.1% of the income from Upper Deck as U.S.-source income.

The IRS remained firm in the position stated in its audit technique guide and AM 2009-005, arguing that 100% of the on-course endorsement fees represented personal service income. The IRS also challenged Goosen’s sourcing of the off-course royalty income, maintaining that 25% of the income was properly allocable to the United States. Based on these adjustments, the IRS assessed additional tax of $20,224 for 2002 and $144,474 for 2003.

Tax Court Decision

Character: The Tax Court confirmed Goosen’s characterization of his on-course endorsement income as 50% personal service income and 50% royalty income, disagreeing with the IRS’s position that the value of the right to use Goosen’s name and likeness was de minimis . The court noted that “petitioner’s name and his associated international reputation had a value beyond his golf skills and abilities,” citing his position as one of the world’s top golfers and his immense popularity.

In reaching the conclusion that Goosen’s on-course sponsors paid substantial money for the right to use his name and likeness, the Tax Court lent credence to the testimony of a TaylorMade executive, who maintained that the company viewed Goosen not only as a golfer but as a brand ambassador. TaylorMade wanted to be associated with Goosen’s “cool and professional persona” and marketed that image on a worldwide basis.

The court also referred to an expert report provided on Goosen’s behalf by a former president of Wilson Sporting Goods, which supported the contention that the on-course endorsement contracts were intended to pay Goosen for his name and likeness rather than for the performance of services. The report stated that “an athlete’s image is often more important than an athlete’s performance on the course.”

As evidence for this argument, the report highlighted the fact that TaylorMade also had an endorsement contract with Sergio Garcia, a younger golfer with a more dynamic, maverick public image. Seeking to capitalize on the marketability of this image, TaylorMade paid Garcia significantly more money than Goosen, despite the fact that Garcia was not as accomplished a golfer. According to the report, this compensation disparity would indicate that a sponsor is indeed paying in significant part for an athlete’s image and not solely for his or her success on the course.

Having established that Goosen’s name and likeness had a significant value, the Tax Court next set out to determine the proper allocation between personal service income and royalty income. In doing so, the court held that the “performance of services and the use of name and likeness were equally important,” resulting in a characterization of 50% personal service income and 50% royalty income.

Sourcing of royalty income : Because the parties had stipulated the sourcing of the personal service component of the on-course endorsement income, the Tax Court was left with the task of determining what portion of Goosen’s on-course and off-course royalty income was properly sourced to the United States. In doing so, the court focused on the Code’s requirement that royalty income be sourced where Goosen’s name and likeness were used.

Sourcing of on-course royalty income : The Tax Court was unwilling to accept Goosen’s position that only 6.4% of his on-course royalty income was U.S.-source income, citing the U.S. position as the largest golf market in the world and one of Goosen’s three largest markets for golf endorsements. Based on these facts, the court concluded that 50% of the on-course endorsement income was U.S. sourced.

Sourcing of off-course royalty income : For reasons it did not explain, the court grouped Goosen’s endorsement income from the Rolex contract with his on-course endorsements for purposes of determining its source. As a result, 50% of the Rolex income was deemed U.S.-source income.

In determining the U.S.-source income of the Upper Deck and Electronic Arts contracts, the Tax Court held that the sales of golf cards and video games indicated where these companies used Goosen’s name and likeness. Because Upper Deck and Electronic Arts sold 92% and 70%, respectively, of their products within the United States, Goosen’s endorsement income from these contracts was sourced accordingly.

Effectively connected U.S.-source royalty income : Finally, the Tax Court analyzed whether Goosen’s on-course or off-course U.S.-source royalty income was effectively connected with a U.S. trade or business.

In holding that Goosen’s on-course U.S.-source royalty income was effectively connected income, the court noted that Goosen’s endorsement fee from the use of his name and likeness depended on his playing in a minimum number of tournaments. Consequently, the tournament play was material to Goosen’s receiving the royalty income under the contracts, causing the income to be effectively connected with Goosen’s U.S. trade or business of playing golf.

In contrast, the court concluded that Goosen’s off-course U.S.-source royalty income was not effectively connected income, because Goosen would be paid regardless of whether he played in or won any tournaments, and even if he never stepped foot inside the United States.


The Tax Court’s decision in Goosen provides nonresident professional athletes with long-awaited authority for determining the character and source of their worldwide endorsement income.

Because royalty income generally receives beneficial treatment under U.S. tax treaties, there is tremendous motivation for athletes to characterize a portion of their on-course endorsement income as royalty income. With the decision in Goosen , the Tax Court has now approved this approach. This revelation is the most noteworthy aspect of the Goosen decision, particularly as it is contrary to prior IRS guidance.

It is important to note, however, that in assigning value to the name and likeness rights used by Goosen’s on-course sponsors, the court placed great emphasis on Goosen’s significant tournament success and his resulting global appeal. This should temper the optimism many international athletes may take from this decision because the court’s reasoning raises several issues that taxpayers and their advisers must consider:

  • Would the same result have been reached if an athlete ranked 150th on the money list rather than in the top 10?
  • What if an athlete had not won a major championship, thereby increasing his or her name recognition around the world?
  • If an athlete is a hero in his or her home country but a relative unknown in the United States, would a U.S court acknowledge that the athlete’s name and likeness could have significant value on a worldwide basis?

These questions raise doubt as to whether the courts will be willing to consistently hold that an athlete’s name and likeness have significant value, permitting an allocation between personal service and royalty income.

Despite being an overall win for taxpayers, some of the aspects of the Goosen decision were not positive. The Tax Court’s decision to treat Goosen’s on-course royalty income as effectively connected with a U.S. trade or business was particularly damaging. In doing so, this income became subject to graduated tax rates rather than the potentially favorable treaty rates generally afforded royalty income. In this instance, based on the particular methodologies Goosen used to source on-course personal service versus royalty income to the United States, Goosen may have preferred to have 100% of his on-course endorsement income characterized as personal service income.

In addition, the sourcing of off-course royalty income according to the sales of the underlying product increased Goosen’s tax liability, raising his U.S.-source royalty income from contracts with Upper Deck and Electronic Arts by 83% and 62%, respectively. This sourcing methodology becomes a precedent that will be difficult for athletes to overcome in future decisions.

The Tax Court’s 50% sourcing of Goosen’s on-course and Rolex royalty income also increased his U.S.-source income from those contracts by nearly 45%. It is curious that the court chose to use an estimated allocation amount rather than to employ the same approach used in sourcing Upper Deck and Electronic Arts income. Why did the court not simply allocate the on-course and Rolex royalty income on the basis of those companies’ U.S. sales as a percentage of their worldwide sales?

Perhaps the Tax Court took the view that when analyzing on-court contracts, sales of the underlying product were not determinative of where the sponsor was using Goosen’s name and likeness. For these agreements, the sponsor enjoyed regular global exposure from Goosen’s use of their products on live television. As a result, the court may have taken the view that the sponsor was using Goosen’s name and likeness to promote its products more evenly around the world, regardless of where it sold the products.

Perhaps the biggest winner emerging from the Goosen decision is fellow golfer Sergio Garcia, who currently has a pending case before the Tax Court on the same issues, but with much larger dollar amounts at stake. The IRS has again taken the position that 100% of Garcia’s on-course endorsement income is personal service income. Based on the precedent set in Goosen, Garcia’s attorneys will likely be quick to point out that their client’s on-course endorsement income dwarfs that of Goosen, despite his not having the same level of on-course success, supporting the argument that Garcia’s sponsors are paying for his image rather than his golf game.

The Tax Court will likely decide Garcia’s case in the near future. Once that happens, taxpayers will know whether the Goosen decision was a one-case anomaly or a precedent-setting road map for future cases to follow.

Goosen, 136 T.C. No. 27 (2011)


Tony Nitti is a partner with WithumSmith+Brown, PC, in Aspen, CO. For more information about this article, contact Mr. Nitti at

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