Amortization Simplicity Not Obvious for Acquired Domain Names
By Annette Nellen,
Professor
San José State University, San José, CA. Professor Nellen is also a Fellow at the New America Foundation, Washington, DC.
The Revenue Reconciliation Act of 1993 (P.L. 103-66) created
§197 as a simplification provision that would reduce
controversies between taxpayers and the IRS as to the amortization
treatment of acquired intangible assets. The 15-year amortizable life
provided by §197 covers many types of acquired, as well as some
self-created, intangibles. It appears that the categories of
amortizable §197 intangibles were intended to be very broad
because not only did the list cover many specific assets, but there is
also reference to “any other similar item” with respect to
some of the listed intangibles.
However, the language of §197 has not been broad enough and
there are some intangibles that do not fit neatly or obviously within
any of the listed categories. One example is a type of intangible that
was created after 1993 and thus, was not something Congress could have
even considered in crafting §197. This particular
“uncertain” intangible is a domain name or URL (Uniform
Resource Locator).
Typically, a business or individual obtains a domain name by
registering with a registrar1
and paying a nominal fee (perhaps $6 to $8). Other times, a business
may acquire a domain name that has already been registered by someone
else.2 Some of these purchases
have been quite newsworthy due to the dollar amount involved. For
example, in 2000, “loans.com” sold at auction for a
reported $3 million and in 2006, “diamonds.com” sold for
$7.5 million.3 Significant
amounts may also be allocated to a domain name when a taxpayer
acquires another business in a taxable acquisition.
Is an acquired domain name a §197 intangible? If not, then the
§167 regulations should be reviewed to determine if the asset is
amortizable. Under Regs. §1.167(a)-3(b), a safe harbor rule
provides that where there is no statutory life, no possibility of
estimating the life with reasonable accuracy, no prohibition on
amortization, and it is not an intangible described in Regs.
§1.263(a)-4(c) acquired from another person, the intangible asset
will have a 15-year life. Regs. §1.263(a)-4(c) lists a variety of
intangibles including some specifically covered under §197 and
others specifically excluded from §197. However, there is broad
language at the start of Regs. §1.263(a)-4(c) that provides that
the listed intangibles are just examples of intangibles acquired from
another party rather than an exhaustive list. Thus, it appears that
any intangible acquired from another party cannot benefit from the
15-year safe harbor even if it is not a §197 intangible.
Consequently, if it is determined that a domain name falls outside of
§197, it can only be amortized if it is to be used for a limited
period and the length of that period can be estimated with reasonable
accuracy. Given that a business would usually intend to use a domain
name for an indeterminable period of time, it would be a more
favorable tax result for a domain purchased from another party at a
significant cost to be a §197 intangible with a 15-year life.
Section 197 treatment seems logical given the simplification intent
behind §197 and the fact that §197 applies to some
intangibles that have indeterminable lives, such as acquired
goodwill.
Possible categories of §197 intangibles into which a purchased
domain name used in a trade or business or held for investment might
fall within seem to be:
1. Customer-based intangibles and “any similar item” per
§197(d)(1)(C)(iv) and (vi);
2. Any license, permit, or other right granted by a governmental unit or
an agency or instrumentality per §197(d)(1)(D); and
3.
Any trademark per §197(d)(1)(F).
Each of these possibilities is discussed next.
Section 197(d)(2)(A) defines “customer-based
intangible” as a “composition of market, market share, and
any other value resulting from future provision of goods or services
pursuant to relationships (contractual or otherwise) in the ordinary
course of business with customers.” Regs. §1.197-2(b)(6)
further provides that a customer-based intangible includes
“customer base, a circulation base, an undeveloped market or
market growth, insurance in force, the existence of a qualification to
supply goods or services to a particular customer, a mortgage
servicing contract, an investment management contract or other
relationship with customer involving the future provision of goods or
services.” Arguably, if someone owns, for example, the URL
“erasers.com,” there is value in it because they can
establish a website with that URL and generate advertising revenues by
selling space on that site to eraser companies wanting to list their
URL and company information. If generation of advertising dollars is
what causes the acquired domain name to have value, it seems to meet
the definition of a §197 intangible, assuming the URL and the
revenue generating possibilities can be viewed as a single asset. If
the domain name does not have value from providing goods or services
to customers, other possible §197 categories should be
considered.
A license, permit, or other government-granted right can be a
§197 intangible even if it has an indefinite term or can be
renewed indefinitely. Regs. §1.197-2(b)(8) includes the following
examples of assets that fall within this §197 category: liquor
license, taxicab medallion, airport landing right, regulated airline
route, and television broadcasting license. Oversight and management
of space on the Internet is under the direction of a non-profit
organization called ICANN (Internet Corporation for Assigned Names and
Numbers). According to its website,
ICANN:
is
an internationally organized, non-profit corporation that has
responsibility for Internet Protocol (IP) address space allocation,
protocol identifier assignment, generic (gTLD) and country code
(ccTLD) Top-Level Domain name system management, and root server
system management functions. These services were originally performed
under U.S. Government contract by the Internet Assigned Numbers
Authority (IANA) and other entities. ICANN now performs the IANA
function.
As
a private-public partnership, ICANN is dedicated to preserving the
operational stability of the Internet; to promoting competition; to
achieving broad representation of global Internet communities; and to
developing policy appropriate to its mission through bottom-up,
consensus-based processes.
Is ICANN a government agency? The U.S. Department of Commerce
played a role in setting up ICANN. Does that make it a government
agency? One commentator has stated that the Department of Commerce is
the source of ICANN's powers.4
The answer is not clear since ICANN is a non-profit organization
rather than a government agency even though it was established under
government authority.
Regs. §1.197-2(b)(1) defines a trademark as including
“any word, name, symbol, or device, or any combination thereof,
adopted and used to identify goods or services and distinguish them
from those provided by others.… A trademark or trade name
includes any trademark or trade name arising under statute or
applicable common law, and any similar right granted by
contract.” Is a domain name a “similar right granted by
contract?” While domain names and trademarks appear to share
some similarities, there are also some differences. Both domain names
and trademarks serve to identify a business and may have distinctive
characteristics. However, the purpose of a domain name is to represent
a series of numbers to locate a website. Domain names are only unique
in terms of identifying a website; they do not have any distinctive
shape, color, font, etc. Also, unlike a trademark, a domain name can
be issued as long as no one else has registered
it;5 there is no need to show
that it will be used in commerce. Also, some words that can be
registered as domain names, such as “loans.com,” are
unlikely to qualify as a trademark because they are common words.
A 2000 article suggested that a domain name derives its value from
two key sources: (1) the name's association with a company or product
(such as “Amazon.com”), and (2) inherent value that is not
part of the trademark value, but the value from registration of the
name (such as
“drugs.com”).6 The
author posited that the value associated with the company or product
can be treated as a trademark under §197, but that the inherent
value cannot be treated as such. If the government agrees with this
interpretation, might the inherent value be a customer-based
intangible since the likely expectation for the asset (and what gives
it value) is that it will generate revenue, such as from
advertising?
Depending on the facts and circumstances of the domain name and its
intended purpose (what causes it to have value such that purchase
price is allocated to it), a domain name might be a §197
intangible. Given the intent of §197 to simplify asset
identification, allocation of purchase price, and determination of an
amortizable life, it seems that Congress would have wanted a domain
name to be a §197 intangible. But, given the existing language
that does not clearly encompass a domain name, taxpayers will need to
make their case for such treatment. This is an area greatly in need of
guidance from Congress or the IRS.
For more information, in the Tax Management Portfolios, see
Nellen, 533 T.M., Amortization of Intangibles, and in Tax
Practice Series, see ¶2380, Amortization of Intangibles.
1
A list of registrars can be found at http://www.icann.org/registrars/accredited-list.html.
2
Domain names are also traded on the Internet, such as on eBay.
3
Rapaport News, 5/11/06; http://www.diamonds.net/news/NewsItem.aspx?ArticleID=14883. See also Zetetic, All Time Top Domain Sales; http://www.zetetic.com/domain-name-sales.html.
4
Froomkin, “Wrong turn in cyberspace: using ICANN to route around the APA and the Constitution,” 50 Duke Law J., 17, 71 (Oct 2000); available at http://www.law.duke.edu/shell/cite.pl?50+Duke+L.+J.+17. The call for establishment of a non-profit organization to manage the domain name system is explained in a policy paper of the Department of Commerce, docket number 980212036-8146-02; available at http://www.ntia.doc.gov/ntiahome/domainname/6_5_98dns.htm.
5
The Anticybersquatting Consumer Protection Act (P.L. 106-113, 11/29/99) which amends the trademark statute (15 U.S.C. §1125(d)) may deter individuals from registering domain names intended to be similar to trademarks.
6
Hardesty, “Taxation of Internet Domain Names--Can They Be Shoehorned into the 15-Year Amortization Rules?” 93 J. Tax'n, No. 6, 367.
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