Sergio Garcia
v. Commissioner, 140 T.C. No. 6, Code Sec(s) 864; 871; 894.
SERGIO GARCIA,
Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent .Case Information:
Code Sec(s): 864; 871; 894 Docket: Docket No. 13649-10. Date Issued: 03/14/2013
HEADNOTE XX.
Reference(s): Code Sec. 864; Code Sec. 871; Code Sec. 894 Syllabus Official Tax
Court Syllabus
. GOEKE,
Judge: Respondent determined deficiencies in petitioner'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 endorsement
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 personal services;
(2) whether
the U.S. source royalty compensation is income to petitioner or to Long Drive
Sarl, LLC (Long Drive).
Because we
hold that even if the U.S. source royalty compensation 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 compensation is taxable to petitioner
in the United States.
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 professional 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 personality,
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. However, 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 petitioner 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 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 endorsement 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 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] ambassador. 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.
(continued...) the end of 2002 and produced golf balls). The
endorsement agreement was a “head to toe” 4 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 endorsement
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 petitioner 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 petitioner's image rights). Petition had certain other
obligations, including: encouraging cross-promotion of TaylorMade products 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
“violating 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 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
furtherinfra) 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 termination of the endorsement agreement. However,
there would be no penalty if TaylorMade failed to use the service or personal
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 remuneration 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 contract period. If
TaylorMade opted to renegotiate and the parties could not come to an
endorsement agreement after 30 days, TaylorMade had the option to terminate the
endorsement 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 (discussed 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 petitioner would
use TaylorMade products and critique them. 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 remuneration to
approximately $5.5 million ($4.75 million if petitioner failed to use a Maxfli
ball in all golfing activities during that year); (3) added an alternative base
remuneration 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 personal 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 participated 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 Switzerland and thereafter reached an endorsement agreement
with Swiss authorities regarding the manner in which it would be 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 endorsement agreement (U.S. licensed image rights). In return
petitioner 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 endorsement 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 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 deficiency
to petitioner for 2003 and 2004 determining deficiencies 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 [12 AFTR 1456] (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 [69 AFTR 2d 92-694] (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
petitioner'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 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 outside 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 services. Respondent has since abandoned that position and instead
argues that “The vast majority of the remuneration *** is attributable to the
personal services Petitioner rendered 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 agreement 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 [TC 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 [91 AFTR 2d
2003-912] (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
reputation 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 outside 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 endorsement agreement (discussed furtherinfra). As a result, we 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 petitioner'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 petitioner, determined the value of petitioner's service
days/personal appearances using both the mean ($50,561) and median ($33,333)
values of the other contracts, and determined 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 difficult valuation problem, we do not agree with Mr.
Roesler's or Mr. Fort's ultimate conclusions regarding allocation to personal
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. 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— The 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 likeness, 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 compensation 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 crucial elements of petitioner's endorsement agreement. For
example, TaylorMade's chief marketing director, Robert Maggiore, 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 elements were critical. We have previously decided cases
involving sports stars where allocation of payments for personal services and
royalties was at issue. In Kramer v. Commissioner, 80 T.C. 768, 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 somewhat 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
situation much more similar to petitioner's which makes for a better
comparison. Goosen v. Commissioner, 136 T.C. 547, involved a prominent
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 petitioner,
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 available 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 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 agreement (as well as his Acushnet and Izod endorsement
agreements). 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
Taylor Made used his image rights to sell its products, is strong evidence that
his TaylorMade endorsement 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 endorsement 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 convinced that petitioner's
TaylorMade endorsement agreement 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 endorsement 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 evidence show
that service and personal appearance days did not constitute a large portion of
the value of petitioner's personal 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 personal appearance days than Mr.
Goosen is of nominal importance. TaylorMade required Mr. Goosen to play in more
professional 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 professional 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 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 petitioner'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 addition, 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 negligible importance compared to the other personal
services required under the endorsement agreement. We also find that certain
other requirements of petitioner (such as the requirement that he encourage cross-promotion
of TaylorMade with 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 [28 AFTR
2d 71-5756] (9th Cir. 1971), Commissioner v. Ferrer, 304 F.2d 125, 135 [9 AFTR
2d 1651] (2d Cir. 1962), rev'g 35 T.C. 617 (1961), and Ditmars v. Commissioner,
302 F.2d 481, 488 [9 AFTR 2d 1269] (2d Cir. 1962), rev'g T.C. Memo. 1961-105 [¶61,105
PH Memo TC]). 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 Switzerland
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 royalty income as well as the
personal service income attributable 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 properly
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
agreement] 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 petitioner'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 impermissible
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— The
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 governs the taxability of the image right
payments. Instead, 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 Department of the Treasury Technical Explanation of the Convention 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). Petitioner 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
ispredominantly attributable to the performance itself or other activities or
property rights.” (Emphasis supplied.) It further states that— Article 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 performer 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 articles 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.] . 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 has some connection 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 treaty did
apply to petitioner, then amounts paid to petitioner 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 or
during trial did either party raise the possibility that petitioner's personal
service income for services 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 concedes 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 petitioner 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 petitioner “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 previously conceded that all U.S.
source personal service income was taxable in the United States. We agree with
respondent that petitioner previously conceded 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 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 [69 AFTR 2d 92-998] (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 compensation 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. 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, petitioner has been
unable to pull off a win in one of the Majors. 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]
ambassador. 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 contracts. The
most common type of endorsement contract (representing approximately 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 contracts for a golfer to use specific products
and to grant a company the right 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). 8 Depending on the year and which
TaylorMade products he did use, petitioner 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. 9 Petitioner continued to use a
competitor's ball into 2004 but then returned 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 purposes. 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. 13
All Rule references are to the Tax Court Rules of Practice and
Procedure. 14 Mr. Fort assigned no value to petitioner's product
testing or other provisions of the endorsement agreement. 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 requirements of his TaylorMade
endorsement agreement even though he was also required to wear certain Izod
clothing. 17 It was not established how many service days and
personal appearances Mr. Goosen actually completed for TaylorMade. 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. 20
Similar to the Treasury Technical Explanation example, images of
petitioner playing in professional golf events or posing/acting in TaylorMade
shoots were used in TaylorMade advertisements. 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 treatwww.irstaxattorney.com (212) 588-1113 ab@irstaxattorney.com
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