A recent decision in the Eleventh Circuit Court of Appeals may have tax implications for talent who conducts significant endorsement or brand ambassador activities. Generally, endorsement deals often have two components: (1) endorsement services (e.g., public appearances, social media) and (2) licensing the talent’s name and likeness (e.g., for use on print and digital advertisements). In other relevant tax contexts, income attributable to endorsement services has been treated as services income, while income attributable to licensing of one’s name and likeness has been treated as a royalty. See, e.g., Goosen v. Comm’r, 136 T.C. 547 (2011) (holding that income arising from licensing one’s name and likeness constitutes royalty income for purposes of determining U.S. source income). In the limited context of determining whether income is qualified business income for purposes of IRC 199A, however, income attributable to licensing one’s name and likeness is treated as disqualified service income. But is name and likeness income subject to self-employment tax?
The Eleventh Circuit, affirming a Tax Court decision, held that a best-selling crime fiction author must pay self-employment tax on all income received under her publishing contract, including any royalty income attributable to the use of her “brand,” including her name and likeness. Slaughter v. Comm’r, No. 20-10786, 2021 BL 291695 (11th Cir. Aug. 3, 2021), aff’g, 117 T.C.M. 1323 (2019). While the Slaughter opinion is unpublished and arose in the context of a book author promoting her novels, it may open the door for reexamination by the IRS and other tax authorities of how name and likeness income should be reported going forward in endorsement and brand ambassador deals.
In Slaughter, an author received advances and royalties from book sales pursuant to various publishing contracts. While she was required to perform writing services for her publishers, the deals often included licenses granting the publishers the right to use her name and likeness for advertising and promoting the novels. The publishing contracts did not include any allocation of the payments among the author’s writing services and the publisher’s right to use the authors “brand” to promote her novels. Furthermore, in order to maintain her brand, the author worked with her literary agent to engage in various promotional activities during the years at issue, including giving interviews and attending promotional and publicity events.
On her tax return, the author allocated income from her publishing contracts between (a) her writing services and (b) royalties from intangible assets related to her brand, such as name and likeness, based on the relative time she spent on each activity during the year. The author also took the position that she was liable only for self-employment taxes on income allocable to her writing services, and not income related to her brand, claiming that she was in the trade or business of “writing” only and not in the trade or business of licensing her name and likeness.
The Eleventh Circuit disagreed with the author’s reporting position and affirmed the Tax Court’s decision to levy self-employment tax on all of the author’s income received under her publishing deals, holding that the author’s trade or business of “writing” was broadly defined to include her “brand,” her promotional activities to enhance her brand, and the licensing of her name and likeness. The court further held that such activities, based on the author’s specific facts and circumstances, were “sufficiently continuous and regular” to constitute part of an overall trade or business. As evidence, the Eleventh Circuit noted that the author deducted all of her expenses, including expenses clearly attributable to promotional activities, as trade or business expenses for federal income tax purposes. Last, the Eleventh Circuit held that any income attributable to her brand had sufficient “nexus” to her writing because publishers would pay “less – or even nothing” for the use of her brand if she ever stopped writing novels.
The Slaughter decision may serve as a cautionary tale for talent who carry out significant promotional activities or who are engaged in brand ambassador deals. Specifically, talent and their advisors may reconsider how income from endorsement or brand ambassador deals that include licensing their name and likeness, or any other intangible assets that implicate the talent’s brand, fits into their overall tax structure and reporting scheme, and whether their specific deal may be distinguishable from the Slaughter case.
The Venable Entertainment Tax Group stands ready to assist talent and their advisors in exploring solutions to the potential hurdles raised by the Slaughter decision.