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IRS addresses income tax treatment of costs incurred to acquire Internet domain names

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Tax Hot Topics Internet Domain NamesIn a recent chief counsel advice (CCA) memorandum (CCA 201543014) (Sept. 10, 2015), the IRS addressed the applicability of Sections 162, 263(a) and 197 to costs incurred to acquire nongeneric and generic Internet domain names from the secondary market for use in a taxpayer’s trade or business. Specifically, the issues addressed were (i) whether the costs to acquire nongeneric and generic domain names are deductible under Section 162 or are required to be capitalized under Section 263(a), and (ii) if required to be capitalized under Section 263(a), whether the costs are amortized under Section 197.

In the CCA memorandum, the IRS describes nongeneric domain names as usually being a specific company or product name. Alternatively, generic domain names are domain names that are not a specific company or product name, but a generic term describing a product or service that people associate with the topic.

The IRS concluded that the costs incurred to acquire both nongeneric and generic domain names from the secondary market are required to be capitalized under Treas. Reg. Sec. 1.263(a)-4. Furthermore, nongeneric domain names qualify as amortizable intangibles under Treas. Reg. Sec. 1.197-2(b)(10) or 1.197-2(b)(6).  Generic domain names qualify as amortizable intangibles under Treas. Reg. Sec. 1.197-2(b)(6).  

The IRS said that nongeneric domain names that are registered as a trademark or function as a trademark meet the definition of a trademark under Treas. Reg. Sec. 1.197(b)(10) and thus constitute an amortizable intangible under Section 197. Alternatively, if the nongeneric domain name does not meet the definition of a trademark under Treas. Reg. Sec. 1.197(b)(10), but will be used in the taxpayer’s trade or business to provide goods or services through a website that is maintained by the taxpayer, then the domain name meets the definition of a customer-based intangible under Treas. Reg. Sec. 1.197-2(b)(6) and thus constitutes an amortizable intangible under Section 197. The IRS noted that its conclusion applies to a nongeneric domain name whether acquired as a separate asset or as part of a trade or business.

Similarly, the IRS stated that a generic domain name will meet the definition of a customer-based intangible under Treas. Reg. Section 1.197-2(b)(6) and thus will constitute an amortizable intangible under Section 197 if (i) it is acquired from the secondary market where the website is already constructed and will be maintained by the taxpayer; and (ii) it will be used in the taxpayer’s trade or business to generate advertising revenue by selling space on the website or to increase its market share by providing goods or services through the website. The IRS noted that its conclusion applies to a generic domain name whether acquired as a separate asset or as part of a trade or business.

The CCA memorandum analyzed the federal tax treatment of domain names acquired from the secondary market for use in the taxpayer’s trade or business and did not address the federal tax treatment of a domain name acquired for resale or for investment.

Contacts
Andy Cordonnier
+1 202 521 1502
andy.cordonnier@us.gt.com

Bryan Keith
+1 202 861 4116
bryan.keith@us.gt.com

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