Spanish golfer Sergio Garcia recently litigated a $1.7 million tax case arising out of a major endorsement contract with TaylorMade, a golf equipment manufacturer.
At issue in the case is how Garcia should characterize the income that he received from the endorsement deal. The income could be classified as personal services, royalties, or a combination of both. (As a Swiss resident, Garcia would only have to pay U.S. taxes on royalty income.)
In a note from this spring’s Tax Lawyer, Georgetown Law student Jay Tymkovich argues that Garcia’s case “exemplifies the convoluted rules surrounding the allocation of income by nonresident alien athletes.”
Tymkovich calls for a standard income allocation for nonresident alien athletes after reviewing Garcia’s tax litigation and a nearly identical case involving a TaylorMade contract with South African golfer Retief Goosen.
According to Tymkovich:
“Taxpayers must approximate their allocations based on criteria that are difficult–if not impossible–to weigh with accuracy. If they make an allocation that the Service disagrees with, they must either capitulate or litigate the issue. The current system is unpredictable, subjective, and provides little guidance to taxpayers.
For endorsement agreements similar to Garcia’s and Goosen’s that require a combination of personal services and the use of image rights, a safe harbor allowing for a default 50/50 split would be appropriate. This would simplify the rules and enhance taxpayer certainty. As long as the standard remains in its current amorphous state, cases like Garcia and Goosen will proliferate until some sort of clarity emerges.”
More: “Out of Bounds: How Garcia v. Commissioner Illustrates the Impossibility of Applying the Rules of Taxation Affecting Nonresident Alien Athletes,” Jay Tymkovich, Tax Lawyer, Vol. 70, No. 3 (Spring 2017)
Principal case: Garcia v. Commissioner, 140 T.C. 141 (PDF)
Photo: Lukáš Opekar