Source: https://www.bdo.com/insights/industries/government-contracting/fall-2016/so-you-bought-an-internet-domain-irs-chief-counse
Timestamp: 2019-04-26 09:52:11+00:00

Document:
In today’s business environment, a strong internet presence with a streamlined website is vital for survival. For many businesses, online market share growth requires the acquisition of applicable domain names for better competitive positioning. Until recently, there had not been any direct IRS guidance on the proper tax treatment of costs incurred—outside of the acquisition of a trade or business—to acquire, create or facilitate the acquisition of internet domain names. In Chief Counsel Advice (CCA) 201543014, released in Fall 2015, the IRS addresses whether domain names are a capitalized cost under IRC §263(a) or deductible as a trade or business expense under IRC §162. The CCA then addresses whether domain names are amortizable intangibles under IRC §197. According to the CCA, this second determination depends on the nature of the domain name and its use by the taxpayer.
In looking at case law, the CCA notes that a domain name is a form of intangible asset. It then cites the Treasury Regulations under IRC §263(a), which provide that the amounts paid to acquire, create, enhance or facilitate the acquisition of an intangible asset are to be capitalized, including amounts paid to another party for any intangible asset in a purchase (or similar transaction). As such, it concludes that costs associated with the acquisition of domain names are to be capitalized as an intangible asset rather than deducted under IRC §162.
The real substance of the CCA is in determining the how domain names fall within IRC §197, given the exceptions under IRC §197 for intangibles not acquired in the acquisition of a trade or business. Here, the CCA focuses on how domain names could constitute either: (i) a trademark under IRC §197(d)(1)(F) or (ii) customer-based intangibles under 197(d)(1)(c)(iv).
First, under the Regulations, a trademark includes any word, name, symbol or device adopted and used to identify goods or services and distinguish them from those provided by others. If a domain name were registered as a trademark, the CCA notes that it would clearly be amortizable under §197. However, the CCA also notes that most domain names are not registered. While non-generic domain names are generally used to identify a particular good, service and/or business associated with the website, identification alone is not enough to meet the definition of a trademark under §1.197-2(b)(10) unless the name also distinguishes the goods or services from those provided by others. As a result, the CCA concludes that a non-generic domain name that name both identifies and distinguishes the taxpayer’s goods or services from those provided by others may qualify as a trademark under IRC §197(d)(1)(F).
Alternatively, under Treasury Regulation §197(d)(6), a customer-based intangible includes any composition of market, market share or other value resulting from the future provision of goods or services pursuant to contractual or other relationships in the ordinary course of business with customers. As such, the CCA concludes that capitalized costs paid to acquire either a non-generic domain name that does not function as a trademark or a generic domain name are amortizable under IRC §197(d)(1)(c)(iv) as customer-based intangibles if the acquiring taxpayer uses the domain name in its trade or business to provide goods or services through a website that is already constructed and maintained by the acquiring taxpayer.
Lastly, the CCA warns that if a taxpayer acquires a domain name before a website has been constructed and no goods or services have been offered, then the domain name does not meet the definition of an IRC §197 intangible. In this case, the domain name would be an intangible subject to IRC §167 treatment. As a result, the taxpayer may only deduct amortization for the intangible if the taxpayer can show that the domain name has a limited useful life. However, since a domain name is usually intended to be used over an unknown period of time, the IRS believes no deduction under IRC §167 would be available.
By and large, this CCA provides guidance for a taxpayer who has acquired domain names outside of the acquisition of a trade or business in order to better position their trade or business in the online marketplace. However, unclear positions still remain. In particular, the CCA notes further factual development is needed to determine if domain names actually meet the definition of a trademark. Moreover, the IRS states that the analysis may differ if the domain names are purchased for reasons not discussed or outside of the secondary market.
1 Kremen v. Cohen, 337 F.3d. 1024, 1029 (9th Cir. 2003).
2 Treas. Reg. §1.263(a)-4(b)(1), and Treas. Reg. §1.263(a)‑4(c)(1).
Alison Torres is a tax managing director in BDO’s Transaction Advisory Services practice, and may be reached at atorres@bdo.com.
Brendan Sullivan is a tax senior manager in BDO’s Transaction Advisory Services practice, and may be reached at bjsullivan@bdo.com.
Ryan O’Farrell is a tax senior associate in BDO’s Transaction Advisory Services practice, and may be reached at rofarrell@bdo.com.
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