US-Swiss Tax Cases

Personal Services Versus Royalties in Sergio Garcia Endorsement Deal.

Sergio Garcia loses and wins in Tax Court Golfer Sergio Garcia signed a “head-to-toe” endorsement deal with sporting equipment maker TaylorMade in 2002. The endorsement deal was for personal services and royalties for use of Garcia’s image. Personal services are taxed as income in the United States and royalties are taxed at a lesser, variable rate. Garcia valued the personal services at 15 percent of the contract and the royalties at 85 percent of the contract. The IRS argued that the entire endorsement deal was for personal services and assessed a $1.7 million deficiency. The Tax Court found evidence that the deal hinged upon Garcia’s image and brand and adjusted the deficiency to reflect a 64/35 percent split between royalties and personal services. Sergio Garcia’s golf career is built upon passion and craft. Popular with fans, Garcia won the 2017 Masters Tournament and the 2008 Players Championship. Garcia has accumulated $49 million in tournament winnings in his career. Feuds, angry outbursts on the greens, and hurling a golf club at his caddy have marked his career, and Garcia is a golfer who holds the fans’ attention. He has spent most of his career ranked in the top ten among professional…

Medtronic versus the Commissioner of the Internal Revenue Service

Intangible Assets and Transfer Pricing: The Medtronic Case IRS provided Medtronic, a manufacturer of pacemakers and other medical equipment, a notice of deficiency of $1.4 billion for the tax years 2005 and 2006. The issue was the treatment and valuation of royalty payments to Medtronic’s affiliate MPROC. The IRS calculated the deficiency using the comparable profits method (CPM), which had not been the standard in the negotiation of a previous memorandum of understanding (MOU) between the IRS and Medtronic that had governed royalty payments. The MOU used the comparable uncontrolled transaction method (CUT) in its evaluation and Medtronic retained that method in their argument before the Tax Court. The effect of using CPM had allowed the IRS to ignore certain economically valuable benefits to four licensing agreements between Medtronic and MPROC, and to disregard MPROC’s important responsibility to maintain product quality control in determining the transfer pricing tax. The Tax Court ruled that the IRS had been “arbitrary, capricious and unreasonable” in their revaluation of royalty payments and in the notice of deficiency. While the Tax Court determined that the CUT method was more appropriate in the Medtronic case, it felt the royalty payments needed to be adjusted to reflect…

Improving Corporate Arbitration

Corporate arbitration is increasingly important for settling transnational business disputes. How can the process be improved? A 2013 survey of corporate counsels Price, Waterhouse Coopers revealed that corporate arbitration is an increasingly popular and vital platform for settling transnational business disputes. However, the increase in popularity is not consistent across all industries; the energy sector and construction are more likely to view arbitration as the best option for settling disputes while the financial sector may prefer litigation. Arbitration was the “most preferred” or “preferred” option for over 80 percent of respondents, while court litigation was “most preferred” or “preferred” by 56 percent of respondents. As for why corporate counsels preferred arbitration to all other dispute resolution frameworks, the following factors were considered most important: The expertise of the decision-maker (47 percent) Neutrality (43 percent) Confidentiality (37 percent) Enforceability (35 percent) Procedural flexibility (26 percent) Speed (21 percent) Cost (2 percent) However, several respondents felt that corporate arbitration was in danger of becoming “judicialized,” or increasingly formal and rule-bound, which could potentially increase cost and delays. Even to in-house corporate counsels, the possibility that arbitration could become more like litigation could greatly reduce the appeal of this dispute resolution framework. The…

Star International versus the United States of America

Tax Treaty Shopping? Star International vs. United States of America The case involved a dispute over tax refund and US-Swiss tax treaty. IRS denied Starr International a full refund based upon alleged tax treaty shopping. The company appealed twice and was advised by US Circuit Court to file another appeal based upon the proper definition of “principle purpose.” In 2007, Starr International filed suit against the United States. There was a $38 million tax refund to the company in dispute and, from the IRS’s perspective, the issue was tax treaty shopping. The company had recently moved to Switzerland and wanted to take advantage of provisions of the US-Switzerland tax treaty to reduce their tax rate to 15 percent from 30 percent on a dividend payment from a US corporation. The dividend payment was subject to the 30 percent withholding rate because it was US-sourced fixed or determinable, annual or periodic (FDAP) income paid to foreign persons. The company wanted the withholding to be reduced to 15 percent as provided by the 1996 US-Swiss tax treaty Article 22(6) and petitioned the US competent authority, the IRS, for discretionary relief. The IRS denied the petition because the company did not automatically qualify…

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