Tax Planning Lessons From a Golf Pro: Sergio Garcia v. Commissioner

By Team HRH | January 5, 2015

In professional golf and taxes, coming up short costs big money. Sergio Garcia learned this the hard way in Sergio Garcia v. Commissioner, 140 T.C. No. 6 (2013).

Sergio Garcia is a well-known professional golfer, a native of Spain, and was a Swiss resident when he petitioned the Tax Court over the treatment of his endorsement income by the IRS. Garcia is the second high-profile decision in two years involving a foreign professional golfer and the split treatment of endorsement income between personal services and royalties (Retief Goosen v. Commissioner, 136 T.C. 547 (2011)). The case demonstrates the impact of tax planning carried out prior to rather than after a transaction. It also highlights the need for careful tax planning when multiple types of income are involved. With proper tax planning and the correct drafting of the agreements, Garcia would have developed a stronger case and perhaps a more favorable outcome.


Even the casual golf fan will recognize Sergio Garcia for his charismatic personality, explosive play, the nickname “El Nino,” and his duel with (and eventual loss to) Tiger Woods at the 1999 PGA Championship. These qualities made Garcia one of the most marketable golfers in the world. As a result, TaylorMade (a golf equipment & accessories company) negotiated a seven-year endorsement agreement with Garcia in 2002.

The “head to toe” agreement made Garcia a TaylorMade “Global Icon.” Garcia agreed to exclusively use TaylorMade’s products, license his name & likeness to the company, play in a minimum number of golf tournaments, make personal appearances, and fulfill other minor obligations. In exchange, TaylorMade agreed to an annual base compensation of $7 million to Garcia for the first three years, with the amount fluctuating between $3 and 9 million thereafter, depending on his average world ranking.

The agreement did not specify the percentage of payment attributable to Garcia’s personal services versus his image rights. Within months, Garcia and TaylorMade twice amended the agreement and added a provision which allocated the payments to Garcia as 15% for personal services and 85% for use of his name & likeness.

Garcia reported a portion of his personal service income as U.S. sourced on his 2003 and 2004 U.S. tax returns. All of the royalty income was reported as non-taxable income pursuant to the U.S. Switzerland tax treaty. The IRS issued a notice of deficiency in 2010 to Garcia for $930,248 and $789,518 for tax years 2003 and 2004, respectively. The IRS initially took the position that 100% of the amount paid was for Garcia’s personal services, but later argued that only the “vast majority” was for personal services.

The Court discussed two main issues in the opinion: 1) the allocation of TaylorMade’s payments to Garcia between personal services and royalty income, and 2) the U.S. taxable portion of Garcia’s income. The Court allocated the payments 35% for personal services and 65% for royalties, but held that only the U.S. sourced personal service income was taxable to the U.S., due to the tax treaty with the Swiss.

Garcia argued that the Court should use the 15% personal services-85% royalties allocation because it was the result of an arms-length negotiation between unrelated parties with adverse tax interests. Unfortunately for him, TaylorMade’s CEO undercut the argument when he testified that he did not care what the allocation was. Furthermore, TaylorMade’s outside counsel testified that Garcia’s team was responsible for the allocation being in the amended agreement and TaylorMade did not put “a whole lot of effort” into it.

The Court stated Garcia’s 15%-85% allocation “did not comport with the economic reality of the endorsement agreement.” The Court also disagreed with the allocations suggested by four different expert reports (one from the IRS, and three from Garcia).

The Court concluded that Garcia’s royalty for his name and likeness was worth a higher percentage than the 50%-50% allocation in the Goosen case because Garcia was the center piece of TaylorMade’s marketing campaign, whereas Goosen did not have that same kind of “head to toe deal.”  The Court also noted that Garcia was not as accomplished a golfer as Goosen, and that Garcia was required to play in a fewer number of golf events.


Garcia illustrates the effect of tax planning performed before versus after a transaction.  The Court did not abide by the 15%-85% allocation stated in the contract, in part, because Garcia’s team did not address the allocation issue until after the initial agreement was signed. The Court may have chosen an allocation closer to 15%-85% if Garcia had negotiated that split into the original contract, instead of into the renegotiated contracts.

Garcia also shows the complications when multiple types of income are involved. Garcia was compensated for his name and likeness as well as for multiple services provided to TaylorMade, but he negotiated only one amount. Garcia potentially could have avoided the entire allocation issue if he had negotiated a separate payment and contract for each type of income: his use of TaylorMade products, TaylorMade’s use of his image, and the other services Garcia provided to TaylorMade.

The nature of Garcia’s personal service compensation also could have been structured differently. Providing personal services requires time. Garcia could have been compensated at a particular rate based on the number of appearances he made, or at a different rate for playing in a golf tournament. Basing his compensation more closely to the actual time spent performing services would have made it more difficult for the Court to allocate his payments based on a somewhat arbitrary percentage.

The other lesson from Garcia is the importance of determining the type of income to be received, and the international, federal and state income tax ramifications. This is crucial as it impacts the deal negotiations and the structure of the agreements. Generally, if long-term capital gains can be justified, they receive better tax treatment than ordinary income. Further, certain types of ordinary income receive better tax treatment than others. For instance, most royalties are only subject to ordinary income tax, whereas certain types of royalties and personal service income are subject to both ordinary income and self-employment tax. International and state taxation adds another level of complication.  Understanding these issues is crucial for a client negotiating a business deal involving tangible and intangible property, royalties and personal service type income.


A great golf shot requires a pre-shot plan by analyzing the impact of factors such as the wind or the contours of the greens. Likewise, a great business transaction requires proper tax planning before the ink is dry on the contract. Transactions providing for multiple types of income require special attention in order to optimize the tax ramifications. Garcia shows us that proper tax planning is essential for all of us, not just professional golfers.

This information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Any tax advice contained in this communication is not intended or written to be used and cannot be used by any taxpayer for the purpose of avoiding tax penalties. Please contact our office (603-627-3838) for more information on this subject and how it pertains to your specific tax or financial situation. Howe, Riley & Howe, PLLC would be happy to answer your tax and financial questions regarding these issues or other matters that may be of interest to you or your business.

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