United States: IRS addresses US Source Retainer Fees and Ranking and Placement Bonuses derived by Professional Golf and Tennis Players from On-court Endorsement Contracts

The Internal Revenue Service (IRS) has issued on 2 July 2009 a generic legal advice memorandum on whether retainer fees and ranking and placement bonuses should for the application of the Internal Revenue Code (IRC) be classified as income from personal services, royalties, or both and whether such income components should under the 2006 US Model Tax Convention be classified as business profit under Article 7, royalties under Article 12 or income derived by a sportsman under Article 16.

According to the summary of the memorandum, the ranking and placement bonuses are to be characterized as income from personal services under the IRC. For the application of the 2006 US Model the ranking and placement bonuses are to be classified as income derived by a sportsman under Article 16 (Entertainers and Sportsmen) of the US Model.

The characterization of Retainer fees depends on whether the sponsor retained the player to use his or her name or likeness rights on a stand-alone basis and whether a portion of the retainer may be characterized as royalty. In the latter case? depending on the facts ? such royalty may be effectively connected with the conduct of that player?s US trade or business. Otherwise the retainer fees should be characterized as income from personal services (and to the extent that services are performed in the United States be taxed on a net basis at graduate rates).

Retainer fees are for the application of the 2006 US Model normally to be classified as income derived by a sportsman under its Article 16. Retainer fees that are not related to the personal activities as an athlete (as may be the case under certain ?off-court endorsement contracts?) would generally be classified as business profits under Article 7 (Business Profits).