My seven year old has a penchant for getting herself into trouble. She’s that kind of kid who pushes boundaries to see exactly how far she can get. Lucky for her, she also has a pretty quick wit and a couple of looks up her sleeve. When she gets into trouble, she peers up at me and begs, “One more chance!” You, of course, know exactly why she does this: I usually give in.

Yeah, I know better. But I do it anyway. I feel like maybe this time – this time – she’ll learn her lesson.

The IRS isn’t so very different. In a surprise move, the IRS has announced that they’re giving “One more chance!” to those folks with offshore accounts.

It’s deja vu all over again. In February 2011, IRS Commissioner Doug Shulman announced the Offshore Voluntary Disclosure Initiative (OVDI), saying:

As we continue to amass more information and pursue more people internationally, the risk to individuals hiding assets offshore is increasing. This new effort gives those hiding money in foreign accounts a tough, fair way to resolve their tax problems once and for all. And it gives people a chance to come in before we find them. (emphasis added)

Only last year, I totally expected it. This move, I’ll admit, I didn’t see coming. I thought “once and for all” really meant once and for all.

I guess $4.4 billion can change your mind pretty quickly. That’s the total amount of taxes collected by the IRS under the previous two programs, one in 2009 and the most recent in 2011. That total is expected to climb as the IRS processes the 2011 disclosures, including those which were extended due to Hurricane Irene.

The new program hopes to further increase compliance and – hopefully – add some more dollars to the Treasury. But there’s a catch – and it’s a pretty big one: there are no rules.

Okay, maybe that’s a bit dramatic. There are some rules. The IRS just reserves the right to change them at any time.

For example, there’s no deadline for compliance. That’s the kind of thing that is going to give tax professionals like me a headache. We like deadlines. But the IRS has not set a deadline. They can end the program at any time.

Also? The existing terms of the program may change at any time going forward. According to the IRS, they “may increase penalties in the program for all or some taxpayers or defined classes of taxpayers.”

So, er, I guess the strategy is to keep taxpayers guessing? Or encourage compliance as early as possible?

For the record, as it exists right now, individuals who participate in the program will pay a penalty of 27.5% (up from 25% in the 2011 program) of the highest aggregate balance in foreign bank accounts or value of foreign assets during the eight full tax years prior to the disclosure. As in 2011, if circumstances warrant, some taxpayers will be eligible for penalties of just 5% or 12.5%.

To qualify, participants in the program must file all original and amended tax returns for up to years prior to the disclosure. Payment must also be made for the taxes and interest due as well as applicable penalties.

Further, taxpayers who have come forward since the previous OVDI closed last year will be eligible to participate in the new program.

Again, that could all change. But that’s how it stands as of now.

For its part, the IRS believes that this new opportunity is a good one for taxpayers. Commissioner Shulman offers:

As we’ve said all along, people need to come in and get right with us before we find you. We are following more leads and the risk for people who do not come in continues to increase.

This is a tricky area. I’ve been critical of the underlying laws requiring disclosure. I believe that it pulls too many taxpayers into noncompliance by accident. Under the rules, taxpayers who pay taxes on their foreign income but don’t properly disclose the specific accounts are breaking the law. And taxpayers who have modest foreign accounts for things like paying tuition for study abroad programs, internships or travel, can find themselves noncompliant. Also at risk? Executives and workers in the US on temporary visas and dual citizens. Not your run of the mill tax scofflaws as the IRS would paint them. But folks who just didn’t understand and comply with the rules.

So, in that regard, I think that these efforts to give taxpayers “One more chance!” make sense. I’m just not a fan of the constantly moving target now in effect.

Yes, yes, taxpayers should get compliant as soon as possible. And I don’t believe in rewarding those who wait.

But – and I know this is crazy talk – maybe there’s an alternative to disclosure program after disclosure program meant to weed out the bad guys? Maybe we should change the rules altogether. Why not rewrite the laws so that people who weren’t intended to get caught up in the whole mess to begin with aren’t affected? I know that would take some effort on the part of Congress and (deep breath) cooperation (and goodness knows that’s asking for a lot) but wouldn’t it make more sense?

*Sigh* For now, it is what it is.

Of course, if the “One more chance!” thing doesn’t work, we can always try what we do to the seven year old: straight to bed with no TV and no more dancing in your room.

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Want more taxgirl goodness? Sign up to receive posts by email, follow me on twitter (@taxgirl) or hang out with me on Facebook.Similar Posts:

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It’s not unusual to hear reports of corruption in tax offices in some states in India. Taxpayers have come to understand that it’s a way of life, including regular demands by public officials to pay bribes, sometimes holding tax records hostage until the bribes were paid. Well, some taxpayers. Two farmers in Basti, located in northern India, decided that they were officially fed up. And they did something about it: they dumped three sacks of snakes on the floor in the tax office. The sacks contained about forty snakes, including four deadly cobras.

Clerks at the office reacted the way that my mother would: they climbed on tables to escape the slithering reptiles. Fortunately, there were no injuries and all of the snakes were recovered. The two farmers, identified as Hukkul Khan (a snake charmer) and Ramkul Ram, have not yet been apprehended.

As a tax professional, I can’t say that I recommend this course of action. But it certainly got attention.

You can watch the video of the incident here.

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Want more taxgirl goodness? Sign up to receive posts by email, follow me on twitter (@taxgirl) or hang out with me on Facebook.Similar Posts:

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Talk about the naked truth. Fans of beleaguered artist Ai Weiwei have tapped the power of the internet to show their support… by posing naked.

Ai Weiwei was charged with tax evasion earlier this year, a charge that he claims is related to his outspoken criticism of the Chinese government. He was able to raise the money necessary to pay the fine and appeal the charges but said at the time that he was expecting things to get worse. He was right. Now, the artist is being investigated by Chinese officials on porn charges. The charges are tied to a photo titled “One Tiger, Eight Breasts” which shows the artist and four women, all of them sitting nude but with no contact between the five (link will take you to the original photo – NSFW).

In response, supporters have posted nude photos of themselves online. A number of supporters have even tweeted the photos to Ai (@aiww) – some have gone so far as to change their avatars to various nude poses.

And dear readers, you know I love you but for future reference, if you want to show your support for me, a quick comment below or a nice email will do. No need to post nude photos. Except for you, Luke Wilson. Rowr.

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Want more taxgirl goodness? Sign up to receive posts by email, follow me on twitter (@taxgirl) or hang out with me on Facebook.Similar Posts:

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Over the summer, my dad asked me if I had heard about Chinese artist Ai Weiwei. I had heard brief mentions of some tax woes but nothing big.

It’s a big story, my dad advised. I nodded, making a mental note to follow-up. And then I didn’t.

As with so many things (but not everything – pig’s feet are not delicious and khaki shorts are not appropriate for any occasion) Dad was right. This week, Ai made headlines all over the world when he announced that he would challenge his $2.4 million tax bill. The bill was levied against him by the Chinese government as the result of an investigation into what they’re calling tax evasion. Ai and his supporters call it something else: suppression. You see, Ai likes to talk. Openly. And his favorite target is criticism of the existing Chinese government.

If the name Ai Weiwei sounds vaguely familiar to those of us who maybe aren’t well versed in Chinese dissidents, it’s because he helped design the National Stadium in Beijing, known as the “Bird’s Nest” (鸟巢). The stadium was the centerpiece of the 2008 Olympics.

For all that Ai is recognizable after the Olympics, his artwork is far from mainstream. He’s controversial, a status which he clearly enjoys. But he’s also aware that there are lines that shouldn’t be crossed in Communist China, telling the BBC in 2005:

You really have to be very alert about where is the fine line, the border.

Apparently, he found that line.

A few months after Ai’s studio was demolished by the Chinese government, Ai was detained at the airport in April 2011 on undisclosed charges. Rumors swirled that the charges were related to finances and that proved to be true when months later, Ai allegedly confessed to tax evasion. Prior to the announcement, Ai had been held in secret for 81 days.

Now, Ai is speaking out. He has decided to fight the charges against him. It won’t be an easy task. To do so, Ai will have to put up $1.3 million as collateral. That’s the first step before he’s allowed to appeal.

To raise the money, Ai’s mother is selling her home. Supporters have also been donating money for Ai. A recent campaign on Google+ resulted in big dollars, all of which Ai promised to return. The government has alluded to his conduct as “illegal fundraising” – perhaps a dire warning that even if he makes the tight deadline, he will be charged again. For now, Ai has 15 days from the receipt of the bill to come up with the money. If he doesn’t come up with the money, he will likely find himself in jail again.

Ai now says that he did nothing wrong. His supporters believe that he is being targeted for speaking out against the Chinese government. It wouldn’t be the first time that the government has come down hard on Ai for being outspoken. After he supported an investigation into student deaths following the 2008 Sichuan earthquake, Ai was allegedly beaten by the police so badly that he suffered a hemorrhage.

Despite how he’s been treated, Ai refuses to leave China. His home, he constantly reminds his supporters, is in China. This doesn’t mean, however, that he has stopped talking about his ordeal. Even though he’s being monitored, Ai is on twitter: @aiww (yes, he tweets in Chinese). He says about the site, “Without Twitter, it’s just like I’m not a person. I’ve already sent out more than 60,000 tweets.” Those tweets are being compiled into a book.

It’s no wonder, with all of the media attention, that the Chinese government is concerned about the flow of information in and out of the country. As a result, the BBC reported that high ranking government officials recently contacted senior executives from internet, telecommunications and technology companies to discuss their options.

Meanwhile, the whole world is watching.

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Want more taxgirl goodness? Sign up to receive posts by email, follow me on twitter (@taxgirl) or hang out with me on Facebook.Similar Posts:

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We love a good underdog story, don’t we? I think that’s why the folklore of Robin Hood – who robbed the rich to the poor – has endured over hundreds of years. We like the idea that a plucky spirit and a good heart can somehow overcome even most seemingly impossible set of obstacles. We cheer the notion that you don’t have to have money or armies or the power of government in order to make a change. You just need to dress up a dreamy Kevin Costner – even with a dreadful English accent – and voila, all is right with the world.

In real life, however, things aren’t so simple. You can’t simply take from the rich and give to the poor without committing a felony in most jurisdictions. Unless, of course, it’s legislated.

This week, a bill was introduced that would impose a new tax on certain trading transactions in financial markets. The tax – which is aimed at the wealthy – is already being called the “Robin Hood Tax” and is part of H.R. 3313, sponsored by Rep. Peter A. DeFazio (D-OR). Twelve co-sponsors in the House have signed onto the bill so far: Rep. Earl Blumenauer (D-OR); Rep. Bruce Braley (D-IA); Rep. John Conyers, Jr. (D-MI); Rep. Donna F. Edwards (D-MD); Rep. Bob Filner (D-CA); Rep. Maurice D. Hinchey (D-NY); Rep. Mazie K. Hirono (D-Hi); Rep. Henry C. “Hank” Johnson, Jr. (D-GA); Rep. John P. Sarbanes (D-MD); Rep. Louise McIntosh Slaughter (D-NY); Rep. Betty Sutton (D-OH) and Rep. Peter Welch (D-VT). Nope, those Ds aren’t typos. All of the sponsors of the bill are Democrats.

The bill would impose a “financial speculation tax” of .03%, or $3 for every $10,000, on the trade of stocks, bonds and other debt and derivatives. Trades by consumers (you and me) would be excluded.

DeFazio has said about the bill:

This legislation will curb unnecessary speculation and generate needed revenue to help our cash-strapped federal government pay down debt and invest in the real economy to benefit all Americans.

You have to admit, that sounds pretty noble.

But noble doesn’t necessarily get you very far. And DeFazio should know that. He proposed a similar tax on securities in February 2009 as part of H.R. 1068, called Let Wall Street Pay for Wall Street’s Bailout Act of 2009 and again in December 2009 as part of H.R. 4191, the similarly titled Let Wall Street Pay for the Restoration of Main Street Act of 2009. Neither bill made it to a vote. And if I had to guess, this one won’t either: it currently sits in the House Committee on Ways and Means where it will likely sit awhile.

To be fair, the tax is based on a similar proposal being considered by the European Commission. The sense in the EU is that their version of a financial transaction tax will pass despite some opposition. There are two fairly good reasons why the tax will fare better in the EU than in the US. One, the EU is increasingly desperate to get its markets under control or face a potential split. Two, a working model, of sorts, is already in place in the UK (Sweden ditched its version years ago). The Stamp Duty Reserve Tax (“SDRT”) has been around for 25 years, made law as part of the Finance Act of 1986, and imposes a tax on most paperless trades of companies located in or registered in the UK. Proponents point to that tax as evidence that such a tax can work.

And perhaps it can. But in the US, there’s a considerable amount of opposition to the bill (especially along party lines). Critics claim that it will be difficult to enforce and that the real financial benefit of the tax is difficult to measure. The latter appears to be true as proponents have yet offer up a firm revenue estimate.

Most of the opposition, though, revolves around the notion that Wall Street will merely pass along the tax to consumers even though consumers are specifically excluded on the face of the bill. It’s a fair argument.

I know that’s not the intention of the bill. But then, the intention of the Durbin amendment wasn’t to boost debit card fees and yet, that’s exactly what happened. What guarantee do we have that this won’t be different? Might, for example, the tax be offset at the top by shareholder fees that trickle down?

We’ve looked the other way for far too long. It was easy to ignore the warning signs when our economy was humming along but the current financial mess – the disparate incomes, skyrocketing debt, unacceptably high levels of employment – has been a long time coming. And it’s not going to fixed by tacking on a few taxes in an effort to create the illusion of parity.

The schism between the rich and the poor is big. And it’s getting bigger. And whether or not you agree with what’s going on with Wall Street, it should be clear that we can’t simply tax and regulate our way out of that culture. There will be consequences – and most of it will be aimed straight at the middle class. Remarkably, however, we still cling to the notion that all of this is somehow good for us. Apparently, it’s all in the presentation.

It’s rather like the moment in the movie, Robin Hood, when the Sheriff of Nottingham wonders aloud:

Wait a minute. Robin Hood steals money from my pocket, forcing me to hurt the public, and they love him for it?

Exactly.

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Want more taxgirl goodness? Sign up to receive posts by email, follow me on twitter (@taxgirl) or hang out with me on Facebook.Similar Posts:

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Riot police have reportedly moved in to calm protestors after rioting broke out inside a metro area over taxes.

No, this isn’t Oakland, California. It’s Huzhou, China, a textiles center located in the northern Zhejiang province of eastern China.

Earlier this week, a children’s clothing business in Huzhou refused to pay its tax bill. The tax collector who attempted to collect from the business was attacked shortly thereafter which led to rioting in the city on late Wednesday and into Thursday. The rioters reportedly threw stones, smashed street lights and overturned cars.

Details remain sketchy. According to the BBC, Zhejiang Online, a government run news site, had indicated that up to 600 people were involved. Local reports put the number of people involved higher, claiming that “thousands” of protesters had clashed with police.

I couldn’t find any such references on the site which isn’t terribly surprisingly. China has traditionally been tight-lipped about efforts to control its people. Taking it a step further, China has reportedly moved to quelch the riots by blocking online access to news about what they’re calling “an incident.” Bloggers have reported that Chinese authorities have moved to block the terms “tax”, “protest” and “Zhili” from online media although the twitter stream for “Huzhou” remains busy. The efforts to censor reporting of the protests have presented quite a challenge considering that China has more than 500 million internet users.

Interestingly, the tax collector whose actions are said to have triggered the riots has been fired.Similar Posts:

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The line judges may call the shots on the court but it’s clear that Spanish tennis star Rafael Nadal is calling the shots off the court. The world’s second-ranked men’s tennis player has announced that he will not play the Queen’s Club tourney next year in Britain, citing that country’s tax laws as a deterrent. Instead, he says, he’ll play in more tax friendly Germany that week.

Queen’s Club is considered the warm-up to Wimbledon. Nadal has played in the tourney almost every year for the past six years; he had to bow out in 2009 due to injury. But this year, he worries that he will lose money if he plays Queen’s due to Britain’s tax laws.

The Brits, like the US, attempt to tax global income. However, under British tax law, the amount of tax due is pro-rated based on the number of events that an athlete competes in; this is in addition to a 50% tax rate on appearance fees. If, for example, Nadal participates in ten tournaments in 2011 and one of those tournaments is located in the UK, the Brits take the position that they are more or less entitled to 1/10 of Nadal’s worldwide income (some exceptions apply but you get the idea). The tax is imposed even though the athletes, like Nadal, may not live in Britain.

Clearly, the law isn’t popular. It has kept big names like Spanish golfer Sergio “El Nino” Garcia and Jamaican sprinter Usain Bolt out of the country for nearly every event. In fact, Bolt has indicated that he will only race in Britain for the Olympics – and not any of the matches leading up the Olympics – which sent Britain’s Tax Minister scurrying for a fix. In fact, in order to ensure that athletes actually show up for the 2012 Olympics, the British taxing authorities have agreed to a limited exemption to the tax rule.

In the past, the tax office has also considered a special tax break for the purposes of luring Tiger Woods to the country (though not so necessary these days, huh?) for the Ryder Cup. It wasn’t the only concession the taxing authorities considered: after Wembley was passed over as the host for the 2010 Champions League final, changes were made to exempt visiting footballers (that’s soccer to you and me) from the tax laws. As a result, Wembley hosted the 2011 Champions League final on May 28 of this year in which Barcelona competed (and won) against Manchester United. It was the first European Cup final held in the new Wembley stadium.

Will UK make such an exception for Nadal? The pressure is on but so far, there’s no indication that anything is seriously being considered. Of course, tennis fans need not totally despair: Nadal isn’t boycotting Britain altogether. He has announced that he will indeed play Wimbledon and the ATP World Tour finals, both of which are held in Britain.Similar Posts:

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There’s no way round it: Americans are getting fat.

According to the CDC, there has been a “dramatic increase in obesity” over the past twenty years. Across the country, about a third of all adults are classified as obese, meaning that they have a Body Mass Index (BMI) of 30 or higher. To put that into perspective, a person who is 5’9″ would be considered healthy at a weight between 125 and 168 pounds; a BMI of 30 would put his or her weight at more than 203 pounds.

As of last year, no single state had an obesity rate of less than 20%. Near three quarters of all states had an obesity rate of at least 25%. And twelve states – nearly all of them southern (and you know I write this as a southern girl) – reported obesity rates of 30% or more: Alabama, Arkansas, Kentucky, Louisiana, Michigan, Mississippi, Missouri, Oklahoma, South Carolina, Tennessee, Texas, and West Virginia.

So what if we’re fat?

Well, besides the obvious – shorter life spans and the unfortunate butt of jokes from Canadians (which really hurt, eh?) – it’s expensive. In 2008, Health Affairs reported that medical costs related to obesity were estimated at $147 billion. That works out to $1,429 in higher costs than folks considered to be a “normal” weight. For a nation concerned about the overwhelming cost of health care, that should give us pause.

It also raises an interesting point: who should pay those costs?

I know it’s on the tip of your tongue to say that it should be an individual responsibility. But that’s neither practical nor legal. We can’t charge different rates at the doctor based on your health and weight nor can insurers charge you based on your BMI – not without a humongous lawsuit.

Many government officials have tried to pass along the costs in the form of various taxes attached to unhealthy food choices. In Philadelphia, Mayor Nutter tried to push a soda tax through to raise revenue; then Governor Paterson made noise about the same thing in New York, labeling it a “fat tax” – neither official ended up passing the measure. Congress even considered a similar proposal and ultimately tabled it.

Other locales have tried to push similar ideas through, proposing a “fat tax” on everything from sugary drinks to sodas to fatty foods. So far, we, as a country, haven’t budged. And we’re still fat.

But does that mean the idea won’t work? Or just that we don’t like it?Similar Posts:

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Donna (not her real name, of course) has been breaking the law for years.

The funny thing is she doesn’t look like your stereotypical criminal: she’s well dressed, well spoken and well travelled.

She hasn’t physically harmed anyone. She hasn’t stolen anything. I’m not sure she has so much as a traffic violation.

Her crime? While she has faithfully reported all of her taxable income over the years, she has failed to file a form TD F 90-22.1 (downloads as a pdf). You know that one, right? It just rolls off the tongue.

Chances are, if you’re actually familiar with the form TD F 90-22.1, you likely know it by its more common name, the Report of Foreign Bank and Financial Accounts, or FBAR.

FBARs have been around for more than forty years now, though they’re just now getting a lot of press. The Report of Foreign Bank and Financial Accounts requirements (31 CFR 103.24), or the FBAR rules, are part of the Banking Secrecy Act. Under the rules, each “US person” with an interest in, signature or other authority over, one or more bank, securities, or other financial accounts in any foreign country must file an FBAR if the aggregate value of such accounts at any point in a calendar year exceeds $10,000. A “US person” generally means a citizen or resident of the United States, or a person in and doing business in the United States – it is not limited to individual taxpayers and includes partnerships and corporations.

In other words, if the total of your interests in all of the foreign accounts in which you have an interest (even if it’s authoritative rather than financial) reaches $10,000 or more at any point in the calendar year, you need to file an FBAR. That applies even if you’ve been faithfully reporting the income on your federal income tax return (like Donna) and even if you’ve never, ever repatriated a single dollar to the U.S. (also like Donna).

If the total of your interests in all of your foreign accounts reaches $10,000 or more at any point in the calendar year, you must file an FBAR by the deadline. The official deadline is June 30 following each calendar year (so, for 2010, the deadline is June 30, 2011). There are no extensions – and very few exceptions.

To file an FBAR, check the appropriate block on your federal form 1040 at Schedule B and then file form TD F 90-22.1, Report of Foreign Bank and Financial Accounts.

You don’t send your FBAR with your tax return. Instead, you file it with:

United States Department of the Treasury
P.O. Box 32621
Detroit, MI 48232-0621

Or if you’re using an express delivery service:

IRS Enterprise Computing Center
ATTN: CTR Operations Mailroom, 4th Floor
985 Michigan AvenueDetroit, MI 48226

Failure to comply can make you a criminal. Seriously. Failure to file an FBAR may, under the law, result in civil penalties, criminal penalties or both (the list of potential penalties that may apply is distressingly long). It’s all very draconian but it’s also very real. And you should take it seriously.

While the rules have been around for awhile, the IRS has been unconcerned comatose apathetic fairly quiet when it comes to enforcement. In recent years, however, the IRS has made the monitoring foreign accounts part of their targeted enforcement strategy. That means – and they’ve made it extremely clear – they’re coming for you.

If you haven’t filed FBARs for the past few years and believe that you should have, don’t panic. The IRS is currently offering a limited amnesty program for taxpayers who are not compliant, the 2011 Offshore Voluntary Disclosure Initiative (OVDI). Commissioner Doug Shulman emphasized that the goal of the program was to assist taxpayers in understanding and meeting their reporting obligations:

As I’ve said all along, the goal is to get people back into the U.S. tax system. Combating international tax evasion is a top priority for the IRS. We have additional cases and banks under review. The situation will just get worse in the months ahead for those hiding assets and income offshore. This new disclosure initiative is the last, best chance for people to get back into the system.

It’s an interesting characterization. Folks like Donna swear they’re not “hiding assets” and I would agree in theory. She’s been reporting the income and she’s not looking to evade taxation. But under the rules, she’s as much a cheater to Shulman as those folks at UBS, HSBC and Deutsche Bank who were purposefully looking to keep assets from the IRS.

It’s also important to understand that your “last, best chance” doesn’t mean a free pass. Taxpayers who have not been reporting their foreign taxable income will be required to pay back taxes and interest, as well any accuracy-related and/or delinquency penalties. However, qualified taxpayers may be eligible for a reduced penalty scheme and will avoid criminal prosecution but only if you’ve managed to avoid detection to date. If you’ve already been targeted for enforcement by IRS, you aren’t eligible for the program.

If you’re one of those taxpayers like Donna who has been reporting income all along, but not filing your FBARs, the IRS is offering a simplified version of the OVDI. If you qualify, you can file the delinquent FBAR reports with a statement explaining why the reports are filed late and avoid the penalty for the failure to file the delinquent FBARs so long as you meet the August 31, 2011 deadline. However, the IRS stresses that FBARs for 2010 are due on June 30, 2011 and must be filed by that date even if you are participating in the initiative.

Again, that June 30, 2011 date is important. If you need to come clean, or if you’re scratching your head wondering whether you might need to file an FBAR, contact your tax professional for more details. You can also contact the IRS directly by calling 800-800-2877 and selecting option 2 or emailing FBARquestions@irs.gov (questions only to this email address, the system doesn’t accept actual FBARs).

I’ve talked about the FBAR requirements with many of my clients, like Donna and I understand the frustrations. I realize that the reporting requirements are burdensome and confusing. I also agree that they’re invasive. And I totally get that they make clients want to scream and pull out their hair. But – like it or not – they’re also the law.Similar Posts:

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When LeBron James hits the court in Nike apparel, does it make you like Nike more or less?

What about David Beckham wearing (sort of) Armani underwear or Adidas sportswear?

Do those endorsements make you want to go out and support those brands? Major labels seem to think so, signing up a number of athletes, celebrities and reality “stars” (like the Kardashian sisters and Paris Hilton) to wear their clothes, model their extensions and flash their jewelry in exchange for cash. These endorsements can be the major source of income for some celebrities, eclipsing their actual pay, even though celebrity endorsements apparently aren’t worth what they used to be for the consumer.

The issue of endorsements – and their value – hit the Tax Court this week courtesy of South African born golfer Retief Goosen. Goosen filed a court challenge to the IRS’ assessment of his endorsement income (downloads as a pdf).

Goosen has lucrative endorsements for most of his golfing equipment. For example, he has deals that require him to use TaylorMade golf clubs and golf bags (owned by Adidas) and Titleist golf balls and golf gloves (owned by Acushnet) while wearing Izod apparel during play. Off the golf course, he endorses watches (Rolex), video games (Electronic Arts) and trading cards (Upper Deck).

On Goosen’s tax returns, he took the position that the off-course endorsements were classified as royalty income; the IRS agreed. However, Goosen also took the position that the golf endorsements were a mix of royalty and personal services. This was more tax advantageous to him than the IRS’ position that it was solely personal services income. Under the Tax Code, royalties are generally subject to more favorable tax treaty provisions; Goosen has a residence in England and as a non-domiciliary U.K. resident wanted to claim benefits under the U.S.-U.K. tax treaty. Personal services income is subject to regular U.S. income tax rates.

Goosen’s basis for his argument is that sponsors paid him for the right to co-market and co-brand their products with his name and image. Traditionally, courts have characterized these payments as royalties because the person has an ownership interest in that valuable right.

The IRS, however, took the position that Goosen was actually being paid for his services, namely playing golf and using their products. To support their argument, IRS pointed to the endorsement contracts Goosen signed which required Goosen to play in a certain number of golf games each year.

U.S. Tax Court Judge Kroupa ruled in Goosen’s favor on this issue, noting that Goosen’s “accomplishments on the golf course made him famous, though it was his image that made him marketable.” Judge Kroupa seemed to focus on the idea that Goosen’s image – that as a cool, collected golf player – mattered as much, if not more, than his ability to play golf. To support this notion, Judge Kroupa pointed to a morals clause in the contracts that required Goosen to maintain a certain image and penalized the golfer if he compromised that image; the opinion noted that image is extremely important in certain sports arenas, especially in golf. Of course, Tiger Woods was cited as example when it was noted that Tiger lost many of his sponsorships after his series of affairs not simply because his game declined (which it did) but because “sponsors determined that Mr. Woods’ image was no longer compatible with their products.” In other words, image matters, and Goosen’s contracts contributed to the idea that a certain image matters, at least in his case. And as a result, the court agreed with Goosen that income received from those contracts could be classified as half royalty income and half personal services income.

Goosen, however, didn’t win the entire round. While Goosen and the IRS both agreed that personal services income, tournament bonuses and ranking bonuses should be considered US sourced, they disagreed as to what portion of the royalty income from endorsement fees should be considered US sourced.

Generally, royalty income which is paid for the right to use intangible property (such as a likeness) is sourced where the property is used or is granted the privilege of being used. The courts can look to an allocation source inside a contract but in Goosen’s case, Judge Kroupa determined that the allocation wasn’t specific enough (the contract used the term “worldwide” to refer to non-UK sources and it wasn’t narrowed further). That means that the courts have to look to outside evidence. That evidence wasn’t favorable to Goosen. In the case of the trading cards, for example, Upper Deck sold 92% of its golf cards in the U.S. The video games that Goosen endorsed had a U.S. market share of 70%. While purchase statistics don’t always indicate the value of an intangible party in the U.S., they can be indicative of the allocation. In the case of the cards and video games, Judge Kroupa noted that they were primarily marketed inside the U.S. as opposed to globally. Thus, those sales percentages were held to represent the actual U.S. source income. With respect to the Rolex and “on course” royalty fees (as noted above), the court found it reasonable to attribute 50% as U.S. source.

Goosen also lost his bid to have all of his income subject to the terms of the U.K./U.S. tax treaty. Goosen routed some of the income directly to the tax-friendly state of Liechtenstein rather than to his tax home in the U.K. Based on the evidence, Judge Kroupa held that Goosen “has not shown that he is eligible for any treaty benefits.”

So what does all of this mean going forward? I think it signifies a few things:

1. Image matters. Not just on camera but in Tax Court.
2. Contracts need to be specific. Despite the fact that we sometimes act like we own the world, we don’t, so “worldwide” does not equal U.S.
3. You can’t do one way what you can’t do another. I know, double negatives. But you and I – and Judge Kroupa – all know why Goosen chose to be paid in Liechtenstein. It’s either U.K. income or it’s U.S. income under the facts as presented. If you’re going to argue that it’s neither, then no treaty applies.
4. Finally, athletes and stars all over the world who do business in the U.S. are calling their tax lawyers right now. Or at least they should be.

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