Star Power May Decide Royalties in Foreign Athletes’ Tax Cases

April 29, 2013

How much is a professional golfer’s image worth?

A good bit, but not as much as one top golfer thought, according to a recent U.S. Tax Court decision against professional golfer Sergio Garcia.

The Spanish golfer, who is a resident of Switzerland, said 85 percent of his income from an endorsement agreement with TaylorMade Golf Co. came from image-derived royalty payments. Royalties in the case were exempt from U.S. taxation because they flowed through a Swiss business entity and were protected by the Swiss Tax Treaty.

The Tax Court found the 85 percent royalty “does not comport with the economic reality of the endorsement agreement,” and allocated just 65 percent to royalties and the other 35 percent to personal services, which are subject to U.S. taxes.

The case, Garcia v. Commissioner, 140 T.C. No. 6, U.S. Tax Court, concerned a disputed $1.7 million in taxes that the IRS charged Garcia in 2003 and 2004.

The ruling said that Garcia was “the centerpiece of TaylorMade’s marketing” which was “strong evidence that his TaylorMade endorsement agreement was more heavily weighted toward image rights.

Garcia has been in the top echelons of the PGA Tour since 1999 when he was 19. He has spent most of his career in the top 10 and was the world’s second-ranked golfer in 2008.

Garcia’s star power helped him win a more favorable split than another golfer who was challenged on the same issue by the Tax Court in 2011. South African golfer Retief Goosen was granted a lesser 50/50 percentage split between personal service and royalty payments.

The Goosen case helped to provide guidance for determining the source of income of foreign athletes. IRS rules say foreign athletes and entertainers generally must pay U.S. income tax on their U.S. source income, which includes compensation for performances, tournaments, personal appearances, endorsements, the sale of merchandise, and income closely related to the event.

Many treaties, however, provide that only a taxpayer’s country of residence may tax royalty income, allowing royalty income to escape U.S. taxation in many cases.

Foreign athletes are generally subject to special withholding rules and are required to file a U.S. federal income tax return to report and pay any U.S. tax.