Spanish golfer Sergio Garcia has won a US Tax Court ruling that could have repercussions for famous international sports stars who cash in on corporate sponsorship deals, tax professionals said on Friday.
In a dispute with the Internal Revenue Service over a $1.7 million (£1.12m) tax bill, the court ruled largely, though not entirely, in Garcia's favour. Lawyers said others might benefit from the ruling, depending on how their home countries tax royalties.
The tax-collecting IRS declined to comment.
Two types of sponsorship fees were at the center of the dispute. One type is service payments that sports stars, particularly golf and tennis players, get for using or wearing a sponsor's gear while playing.
The other is royalties sponsors pay for using stars' images in advertising. These are harder to value for tax purposes.
The IRS billed Garcia $1.7 million in 2010 for tax years 2003 and 2004, arguing he owed service payment taxes from an endorsement deal with TaylorMade, a golf equipment company owned by Adidas AG.
Garcia argued the money was royalty income from Switzerland, where he lived. Switzerland has a tax treaty with the United States that spares Swiss royalty income from U.S. taxes.
The Tax Court granted Garcia a 65 percent/35 percent split between royalty and service income because Garcia was TaylorMade's only "global icon" during the years at issue.
Garcia "was the centrepiece of TaylorMade's marketing," Tax Court Judge Joseph Goeke wrote in a 37-page decision.
Garcia's status as an icon was "strong evidence that his TaylorMade endorsement agreement was more heavily weighted toward image rights," the judge said.
The golfer had sought a more favourable split. "Certainly we were disappointed not to have the full 85 per cent to 15 per cent split," said Thomas Linguanti of law firm Baker & McKenzie, who represented Garcia, said on Friday.
Garcia's ultimate tax bill has not yet been determined.
Garcia burst onto the golf scene at the 1999 US PGA Championship when he finished second behind Tiger Woods.
Garcia has never won one of golf's four Major tournaments.
The Tax Court's ruling means athletes will want to write contracts that pay them more in royalty fees, said Lewis Taishoff, a tax lawyer in New York.
South African Golfer Retief Goosen won in Tax Court on this issue in 2011, but was granted a 50 per cent/50 per cent split between service and royalty payments.
Garcia's star power helped him win a more favorable tax court ruling, Taishoff said.
"Garcia, because he's a persona ... it's not what he does on the playing field so much as it is his style," Taishoff said.