Y.E. Yang’s taming of the Tiger in the PGA Golf Championship is the
latest in a recent wave of seven other South Korean woman golfers to win
11 major golf tournaments. A growing number of non-U.S. golf and tennis
professionals have achieved marquee status in the U.S., and last month
the IRS announced it would try to tame all these athletes by cracking
down on their endorsement fees earned from corporate sponsors. “This
follows on the heels of a broad IRS initiative launched two years ago to
closely scrutinize their U.S. tax compliance activities,” says Lucy Lee,
a tax attorney at Caplin & Drysdale who represents foreign athletes.
The agency now concludes that all endorsement income earned by
nonresident athletes will be subject to full U.S. tax at the graduated
rates, with 35% being the top rate. This means the IRS will challenge
athletes that report their endorsement income as royalties at lower
withholding tax rates, often eliminated or reduced by an international
treaty to 0 to 15%. The IRS claims that athletes wearing, using and
promoting a sponsor’s product or logo perform personal services as
“walking billboards” for their corporate sponsors.
“This IRS guidance is aggressive, unwelcome, and should be carefully
monitored by the athletes and their professional advisors,” says Ms.
Lee. “Many thought that as long as they didn’t establish a U.S.
residence, they could take advantage of the low tax rates within the
favorable network of tax treaties established between the U.S. and other
countries.”
However, the IRS did not totally shut the door on foreign athletes,
because the guidance is limited to “typical” endorsement contracts used
in the tennis and golf business. Therefore, athletes should seek counsel
on tax planning opportunities such as adjusting the player-sponsor
business relationship and changing the terms of those contracts. To
discuss the implications of this new guidance, please contact Lucy
Lee at (202) 862-8863 or lsl@capdale.com.
About Caplin & Drysdale. Caplin & Drysdale is a Washington,
D.C.-based law firm providing sophisticated tax counsel to nonresident
entertainers and athletes, companies and tax-exempt organizations
internationally. The firm also offers counseling in corporate law,
white-collar defense, political activity law, employee benefits, exempt
organizations law, and complex civil litigation services. Visit www.capdale.com
for more information.
Caplin & Drysdale
Bency Thomas, 202-862-5097
bt@capdale.com