                            140 T.C. No. 6



                  UNITED STATES TAX COURT



             SERGIO GARCIA, Petitioner v.
    COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 13649-10.                         Filed March 14, 2013.



       P, a professional golfer and a resident of Switzerland, entered
into an endorsement agreement with sponsor T. P agreed to allow T
to use his image, name, and voice (image rights) in advertising and
marketing campaigns worldwide. P also agreed to perform personal
services for T including using T’s products in all his golf play, posing
and acting for advertisements, and making personal appearances for the
company. In return for his services and use of his image rights, T
agreed to pay P certain compensation.

       P and T allocated 85% of P’s compensation to royalties (for use
of his image rights) and 15% to personal services. P established EP,
LLC, in the State of Delaware, which would receive the royalty
payments and then pay a portion of the royalty payments (attributable
to use of the image rights in the United States) to a second LLC that P
established in Switzerland, LD. The result was that P paid no U.S. tax
on the royalty payments, but did pay U.S. tax on the U.S. source
personal service payments.
                                        -2-

             R now disputes the 85%-15% allocation between royalty and
      personal service payments, arguing for a larger portion attributable to
      P’s personal services. R also claims that we should find the U.S.
      source royalty payments were made directly to P and disregard the
      form of the transaction involving EP and LD. R additionally claims
      that such royalty income (as well as all U.S. source personal service
      income) should be taxable to P in the United States and not exempted
      from U.S. taxation under the Convention between the United States of
      America and the Swiss Confederation for the Avoidance of Double
      Taxation with Respect to Taxes on Income (Swiss Tax Treaty).

             P claims that the 85%-15% allocation between royalty and
      personal service payments understated, if anything, the royalty
      allocation. P disputes R’s claims regarding the EP/LD transaction and
      further claims that even if that transaction is disregarded (and we
      consider the payments to have been made directly to P), all of P’s
      royalty income, as well as a portion of his U.S. source personal service
      income, is exempt from tax in the United States under the Swiss Tax
      Treaty.

            Held: The payments made by T are allocated 65% to royalties
      and 35% to personal services.

            Held, further, any royalty income to P is exempt from taxation in
      the United States under the Swiss Tax Treaty. However, none of his
      U.S. source personal service income is exempt from taxation in the
      United States.



      Thomas V. Linguanti, Jenny A. Austin, Jason D. Dimopoulos, Robert F.

Hudson, Jr., and Robert H. Moore, for petitioner.

      W. Robert Abramitis, Tracey B Leibowitz, and Karen J. Lapekas, for

respondent.
                                            -3-

      GOEKE, Judge: Respondent determined deficiencies in petitioner’s Federal

income tax of $930,248 and $789,518 for tax years 2003 and 2004, respectively, as

a result of income he purportedly received during those years through an

endorsement agreement with TaylorMade Golf Co. (TaylorMade). After

concessions, the issues for decision are:

      (1) the extent to which payments made by TaylorMade under the

endorsement agreement are compensation for the performance of petitioner’s

personal services and the extent to which the payments are royalties for the use of

petitioner’s image rights. We hold that the payments made by TaylorMade are

allocated 65% to royalties and 35% to personal services;

      (2) whether the U.S. source royalty compensation is income to petitioner or to

Long Drive Sàrl, LLC (Long Drive). Because we hold that even if the U.S. source

royalty compensation was income to petitioner, he is not taxable in the United States

on any of this income, we need not address this issue.

      (3) whether the U.S. source royalty compensation and a portion of the U.S.

source personal service compensation are taxable to petitioner in the United States.

We hold that no royalty compensation is taxable to petitioner in the United States,

but that all U.S. source personal service compensation is taxable to petitioner in the

United States.
                                          -4-

                                FINDINGS OF FACT

      At the time the petition was filed petitioner was a Spanish citizen residing in

Switzerland.

1. Background

      Petitioner is a professional golfer, having turned professional in 1999 after a

highly successful amateur golf career. Since 1999 he has played golf around the

world, on both the Professional Golfers’ Association of America Tour (PGA Tour)

and the European Tour. From 1999 to 2004 his world golf ranking was: 12th at the

end of 1999; 16th at the end of 2000; 6th at the end of 2001; 4th at the end of 2002;

36th at the end of 2003; and 7th at the end of 2004.

      Petitioner was born in Spain, and his skill at golf and dynamic character

attributes have made him a fan favorite and a world-famous celebrity. Nicknamed

“El Nino” in his early years as a professional, petitioner is notable for his

charismatic and fiery personality which differentiates him from most others who

play “the gentleman’s game” for a living. Petitioner’s personality and his athletic

image have helped to make him one of the most marketable golfers in the world,

even more marketable than many of those golfers who rank ahead of him or who
                                        -5-

have won one of golf’s four “Major” tournaments.1 Taken together, petitioner’s

personality, image, and golf skill make up his personal brand.

      Since 2001 petitioner has been represented by IMG, a sports entertainment

media company that finds and presents to him endorsement, appearance, and golf

opportunities. IMG also negotiates contracts on petitioner’s behalf and helps to

manage his relationships with his various sponsors. However, petitioner makes the

final decisions regarding what products he will endorse, what appearances he will

make, and what golf events he will play in. Over the years petitioner has entered

into a variety of endorsement agreements for products used both on and off the golf

course, including sunglasses, video games, watches, real estate resorts, and trading

cards. Sponsors value petitioner’s endorsement because it allows their products to

be associated with his popular personal brand.

2. TaylorMade Endorsement Agreement and Performance

      On October 8, 2002, petitioner entered into a seven-year endorsement

agreement (commencing January 1, 2003, and ending December 31, 2009) with




      1
       “The Majors” are the Masters, the U.S. Open, the British Open, and the
PGA Championship. Professional golfers are largely remembered for how they
perform in these tournaments. Although he has come close, petitioner has been
unable to pull off a win in one of the Majors.
                                         -6-

TaylorMade under which he would become a TaylorMade “Global Icon”,2 around

whom TaylorMade would build its brand. At the time the endorsement agreement

was signed TaylorMade had endorsements and/or use agreements with nearly 200

professional golfers, but petitioner was the only one who held the Global Icon title.

Under the endorsement agreement petitioner would exclusively wear and use golf

products produced by TaylorMade and associated brands (TaylorMade products),

and TaylorMade would receive the right to use petitioner’s image, likeness,

signature, voice, and any other symbols associated with his identity to promote

TaylorMade products. The associated brands were Adidas (which owned

TaylorMade’s parent company)3 and Maxfli (which was acquired by TaylorMade at

      2
          The endorsement agreement defined the term “Global Icon” as--

      a premiere golfer who consistently ranks among the world’s best
      players and represents and symbolizes the finest attributes of the game
      and * * * [TaylorMade]. A person who connects emotionally with
      golfers in all regions of the world, and is synonymous with the core
      brand values of * * * [TaylorMade], and who becomes a * * *
      [TaylorMade] ambassador. The relationship between a Global Icon
      and the company is multi-faceted. Continued investment by the
      company to enhance the athlete’s performance and develop his persona
      will maximize both parties’ long-term investments in the relationship.
      3
        While petitioner was the only golfer in the Adidas family identified as a
Global Icon, Adidas identified certain other prominent sports figures as Global
Icons, including David Beckham (soccer), Anna Kournikova (tennis), and Steffi

                                                                        (continued...)
                                          -7-

the end of 2002 and produced golf balls). The endorsement agreement was a “head

to toe”4 deal; products which petitioner was required to use included golf clubs, golf

balls, golf gloves, golf bags, shoes, clothing, hats, and essentially any other golf

product he would use in a professional event.

      At the time TaylorMade signed petitioner to the endorsement agreement

TaylorMade was seeking to redefine its brand as part of a larger strategy to focus

the company on high-performance golf products. TaylorMade signed petitioner to

the endorsement agreement because he would add a “cool”, “athletic”, and

“competitive” element to the TaylorMade brand which would help them “appeal to

competitive golfers, younger golfers, athletic golfers, and golfers that wanted to

have a little bit of fun.” As its only Global Icon, petitioner was the centerpiece of

TaylorMade’s marketing efforts; he featured prominently on TaylorMade’s




      3
        (...continued)
Graf (tennis).
      4
        In addition to so-called head to toe deals which also involved name and
image rights, there are two other primary types of golf endorsement contracts. The
most common type of endorsement contract (representing approximately 85-90% of
all contracts) is a “wear and carry” contract, in which a golfer is paid to use specific
products in one or many tournaments but does not give up his or her image rights.
Less common than “wear and carry” contracts (but more common than “head to
toe” contracts) are contracts for a golfer to use specific products and to grant a
company the right to use the golfer’s image rights to promote the products used.
                                          -8-

worldwide Web site, in TaylorMade’s TV and print advertisements, point-of-sale

materials (such as racks holding golf clubs and balls at sporting goods stores), and

other forms of advertising.

      As previously discussed, under the endorsement agreement petitioner was

obligated to exclusively use certain TaylorMade products, both on and off the golf

course.5 TaylorMade also received the right to “fully exploit the Endorsement” and

to use petitioner’s image rights in doing so (without making a royalty payment each

time it used petitioner’s image rights). Petition had certain other obligations,

including: encouraging cross-promotion of TaylorMade products with his other

corporate sponsors; playing in at least 20 professional golf events each year;6 acting

in a courteous and professional manner, including not breaking the law, using

performance-enhancing drugs, or committing an act “violating public morality or

decency”; completing at least 12 combined service and personal appearance days

each year;7 using “diligent efforts” to be available to test TaylorMade products; and




      5
       Petitioner’s caddy was also required to wear TaylorMade clothing, shoes,
and headgear during professional events.
      6
          Petitioner played in more than 20 events in both 2003 and 2004.
      7
        During such days petitioner would shoot advertisements for TaylorMade and
entertain customers and clients of TaylorMade (among other promotional activities).
                                           -9-

generally supporting TaylorMade products and promoting goodwill toward the

TaylorMade brand. There were many other minor obligations petitioner had under

the endorsement agreement, such as using reasonable efforts to ensure his

TaylorMade trademarks were visible.

        Petitioner would incur various penalties for not fulfilling his obligations under

the endorsement agreement. For example, had he failed to play in 20 professional

golf events in a given year, his base remuneration (discussed further infra) would

have been reduced pro rata. Failure to comply with his other obligations would

possibly have resulted in (at TaylorMade’s discretion) other financial penalties or

termination of the endorsement agreement. However, there would be no penalty if

TaylorMade failed to use the service or personal appearance days in any contract

year.

        TaylorMade also had various obligations under the endorsement agreement,

most of which involved supplying petitioner with its products and paying him.

Petitioner’s base remuneration for years 2003 through 2005 was $7 million, after

which time his base remuneration depended on his average world ranking at the end

of the year, from a high of $9 million for a 1st place rank to a low of $3 million

should he be ranked 21st or lower. Petitioner’s base remuneration for years 2004

through 2009 could also be calculated under an alternative method (more favorable
                                         - 10 -

to petitioner) if TaylorMade’s products sold well during the years 2003 through

2009. He could also earn bonuses for each Major tournament he won while using

the products which he was required to endorse.8

      The original endorsement agreement did not specify the percentage of the

remuneration attributable to petitioner’s personal services and the percentage

attributable to his image rights. TaylorMade had the option to renegotiate the

endorsement agreement should petitioner fall to 40th place or lower in the world

rankings at any time during the contract period. If TaylorMade opted to renegotiate

and the parties could not come to an endorsement agreement after 30 days,

TaylorMade had the option to terminate the endorsement agreement.

      In March 2003 a dispute arose between petitioner and TaylorMade

regarding the Maxfli brand of golf balls which petitioner was required to use.

Petitioner believed the balls were not suitable for his use and returned to using a

competitor’s brand. At the time petitioner stopped using Maxfli balls TaylorMade

had already spent several million dollars developing an advertising campaign for

the Maxfli brand featuring petitioner. TaylorMade was forced to scuttle the portion

of this campaign featuring petitioner as a result of his use of a competitor’s ball


      8
        Depending on the year and which TaylorMade products he did use,
petitioner might forfeit some or all of the bonus remuneration should he fail to use
some or all of the TaylorMade products which he was required to use.
                                          - 11 -

because the advertising was no longer “authentic”. The parties had difficulty

resolving the dispute but eventually agreed to amend the endorsement agreement in

certain ways.

      The first amended endorsement agreement was executed on August 21,

2003. This amended endorsement agreement reduced petitioner’s 2003 base

remuneration to $4 million (from $7 million). It also reduced base remuneration

(including petitioner’s base pay under the alternative method involving

TaylorMade sales, which remained at $7 million) by one-seventh for each later

year in which petitioner failed to use a Maxfli ball for the entirety of the year in all

golfing activities. The first amended endorsement agreement did not substantially

change the bonus remuneration payments other than to add a penalty for not using

a Maxfli ball should he win a Major tournament during 2003. The first amended

endorsement agreement also added a provision regarding division of payments for

use of petitioner’s image rights and his personal services: 15% of remuneration

(both base and bonus) would be paid to petitioner for his personal services and

85% of remuneration would be paid to Even Par, LLC (Even Par), which had been

granted petitioner’s image rights licensed by TaylorMade for use in the United

States (discussed further infra). Finally, the first amended contract specified that

petitioner would be available for two product-testing days each year of the
                                         - 12 -

contract. On such days petitioner would use TaylorMade products and critique

them.

        Several months after the first amended contract was signed, petitioner was

still not using a Maxfli ball,9 and the parties agreed to amend the endorsement

agreement a second time. In addition to the remuneration reductions in the first

amended endorsement agreement, the second amended endorsement agreement: (1)

reduced 2004 base remuneration to $4.5 million; (2) reduced 2005 base

remuneration to approximately $5.5 million ($4.75 million if petitioner failed to use

a Maxfli ball in all golfing activities during that year); (3) added an alternative base

remuneration calculation for 2004 and 2005 should petitioner finish in the top 10 in

the world golf rankings;10 and (4) removed the provision of the endorsement

agreement allowing TaylorMade to renegotiate (and potentially terminate) the

endorsement agreement should petitioner finish in 40th place or lower in the world

golf rankings.




        9
       Petitioner continued to use a competitor’s ball into 2004 but then returned to
using a Maxfli ball.
        10
         Base remuneration under this alternative computation method would be
reduced by one-seventh should petitioner fail to use a Maxfli ball during all golfing
activities during the specific year.
                                         - 13 -

      TaylorMade did not fully use petitioner’s service or personal appearance days

in either 2003 or 2004. It is unclear from the evidence and testimony exactly how

many service, personal appearance, and product-testing days TaylorMade used each

year. However, it appears that petitioner participated in a total of 10 service,

personal appearance, and product-testing days in 2003 and a total of 9 such days in

2004. The personal appearances involved playing golf with TaylorMade clientele,

attending certain company events (such as dinners), and visiting stores. These

events took place in several countries, including Ireland, the United States, Japan,

Spain, and Portugal.

3. Companies Related to Petitioner11

      On May 22, 2003, Long Drive was incorporated in Switzerland and

thereafter reached an endorsement agreement with Swiss authorities regarding the

manner in which it would be taxed under Swiss law. Petitioner owned 99.5% of

Long Drive, and the remaining 0.5% was owned by his financial adviser, Gonzalo

Rodriguez-Fraile. Even Par was formed in Delaware on December 12, 2002.

Petitioner owned 99.8% of Even Par, and the remaining 0.2% was owned by his

father, Victoriano Garcia.


      11
        The structure of the related companies is not pertinent to the ultimate
decisions in this Opinion. This information is provided for background purposes.
                                        - 14 -

      Petitioner sold Long Drive his image rights licensed by TaylorMade for use in

the United States under the endorsement agreement (U.S. licensed image rights). In

return petitioner received a promissory note from Long Drive payable over seven

years. Next, the U.S. licensed image rights were assigned by Long Drive to Even

Par, which in return agreed to pay all amounts collected from TaylorMade in

connection with those rights directly to Long Drive (which would then pay

petitioner in satisfaction of the promissory note).12 Because of the manner in which

the Swiss authorities agreed to tax the payments made to Long Drive from Even Par,

the structure created an advantageous system for petitioner; his U.S. royalty

payments would not be taxed in the United States and would instead be taxed at

lower rates under Swiss law (as per the endorsement agreement between the Swiss

authorities and Long Drive).

      As previously stated, the first amended endorsement agreement (but not the

original) contained a provision assigning 85% of the payments to Even Par (for

TaylorMade’s use of petitioner’s image rights, both within and outside the United

States) and 15% to petitioner (for his personal services, both within and outside the


      12
         Even Par also received payments for use of petitioner’s image right used
outside the United States and paid those amounts to a Netherlands company wholly
owned by petitioner. The parties agree that remuneration for the non-U.S. image
rights is not taxable in the United States and it need not be further addressed.
                                          - 15 -

United States). TaylorMade made each payment under the endorsement agreement

to IMG, which would take its expenses and then pay 85% of the remaining amount

to Even Par and 15% to petitioner.

      On each of his Forms 1040-NR, U.S. Nonresident Alien Income Tax Return,

for 2003 and 2004 petitioner reported a portion of the personal service payments as

his U.S. source income effectively connected with the conduct of a trade or business

within the United States. He did not report any of the royalty payments made to

Even Par. Even Par filed tax returns as a partnership, reporting only gross royalty

income and matching royalty expenses (which it deducted from the gross royalty

income, leaving no taxable income). Even Par’s returns stated that the royalty

payments were taxable only under Swiss law.

4. Other Information

      On March 17, 2010, respondent issued a notice of deficiency to petitioner for

2003 and 2004 determining deficiencies of $930,248 and $789,518, respectively.

Petitioner timely filed a petition contesting the deficiencies.
                                          - 16 -

                                       OPINION

I. Burden of Proof

      Generally, taxpayers bear the burden of proving, by a preponderance of the

evidence, that the determinations of the Commissioner are incorrect. Rule 142(a);13

Welch v. Helvering, 290 U.S. 111, 115 (1933). Deductions are a matter of

legislative grace, and taxpayers bear the burden of proving that they have met all

requirements necessary to be entitled to the claimed deductions. Rule 142(a);

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). The parties agree that

respondent bears the burden of proof on certain issues raised in an amendment to

respondent’s answer. However, because we decide all issues on the basis of the

preponderance of the evidence, we need not address the burden of proof further.

See Knudsen v. Commissioner, 131 T.C. 185 (2008).

II. Allocation of TaylorMade Payments--Personal Services and Royalties

      A. Stipulated Issues, General Arguments, Allocation in First Amended
         Endorsement agreement, and Expert Reports

      The parties have stipulated that during 2003, 69% of petitioner’s personal

service income was derived from sources within the United States and the remaining

31% was derived from sources outside the United States. The parties have also


      13
           All Rule references are to the Tax Court Rules of Practice and Procedure.
                                        - 17 -

stipulated that during 2004, 68% of petitioner’s personal service income was

derived from sources within the United States and the remaining 32% was derived

from sources outside the United States. Finally, the parties have stipulated that any

portion of the TaylorMade payments which we determine to be royalties paid for the

use of petitioner’s image rights shall be treated as 50% U.S. source income and 50%

foreign source income.

      In his notice of deficiency respondent took the position that all payments

made by TaylorMade under the endorsement agreement were compensation for

petitioner’s personal services. Respondent has since abandoned that position and

instead argues that “The vast majority of the remuneration * * * is attributable to the

personal services Petitioner rendered to Taylor Made.” Petitioner claims that the

first amended endorsement agreement’s 85%-15% allocation between royalty and

personal service payments, if anything, understated the royalty allocation.

      One of petitioner’s arguments is that we should respect the 85%-15%

allocation in the first amended endorsement agreement as the product of an arm’s-

length negotiation between two unrelated parties with adverse tax interests. See

O’Dell & Co. v. Commissioner, 61 T.C. 461, 468 (1974); Bemidji Distrib. Co. v.

Commissioner, T.C. Memo. 2001-260, 2001 Tax Ct. Memo LEXIS 295, at *18

(“adverse tax interests deter allocations which lack economic reality”), aff’d sub
                                          - 18 -

nom. Langdon v. Commissioner, 59 Fed. Appx. 168 (8th Cir. 2003). Petitioner

claims that he and TaylorMade had adverse tax interests because he wished to have

a higher percentage of his pay consist of royalties (on which he would pay taxes

only in Switzerland), and TaylorMade wished to satisfy its legal withholding

requirements and not damage its reputation by using an allocation which was

indefensible. However, TaylorMade’s CEO testified that “it was irrelevant to me

whether it was 85/15 or 50/50.” Similarly, TaylorMade’s outside counsel testified

that petitioner’s team took the lead on the allocation issue and that TaylorMade did

not put “a whole lot of effort” into it. In addition, after reviewing the facts of this

case, we conclude that the 85%-15% allocation does not comport with the economic

reality of the endorsement agreement (discussed further infra). As a result, we will

not adopt the 85%-15% allocation stated in the first amended endorsement

agreement.

      The parties have introduced four expert reports (one from respondent, three

from petitioner) regarding the allocation issue. Respondent’s expert witness, Mark

Roesler, found that under the general industry standard, personal services are more

valuable than use of image rights. Considering various factors, he concluded that a

majority of the payments were attributable to petitioner’s personal services. Two of

petitioner’s expert witnesses made general conclusions, based on the facts of the
                                        - 19 -

case, that TaylorMade entered into the endorsement agreement with petitioner

primarily for use of his image rights. Petitioner’s third expert witness, Rodney Fort,

examined other endorsement contracts involving petitioner, determined the value of

petitioner’s service days/personal appearances using both the mean ($50,561) and

median ($33,333) values of the other contracts, and determined the value of the

“wear-and-carry” portion of the endorsement agreement to be $150,000 per year.14

He then subtracted these various values from the original $7 million base

remuneration for 2003 and 2004 to determine a range of values for the image rights.

In percentage terms, Mr. Fort allocated 89% to 96% of the 2003 payments to

royalties and 83% to 92% of the 2004 payments to royalties, with the remainder for

each year allocated to personal services.

      Although we appreciate their attempts to analyze a difficult valuation

problem, we do not agree with Mr. Roesler’s or Mr. Fort’s ultimate conclusions

regarding allocation to personal services and royalties. We have considered the

analysis in each expert report and find those analyses to be helpful in reaching our

holding.




      14
        Mr. Fort assigned no value to petitioner’s product testing or other provisions
of the endorsement agreement.
                                        - 20 -

      B. Discussion of Facts and Law

      “Courts have repeatedly characterized payments for the right to use a

person’s name and likeness as royalties because the person has an ownership

interest in the right.” Goosen v. Commissioner, 136 T.C. 547, 559 (2011) (citing

Cepeda v. Swift & Co., 415 F.2d 1205 (8th Cir. 1969), Haelan Lab., Inc. v. Topps

Chewing Gum, Inc., 202 F.2d 866 (2d Cir. 1953), Boulez v. Commissioner, 83 T.C.

584 (1984), Kramer v. Commissioner, 80 T.C. 768 (1983), and Uhlaender v.

Henricksen, 316 F. Supp. 1277 (D. Minn. 1970)). In Goosen v. Commissioner, 136

T.C. at 560, we further stated that--

             The characterization of * * * [a taxpayer’s] endorsement fees
      and bonuses depends on whether the sponsors primarily paid for * * *
      [the taxpayer’s] services, for the use of * * * [the taxpayer’s] name and
      likeness, or for both. We must divine the intent of the sponsors and of
      * * * [the taxpayer] from the entire record, including the terms of the
      specific endorsement agreement. [Citations omitted.]

      The facts of this case are well established. Under the endorsement agreement

petitioner would receive compensation for performing certain personal services and

also for allowing TaylorMade to use his image rights to sell products. Petitioner

became TaylorMade’s only Global Icon, and his name and/or likeness were

prominently featured in TaylorMade’s advertisements around the world.
                                         - 21 -

      Multiple witnesses, familiar with the sports advertising industry as a whole

and with the practices of TaylorMade specifically, have clearly and credibly

testified that both the use of petitioner’s image rights and the personal services

petitioner provided (especially his use of the TaylorMade products while playing in

professional golf events) were crucial elements of petitioner’s endorsement

agreement. For example, TaylorMade’s chief marketing director, Robert Maggiore,

testified that under the endorsement agreement TaylorMade received petitioner’s

“brand and image and license. He then wears and plays our products, and then we

tell the story about all the equipment he has in play. So if you pull one of those

pieces out, like the house of cards kind of falls.”

      We concur with the testimony of Mr. Maggiore and other witnesses that both

the use of petitioner’s image rights and the personal services he provided were

critical elements of the endorsement agreement. However, it does not directly

follow that a 50-50 allocation between royalty and personal service compensation is

called for simply because both elements were critical.

      We have previously decided cases involving sports stars where allocation of

payments for personal services and royalties was at issue. In Kramer v.

Commissioner, 80 T.C. 768, involving an endorsement agreement between a retired

tennis champion and Wilson Sporting Goods Co. during 1975 and 1976, we
                                        - 22 -

allocated 70% of payments to royalties and 30% of payments to personal services.

However, given the somewhat different facts of that case, combined with its age,15

we do not give much weight to the 70%-30% allocation reached. In addition, we

have a recent case involving a factual situation much more similar to petitioner’s

which makes for a better comparison.

      Goosen v. Commissioner, 136 T.C. 547, involved a prominent professional

golfer, Retief Goosen, under a contract with TaylorMade during the years 2002 and

2003 to endorse and use certain TaylorMade products and allow TaylorMade to use

his image rights to market those products. Unlike petitioner, Mr. Goosen was not a

TaylorMade Global Icon and was not signed to a “head to toe” contract with

TaylorMade. Rather, Mr. Goosen was identified as a TaylorMade “brand

ambassador” who was required only to use and endorse TaylorMade clothing,

headgear, golf clubs, golf club head covers, and golf bags. Mr. Goosen also had to

complete eight total service and personal appearance days annually for TaylorMade,

as well as an unstated amount of product testing. In addition, Mr. Goosen was

required to play in “a minimum of 20 PGA Tour tournaments and 11 European Tour

tournaments per year” or his endorsement fees would be prorated. Id. at 553. Mr.


      15
        Certain evidence and testimony indicated that the sports endorsement
business is one which changes rapidly.
                                       - 23 -

Goosen was paid a $400,000 annual endorsement fee by TaylorMade, with bonuses

available should he attain a higher world golf ranking or win specified tournaments.

      In addition to his TaylorMade endorsement agreement, Mr. Goosen had an

endorsement agreement with Acushnet Co. (Acushnet) to use Titleist golf balls and

golf gloves which paid him $350,000 and $375,000 in the two years at issue. Mr.

Goosen also had an endorsement agreement with Izod Club (Izod) to wear certain

clothing while playing golf,16 which paid him approximately $35,000 annually.

Under these two endorsement agreements Mr. Goosen agreed to complete a total of

six service and personal appearance days annually, as well as to do product testing

for Acushnet.

      Considering the specific facts of Goosen, we held that a 50-50 split between

royalty and personal service payments was appropriate for Mr. Goosen’s

TaylorMade endorsement agreement (as well as his Acushnet and Izod endorsement

agreements). In doing so, we “highlighted the contrast between TaylorMade’s

on-course endorsements with” Mr. Goosen and petitioner’s TaylorMade

endorsement agreement. Id. at 561-562. We noted that Mr. Goosen--



      16
         It appears Mr. Goosen was able to comply with the clothing requirements of
his TaylorMade endorsement agreement even though he was also required to wear
certain Izod clothing.
                                       - 24 -

      ranked either near or higher than Mr. Garcia on the PGA Tour and
      World Golf Rankings during the years at issue. * * * [Mr. Goosen]
      had won a Major Championship as well as several high-profile
      tournaments on the European Tour. In contrast, Mr. Garcia had failed
      to win a Major Championship and had few significant wins. Despite
      this difference in golf performance, both * * * [Mr. Goosen] and Mr.
      Garcia entered into substantially similar endorsement agreements with
      TaylorMade. In addition, Mr. Garcia was paid substantially more than
      * * * [Mr. Goosen] despite his lesser record. TaylorMade valued Mr.
      Garcia’s flash, looks and maverick personality more than * * * [Mr.
      Goosen’s] cool, “Iceman” demeanor. We find that TaylorMade, Izod
      and Acushnet valued * * * [Mr. Goosen’s] image, and they paid
      substantial money for the right to use his name and likeness. [Id.]

      Considering the facts and prior caselaw, we do not believe a 50-50 split

between royalty and personal service payments is appropriate in petitioner’s case.

Petitioner was TaylorMade’s only Global Icon during the years at issue; he was the

centerpiece of TaylorMade’s marketing efforts and the golfer around whom

TaylorMade sought to build its brand. The same cannot be said of Mr. Goosen.

We find that petitioner’s status as a TaylorMade Global Icon, especially the extent

to which Taylor Made used his image rights to sell its products, is strong evidence

that his TaylorMade endorsement agreement was more heavily weighted toward

image rights than Mr. Goosen’s.

      Respondent argues that petitioner was paid more than Mr. Goosen primarily

because petitioner’s TaylorMade endorsement agreement required more personal
                                         - 25 -

services than Mr. Goosen’s and “Petitioner’s charisma and playing style * * *

increased the value of his services.” We agree with respondent that petitioner’s

personal services are worth more than Mr. Goosen’s, all else being equal.

However, we are not convinced that petitioner’s TaylorMade endorsement

agreement required more personal services than Mr. Goosen’s, especially when one

considers the relative values of different personal services.

      Many of the personal service requirements of petitioner’s and Mr. Goosen’s

TaylorMade endorsement agreements are similar. For example, both had a

responsibility to endorse the required products and both had clauses in their

endorsement agreements allowing TaylorMade to fire them should they act in an

immoral or illegal manner. There were some notable differences, however.

      Petitioner was required to complete a total of 12 service and personal

appearance days each year for TaylorMade, while Mr. Goosen was required to

complete only 8. However, Mr. Goosen’s TaylorMade agreement was not a “head

to toe” deal, and he was required to complete six additional service and personal

appearance days for Acushnet and Izod. It thus appears that Mr. Goosen was

required to perform more service and personal appearance days per endorsed

product than petitioner. In addition, the testimony and other evidence show that

service and personal appearance days did not constitute a large portion of the value
                                         - 26 -

of petitioner’s personal services; TaylorMade did not fully use the 12 service and

personal appearance days in either 2003 or 2004 (using 10 or fewer each year),17

and TaylorMade’s CEO, Mark King, testified that any personal appearances

petitioner made were “gravy” to TaylorMade. Considering these facts, we find the

fact that petitioner’s TaylorMade endorsement agreement required him to complete

more service and personal appearance days than Mr. Goosen is of nominal

importance.

      TaylorMade required Mr. Goosen to play in more professional golf events

while using endorsed products each year (31) than it required petitioner to play in

(20). We believe that petitioner’s use of endorsed products during his professional

play was by far the most valuable personal service he provided to TaylorMade; his

pay was reduced by millions of dollars when he chose not to play a Maxfli golf ball,

TaylorMade used shots of petitioner using its products during professional events in

its ads, and multiple witnesses testified to the great importance of petitioner’s use of

TaylorMade products while playing.18 Respondent agrees that “Petitioner’s


      17
       It was not established how many service days and personal appearances Mr.
Goosen actually completed for TaylorMade.
      18
        In addition, as discussed supra and infra, other testimony and other evidence
reflected that TaylorMade did not place a great deal of value on petitioner’s service
and personal appearance days or on his product testing.
                                       - 27 -

performance for Taylor Made on the PGA and European golf tours” was of

“predominant importance to the parties.” Given the facts regarding the high value

of petitioner’s play while using TaylorMade products, we find the significantly

lower number of professional events TaylorMade required petitioner to play in

compared to Mr. Goosen is strong evidence that his TaylorMade endorsement

agreement was less proportionately weighted toward personal services than Mr.

Goosen’s.

      Petitioner was required to complete two product-testing days for TaylorMade

each year, but it is unclear how many such days Mr. Goosen was required to

complete for the lesser number of TaylorMade products which he endorsed. In

addition, Mr. King gave testimony indicating that petitioner’s product-testing days

(even if they did have some value to TaylorMade) were of little importance in

comparison with other personal services.19 As a result, we find any differences in

required product-testing days between petitioner’s and Mr. Goosen’s TaylorMade

endorsement agreements were not of great significance.




      19
         Specifically, Mr. King testified that TaylorMade “probably [did] not” listen
to petitioner’s product recommendations and that the fact petitioner tested
TaylorMade products “certainly * * * [wasn’t] a primary message” of TaylorMade’s
advertising, if it was mentioned at all.
                                        - 28 -

      Respondent has cited other personal services not required of Mr. Goosen

which were required of petitioner as a TaylorMade Global Icon. Such personal

services include “embod[ying] what * * * [TaylorMade] is trying to portray to the

marketplace and to the consumers”, playing golf “with style and charisma”, and

representing TaylorMade’s values even when petitioner is “walking down the

street”. However, these are amorphous concepts, and we find they are of negligible

importance compared to the other personal services required under the endorsement

agreement. We also find that certain other requirements of petitioner (such as the

requirement that he encourage cross-promotion of TaylorMade with other brands he

endorsed), to be similarly negligible in comparison with the other personal service

requirements.

      C. Conclusion Regarding the Allocation Issue

      We have previously recognized that precision in making an allocation

between royalty and personal service payments “is unattainable, [but that] we must

do the best we can with the evidence presented.” Goosen v. Commissioner, 136

T.C. at 562 (citing Kramer v. Commissioner, 80 T.C. 768, DeMink v. United States,

448 F.2d 867, 870 (9th Cir. 1971), Commissioner v. Ferrer, 304 F.2d 125, 135 (2d

Cir. 1962), rev’g 35 T.C. 617 (1961), and Ditmars v. Commissioner, 302 F.2d 481,

488 (2d Cir. 1962), rev’g T.C. Memo. 1961-105). Considering all the surrounding
                                         - 29 -

facts and circumstances, we find that 65% of the endorsement fees petitioner

received represented royalty compensation and 35% represented personal service

compensation.

III. Effect of Swiss Tax Treaty

      The parties agree that petitioner is a resident of Switzerland and that the

Convention for the Avoidance of Double Taxation With Respect to Taxes on

Income, U.S.-Switz., Oct. 2, 1996, Tax Treaties (CCH) para. 9101.001 (Swiss Tax

Treaty) applies to him. However, the parties disagree on what portion of

petitioner’s TaylorMade endorsement income is taxable to him in the United States

under that treaty. Petitioner argues that only the personal service income

attributable to his wearing TaylorMade products while playing golf is taxable in the

United States and that the royalty income as well as the personal service income

attributable to his other personal services is taxable only in Switzerland.

Respondent contends that all income at issue is taxable in the United States.

      Petitioner also notes that respondent may not have properly raised the issue of

“How the U.S.-Swiss Treaty Applies to Income Garcia Earns From TaylorMade.”

However, we find respondent adequately raised the issue regarding application of

Article 17, Artistes and Sportsmen, of the Swiss Tax Treaty to petitioner’s royalty

payments in his second amended answer when he stated that “Any U.S.-source
                                        - 30 -

royalties paid under the * * * [endorsement agreement] were paid for Petitioner’s

personal activities in the U.S. as a sportsman within the meaning of Article 17(1) of

the Swiss Treaty.”

      A. Royalty Income

      Respondent argues that the compensation for use of petitioner’s U.S. image

rights is income to petitioner rather than to Long Drive because petitioner’s

endorsement agreement with Long Drive under which petitioner sold Long Drive his

U.S. image rights licensed by TaylorMade was an impermissible assignment of

income. Respondent also argues that petitioner’s endorsement agreement with Long

Drive lacks economic substance. Respondent claims that we should deem the image

right payments to have been made to petitioner directly and then further argues that

that income is taxable in the United States under the Swiss Tax Treaty. Because we

find that even if the image right payments were income to petitioner (rather than

Long Drive) they are not taxable in the United States under the Swiss Tax Treaty,

we need not address respondent’s arguments regarding assignment of income or

economic substance.

      Article 12(1) of the Swiss Tax Treaty, Tax Treaties (CCH) para. 9101.12, at

185,019, provides that “Royalties derived and beneficially owned by a resident of a
                                          - 31 -

Contracting State shall be taxable only in that State.” Article 12(2) provides

that--

         The term “royalties” as used in this Convention means payments of any
         kind received as a consideration for the use of, or the right to use, any
         copyright of literary, artistic, or scientific work (but not including
         motion pictures, or films, tapes or other means of reproduction for use
         in radio or television broadcasting), any patent, trademark, design or
         model, plan, secret formula or process, or other like right or property,
         or for information concerning industrial, commercial, or scientific
         experience. The term “royalties” also includes gains derived from the
         alienation of any such right or property which are contingent on the
         productivity, use, or disposition thereof. [Id.; emphasis supplied.]

Petitioner argues that the payments he received from TaylorMade for use of his

image rights are royalties as defined by article 12(2) and are therefore taxable only

in Switzerland under article 12(1).

         Respondent disagrees with petitioner that article 12 governs the taxability of

the image right payments. Instead, respondent contends that those payments are

governed by Article 17, Artistes and Sportsmen. Article 17(1) provides that

“income derived by a resident of a Contracting State as an entertainer, such as a

theatre, motion picture, radio, or television artiste, or a musician, or as a sportsman,

from his personal activities as such exercised in the other Contracting State may be

taxed in that other State.”
                                         - 32 -

         In support of his argument, respondent cites the Department of the Treasury

Technical Explanation of the Convention Between the United States of America

and the Swiss Confederation for the Avoidance of Double Taxation With Respect

to Taxes on Income (Oct. 2, 1996), Tax Treaties (CCH) para. 9145 (Treasury

Technical Explanation). Petitioner agrees with respondent that the Treasury

Technical Explanation is useful in interpreting the Swiss Tax Treaty, and we

concur. See Kolovrat v. Oregon, 366 U.S. 187, 194 (1961) (“While courts

interpret treaties for themselves, the meaning given them by the departments of

government particularly charged with their negotiation and enforcement is given

great weight.”); see also N.W. Life Assur. Co. of Can. v. Commissioner, 107 T.C.

363, 385 (1996) (finding the Treasury Technical Explanation to another tax treaty

to be “persuasive”). Regarding article 17, the Treasury Technical Explanation,

Tax Treaties (CCH) para. 9145, at 185,242, states that “In determining whether

income falls under Article 17 or another article, the controlling factor will be

whether the income in question is predominantly attributable to the performance

itself or other activities or property rights.” (Emphasis supplied.) It further states

that--

         Article 17 applies to all income connected with a performance by an
         entertainer, such as appearance fees, award or prize money, and a
         share of the gate receipts. Income derived from a Contracting State by
                                         - 33 -

      a performer who is a resident of the other Contracting State from other
      than actual performance, such as royalties from record sales and
      payments for product endorsements, is not covered by this Article, but
      by other articles of the Convention, as appropriate, such as Article 12
      (Royalties) * * *. For example, if an entertainer receives royalty
      income from the sale of live recordings, the royalty income would be
      exempt from source country tax under Article 12, even if the
      performance was conducted in the source country, although he could
      be taxed in the source country with respect to income from the
      performance itself under * * * [Article 17]. [Id.; emphasis supplied.]

      The parties agree that the Treasury Technical Explanation does not define the

term “predominantly attributable”. Both parties have made arguments regarding

how we should interpret that phrase, but we need not delve into them because we

find the example involving a sale of live recordings to be highly illustrative of the

intent of the Swiss Tax Treaty. Even given the relationship between a live

performance and a recording of that performance, the Treasury Technical

Explanation states that proceeds from the sale of such a recording may be royalties

not taxable in the source country under article 12. In a similar vein, we believe that

even though petitioner’s golf play and personal services performed in the United

States has some connection to his U.S. image rights,20 income from the sale of such




      20
        Similar to the Treasury Technical Explanation example, images of petitioner
playing in professional golf events or posing/acting in TaylorMade shoots were used
in TaylorMade advertisements.
                                         - 34 -

image rights is not predominantly attributable to his performance in the United

States. Rather, the image rights are a separate intangible that generated royalties

(as defined by article 12(2)) for petitioner when TaylorMade paid him for their use.

       We thus find that the income petitioner received from TaylorMade for use of

his U.S. image rights was royalty income not taxable in the United States under

article 12(1).

       B. Personal Service Income for Services Other Than Wearing TaylorMade
          Products While Golfing

       In the first amended endorsement agreement, petitioner and TaylorMade

allocated 85% of payments to royalties and 15% to personal services. On his 2003

and 2004 tax returns petitioner included 100% of his U.S. source personal service

income under the endorsement agreement in his U.S. taxable income. Petitioner did

not raise in the petition the issue that he may have included too much of his personal

service income in his U.S. taxable income.

       Neither party raised any argument regarding the Swiss Tax Treaty until nearly

a year and a half after the petition was filed. Respondent first raised issues

regarding the Swiss Tax Treaty, but contended only that (1) petitioner was not a

Swiss resident to whom the treaty applied, and (2) if the treaty did apply to

petitioner, then amounts paid to petitioner for use of his U.S. image rights were
                                         - 35 -

taxable in the United States under article 17 of the treaty. Respondent later

conceded that his first argument was incorrect and that petitioner was a Swiss

resident to whom the treaty applied.

      Neither before or during trial did either party raise the possibility that

petitioner’s personal service income for services other than wearing TaylorMade

products while golfing might not be taxable in the United States under the Swiss

Tax Treaty. In fact, petitioner’s pretrial memorandum concedes that “Garcia was

subject to tax in the U.S. on his U.S.-source personal service income under either

U.S. federal income tax law or under Article 17 of the U.S.-Swiss Tax Treaty.”21

Petitioner’s counsel also stated at trial that petitioner would “pay the same amount

of U.S. tax on all of his personal services income” whether or not respondent’s

assignment of income and economic substance arguments regarding Long Drive

prevailed. He further stated that petitioner “will pay and does pay the full amount of

U.S. tax on any tournament winnings or prize money or other service income he

receives from the United States” and that “Even if the Court were to find that more




      21
        The pretrial memorandum further states that “because Garcia was subject to
and paid U.S. taxes on his U.S.-source personal service income (from TaylorMade
and otherwise), his U.S.-source personal service income was exempt from Swiss
income tax pursuant to Swiss domestic and treaty law.”
                                         - 36 -

of the income should be allocated to personal services * * * [petitioner] will pay the

full U.S. tax on that” income.

      In his posttrial opening brief petitioner for the first time raised the issue that a

portion of his U.S. source personal service income might not be taxable in the

United States. Respondent did not address the issue in his posttrial opening brief

but noted in his reply brief that petitioner had previously conceded that all U.S.

source personal service income was taxable in the United States.

      We agree with respondent that petitioner previously conceded the issue. By

raising the issue when and in the manner he did, petitioner prejudiced respondent in

that respondent was unable to introduce testimony and/or other evidence that could

have supported his position that all U.S. source personal service income was taxable

in the United States. Respondent was also unable to introduce testimony and/or

other evidence regarding the allocation of U.S. source personal service income

attributable to petitioner’s wearing TaylorMade products while playing golf (which

petitioner concedes is taxable in the United States) and other U.S. source personal

service income (which petitioner now claims is not taxable in the United States).

We find that petitioner raised the issue too late, and we will not consider it. See

DiLeo v. Commissioner, 96 T.C. 858, 891 (1991), aff’d, 959 F.2d 16 (2d Cir.
                                         - 37 -

1992). As a result, petitioner is liable for U.S. tax on all U.S. source personal

service income he received.

IV. Conclusion

         We hold that the compensation paid by TaylorMade under the endorsement

agreement is allocated 65% to royalties and 35% to personal services. We further

hold that none of the royalty compensation is taxable to petitioner in the United

States but that all of the U.S. source personal service compensation is taxable to

petitioner in the United States.

         In reaching our holdings herein, we have considered all arguments made, and,

to the extent not mentioned above, we conclude they are moot, irrelevant, or without

merit.

         To reflect the foregoing,


                                                        Decision will be entered

                                                  under Rule 155.
