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Personal brand compensation subject to self-employment tax

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Tax Hot Topics newsletterThe U.S. Tax Court held in Slaughter v. Commissioner (T.C. Memo. 2019-65) that royalty payments related to an author’s personal brand are subject to self-employment tax.

Throughout the early 2000s, the petitioner, a prominent author, had developed a very successful brand and body of written works. In addition to writing, she spent considerable time on promotional activities to further market her works. The petitioner would enter into various contracts with publishers and receive nonrefundable advances and royalties related to sales of her manuscripts. The contracts specified that royalty rates applied to the revenues or profits from the petitioner’s written works, and only the amounts in excess of the advance amounts would be paid as royalties. Due to her considerable success, publishers were willing to pay more for the petitioner’s work because of her brand.

For the petitioner’s 2010 and 2011 tax returns, her tax counsel determined that she was being compensated for more than simply writing and that a considerable portion of her compensation was derived from her personal brand and reputation. The petitioner’s tax counsel reasoned that the author’s personal brand is akin to an intangible asset beyond that of a trade or business of an author and that amounts paid to the petitioner for use of her name and likeness was investment income. Therefore, she should only pay self-employment tax on the amounts that publishers pay her for writing and not on amounts paid for her name and likeness.

Upon audit, the IRS disagreed with the petitioner’s position and stated that there was sufficient nexus between the royalties paid to the petitioner and her trade or business of writing such that all of her income from publishing contracts would be subject to self-employment tax. The Tax Court upheld the IRS’s position on the basis that the petitioner’s brand is part of her trade or business. Since self-employment tax is computed on gross income derived from an individual’s trade or business, the court examined whether an individual’s personal branding constitutes a trade or business. In its analysis, the court determined that the term “trade or business” should be construed broadly, and that the petitioner’s time spent on promotional activities to further develop her status as a brand author formed part of her trade or business as an author.

Contact
Jeff Martin
Partner
Washington National Tax Office
T +1 202 521 1526

Keith Mong
Managing Director
Washington National Tax Office
T +1 202 521 1554

James Sanchez
Senior Associate
Washington National Tax Office
T +1 202 861 4107

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