The recent Tax Court case of Garcia v. Commissioner,¹ which dealt with the taxation of a nonresident alien (NRA) golfer’s endorsement income, has drawn much attention. Although the Tax Court increased the taxpayer’s U.S. federal income tax liability over what he had reported on his return, the decision has nonetheless dealt a devastating blow to the IRS’s aggressive rulings and litigating position on the scope of the ‘‘Artistes and Sportsmen’’ article² of the income tax treaties to which the United States is a party.

This report focuses on two key aspects of Garcia: (1) the classification of an athlete’s endorsement income as royalty income rather than services income; and (2) the taxability of that royalty income under an ‘‘Artistes and Sportsmen’’ treaty provision. It does not address the method for allocating an athlete’s endorsement income between services income and royalty income, which was another issue in Garcia.

This report summarizes the U.S. federal income taxation of NRA athletes before turning to the relevant portions of Garcia. It argues that while the Tax Court’s stated rationale for rejecting the IRS’s position is undoubtedly correct, there is a more fundamental structural reason for why the IRS’s position is untenable.

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