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SERGIO GARCIA, PETITIONER v. COMMISSIONER OF
INTERNAL REVENUE, RESPONDENT
Docket No. 13649–10. Filed March 14, 2013.
P, a professional golfer and a resident of Switzerland,
entered into an endorsement agreement with sponsor T. P
agreed to allow T to use his image, name, and voice (image
rights) in advertising and marketing campaigns worldwide. P
also agreed to perform personal services for T including using
T’s products in all his golf play, posing and acting for
advertisements, and making personal appearances for the
company. In return for his services and use of his image
rights, T agreed to pay P certain compensation. P and T allo-
cated 85% of P’s compensation to royalties (for use of his
image rights) and 15% to personal services. P established EP,
LLC, in the State of Delaware, which would receive the roy-
alty payments and then pay a portion of the royalty payments
(attributable to use of the image rights in the United States)
to a second LLC that P established in Switzerland, LD. The
result was that P paid no U.S. tax on the royalty payments,
but did pay U.S. tax on the U.S. source personal service pay-
ments. R now disputes the 85%–15% allocation between roy-
alty and personal service payments, arguing for a larger por-
tion attributable to P’s personal services. R also claims that
we should find the U.S. source royalty payments were made
directly to P and disregard the form of the transaction
involving EP and LD. R additionally claims that such royalty
income (as well as all U.S. source personal service income)
should be taxable to P in the United States and not exempted
from U.S. taxation under the Convention between the United
States of America and the Swiss Confederation for the Avoid-
ance of Double Taxation with Respect to Taxes on Income
(Swiss Tax Treaty). P claims that the 85%–15% allocation
between royalty and personal service payments understated,
141
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142 140 UNITED STATES TAX COURT REPORTS (141)
if anything, the royalty allocation. P disputes R’s claims
regarding the EP/LD transaction and further claims that even
if that transaction is disregarded (and we consider the pay-
ments to have been made directly to P), all of P’s royalty
income, as well as a portion of his U.S. source personal service
income, is exempt from tax in the United States under the
Swiss Tax Treaty. Held: The payments made by T are allo-
cated 65% to royalties and 35% to personal services. Held, fur-
ther, any royalty income to P is exempt from taxation in the
United States under the Swiss Tax Treaty. However, none of
his U.S. source personal service income is exempt from tax-
ation in the United States.
Thomas V. Linguanti, Jenny A. Austin, Jason D.
Dimopoulos, Robert F. Hudson, Jr., and Robert H. Moore, for
petitioner.
W. Robert Abramitis, Tracey B. Leibowitz, and Karen J.
Lapekas, for respondent.
GOEKE, Judge: Respondent determined deficiencies in peti-
tioner’s Federal income tax of $930,248 and $789,518 for tax
years 2003 and 2004, respectively, as a result of income he
purportedly received during those years through an endorse-
ment agreement with TaylorMade Golf Co. (TaylorMade).
After concessions, the issues for decision are:
(1) the extent to which payments made by TaylorMade
under the endorsement agreement are compensation for the
performance of petitioner’s personal services and the extent
to which the payments are royalties for the use of petitioner’s
image rights. We hold that the payments made by
TaylorMade are allocated 65% to royalties and 35% to per-
sonal services;
(2) whether the U.S. source royalty compensation is income
to petitioner or to Long Drive Sa`rl, LLC (Long Drive).
Because we hold that even if the U.S. source royalty com-
pensation was income to petitioner, he is not taxable in the
United States on any of this income, we need not address
this issue;
(3) whether the U.S. source royalty compensation and a
portion of the U.S. source personal service compensation are
taxable to petitioner in the United States. We hold that no
royalty compensation is taxable to petitioner in the United
States, but that all U.S. source personal service compensa-
tion is taxable to petitioner in the United States.
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(141) GARCIA v. COMMISSIONER 143
FINDINGS OF FACT
At the time the petition was filed, petitioner was a Spanish
citizen residing in Switzerland.
1. Background
Petitioner is a professional golfer, having turned profes-
sional in 1999 after a highly successful amateur golf career.
Since 1999 he has played golf around the world, on both the
Professional Golfers’ Association of America Tour (PGA Tour)
and the European Tour. From 1999 to 2004 his world golf
ranking was: 12th at the end of 1999; 16th at the end of
2000; 6th at the end of 2001; 4th at the end of 2002; 36th
at the end of 2003; and 7th at the end of 2004.
Petitioner was born in Spain, and his skill at golf and
dynamic character attributes have made him a fan favorite
and a world-famous celebrity. Nicknamed ‘‘El Nino’’ in his
early years as a professional, petitioner is notable for his
charismatic and fiery personality which differentiates him
from most others who play ‘‘the gentleman’s game’’ for a
living. Petitioner’s personality and his athletic image have
helped to make him one of the most marketable golfers in
the world, even more marketable than many of those golfers
who rank ahead of him or who have won one of golf ’s four
‘‘Major’’ tournaments. 1 Taken together, petitioner’s person-
ality, image, and golf skill make up his personal brand.
Since 2001 petitioner has been represented by IMG, a
sports entertainment media company that finds and presents
to him endorsement, appearance, and golf opportunities. IMG
also negotiates contracts on petitioner’s behalf and helps to
manage his relationships with his various sponsors. How-
ever, petitioner makes the final decisions regarding what
products he will endorse, what appearances he will make,
and what golf events he will play in. Over the years peti-
tioner has entered into a variety of endorsement agreements
for products used both on and off the golf course, including
sunglasses, video games, watches, real estate resorts, and
trading cards. Sponsors value petitioner’s endorsement
1 ‘‘The
Majors’’ are the Masters, the U.S. Open, the British Open, and
the PGA Championship. Professional golfers are largely remembered for
how they perform in these tournaments. Although he has come close, peti-
tioner has been unable to pull off a win in one of the Majors.
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144 140 UNITED STATES TAX COURT REPORTS (141)
because it allows their products to be associated with his
popular personal brand.
2. TaylorMade Endorsement Agreement and Performance
On October 8, 2002, petitioner entered into a seven-year
endorsement agreement (commencing January 1, 2003, and
ending December 31, 2009) with TaylorMade under which he
would become a TaylorMade ‘‘Global Icon’’, 2 around whom
TaylorMade would build its brand. At the time the endorse-
ment agreement was signed TaylorMade had endorsements
and/or use agreements with nearly 200 professional golfers,
but petitioner was the only one who held the Global Icon
title. Under the endorsement agreement petitioner would
exclusively wear and use golf products produced by
TaylorMade and associated brands (TaylorMade products),
and TaylorMade would receive the right to use petitioner’s
image, likeness, signature, voice, and any other symbols
associated with his identity to promote TaylorMade products.
The associated brands were Adidas (which owned
TaylorMade’s parent company) 3 and Maxfli (which was
acquired by TaylorMade at the end of 2002 and produced golf
balls). The endorsement agreement was a ‘‘head to toe’’ 4
2 The endorsement agreement defined the term ‘‘Global Icon’’ as—
a premiere golfer who consistently ranks among the world’s best players
and represents and symbolizes the finest attributes of the game and
* * * [TaylorMade]. A person who connects emotionally with golfers in
all regions of the world, and is synonymous with the core brand values
of * * * [TaylorMade], and who becomes a * * * [TaylorMade] ambas-
sador. The relationship between a Global Icon and the company is multi-
faceted. Continued investment by the company to enhance the athlete’s
performance and develop his persona will maximize both parties’ long-
term investments in the relationship.
3 While petitioner was the only golfer in the Adidas family identified as
a Global Icon, Adidas identified certain other prominent sports figures as
Global Icons, including David Beckham (soccer), Anna Kournikova (tennis),
and Steffi Graf (tennis).
4 In addition to so-called head to toe deals which also involved name and
image rights, there are two other primary types of golf endorsement con-
tracts. The most common type of endorsement contract (representing ap-
proximately 85–90% of all contracts) is a ‘‘wear and carry’’ contract, in
which a golfer is paid to use specific products in one or many tournaments
but does not give up his or her image rights. Less common than ‘‘wear and
carry’’ contracts (but more common than ‘‘head to toe’’ contracts) are con-
tracts for a golfer to use specific products and to grant a company the right
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(141) GARCIA v. COMMISSIONER 145
deal; products which petitioner was required to use included
golf clubs, golf balls, golf gloves, golf bags, shoes, clothing,
hats, and essentially any other golf product he would use in
a professional event.
At the time TaylorMade signed petitioner to the endorse-
ment agreement TaylorMade was seeking to redefine its
brand as part of a larger strategy to focus the company on
high-performance golf products. TaylorMade signed peti-
tioner to the endorsement agreement because he would add
a ‘‘cool’’, ‘‘athletic’’, and ‘‘competitive’’ element to the
TaylorMade brand which would help them ‘‘appeal to
competitive golfers, younger golfers, athletic golfers, and
golfers that wanted to have a little bit of fun.’’ As its only
Global Icon, petitioner was the centerpiece of TaylorMade’s
marketing efforts; he featured prominently on TaylorMade’s
worldwide Web site, in TaylorMade’s TV and print
advertisements, point-of-sale materials (such as racks
holding golf clubs and balls at sporting goods stores), and
other forms of advertising.
As previously discussed, under the endorsement agreement
petitioner was obligated to exclusively use certain
TaylorMade products, both on and off the golf course. 5
TaylorMade also received the right to ‘‘fully exploit the
Endorsement’’ and to use petitioner’s image rights in doing
so (without making a royalty payment each time it used peti-
tioner’s image rights). Petition had certain other obligations,
including: encouraging cross-promotion of TaylorMade prod-
ucts with his other corporate sponsors; playing in at least 20
professional golf events each year; 6 acting in a courteous and
professional manner, including not breaking the law, using
performance-enhancing drugs, or committing an act ‘‘vio-
lating public morality or decency’’; completing at least 12
combined service and personal appearance days each year; 7
using ‘‘diligent efforts’’ to be available to test TaylorMade
products; and generally supporting TaylorMade products and
to use the golfer’s image rights to promote the products used.
5 Petitioner’s caddy was also required to wear TaylorMade clothing,
shoes, and headgear during professional events.
6 Petitioner played in more than 20 events in both 2003 and 2004.
7 During such days petitioner would shoot advertisements for
TaylorMade and entertain customers and clients of TaylorMade (among
other promotional activities).
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146 140 UNITED STATES TAX COURT REPORTS (141)
promoting goodwill toward the TaylorMade brand. There
were many other minor obligations petitioner had under the
endorsement agreement, such as using reasonable efforts to
ensure his TaylorMade trademarks were visible.
Petitioner would incur various penalties for not fulfilling
his obligations under the endorsement agreement. For
example, had he failed to play in 20 professional golf events
in a given year, his base remuneration (discussed further
infra) would have been reduced pro rata. Failure to comply
with his other obligations would possibly have resulted in (at
TaylorMade’s discretion) other financial penalties or termi-
nation of the endorsement agreement. However, there would
be no penalty if TaylorMade failed to use the service or per-
sonal appearance days in any contract year.
TaylorMade also had various obligations under the
endorsement agreement, most of which involved supplying
petitioner with its products and paying him. Petitioner’s base
remuneration for years 2003 through 2005 was $7 million,
after which time his base remuneration depended on his
average world ranking at the end of the year, from a high
of $9 million for a 1st place rank to a low of $3 million
should he be ranked 21st or lower. Petitioner’s base remu-
neration for years 2004 through 2009 could also be calculated
under an alternative method (more favorable to petitioner) if
TaylorMade’s products sold well during the years 2003
through 2009. He could also earn bonuses for each Major
tournament he won while using the products which he was
required to endorse. 8
The original endorsement agreement did not specify the
percentage of the remuneration attributable to petitioner’s
personal services and the percentage attributable to his
image rights. TaylorMade had the option to renegotiate the
endorsement agreement should petitioner fall to 40th place
or lower in the world rankings at any time during the con-
tract period. If TaylorMade opted to renegotiate and the par-
ties could not come to an endorsement agreement after 30
8 Depending on the year and which TaylorMade products he did use, pe-
titioner might forfeit some or all of the bonus remuneration should he fail
to use some or all of the TaylorMade products which he was required to
use.
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(141) GARCIA v. COMMISSIONER 147
days, TaylorMade had the option to terminate the endorse-
ment agreement.
In March 2003 a dispute arose between petitioner and
TaylorMade regarding the Maxfli brand of golf balls which
petitioner was required to use. Petitioner believed the balls
were not suitable for his use and returned to using a
competitor’s brand. At the time petitioner stopped using
Maxfli balls TaylorMade had already spent several million
dollars developing an advertising campaign for the Maxfli
brand featuring petitioner. TaylorMade was forced to scuttle
the portion of this campaign featuring petitioner as a result
of his use of a competitor’s ball because the advertising was
no longer ‘‘authentic’’. The parties had difficulty resolving the
dispute but eventually agreed to amend the endorsement
agreement in certain ways.
The first amended endorsement agreement was executed
on August 21, 2003. This amended endorsement agreement
reduced petitioner’s 2003 base remuneration to $4 million
(from $7 million). It also reduced base remuneration
(including petitioner’s base pay under the alternative method
involving TaylorMade sales, which remained at $7 million)
by one-seventh for each later year in which petitioner failed
to use a Maxfli ball for the entirety of the year in all golfing
activities. The first amended endorsement agreement did not
substantially change the bonus remuneration payments other
than to add a penalty for not using a Maxfli ball should he
win a Major tournament during 2003. The first amended
endorsement agreement also added a provision regarding
division of payments for use of petitioner’s image rights and
his personal services: 15% of remuneration (both base and
bonus) would be paid to petitioner for his personal services
and 85% of remuneration would be paid to Even Par, LLC
(Even Par), which had been granted petitioner’s image rights
licensed by TaylorMade for use in the United States (dis-
cussed further infra). Finally, the first amended contract
specified that petitioner would be available for two product-
testing days each year of the contract. On such days peti-
tioner would use TaylorMade products and critique them.
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148 140 UNITED STATES TAX COURT REPORTS (141)
Several months after the first amended contract was
signed, petitioner was still not using a Maxfli ball, 9 and the
parties agreed to amend the endorsement agreement a
second time. In addition to the remuneration reductions in
the first amended endorsement agreement, the second
amended endorsement agreement: (1) reduced 2004 base
remuneration to $4.5 million; (2) reduced 2005 base remu-
neration to approximately $5.5 million ($4.75 million if peti-
tioner failed to use a Maxfli ball in all golfing activities
during that year); (3) added an alternative base remunera-
tion calculation for 2004 and 2005 should petitioner finish in
the top 10 in the world golf rankings; 10 and (4) removed the
provision of the endorsement agreement allowing
TaylorMade to renegotiate (and potentially terminate) the
endorsement agreement should petitioner finish in 40th place
or lower in the world golf rankings.
TaylorMade did not fully use petitioner’s service or per-
sonal appearance days in either 2003 or 2004. It is unclear
from the evidence and testimony exactly how many service,
personal appearance, and product-testing days TaylorMade
used each year. However, it appears that petitioner partici-
pated in a total of 10 service, personal appearance, and
product-testing days in 2003 and a total of 9 such days in
2004. The personal appearances involved playing golf with
TaylorMade clientele, attending certain company events
(such as dinners), and visiting stores. These events took
place in several countries, including Ireland, the United
States, Japan, Spain, and Portugal.
3. Companies Related to Petitioner 11
On May 22, 2003, Long Drive was incorporated in Switzer-
land and thereafter reached an endorsement agreement with
Swiss authorities regarding the manner in which it would be
9 Petitioner
continued to use a competitor’s ball into 2004 but then re-
turned to using a Maxfli ball.
10 Base remuneration under this alternative computation method would
be reduced by one-seventh should petitioner fail to use a Maxfli ball during
all golfing activities during the specific year.
11 The structure of the related companies is not pertinent to the ultimate
decisions in this Opinion. This information is provided for background pur-
poses.
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(141) GARCIA v. COMMISSIONER 149
taxed under Swiss law. Petitioner owned 99.5% of Long
Drive, and the remaining 0.5% was owned by his financial
adviser, Gonzalo Rodriguez-Fraile. Even Par was formed in
Delaware on December 12, 2002. Petitioner owned 99.8% of
Even Par, and the remaining 0.2% was owned by his father,
Victoriano Garcia.
Petitioner sold Long Drive his image rights licensed by
TaylorMade for use in the United States under the endorse-
ment agreement (U.S. licensed image rights). In return peti-
tioner received a promissory note from Long Drive payable
over seven years. Next, the U.S. licensed image rights were
assigned by Long Drive to Even Par, which in return agreed
to pay all amounts collected from TaylorMade in connection
with those rights directly to Long Drive (which would then
pay petitioner in satisfaction of the promissory note). 12
Because of the manner in which the Swiss authorities agreed
to tax the payments made to Long Drive from Even Par, the
structure created an advantageous system for petitioner; his
U.S. royalty payments would not be taxed in the United
States and would instead be taxed at lower rates under
Swiss law (as per the endorsement agreement between the
Swiss authorities and Long Drive).
As previously stated, the first amended endorsement
agreement (but not the original) contained a provision
assigning 85% of the payments to Even Par (for
TaylorMade’s use of petitioner’s image rights, both within
and outside the United States) and 15% to petitioner (for his
personal services, both within and outside the United
States). TaylorMade made each payment under the endorse-
ment agreement to IMG, which would take its expenses and
then pay 85% of the remaining amount to Even Par and 15%
to petitioner.
On each of his Forms 1040–NR, U.S. Nonresident Alien
Income Tax Return, for 2003 and 2004 petitioner reported a
portion of the personal service payments as his U.S. source
income effectively connected with the conduct of a trade or
business within the United States. He did not report any of
12 Even Par also received payments for use of petitioner’s image right
used outside the United States and paid those amounts to a Netherlands
company wholly owned by petitioner. The parties agree that remuneration
for the non-U.S. image rights is not taxable in the United States and it
need not be further addressed.
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150 140 UNITED STATES TAX COURT REPORTS (141)
the royalty payments made to Even Par. Even Par filed tax
returns as a partnership, reporting only gross royalty income
and matching royalty expenses (which it deducted from the
gross royalty income, leaving no taxable income). Even Par’s
returns stated that the royalty payments were taxable only
under Swiss law.
4. Other Information
On March 17, 2010, respondent issued a notice of defi-
ciency to petitioner for 2003 and 2004 determining defi-
ciencies of $930,248 and $789,518, respectively. Petitioner
timely filed a petition contesting the deficiencies.
OPINION
I. Burden of Proof
Generally, taxpayers bear the burden of proving, by a
preponderance of the evidence, that the determinations of the
Commissioner are incorrect. Rule 142(a); 13 Welch v.
Helvering, 290 U.S. 111, 115 (1933). Deductions are a matter
of legislative grace, and taxpayers bear the burden of proving
that they have met all requirements necessary to be entitled
to the claimed deductions. Rule 142(a); INDOPCO, Inc. v.
Commissioner, 503 U.S. 79, 84 (1992). The parties agree that
respondent bears the burden of proof on certain issues raised
in an amendment to respondent’s answer. However, because
we decide all issues on the basis of the preponderance of the
evidence, we need not address the burden of proof further.
See Knudsen v. Commissioner, 131 T.C. 185 (2008).
II. Allocation of TaylorMade Payments—Personal Services
and Royalties
A. Stipulated Issues, General Arguments, Allocation in
First Amended Endorsement agreement, and Expert
Reports
The parties have stipulated that during 2003, 69% of peti-
tioner’s personal service income was derived from sources
within the United States and the remaining 31% was derived
from sources outside the United States. The parties have also
13 All Rule references are to the Tax Court Rules of Practice and Proce-
dure.
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(141) GARCIA v. COMMISSIONER 151
stipulated that during 2004, 68% of petitioner’s personal
service income was derived from sources within the United
States and the remaining 32% was derived from sources out-
side the United States. Finally, the parties have stipulated
that any portion of the TaylorMade payments which we
determine to be royalties paid for the use of petitioner’s
image rights shall be treated as 50% U.S. source income and
50% foreign source income.
In his notice of deficiency respondent took the position that
all payments made by TaylorMade under the endorsement
agreement were compensation for petitioner’s personal serv-
ices. Respondent has since abandoned that position and
instead argues that ‘‘[t]he vast majority of the remuneration
* * * is attributable to the personal services Petitioner ren-
dered to Taylor Made.’’ Petitioner claims that the first
amended endorsement agreement’s 85%–15% allocation
between royalty and personal service payments, if anything,
understated the royalty allocation.
One of petitioner’s arguments is that we should respect the
85%–15% allocation in the first amended endorsement agree-
ment as the product of an arm’s-length negotiation between
two unrelated parties with adverse tax interests. See O’Dell
& Co. v. Commissioner, 61 T.C. 461, 468 (1974); Bemidji
Distrib. Co. v. Commissioner, T.C. Memo. 2001–260, 2001
Tax Ct. Memo LEXIS 295, at *18 (‘‘adverse tax interests
deter allocations which lack economic reality’’), aff ’d sub
nom. Langdon v. Commissioner, 59 Fed. Appx. 168 (8th Cir.
2003). Petitioner claims that he and TaylorMade had adverse
tax interests because he wished to have a higher percentage
of his pay consist of royalties (on which he would pay taxes
only in Switzerland), and TaylorMade wished to satisfy its
legal withholding requirements and not damage its reputa-
tion by using an allocation which was indefensible. However,
TaylorMade’s CEO testified that ‘‘it was irrelevant to me
whether it was 85/15 or 50/50.’’ Similarly, TaylorMade’s out-
side counsel testified that petitioner’s team took the lead on
the allocation issue and that TaylorMade did not put ‘‘a
whole lot of effort’’ into it. In addition, after reviewing the
facts of this case, we conclude that the 85%–15% allocation
does not comport with the economic reality of the endorse-
ment agreement (discussed further infra). As a result, we
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152 140 UNITED STATES TAX COURT REPORTS (141)
will not adopt the 85%–15% allocation stated in the first
amended endorsement agreement.
The parties have introduced four expert reports (one from
respondent, three from petitioner) regarding the allocation
issue. Respondent’s expert witness, Mark Roesler, found that
under the general industry standard, personal services are
more valuable than use of image rights. Considering various
factors, he concluded that a majority of the payments were
attributable to petitioner’s personal services. Two of peti-
tioner’s expert witnesses made general conclusions, based on
the facts of the case, that TaylorMade entered into the
endorsement agreement with petitioner primarily for use of
his image rights. Petitioner’s third expert witness, Rodney
Fort, examined other endorsement contracts involving peti-
tioner, determined the value of petitioner’s service days/per-
sonal appearances using both the mean ($50,561) and
median ($33,333) values of the other contracts, and deter-
mined the value of the ‘‘wear-and-carry’’ portion of the
endorsement agreement to be $150,000 per year. 14 He then
subtracted these various values from the original $7 million
base remuneration for 2003 and 2004 to determine a range
of values for the image rights. In percentage terms, Mr. Fort
allocated 89% to 96% of the 2003 payments to royalties and
83% to 92% of the 2004 payments to royalties, with the
remainder for each year allocated to personal services.
Although we appreciate their attempts to analyze a dif-
ficult valuation problem, we do not agree with Mr. Roesler’s
or Mr. Fort’s ultimate conclusions regarding allocation to per-
sonal services and royalties. We have considered the analysis
in each expert report and find those analyses to be helpful
in reaching our holding.
B. Discussion of Facts and Law
‘‘Courts have repeatedly characterized payments for the
right to use a person’s name and likeness as royalties
because the person has an ownership interest in the right.’’
Goosen v. Commissioner, 136 T.C. 547, 559 (2011) (citing
Cepeda v. Swift & Co., 415 F.2d 1205 (8th Cir. 1969), Haelan
Lab., Inc. v. Topps Chewing Gum, Inc., 202 F.2d 866 (2d Cir.
14 Mr. Fort assigned no value to petitioner’s product testing or other pro-
visions of the endorsement agreement.
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(141) GARCIA v. COMMISSIONER 153
1953), Boulez v. Commissioner, 83 T.C. 584 (1984), Kramer
v. Commissioner, 80 T.C. 768 (1983), and Uhlaender v.
Henricksen, 316 F. Supp. 1277 (D. Minn. 1970)). In Goosen
v. Commissioner, 136 T.C. at 560, we further stated that—
[t]he characterization of * * * [a taxpayer’s] endorsement fees and
bonuses depends on whether the sponsors primarily paid for * * * [the
taxpayer’s] services, for the use of * * * [the taxpayer’s] name and like-
ness, or for both. We must divine the intent of the sponsors and of * * *
[the taxpayer] from the entire record, including the terms of the specific
endorsement agreement. [Citations omitted.]
The facts of this case are well established. Under the
endorsement agreement petitioner would receive compensa-
tion for performing certain personal services and also for
allowing TaylorMade to use his image rights to sell products.
Petitioner became TaylorMade’s only Global Icon, and his
name and/or likeness were prominently featured in
TaylorMade’s advertisements around the world.
Multiple witnesses, familiar with the sports advertising
industry as a whole and with the practices of TaylorMade
specifically, have clearly and credibly testified that both the
use of petitioner’s image rights and the personal services
petitioner provided (especially his use of the TaylorMade
products while playing in professional golf events) were cru-
cial elements of petitioner’s endorsement agreement. For
example, TaylorMade’s chief marketing director, Robert Mag-
giore, testified that under the endorsement agreement
TaylorMade received petitioner’s ‘‘brand and image and
license. He then wears and plays our products, and then we
tell the story about all the equipment he has in play. So if
you pull one of those pieces out, like the house of cards kind
of falls.’’
We concur with the testimony of Mr. Maggiore and other
witnesses that both the use of petitioner’s image rights and
the personal services he provided were critical elements of
the endorsement agreement. However, it does not directly
follow that a 50–50 allocation between royalty and personal
service compensation is called for simply because both ele-
ments were critical.
We have previously decided cases involving sports stars
where allocation of payments for personal services and royal-
ties was at issue. In Kramer v. Commissioner, 80 T.C. 768,
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154 140 UNITED STATES TAX COURT REPORTS (141)
involving an endorsement agreement between a retired
tennis champion and Wilson Sporting Goods Co. during 1975
and 1976, we allocated 70% of payments to royalties and 30%
of payments to personal services. However, given the some-
what different facts of that case, combined with its age, 15 we
do not give much weight to the 70%–30% allocation reached.
In addition, we have a recent case involving a factual situa-
tion much more similar to petitioner’s which makes for a
better comparison.
Goosen v. Commissioner, 136 T.C. 547, involved a promi-
nent professional golfer, Retief Goosen, under a contract with
TaylorMade during the years 2002 and 2003 to endorse and
use certain TaylorMade products and allow TaylorMade to
use his image rights to market those products. Unlike peti-
tioner, Mr. Goosen was not a TaylorMade Global Icon and
was not signed to a ‘‘head to toe’’ contract with TaylorMade.
Rather, Mr. Goosen was identified as a TaylorMade ‘‘brand
ambassador’’ who was required only to use and endorse
TaylorMade clothing, headgear, golf clubs, golf club head
covers, and golf bags. Mr. Goosen also had to complete eight
total service and personal appearance days annually for
TaylorMade, as well as an unstated amount of product
testing. In addition, Mr. Goosen was required to play in ‘‘a
minimum of 20 PGA Tour tournaments and 11 European
Tour tournaments per year’’ or his endorsement fees would
be prorated. Id. at 553. Mr. Goosen was paid a $400,000
annual endorsement fee by TaylorMade, with bonuses avail-
able should he attain a higher world golf ranking or win
specified tournaments.
In addition to his TaylorMade endorsement agreement, Mr.
Goosen had an endorsement agreement with Acushnet Co.
(Acushnet) to use Titleist golf balls and golf gloves which
paid him $350,000 and $375,000 in the two years at issue.
Mr. Goosen also had an endorsement agreement with Izod
Club (Izod) to wear certain clothing while playing golf, 16
which paid him approximately $35,000 annually. Under
these two endorsement agreements Mr. Goosen agreed to
15 Certain evidence and testimony indicated that the sports endorsement
business is one which changes rapidly.
16 It appears Mr. Goosen was able to comply with the clothing require-
ments of his TaylorMade endorsement agreement even though he was also
required to wear certain Izod clothing.
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(141) GARCIA v. COMMISSIONER 155
complete a total of six service and personal appearance days
annually, as well as to do product testing for Acushnet.
Considering the specific facts of Goosen, we held that a 50–
50 split between royalty and personal service payments was
appropriate for Mr. Goosen’s TaylorMade endorsement agree-
ment (as well as his Acushnet and Izod endorsement agree-
ments). In doing so, we ‘‘highlighted the contrast between
TaylorMade’s on-course endorsements with’’ Mr. Goosen and
petitioner’s TaylorMade endorsement agreement. Id. at 561–
562. We noted that Mr. Goosen—
ranked either near or higher than Mr. Garcia on the PGA Tour and
World Golf Rankings during the years at issue. * * * [Mr. Goosen] had
won a Major Championship as well as several high-profile tournaments
on the European Tour. In contrast, Mr. Garcia had failed to win a Major
Championship and had few significant wins. Despite this difference in
golf performance, both * * * [Mr. Goosen] and Mr. Garcia entered into
substantially similar endorsement agreements with TaylorMade. In
addition, Mr. Garcia was paid substantially more than * * * [Mr.
Goosen] despite his lesser record. TaylorMade valued Mr. Garcia’s flash,
looks and maverick personality more than * * * [Mr. Goosen’s] cool,
‘‘Iceman’’ demeanor. We find that TaylorMade, Izod and Acushnet valued
* * * [Mr. Goosen’s] image, and they paid substantial money for the
right to use his name and likeness. [Id.]
Considering the facts and prior caselaw, we do not believe
a 50–50 split between royalty and personal service payments
is appropriate in petitioner’s case. Petitioner was
TaylorMade’s only Global Icon during the years at issue; he
was the centerpiece of TaylorMade’s marketing efforts and
the golfer around whom TaylorMade sought to build its
brand. The same cannot be said of Mr. Goosen. We find that
petitioner’s status as a TaylorMade Global Icon, especially
the extent to which TaylorMade used his image rights to sell
its products, is strong evidence that his TaylorMade endorse-
ment agreement was more heavily weighted toward image
rights than Mr. Goosen’s.
Respondent argues that petitioner was paid more than Mr.
Goosen primarily because petitioner’s TaylorMade endorse-
ment agreement required more personal services than Mr.
Goosen’s and ‘‘Petitioner’s charisma and playing style * * *
increased the value of his services.’’ We agree with
respondent that petitioner’s personal services are worth more
than Mr. Goosen’s, all else being equal. However, we are not
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156 140 UNITED STATES TAX COURT REPORTS (141)
convinced that petitioner’s TaylorMade endorsement agree-
ment required more personal services than Mr. Goosen’s,
especially when one considers the relative values of different
personal services.
Many of the personal service requirements of petitioner’s
and Mr. Goosen’s TaylorMade endorsement agreements are
similar. For example, both had a responsibility to endorse
the required products and both had clauses in their endorse-
ment agreements allowing TaylorMade to fire them should
they act in an immoral or illegal manner. There were some
notable differences, however.
Petitioner was required to complete a total of 12 service
and personal appearance days each year for TaylorMade,
while Mr. Goosen was required to complete only 8. However,
Mr. Goosen’s TaylorMade agreement was not a ‘‘head to toe’’
deal, and he was required to complete six additional service
and personal appearance days for Acushnet and Izod. It thus
appears that Mr. Goosen was required to perform more
service and personal appearance days per endorsed product
than petitioner. In addition, the testimony and other evi-
dence show that service and personal appearance days did
not constitute a large portion of the value of petitioner’s per-
sonal services; TaylorMade did not fully use the 12 service
and personal appearance days in either 2003 or 2004 (using
10 or fewer each year), 17 and TaylorMade’s CEO, Mark
King, testified that any personal appearances petitioner
made were ‘‘gravy’’ to TaylorMade. Considering these facts,
we find the fact that petitioner’s TaylorMade endorsement
agreement required him to complete more service and per-
sonal appearance days than Mr. Goosen is of nominal impor-
tance.
TaylorMade required Mr. Goosen to play in more profes-
sional golf events while using endorsed products each year
(31) than it required petitioner to play in (20). We believe
that petitioner’s use of endorsed products during his profes-
sional play was by far the most valuable personal service he
provided to TaylorMade; his pay was reduced by millions of
dollars when he chose not to play a Maxfli golf ball,
TaylorMade used shots of petitioner using its products
17 It was not established how many service days and personal appear-
ances Mr. Goosen actually completed for TaylorMade.
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(141) GARCIA v. COMMISSIONER 157
during professional events in its ads, and multiple witnesses
testified to the great importance of petitioner’s use of
TaylorMade products while playing. 18 Respondent agrees
that ‘‘Petitioner’s performance for Taylor Made on the PGA
and European golf tours’’ was of ‘‘predominant importance to
the parties.’’ Given the facts regarding the high value of peti-
tioner’s play while using TaylorMade products, we find the
significantly lower number of professional events TaylorMade
required petitioner to play in compared to Mr. Goosen is
strong evidence that his TaylorMade endorsement agreement
was less proportionately weighted toward personal services
than Mr. Goosen’s.
Petitioner was required to complete two product-testing
days for TaylorMade each year, but it is unclear how many
such days Mr. Goosen was required to complete for the lesser
number of TaylorMade products which he endorsed. In addi-
tion, Mr. King gave testimony indicating that petitioner’s
product-testing days (even if they did have some value to
TaylorMade) were of little importance in comparison with
other personal services. 19 As a result, we find any differences
in required product-testing days between petitioner’s and Mr.
Goosen’s TaylorMade endorsement agreements were not of
great significance.
Respondent has cited other personal services not required
of Mr. Goosen which were required of petitioner as a
TaylorMade Global Icon. Such personal services include
‘‘embod[ying] what * * * [TaylorMade] is trying to portray to
the marketplace and to the consumers’’, playing golf ‘‘with
style and charisma’’, and representing TaylorMade’s values
even when petitioner is ‘‘walking down the street’’. However,
these are amorphous concepts, and we find they are of neg-
ligible importance compared to the other personal services
required under the endorsement agreement. We also find cer-
tain other requirements of petitioner (such as the require-
ment that he encourage cross-promotion of TaylorMade with
18 In addition, as discussed supra and infra, other testimony and other
evidence reflected that TaylorMade did not place a great deal of value on
petitioner’s service and personal appearance days or on his product testing.
19 Specifically, Mr. King testified that TaylorMade ‘‘probably [did] not’’
listen to petitioner’s product recommendations and that the fact petitioner
tested TaylorMade products ‘‘certainly * * * [wasn’t] a primary message’’
of TaylorMade’s advertising, if it was mentioned at all.
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158 140 UNITED STATES TAX COURT REPORTS (141)
other brands he endorsed) to be similarly negligible in
comparison with the other personal service requirements.
C. Conclusion Regarding the Allocation Issue
We have previously recognized that precision in making an
allocation between royalty and personal service payments ‘‘is
unattainable, [but that] we must do the best we can with the
evidence presented.’’ Goosen v. Commissioner, 136 T.C. at
562 (citing Kramer v. Commissioner, 80 T.C. 768, DeMink v.
United States, 448 F.2d 867, 870 (9th Cir. 1971), Commis-
sioner v. Ferrer, 304 F.2d 125, 135 (2d Cir. 1962), rev’g 35
T.C. 617 (1961), and Ditmars v. Commissioner, 302 F.2d 481,
488 (2d Cir. 1962), rev’g T.C. Memo. 1961–105). Considering
all the surrounding facts and circumstances, we find that
65% of the endorsement fees petitioner received represented
royalty compensation and 35% represented personal service
compensation.
III. Effect of Swiss Tax Treaty
The parties agree that petitioner is a resident of Switzer-
land and that the Convention for the Avoidance of Double
Taxation With Respect to Taxes on Income, U.S.-Switz., Oct.
2, 1996, Tax Treaties (CCH) para. 9101.001 (Swiss Tax
Treaty), applies to him. However, the parties disagree on
what portion of petitioner’s TaylorMade endorsement income
is taxable to him in the United States under that treaty.
Petitioner argues that only the personal service income
attributable to his wearing TaylorMade products while
playing golf is taxable in the United States and that the roy-
alty income as well as the personal service income attrib-
utable to his other personal services is taxable only in
Switzerland. Respondent contends that all income at issue is
taxable in the United States.
Petitioner also notes that respondent may not have prop-
erly raised the issue of ‘‘How the U.S.-Swiss Treaty Applies
to Income Garcia Earns From TaylorMade.’’ However, we
find respondent adequately raised the issue regarding
application of Article 17, Artistes and Sportsmen, of the
Swiss Tax Treaty to petitioner’s royalty payments in his
second amended answer when he stated that ‘‘Any U.S.-
source royalties paid under the * * * [endorsement agree-
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(141) GARCIA v. COMMISSIONER 159
ment] were paid for Petitioner’s personal activities in the
U.S. as a sportsman within the meaning of Article 17(1) of
the Swiss Treaty.’’
A. Royalty Income
Respondent argues that the compensation for use of peti-
tioner’s U.S. image rights is income to petitioner rather than
to Long Drive because petitioner’s endorsement agreement
with Long Drive under which petitioner sold Long Drive his
U.S. image rights licensed by TaylorMade was an impermis-
sible assignment of income. Respondent also argues that
petitioner’s endorsement agreement with Long Drive lacks
economic substance. Respondent claims that we should deem
the image right payments to have been made to petitioner
directly and then further argues that that income is taxable
in the United States under the Swiss Tax Treaty. Because
we find that even if the image right payments were income
to petitioner (rather than Long Drive) they are not taxable
in the United States under the Swiss Tax Treaty, we need
not address respondent’s arguments regarding assignment of
income or economic substance.
Article 12(1) of the Swiss Tax Treaty, Tax Treaties (CCH)
para. 9101.12, at 185,019, provides that ‘‘Royalties derived
and beneficially owned by a resident of a Contracting State
shall be taxable only in that State.’’ Article 12(2) provides
that—
[t]he term ‘‘royalties’’ as used in this Convention means payments of any
kind received as a consideration for the use of, or the right to use, any
copyright of literary, artistic, or scientific work (but not including motion
pictures, or films, tapes or other means of reproduction for use in radio
or television broadcasting), any patent, trademark, design or model,
plan, secret formula or process, or other like right or property, or for
information concerning industrial, commercial, or scientific experience.
The term ‘‘royalties’’ also includes gains derived from the alienation of
any such right or property which are contingent on the productivity, use,
or disposition thereof. [Id.; emphasis supplied.]
Petitioner argues that the payments he received from
TaylorMade for use of his image rights are royalties as
defined by article 12(2) and are therefore taxable only in
Switzerland under article 12(1).
Respondent disagrees with petitioner that article 12 gov-
erns the taxability of the image right payments. Instead,
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160 140 UNITED STATES TAX COURT REPORTS (141)
respondent contends that those payments are governed by
Article 17, Artistes and Sportsmen. Article 17(1) provides
that ‘‘income derived by a resident of a Contracting State as
an entertainer, such as a theatre, motion picture, radio, or
television artiste, or a musician, or as a sportsman, from his
personal activities as such exercised in the other Contracting
State may be taxed in that other State.’’
In support of his argument, respondent cites the Depart-
ment of the Treasury Technical Explanation of the Conven-
tion Between the United States of America and the Swiss
Confederation for the Avoidance of Double Taxation With
Respect to Taxes on Income (Oct. 2, 1996), Tax Treaties
(CCH) para. 9145 (Treasury Technical Explanation). Peti-
tioner agrees with respondent that the Treasury Technical
Explanation is useful in interpreting the Swiss Tax Treaty,
and we concur. See Kolovrat v. Oregon, 366 U.S. 187, 194
(1961) (‘‘While courts interpret treaties for themselves, the
meaning given them by the departments of government
particularly charged with their negotiation and enforcement
is given great weight.’’); see also N.W. Life Assur. Co. of Can.
v. Commissioner, 107 T.C. 363, 385 (1996) (finding the
Treasury Technical Explanation to another tax treaty to be
‘‘persuasive’’). Regarding article 17, the Treasury Technical
Explanation, Tax Treaties (CCH) para. 9145, at 185,242,
states that ‘‘In determining whether income falls under
Article 17 or another article, the controlling factor will be
whether the income in question is predominantly attributable
to the performance itself or other activities or property
rights.’’ (Emphasis supplied.) It further states that—
[a]rticle 17 applies to all income connected with a performance by an
entertainer, such as appearance fees, award or prize money, and a share
of the gate receipts. Income derived from a Contracting State by a per-
former who is a resident of the other Contracting State from other than
actual performance, such as royalties from record sales and payments for
product endorsements, is not covered by this Article, but by other arti-
cles of the Convention, as appropriate, such as Article 12 (Royalties)
* * *. For example, if an entertainer receives royalty income from the
sale of live recordings, the royalty income would be exempt from source
country tax under Article 12, even if the performance was conducted in
the source country, although he could be taxed in the source country with
respect to income from the performance itself under * * * [Article 17].
[Id.; emphasis supplied.]
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(141) GARCIA v. COMMISSIONER 161
The parties agree that the Treasury Technical Explanation
does not define the term ‘‘predominantly attributable’’. Both
parties have made arguments regarding how we should
interpret that phrase, but we need not delve into them
because we find the example involving a sale of live
recordings to be highly illustrative of the intent of the Swiss
Tax Treaty. Even given the relationship between a live
performance and a recording of that performance, the
Treasury Technical Explanation states that proceeds from
the sale of such a recording may be royalties not taxable in
the source country under article 12. In a similar vein, we
believe that even though petitioner’s golf play and personal
services performed in the United States have some connec-
tion to his U.S. image rights, 20 income from the sale of such
image rights is not predominantly attributable to his
performance in the United States. Rather, the image rights
are a separate intangible that generated royalties (as defined
by article 12(2)) for petitioner when TaylorMade paid him for
their use.
We thus find that the income petitioner received from
TaylorMade for use of his U.S. image rights was royalty
income not taxable in the United States under article 12(1).
B. Personal Service Income for Services Other Than
Wearing TaylorMade Products While Golfing
In the first amended endorsement agreement, petitioner
and TaylorMade allocated 85% of payments to royalties and
15% to personal services. On his 2003 and 2004 tax returns
petitioner included 100% of his U.S. source personal service
income under the endorsement agreement in his U.S. taxable
income. Petitioner did not raise in the petition the issue that
he may have included too much of his personal service
income in his U.S. taxable income.
Neither party raised any argument regarding the Swiss
Tax Treaty until nearly a year and a half after the petition
was filed. Respondent first raised issues regarding the Swiss
Tax Treaty, but contended only that (1) petitioner was not a
Swiss resident to whom the treaty applied, and (2) if the
20 Similar to the Treasury Technical Explanation example, images of pe-
titioner playing in professional golf events or posing/acting in TaylorMade
shoots were used in TaylorMade advertisements.
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162 140 UNITED STATES TAX COURT REPORTS (141)
treaty did apply to petitioner, then amounts paid to peti-
tioner for use of his U.S. image rights were taxable in the
United States under article 17 of the treaty. Respondent
later conceded that his first argument was incorrect and that
petitioner was a Swiss resident to whom the treaty applied.
Neither before nor during trial did either party raise the
possibility that petitioner’s personal service income for serv-
ices other than wearing TaylorMade products while golfing
might not be taxable in the United States under the Swiss
Tax Treaty. In fact, petitioner’s pretrial memorandum con-
cedes that ‘‘Garcia was subject to tax in the U.S. on his U.S.-
source personal service income under either U.S. federal
income tax law or under Article 17 of the U.S.-Swiss Tax
Treaty.’’ 21 Petitioner’s counsel also stated at trial that peti-
tioner would ‘‘pay the same amount of U.S. tax on all of his
personal services income’’ whether or not respondent’s
assignment of income and economic substance arguments
regarding Long Drive prevailed. He further stated that peti-
tioner ‘‘will pay and does pay the full amount of U.S. tax on
any tournament winnings or prize money or other service
income he receives from the United States’’ and that ‘‘Even
if the Court were to find that more of the income should be
allocated to personal services * * * [petitioner] will pay the
full U.S. tax on that’’ income.
In his posttrial opening brief petitioner for the first time
raised the issue that a portion of his U.S. source personal
service income might not be taxable in the United States.
Respondent did not address the issue in his posttrial opening
brief but noted in his reply brief that petitioner had pre-
viously conceded that all U.S. source personal service income
was taxable in the United States.
We agree with respondent that petitioner previously con-
ceded the issue. By raising the issue when and in the
manner he did, petitioner prejudiced respondent in that
respondent was unable to introduce testimony and/or other
evidence that could have supported his position that all U.S.
source personal service income was taxable in the United
21 The pretrial memorandum further states that ‘‘because Garcia was
subject to and paid U.S. taxes on his U.S.-source personal service income
(from TaylorMade and otherwise), his U.S.-source personal service income
was exempt from Swiss income tax pursuant to Swiss domestic and treaty
law.’’
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(141) GARCIA v. COMMISSIONER 163
States. Respondent was also unable to introduce testimony
and/or other evidence regarding the allocation of U.S. source
personal service income attributable to petitioner’s wearing
TaylorMade products while playing golf (which petitioner
concedes is taxable in the United States) and other U.S.
source personal service income (which petitioner now claims
is not taxable in the United States). We find that petitioner
raised the issue too late, and we will not consider it. See
DiLeo v. Commissioner, 96 T.C. 858, 891 (1991), aff ’d, 959
F.2d 16 (2d Cir. 1992). As a result, petitioner is liable for
U.S. tax on all U.S. source personal service income he
received.
IV. Conclusion
We hold that the compensation paid by TaylorMade under
the endorsement agreement is allocated 65% to royalties and
35% to personal services. We further hold that none of the
royalty compensation is taxable to petitioner in the United
States but that all of the U.S. source personal service com-
pensation is taxable to petitioner in the United States.
In reaching our holdings herein, we have considered all
arguments made, and, to the extent not mentioned above, we
conclude they are moot, irrelevant, or without merit.
To reflect the foregoing,
Decision will be entered under Rule 155.
f
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