… Is Good for Garcia?

By Kimberly S. Blanchard, Esq.

Weil, Gotshal & Manges LLP, New York, NY


Back in 2011, I wrote a commentary on the case of Goosen v. Comr.,1 entitled "What's Good for the Goosen …"2 The title's inspiration was based on whether the IRS would have made the same arguments it did in that case where the taxpayer was a U.S. resident individual. I also wondered whether the IRS would be pleased if a foreign tax authority were to tax a U.S. golfer in the same way the IRS sought to tax Mr. Goosen. Finally, I wondered whether the arguments made in Goosen would boomerang in a similar case where the nonresident individual was able to claim benefits under a U.S. tax treaty, as Mr. Goosen had been unable to do.

That last question has been answered, in part, in Garcia v. Comr.,3 a new Tax Court decision again involving a golfer. Mr. Garcia, a Spanish national, was ruled eligible to claim benefits under the tax treaty between the United States and Switzerland. Unfortunately, the treaty analysis was incomplete, because Mr. Garcia raised the treaty argument involving personal services income too late in the proceedings. But taken together with the IRS's legal memorandum AM 2009-005,4 which set forth the IRS's views on the application of tax treaties in these circumstances, a clouded picture is beginning to develop on the question of how U.S. tax applies to a nonresident athlete who earns income from endorsement contracts. 

The salient facts in the two cases are substantially similar. Both men were nonresident professional golfers who had entered into endorsement contracts with a sponsor engaged in the business of selling golf equipment. As is true for any professional golfer, both men played many tournaments while physically present in the United States, and one assumes that the sponsor recognized value in its U.S. markets as well as those outside the United States. And both entered into contracts that purported to allocate the income they earned under the endorsement contracts between "royalties" and "personal services income."

The allocation of any amount to personal services is puzzling. Product manufacturers are willing to pay athletes and other celebrities not for playing a sport or singing a song or whatever it is that they do for a living, but rather for the association of the celebrity's name, likeness, image, and fame with their product.  To maximize the value obtained, sponsors usually require the player to wear or use their products while playing; in the golf world, this is known as an "on-course endorsement contract." Sponsors also sometimes pay for "off-course" endorsements such as print ads, TV spots, or special appearances at events. The point of all this activity is to connect the athlete's image with the sponsor's product. Bonuses are often paid for winning big tournaments, as a big winner's name and likeness is more valuable to a sponsor than a loser's. Yet despite the absence of any golfing services rendered by the player to the sponsor - he was in fact only renting his image - the Tax Court had stretched (over the IRS's objection) in a domestic case, Kramer v. Comr.,5 to find that some portion of an athlete's endorsement income was for personal services, perhaps because the stakes in that case were very high. In doing so, the court offered no reasoning whatsoever - it merely stated that "an allocation was obviously called for." And this arbitrary, unsatisfying allocation approach seems to be what we're all stuck with today.

The basic thesis of my earlier commentary was that the Tax Court, in characterizing some portion of the athlete's income as compensation for personal services, failed to apply common law or common sense. Sponsors do not pay athletes or celebrities for their services - they do not need a runway model to show off their stuff. They pay celebrities for their image and the personal activities necessary to link that image to their product. It is the root consideration underlying the contract that should be controlling.  In a long line of cases involving performing artists, it has uniformly been held that where both services (such as making a music recording) and image (such as the musician's face on the album cover) are contracted for, all of the income is characterized by reference to the main or primary purpose of the contract - in these cases, as personal services income for making a record.6 The same should be true in reverse - where personal services (really personal activities) are de minimis as compared with the value of the image being hired, all of the income should be treated as allocable to the image rights.  Indeed, the Tax Court gave lip service to this line of cases in Goosen, but proceeded to reject the primary purpose test, opting arbitrarily for an allocation as it had done in Kramer

Because the Tax Court continues to perpetuate the original sin of Kramer, we are faced with questions of how to source and tax both royalty income and personal services income with and without the benefit of an applicable tax treaty.


If a nonresident alien receives a royalty that is not effectively connected with the conduct by him of a U.S. trade or business (is not ECI), it is sourced within and without the United States based on where the underlying intangible property is used.7 To the extent sourced to the United States, a non-ECI royalty is subject to a 30% gross-basis withholding and final tax, unless otherwise provided by treaty. Most U.S. tax treaties exempt royalty income from U.S. tax. The Garcia court held that Mr. Garcia's royalty income was exempt under the treaty with Switzerland.

In Goosen, the IRS argued that any royalties Mr. Goosen was deemed to earn should have been taxable as ECI, which is somewhat surprising given that the royalty there was already subject to a 30% gross-basis withholding tax, and one would expect the IRS to collect fewer taxes on the ECI net-basis tax model. The Tax Court held that royalties attributable to off-course endorsements were not ECI, but that royalties attributable to on-course endorsements were ECI. The court seemed to believe that because on-course endorsements involved activities in the nature of services, that somehow this translated into the activities being a "material factor" in earning the associated royalties.8

The IRS did not make the same argument in Garcia. Because Mr. Garcia was entitled to rely on a treaty, he would have been expected to argue that he had no U.S. permanent establishment to which such profits could be attributed. The IRS appears to assume that an athlete does not have a U.S. permanent establishment merely by playing golf in U.S. tournaments.9 The IRS instead argued in Garcia and in AM 2009-005 that, even absent a permanent establishment, a golfer's royalty income can be taxed in the United States under the "artistes and athletes" provision of most U.S. treaties (because it appears as Article 16 of the U.S. Model Treaty, this commentary will refer to the provision as the "Article 16" provision). The Tax Court rightly rejected this argument. Article 16 was clearly intended to allow the source state to tax wages and other compensation earned by artists and athletes who are itinerant and by definition lack a permanent establishment; Article 16 is the analog of Article 7 covering business profits but requiring a permanent establishment.  Nothing in Article 16 suggests that it was intended to cover income, such as endorsement fees, unrelated to the business of actually playing a sport.

Personal Services

Income from the performance of personal services is sourced based on where the services are performed.10 Normally, this is just a day-counting exercise.11 Proposed regulations would provide different "event-based" rules for artists and athletes, mirroring Article 16 of the U.S. Model Treaty, but such regulations are not yet in effect.12 As noted above, these rules, like Article 16, are designed for athletes who actually get paid to play sports; they do not and indeed should not address endorsement income.

Absent a treaty, U.S.-source personal services income is taxable as ECI in the United States. In Goosen, the parties agreed as to what portion of Mr. Goosen's personal services income was ECI. In Garcia, because a treaty applied, Mr. Garcia could not be taxed on his ECI from personal services absent a U.S. permanent establishment, unless Article 16 applied. The IRS did in fact make the Article 16 argument, but the court did not address it on the merits. Because the taxpayer simply failed to recognize the argument for exemption, he raised the point too late. The Tax Court had no alternative but to hold for the government.

This is unfortunate. Article 16 should not apply to endorsement income, even in the case where such income is characterized as personal services income. Article 16, like the proposed regulations mentioned above, is directed to the taxation of income from sports and entertainment, not to endorsements. It presumes that the player or entertainer attends sporting or concert events both within and without the United States, and attempts to allocate his or her professional income between the United States and other countries.  In these cases, the sponsors under the endorsement contracts were not league managers or concert organizers paying an athlete or entertainer to play a sporting event or concert. Here again, the fundamental error of characterizing what is only royalty income, having nothing to do with the actual playing of a sport, as personal services income led the IRS to misapprehend the issues.


The Tax Court's approach to these cases is deficient.  Its allocations between royalty and personal services income are, as the court itself admitted, wholly arbitrary, even clownish.13 These decisions reveal a court at sea without a rudder - or perhaps stuck in a deep bunker with only a putter.

A golfer is not like you or me. He plays for money, and he plays for himself; no employer or recipient of independent personal services is involved. It is telling that in neither of these cases did the court ever stop to consider whether the golfer in fact rendered any personal services to the sponsors at all. The matter was simply assumed away, even in the face of clear testimony that the sponsor did not ascribe any real value to the player's personal appearances. In Garcia, the court actually admitted "expert" evidence on the value accorded to personal services under typical endorsement contracts, as if non-tax experts had any standing at all to form a view on what "personal services" means under the tax law. The court went on to state simply that "[u]nder the endorsement agreement petitioner would receive compensation for performing certain personal services." In AM 2009-005, the IRS begs the question by stating, "Clearly, the terms of the contract require a player to perform services." Would the result have been more thoughtful if the word "services" were replaced with the word "activities"?

The next time a case like these arises, including on appeal, the court should switch clubs and call for a sand wedge.  The common law supports an easier, less arbitrary approach that would ask what the main purpose of an endorsement contract is. Because the answer is evident - it is to buy a player's image - all income under the contract should be characterized as a royalty. 

Ironically, even the IRS seems to agree that allocation is unwarranted under the case law. But the IRS instead insists that 100% of the income under an endorsement contract is personal services income. Perhaps the funniest line in Garcia is where the IRS asserts that Mr. Garcia's "charisma and playing style … increased the value of his personal services"! (Emphasis added.) It should be obvious that it was his charisma, and not the "personal services," that the sponsor was buying.  As even the Kramer court recognized, the athlete's activities under an endorsement contract are nothing more or less than "efforts to maintain or even enhance the goodwill associated with his name."

This commentary also will appear in the July 2013 issue of the  Tax Management International Journal.  For more information, in the Tax Management Portfolios, see Blessing and Lubkin, 905 T.M., Source of Income Rules, Bissell, 907 T.M., U.S. Income Taxation of Nonresident Alien Individuals, Williamson, 943 T.M., U.S. Income Tax Treaties - Provisions Relating Only to Individuals,  and in Tax Practice Series, see ¶7120, Foreign Persons - Gross Basis Taxation, ¶7130, Foreign Persons - Effectively Connected Income, and ¶7160, U.S. Income Tax Treaties.


  1 136 T.C. 547 (2011).

  2 40 Tax Mgmt. Int'l J. 530 (9/9/11). 

  3 140 T.C. No. 6 (3/4/13). 

  4 June 26, 2009. 

  5 80 T.C. 768 (1983). The case involved the since-repealed beneficial maximum tax on personal services income. 

  6 See, e.g., Ingram v. Bowers, 57 F.2d 65 (2d Cir. 1932) (involving Enrico Caruso); Boulez v. Comr., 83 T.C. 584 (1984). 

  7 §861(a)(4). Determining where a person's image and likeness are "used" is obviously difficult. One could do this based on days of play in and outside the United States, but that method does not adequately account for the fact that the value of the image has more to do with the sponsor's market than it does with where a player may play in a given week.  The Tax Court generally adopted the view that sourcing should follow the sponsor's historic sales. 

  8 The court purported to apply the material factor test for ECI set out at Regs. §1.864-4(c)(3)(i). 

  9 This is a puzzling assumption, given that the IRS has held that the presence of a racing horse in the United States for more than a single race may amount to a permanent establishment.  See Rev. Rul. 60-249, 1960-2 C.B. 264. 

  10 §§861(a)(3), 862(a)(3). 

  11 Regs. §1.861-4.

  12 Prop. Regs. §1.861-4(b)(2)(ii)(G) and (c). 

  13 So arbitrary that a recent letter to Tax Notes has great fun at the expense of the players.  Weinstein, "Golf Hacker's Letter to Sergio Garcia," Tax Notes 331 (4/15/13). Mr. Weinstein's time would have been better spent making fun of the Tax Court!