The IRS National Office determined that the proper life for amortization of an acquired domain name is 15 years in Chief Counsel Advice 201543014. That was true whether the domain name was a generic domain name (one that doesn’t refer to a specific company or product name, say “dogfood.com”) or a non-generic domain name (one that is associated with a specific company, product or service name, such as “microsoft.com”).

The ruling assumes these domain names were acquired in the secondary market. That is, someone already had registered the name and the taxpayer was looking to acquire the rights to that domain name. As well, the ruling assumes that the name will be used in the taxpayer’s trade or business.

The IRS first points out that the one thing they are sure you can’t do is simply immediately expense the domain name. As the advice points out:

Section 1.263(a)-4(b)(1)(i) generally provides that a taxpayer must capitalize an amount paid to acquire an intangible. Section 1.263(a)-4(c)(1) provides that a taxpayer must capitalize amounts paid to another party to acquire an intangible from that party in a purchase or similar transaction. Section 1.263(a)-4(c)(1) also provides examples of intangibles requiring capitalization under this rule. One such example is a trademark (as defined in § 1.197-2(b)(10)). Thus, capitalization is required for an amount paid to another party to acquire a domain name that meets the definition of a trademark under § 1.197-2(b)(10)), but is also required for an amount that is paid to acquire a domain name simply because the domain name is an intangible asset. See Kremen v. Cohen, 337 F.3d 1024, 1029 (9th Cir. 2003) (domain name is a form of intangible property). Capitalization is required regardless of whether the acquired domain name is a generic or non-generic domain name.

Now that the IRS has decided the name must be capitalized, the next question is whether the cost can be recovered via amortization and, if so, over what period.

The IRS first looks at the issue of what to do with a domain name that is registered as a trademark, determining that such an item is clearly a §197 intangible, recoverable over 15 years.

Certain domain names may be registered as trademarks. A domain name that is registered as a trademark clearly meets the definition of a trademark under § 1.197-2(b)(10). Because none of the exceptions in § 197(e) and § 1.197-2(c) apply, the taxpayer's capitalized costs of acquiring a domain name that is registered as a trademark, whether acquired as a separate asset or as part of the acquisition of a trade or business, is a § 197 intangible. Further, such capitalized costs are not within the exception in § 197(c)(2) and § 1.197-2(d)(2) for self-created intangibles. Consequently, the taxpayer's capitalized costs of acquiring a domain name that is registered as a trademark, whether acquired as a separate asset or as part of the acquisition of a trade or business, is an amortizable § 197 intangible under § 197(c). Accordingly, these capitalized costs must be amortized ratably over a 15-year period, beginning on the first day of the month in which the intangible was acquired.

However, most domain names (even non-generic ones) are not registered trademarks. So the question arises whether that will change the period over which the costs must be amortized for a non-generic name that is purchased. The advice ultimately concludes that, under somewhat different logic, the same 15 year period will apply.

Alternatively, if a purchased non-generic domain name does not function as a trademark, we believe that the capitalized costs of acquiring such a non-generic domain name meets the definition of a customer-based intangible in § 1.197-2(b)(6) if the acquiring taxpayer uses the non-generic domain name in its trade or business to provide goods or services through a website that is already constructed and will be maintained by the acquiring taxpayer. Consequently, the capitalized costs of such a domain name used in that manner is a § 197 intangible unless an exception in § 197(e) and § 1.197-2(c) is applicable. The only possible exception is in § 1.197-2(c)(13) but it is inapplicable because the non-generic domain name described in this paragraph is a customer-based intangible. See § 1.197-2(c)(13)(i)(C). No other exceptions in § 197(e) and § 1.197-2(c) are applicable. Further, the capitalized costs of such a domain name are not within the exception in § 197(c)(2) and § 1.197-2(d)(2) for self-created intangibles. Consequently, the taxpayer's capitalized costs of acquiring a non-generic domain name used in the manner described in this paragraph, whether acquired as a separate asset or as part of the acquisition of a trade or business, is an amortizable § 197 intangible under § 197(c). Accordingly, under both Situation 1 and Situation 2, the company is required to amortize these capitalized costs ratably over a 15-year period, beginning on the first day of the month in which the intangible was acquired.

The next issue involves a generic domain name—how is that impacted by the rules for amortization of intangibles.

However, a purchased generic domain name is a customer-based intangible as defined in § 1.197-2(b)(6) if (a) the generic domain name is associated with a website that is already constructed and will be maintained by the acquiring taxpayer, and (b) such taxpayer acquired the generic domain name for use in its trade or business either to generate advertising revenue by selling space on the website or to increase its market share by providing goods or services through the website. Accordingly, such a generic domain name is a § 197 intangible unless an exception in § 197(e) and § 1.197-2(c) is applicable.

One key item to note is that the last two rulings assume that the taxpayer is acquiring an already existing site. Likely because this was the fact in the issues at hand, the ruling does not give the logic for what would happen if the domain name was purchased from someone who simply owned the name but was not using it.

Presumably the IRS would determine that even if such items were not §197 intangibles, it would not be reasonable to amortize the costs over the period up to the next renewal of the domain. The argument would be that while the fee for the domain maintains ownership, the real item of value purchased is the right to keep renewing that domain name.

So it seems likely that the safest approach would be to use the safe harbor intangible life found in Reg. §1.167(a)-3(b) for such intangibles that are not subject to the §197 rules—which just happens to be the same 15 years.