United States: Did Sergio Garcia Lose In Match Play With The IRS?

One of the most recognizable names in professional golf—although not the most winning name, having never won a major golf tournament—is Sergio Garcia. He is especially known for his tree shots, the latest of which was a one-handed backward shot from a tree that he climbed to get to his ball in the Arnold Palmer Invitational. More recently, Garcia made news in losing his match play with the IRS. But did he lose?


On his 2003 and 2004 Forms 1040NR, U.S. Nonresident Alien Income Tax Return, Garcia, a U.S. nonresident (he resides in Switzerland), reported 15% of his income from a TaylorMade Golf Co. endorsement agreement as U.S.-source personal service income and the remaining 85% as royalty income for the use of his name, image, and likeness, which is not subject to U.S. taxation under the Switzerland-U.S. tax treaty. When it audited Garcia's returns, the IRS treated 100% of the income as personal service income in accordance with its published position that all endorsement income of a professional athlete is from personal services (see ITA 199938031 and AM2009-005). In turn, deficiency notices in the amounts of $930,248 and $789,518, respectively, were issued, and Garcia filed a Tax Court petition contesting the deficiencies.

On March 14, 2013, the Tax Court held that 35% of the income paid under the TaylorMade endorsement agreement should be characterized as personal service income and the remaining 65% should be treated as royalty income, not subject to U.S. taxation under the Switzerland-U.S. tax treaty (Garcia, 140 T.C. No. 6 (2013)). This is the second time in two years that the Tax Court in very similar cases involving nonresident professional golfers has rejected the IRS position that all income under an endorsement agreement is personal service income (see Goosen, 136 T.C. 547 (2011)).

In 2002, Garcia signed a seven-year endorsement agreement with TaylorMade, under which he became a TaylorMade Global Icon. Under the endorsement agreement, Garcia was required to use, on and off the course, TaylorMade products such as clothing, shoes, gloves, golf clubs, bags, and golf balls. In addition, TaylorMade was given the right to use Garcia's image, likeness, signature, and voice to promote its products. Further, Garcia was required to play in at least 20 professional golf events each year, provide at least 12 personal service and appearance days for the company, and act in a courteous and professional manner.

The initial endorsement agreement did not allocate the compensation between personal service and royalty income, but upon a subsequent amendment a year later, TaylorMade and Garcia agreed that 15% of the compensation was for Garcia's personal services and 85% was for Garcia's image and likeness.

U.S. taxation of nonresident athletes

The delineation between personal service compensation and royalty income is important because of the difference in treatment under the Switzerland-U.S. tax treaty. Generally, nonresident aliens are taxed by the United States only if they are engaged in a U.S. trade or business. For these purposes, the performance of personal services within the United States by a nonresident alien is considered the conduct of a trade or business in the United States. Consequently, income that a nonresident athlete receives as salary, fees, compensation, bonuses, and prize money for performances in the United States is subject to U.S. taxation as income from a U.S. trade or business. The personal service income is taxed at the same graduated rates that apply to U.S. citizens. In addition, if the nonresident athlete receives royalty income connected with the performance of services in the United States, the royalty income is subject to U.S. taxation the same as personal service income.

Only U.S.-source income is subject to U.S. taxation. It is important to determine the character of the income that a foreign athlete is paid since personal service income and royalty income are sourced differently. Personal service income is sourced where the services are performed. Royalty income, on the other hand, is sourced where the property is used or where the privilege of being used is granted.

Royalty income received by a foreign athlete that is not effectively connected with the athlete's performance of personal services in the United States is subject to a flat 30% withholding tax or a lower treaty rate. Under the Switzerland-U.S. tax treaty, only the foreign athlete's country of residence is entitled to tax royalty income. This is what Garcia was relying on to avoid U.S. taxation on the TaylorMade royalty income.

Tax Court opinion

The Tax Court rejected both Garcia's 15/85 and the IRS's 100/0 allocations between personal service income and royalty income, since neither reflected the true intent of the TaylorMade agreement. Finding that Garcia and TaylorMade were not adverse parties, the Tax Court first rejected Garcia's argument that the TaylorMade agreement setting forth a 15/85 allocation was controlling. The testimony of TaylorMade's CEO that the allocation was irrelevant undermined Garcia's argument. At the same time, in response to the IRS's 100% personal service income argument, the Tax Court determined that the TaylorMade agreement was not intended to compensate Garcia only for his personal services. Since Garcia's on-course success did not support the level of his endorsement income, the Tax Court found that TaylorMade must be paying Garcia for his image, likeness, etc. rather than his golf game. Finally, the Tax Court disagreed with the conclusions of both the IRS's and Garcia's experts, but did rely on some of their analytical points in arriving at its conclusions.


This left the Tax Court with the two Tax Court cases dealing with the allocation of endorsement income between personal service income and royalty income. In Kramer, 80 T.C. 768 (1983), a retired professional tennis player was entitled to a certain percentage of net income from the sale of tennis equipment with his name. Under those facts, the Tax Court determined that a 30/70 split was appropriate. The Tax Court distinguished Kramer given the age of the case and its different facts. The Kramer court had held that the 70% royalty income was justified on the basis that, since Kramer was retired and not playing competitive tennis, he was being paid mostly for his image.


The Tax Court then turned to the rationale it used in Goosen, 136 T.C. 547 (2011), where it determined that a 50/50 allocation was appropriate. Because Garcia was a bigger star than Goosen, TaylorMade used Garcia's image rights more than Goosen's, TaylorMade selected Garcia as its sole "Global Icon" while Goosen was only a brand ambassador, and Goosen was required to use TaylorMade products more than Garcia was, the Tax Court found that more of Garcia's contract should be allocated to royalty rights than the Goosen contract. In breaking down an endorsement contract between personal services and royalties, the Tax Court weighed the use of endorsed products during professional play very heavily. Since Goosen had to use TaylorMade products more than Garcia did (Goosen was required to use TaylorMade's products in 31 tournaments a year, while Garcia was required to use them in 20 tournaments a year), the Tax Court allocated a lesser percentage to personal service income for Garcia than it did for Goosen.

Switzerland-U.S. tax treaty

Garcia was not home free yet. To avoid U.S. taxation on the royalty income for his image rights, Garcia argued that the Royalties article of the Switzerland-U.S. tax treaty applied. Under that article, royalties received by a resident of a country, here Switzerland, are taxed only in that country, regardless of whether the royalties are attributable to personal services performed in a different country. The IRS argued that the Artistes and Sportsmen article of the treaty overrode the Royalties article. Under the Artistes and Sportsmen article, royalties are taxable in the country in which the personal activities to which they are attributable are performed. Thus, the decisive factor was whether Garcia's income was predominantly attributable to the personal services performed in the United States.

The Tax Court found that, although Garcia's golf play and personal services performed in the United States had some connection to his image and likeness, the income from the sale of his image and likeness was not predominantly attributable to his performance in the United States. Consequently, the Royalties article of the treaty was the applicable article, and the royalty income was not taxable by the United States.


While the Garcia case may look like a defeat for Garcia since he had argued that only 15% of the endorsement income was for personal services, it is a clear victory over the position of the IRS that 100% of the endorsement income of a nonresident professional athlete should be characterized as personal service income. Clearly, the lesson of the Goosen and Garcia cases is the more marketable an athlete's name, the more likely that fees are being paid for the athlete's image rather than the athlete's performance and skill.

Thomas R. Wechter, J.D., LL.M. (Tax), is a partner with Duane Morris LLP in the Chicago office and concentrates his practice in tax planning for individuals, corporations, and partnerships and in tax controversy matters in front of the IRS and before the Tax Court, U.S. Court of Federal Claims, and the district courts.

Previously published in the AICPA Tax Insider

This article is for general information and does not include full legal analysis of the matters presented. It should not be construed or relied upon as legal advice or legal opinion on any specific facts or circumstances. The description of the results of any specific case or transaction contained herein does not mean or suggest that similar results can or could be obtained in any other matter. Each legal matter should be considered to be unique and subject to varying results. The invitation to contact the authors or attorneys in our firm is not a solicitation to provide professional services and should not be construed as a statement as to any availability to perform legal services in any jurisdiction in which such attorney is not permitted to practice.

Duane Morris LLP, a full-service law firm with more than 700 attorneys in 24 offices in the United States and internationally, offers innovative solutions to the legal and business challenges presented by today's evolving global markets. Duane Morris LLP, a full-service law firm with more than 700 attorneys in 24 offices in the United States and internationally, offers innovative solutions to the legal and business challenges presented by today's evolving global markets. The Duane Morris Institute provides training workshops for HR professionals, in-house counsel, benefits administrators and senior managers.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.