Or, What Counts and What Doesn’t

Two Tax Court cases filed 6/9/11, and each is interesting.

As the old saying goes, a short horse is soon brushed, so let’s start with the number–zip code number. In Nahmi Lee, 136 T.C. Mem. 129, it’s all about the statutory notice of deficiency, the “90-day letter.” IRS sent a 90-day letter to Nahmi’s last known address, but with the wrong zip code, another to a former business address now occupied by an unrelated party (who subsequently sent the notice on to Nahmi’s mother, who, Tax Court finds, “is elderly, is not fluent in English, does not sort her own mail, and frequently is away from her residence at the 46th Street location, working in upstate New York. “ 136 T.C. Mem. 129, at p. 4), and still another to a New Jersey address, concededly not the last known address of Nahmi. Nahmi claims the notice was late, and her petition was timely filed.

No, says Judge Jacobs. The zipcode error is immaterial; if the notice is sent to the last known address, receipt by taxpayer is immaterial. Judge Jacobs puts it this way: “This Court has long held that an inconsequential error in the address used in mailing a notice of deficiency does not render the notice invalid. [citations omitted] An error in the address used in mailing a notice of deficiency is inconsequential where the error is so minor that it would not prevent delivery of the notice.[citations omitted].” 136 T.C. Mem. 129, at p. 6. And the Pickering case, Pickering v. Commissioner, T.C. Memo. 1998-142, disposed of the wrong zipcode issue once and for all.

So Nahmi loses, no jurisdiction under Section 6213(a) (90 days means 90 days from mailing, period), petition dismissed.

Takeaway: any mail from IRS gets top-shelf priority.

Now for the name: Retief Goosen, 136 T.C. 27. Goose is a pro golfer, non-resident alien (South African national residing in the UK for years in question), apparently a big enough noise in the pro golfing world to garner endorsements from the likes of Rolex, Acushnet, Izod and Upper Deck, among others. The issue is Goose’s allocation of endorsement revenue between personal services and royalty income, and secondarily between effectively connected US income and non-effectively connected US income.

Goose entered into employment deals with his management firm, who promo’d him while funneling his income from the pro tour and endorsements into Liechenstein and Channel Islands entities, to keep his non-UK earnings from the UK tax man. The UK tax man agreed.

Goose’s success on the course gained him endorsements of two kinds: wearing or using sponsor’s materials in tournaments (product placement) and non-tournament endorsements. In addition, Goose had to make some personal appearances, test equipment, and generally keep his name clean–no sex, drugs or rock ‘n’ roll.

The issue was the allocation of endorsement money. Goose allocated his tournament US earnings as a fraction of his total world-wide earnings. IRS allocated all US tournament earnings to the US, not just the fraction that represented the US share of Goose’s world-wide earnings. IRS and Goose agreed that non-tournament earnings were royalties, not personal service income, but IRS said 25% was US income and Goose said 10%.

No one disputed that Goose was in a trade or business (TOB) when he played golf for money in the US.

Tax Court looked at what Goose and his sponsors agreed to. In some sponsorship deals, Goose had to play in a certain number of tournaments, with bonuses if he won, and keep clean. He also allowed sponsors to use his name and likeness to advertise their wares. Advertisers testified that Goose’s cool, professional image and his upstanding citizen persona were valuable, aside from his substantial golfing prowess.

So the sponsors needed both Goose’s playing skills and his image. Tax Court agrees with Goose, and splits the US tournament money 50-50 between personal services and royalty income, stressing that this is our old pal facts-and-circumstances at work.

Turning to sourcing, royalty income for intangibles is sourced where the intangible is used. Goose tries the UK deal, 25% UK and 75% elsewhere. Tax Court rejects this. Tax Court looks at sales: trading cards and video games with Goose’s stamp on them are mostly sold in the US, so they’re sourced in the US.

On-course and Rolex present a different problem. Goose is a world-wide brand. While Goose’s US wins give him great creds, Goose musters enough evidence to convince Tax Court to refuse to source all Goose’s on-course and Rolex money to the US, and ends up splitting it 50-50.

Now for effective connection. Goose never had a fixed place of business in the US, so he is only taxed on his US-sourced income effectively connected to his US TOB.

Tax Court summarizes the basics: “In the case of U.S.-source income that is effectively connected with a U.S. trade or business, a nonresident alien will be subject to the graduated tax rates applicable to U.S. residents. In the case of U.S.- source income that is not effectively connected with a U.S. trade or business and consists of rents, dividends, royalties or other fixed or determinable annual or periodic income, the nonresident-alien will be subject to a flat 30-percent withholding tax.” 136 T.C. 27, at pp. 32-33.

Any money related to Goose’s participation in golf tournaments is effectively connected. But off-course, where there was no contractual obligation for Goose to show up, play or do anything, is not effectively connected.

Goose claimed the 12/31/1975 US-UK tax treaty, preventing uncoordinated or double taxation of the contracting parties’ nationals protects whatever part of his US-taxed income was received (and presumably taxed) in the UK. But Goose didn’t prove what was actually received in the UK, because his Liechtenstein and Channel Islands fronts got the money, and what they sent to the UK wasn’t categorized as royalty, personal services, or anything else. So Goose bogeyed that hole.

Takeaway- Facts-and-circumstances prevail again. Goose’s witnesses helped his cause. And Tax Court again plays strict rules of golf.