May 7, 2013
As a follow-up to our posts on the Goosen case regarding sourcing of a golfer’s income from sponsors (see here), we provide this update on the case involving golfer Sergio Garcia. While they were not technically related cases, the significant overlap in issues and facts—not to mention witness testimony—meant that the outcome in Goosen partially determined the outcome in Garcia.
Both cases involved the character of the golfers’ endorsement income. Coincidentally, the golfers each had an endorsement contract with the same brand—TaylorMade. The golfers both argued that the lion’s share of the endorsement income was royalty income (i.e., paid for the use of the golfer’s name and likeness) and not personal services income (which is typically subject to a higher tax rate than royalties because of tax treaties).
Garcia had sold the rights to his image to a Swiss corporation (of which Garcia owned 99.5%) that in turn assigned the rights to a Delaware LLC (of which Garcia owned 99.8%). Garcia’s amended endorsement agreement assigned 85% of the contract payments to the LLC as payments for the use of his image rights. So Garcia argued that at least 85% of the endorsement payments were royalty income by virtue of the terms of the endorsement agreement. The Service originally argued that none of endorsement payments were royalty income and that all of the payments were for personal services. But the Service later tempered its position and argued that the “vast majority” of payments were for personal services.
Thanks to some testimony by the TaylorMade CEO that undermined the allocation in the agreement, the Tax Court declined to follow the 85/15 allocation in the amended endorsement agreement. But the Tax Court also rejected the Service’s argument that the “vast majority” of payments were for personal services. And the Tax Court determined that a 50/50 split was unwarranted.
In rejecting the 50/50 split, the Court tied the outcome in Garcia directly to the outcome in Goosen. As we wrote before, the Court opted for a 50/50 split between royalties and personal services for Goosen’s endorsement income. But expert testimony in Goosen contrasted Goosen’s endorsement income with Garcia’s. The expert in Goosen (Jim Baugh, formerly of Wilson Sporting Goods) had testified that, while Goosen had better on-course results than Garcia, Garcia had a bigger endorsement deal because of Garcia’s “flash, looks and maverick personality.” Consequently, the Court found that Garcia’s endorsement agreement “was more heavily weighted toward image rights than Mr. Goosen’s” and decided on a royalty/personal services split of 65/35.
The Tax Court also rejected the Service’s argument that Garcia’s royalty income was taxable in the U.S. under the U.S.-Swiss treaty. Perhaps the IRS will appeal that legal issue. Will Garcia appeal? The Tax Court’s decision is a victory for Garcia relative to the outcome in Goosen. On the other hand, if Garcia’s brand hinges on his “maverick personality,” then perhaps the “maverick” thing to do is to roll the dice with an appeal. Decision has not yet been entered under Rule 155, so we will wait to see whether there is an appeal.