Hi,

My company (an S corp) is considering purchasing some expensive (over
$100k) domain names this year. These domain names are generic English
words, but do not have a current business or website running on them. 
we would buy just the the domains name. (i.e., 'book.com' or
'speaker.com')

My question is, how does the IRS view domain name purchases?  Are they
classified as intangibles, and subject to a 15-year ammortization, or
can we expense the entire cost the first year, or ... ?

I know the answer is out there somewhere -- millions of dollars have
been spent on domain names in the last few years.  Can you show me (in
order of greatest preference): IRS guidelines or rulings, cases, or
legal opinion?

Thanks!

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Request for Question Clarification by pafalafa-ga on 19 Dec 2003 04:49 PST

Bad news...this appears to be an area of law/policy that is in flux --
domain names may be "contracts for services" or they may be
"intangibles" -- and you may have to request a "private letter" from
the IRS for interpretation of the status of a domain name.

You can see a recent article on the topic here:

http://www.gtlaw.com/pub/articles/2000/kirsner00b.htm

which says, in part:

----------

A company that purchases intangible property rights is usually
entitled to amortize the cost for tax purposes over a 15 year period.
For example, if a company purchased intangible rights for $1,000,000,
it would be allowed to deduct 1/15th of the purchase price per year
($66,667 in this example). However, the amortization of intangibles
regulations provide that in the case of the purchase of a contract for
services, the purchase price must be amortized over the period that
includes all renewal options.

Since the Court held that the rights in a domain name represent a
contract for services, and not intellectual property, the IRS might
take the position that this special amortization rule for service
contracts requiring amortization over the entire contract term could
be applicable to the purchase of a domain name. Because an Internet
domain name can be renewed annually for an indefinite period for a
nominal $35 fee, the IRS could maintain that the contract for services
with Network Solutions has an unlimited life, and therefore would not
subject to amortization deductions. This could result in substantial
tax costs to companies that purchase domain names.

----------

There does not appear by any quidance on this topic at the IRS
website.  What additional information would you need to have a
complete answer to your question?

---

Clarification of Question by uc1bear-ga on 19 Dec 2003 09:25 PST

Ok, Given that the IRS has not issues a clear ruling, what are the
100s of companies who buy these sort of domains doing each year?  A
"Private Letter" seems like it would take too long (tax year ends in a
week!) -- I just want to do my best to follow the 'de facto standard,
so I'm in the same boat as everyone else.

Hello uc1bear,

I should emphasize the disclaimer at the bottom of this page, which
indicates that answers and comments on Google Answers are general
information, and not intended to substitute for informed professional
tax or legal advice.  If you need up-to-date professional tax or legal
advice on this issue, you should contact a tax advisor or lawyer.

The IRS does provide one indication as to the tax treatment of domain
names.  A report by its Upstate New York district notes the "current
approach by the practitioner community" as to the costs of web site
development.  In particular, as to domain names:

"Domain names are being considered as being analogous to trade mark or
trade names and, accordingly, and may be eligible for recovery under
IRC 197. See: MacNeil, C. Ellen and Sandra K. Van DeWalle, eBusiness ?
Tax Treatment of Web Site Development Costs, 2000 TNT 49-107 Special
Reports (2000); Hardesty, David E., Electronic Commerce Taxation and
Planning, Chapters 7, 8 (1999)."

"Electronic Commerce: Challenges & Opportunities" (Research Project 50.31
Research & Analysis Division, Upstate New York District, October
2000), pp. 29-30 n. 55
U.S. Internal Revenue Service
http://www.irs.gov/pub/irs-utl/ecomfinalreport.pdf

In case you are interested, the first citation in that footnote is
available on the Web, though it does not seem to relate to this issue.
 (I presume that it relates to other aspects of the footnote.)

"eBusiness -- Tax Treatment of Web Site Development Costs", by C.
Ellen MacNeil and Sandra K. Van De Walle
Tax Analysts
http://www.taxanalysts.com/www/readingsintaxpolicy.nsf/WebSubjects/3C6C3A7B48FA20898525692F00729F21?OpenDocument

The second citation in that footnote can be obtained in its updated
version from the following web page, apparently on a trial or purchase
basis:

"Electronic Commerce: Taxation and Planning"
E-Commerce Tax News
http://www.ecommercetax.com/ECTP.htm

For the tax treatment of a trademark or trade name, you can search for
each of those terms in this document:

"Publication 535: Business Expenses (For use in preparing 2003 Returns)"
U.S. Internal Revenue Service
http://www.irs.gov/pub/irs-pdf/p535.pdf

Since both of the articles cited by my fellow Researchers discuss
Network Solutions Inc. v. Umbro International Inc., I thought that you
might like to see the actual decision:

"Network Solutions Inc. v. Umbro International Inc." (April 21, 2000)
Virginia Lawyers Weekly
http://www.valawyersweekly.com/archives/va/opin/sup/1991168.htm

One article (cited by Pafalafa) says that the Virginia Supreme Court
ruled that "a domain name is not 'intellectual property,' but rather
is a 'contract for services.'"  The other article (cited by Mvguy)
says similarly that the Supreme Court of Virginia held that "domain
names should be considered services rather than property."  However,
this article also notes that the Supreme Court of Virginia
acknowledged that "the right to use a domain name is a form of
intangible personal property" but did not find that fact to be
dispositive.

What the court actually says is "we do not believe that it is
essential to the outcome of this case to decide whether the circuit
court correctly characterized a domain name as a 'form of intellectual
property.'"  As noted at the outset, I cannot provide an expert legal
opinion; but it seems to me that neither article is correct about the
Umbro opinion.  It appears that the court did not decide this issue at
all; at best, it provides hints as to whether a domain name is or is
not property.

I would suggest that you take the foregoing information to a tax
and/or legal expert, to determine whether a domain name should be
treated in the same way as a trademark or trade name when you file.

- justaskscott


Search terms used on Google:

"domain name" site:irs.gov
"2000 TNT 49"
"electronic commerce taxation and planning"

I also browsed Findlaw to locate the site with Virginia court
opinions; searched that Virginia site for "umbro"; searched the Tax
Analysts site for "web site development costs"; and searched the IRS
site for "trademark".

---

Request for Answer Clarification by uc1bear-ga on 19 Dec 2003 12:21 PST

Hi Justaskscott,

Very good answer.  The only additional thing I would like to know if
if you can find any information on what other buyers have done in the
past.  i.e., Business.com, and so on.  Just one or two datapoints
would go a long way, but I understand if this isn't easy to come by. 
Let me know.  Thanks!

uc

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Clarification of Answer by justaskscott-ga on 19 Dec 2003 13:01 PST

I'm about to head out now, and will probably not be able to do the
follow-up work today or tomorrow.  However, I should be able to do it
on Sunday.  I hope that you will not mind the short delay.

---

Clarification of Answer by justaskscott-ga on 19 Dec 2003 22:54 PST

As it turned out, I had some time tonight to do follow-up work.  In
two articles (which mention the purchase of the Business.com name),
tax lawyer and litigator Myron Frans gives his opinion that a domain
name may be treated as a Section 197 intangible asset.  He indicates
that application of Section 197 to domain names is uncertain, but
reasonable.

"Tax Implications in Buying a Domain Name", by Myron Frans
Faegre & Benson LLP
http://www.faegre.com/articles/article_397.asp

"Business Beat - Name Game Is Big Money" (July 2000)
MinnesotaBusiness Magazine
http://www.minnesotabusiness.com/htm/ni20000701.058663.htm

These are not exactly datapoints, which I have not found.  However,
the articles do indicate how one practitioner views -- and has
presumably applied or influenced others to apply -- Section 197 in
relation to domain names.

Here's another article on whether domain names are intangible property:

http://www.gcwf.com/gcc/GrayCary-C/News--Arti/Articles/112000.1.doc_cvt.htm

Note, however, that the cases mentioned in this article and in the one
mentioned by Palafala-ga involve property disputes, not tax law.

If one buys assets with the intent to resell, the asset may be more
appropritaely treated as an item of inventory, rather than an item
that is expensed or capitalized.  You should consult with a tax
attorney or accountant to discuss your particular type of business and
what the tax ramifications will be for the purchase of the assets.