## Facts

- Sergio Garcia, a professional golfer and Swiss tax resident, was a nonresident alien for U.S. tax purposes in 2003–2004.
- Garcia entered an endorsement agreement with TaylorMade Golf Co. granting worldwide rights to use his name, image, and likeness and requiring personal services (exclusive product use, advertising work, and appearances).
- The contract allocated compensation 85% to “royalties” for image-rights use and 15% to “personal services.”
- Garcia routed payments through a Delaware LLC (EP, LLC) and a Swiss LLC (LD), reporting U.S.-source personal-service income as taxable while treating royalty income as exempt from U.S. tax under the U.S.–Switzerland income tax treaty.
- The IRS issued deficiency notices for 2003 and 2004, asserting the allocation overstated royalties, the entity structure should be disregarded, and U.S.-source amounts were taxable.

## Issues

1. How should TaylorMade’s endorsement payments be allocated between royalty income for image rights and compensation for personal services?
2. Whether royalty income attributable to image-rights use is exempt from U.S. tax under the U.S.–Switzerland income tax treaty.
3. Whether any U.S.-source personal-service income under the endorsement agreement is exempt from U.S. tax under the treaty.
4. Whether the intermediate entities should be disregarded in determining the U.S. tax treatment of the payments.

## Decision

- The court rejected both the contractual 85/15 split and the IRS’s proposed allocation and allocated the payments 65% to royalties and 35% to personal services.
- Royalty income (as allocated) was exempt from U.S. taxation under the U.S.–Switzerland income tax treaty.
- No portion of Garcia’s U.S.-source personal-service income was exempt from U.S. taxation under the treaty.
- Because the royalties were treaty-exempt even if paid directly to Garcia, the court found it unnecessary to resolve the IRS’s entity-disregard position to decide the treaty outcome for royalties.

## Legal Principles

- Payments under a mixed endorsement agreement must be allocated between royalties for intangible rights and compensation for services based on the agreement’s terms and economic reality; contractual labels and percentages are not controlling.
- Consideration for the use of name, image, and likeness can qualify as “royalties” for treaty purposes where it is paid for exploitation of intangible rights.
- Under the U.S.–Switzerland income tax treaty, treaty-resident taxpayers may receive exemption from U.S. tax on qualifying royalty income.
- Treaty protection for royalties does not extend to compensation for personal services physically performed in the United States; absent an applicable treaty exception, U.S.-source service income remains taxable under U.S. law.

## Conclusion

The Tax Court treated the endorsement contract as a dual-purpose arrangement, allocated 65% of payments to treaty-exempt royalties for image-rights use and 35% to personal-service compensation, and held that Garcia’s U.S.-source service income remained fully taxable in the United States despite his Swiss residence and treaty status.


Garcia v. Commissioner, 140 T.C. 141 (2013)