Sergio Garcia will have to pay more U.S. taxes after a judge rejected his argument that 85 percent of his TaylorMade endorsement is royalties for the use of his image, and thus exempt from U.S. taxes, according to Bloomberg.com.
Garcia argued unsuccessfully that 85 percent of his income from an endorsement agreement with TaylorMade Golf Co. stemmed from image-derived royalty payments shielded from U.S. taxation because they flowed through a Swiss business entity and because he’s a resident of Switzerland.
Judge Joseph Goeke in Washington ruled that “the compensation paid by TaylorMade under the endorsement agreement is allocated 65 percent to royalties and 35 percent to personal services.”
Goeke said that the royalty portion of the income was exempt from U.S. taxes under the Swiss Tax Treaty and that all payments for personal services earned in the U.S. are taxable.
Garcia’s case centers on a disputed $1.7 million in his taxes in 2003 and 2004.
Even though Garcia will pay more in taxes, the case is a win for professional golfers and a loss for the IRS. According to Bloomberg, the IRS had claimed that all endorsement earnings should be taxed as personal-service income. Garcia's 65 percent royalty/35 percent personal services tax breakdown is a better deal than fellow TaylorMade endorser Retief Goosen received in a similar case decided in 2011. A different judge ruled that Goosen's deal was 50 percent royalty and 50 percent personal services, according to Bloomberg.
Both the Garcia and Goosen cases involved the division of payments between those for made for a golfer’s image and those based on “personal services,” which include factors like how well he plays.
The difference is important because royalty earnings typically are taxed less heavily under tax treaties than personal services income.
Taken together, the two cases send the message that “the bigger name is going to get more favorable tax treatment,” said Tony Nitti, a partner at the accounting firm of WithumSmith & Brown in Aspen, Colorado.
In his ruling, Judge Goeke sounds like a golf fan when he describes Garcia.
“Petitioner is notable for his charismatic and fiery personality which
differentiates him from most others who play the ‘gentleman’s game’ for a
living,” Goeke wrote in his opinion.
Photo: Sergio Garcia during the first round of the WGC-Cadillac (Mike Ehrmann/Getty Images)