The IRS has concluded, in Chief Counsel Advice (CCA), that costs incurred to acquire Internet domain names must be capitalized under Code Sec. 263(a) as intangible assets. Costs of trademarks and certain other intangible items qualify as Code Sec. 197 intangibles that must be amortized over 15 years.
Take Away. Code Sec. 197 provides a benefit to taxpayers by allowing amortization of intangible assets ratably over 15 years. Otherwise, the asset arguably has an indefinite useful life and could not be written off during the life of the business. Certain intangibles created by the taxpayer cannot be amortized, unless the asset is created as part of the acquisition of assets that are a trade or business.
In 2013, a company purchased two Internet domain names as part of an asset acquisition of a trade or business (Situation 1). The company will use the names in its trade or business. One name is a generic domain name; the other is non-generic. In 2014, the same company purchased two domain names from existing holders, to use in its trade or business: one generic, one non-generic (Situation 2). A non-generic name is usually a company or product name. A generic name typically describes a product or service using generic terms associated with the topic.
The facts provided do not indicate how the company will use the names in its trade or business. The facts do not indicate whether the generic names are associated with a website already constructed and maintained, or whether the non-generic names are registered or function as trademarks.
Under Code Sec. 263, a taxpayer generally must capitalize an amount paid to acquire an intangible. An example of an intangible that must be capitalized is a trademark, as defined in Reg. §1.197-2(b)(10). Costs of a domain name also must be capitalized because the name is an intangible asset. Capitalization is required for both generic and non-generic domain names.
Customer-based intangibles are a Code Sec. 197 intangible. These include amounts paid for a customer base, a circulation base, an undeveloped market, insurance or mortgage servicing, or other relationships with customers involving the future provision of goods or services.
A franchise, trademark, or trade name is also a Code Sec. 197 intangible. Acquisition of these items is the acquisition of a trade or business. A trademark includes a name, symbol or device adopted and used to identify goods and services and distinguish them from items provided by others.
Certain domain names are registered as trademarks and are Code Sec. 197 intangibles. But most domain names are not registered. Because the facts are incomplete, the CCA assumed that each purchased domain name is associated with a website that is already constructed and maintained, and that the taxpayer purchased the generic names to use in its trade or business to generate advertising revenue on the website or to increase its market share through the website.
Non-generic domain names. This is usually a company or product name used to identify goods and services associated with the website. To be a qualified Code Sec. 197 intangible, the name must also be used to distinguish a company’s goods and services from those provided by others. If the name meets these requirements, it can be amortized over 15 years. Here, for both Situations 1 and 2, the company must amortize these costs over 15 years. If the name is not a trademark, it meets the definition of a customer-based intangible and can still be amortized.
Generic domain name. This describes a product or service using a generic name, rather than a company or product name, and is not a trademark under Code Sec. 197. However, it is a customer-based intangible under Code Sec. 197 if it is associated with a website that is already constructed and maintained by the acquiring taxpayer for use in its trade or business, to generate advertising revenue or increase market share. Therefore, under both Situations 1 and 2, the costs of generic names can be amortized over 15 years.