8151 / What special tax rules may apply to a trademark?

In most cases, the only essential date in the development of a trademark or service mark is the date of its first use in connection with the goods or services.

Except for an intent-to-use application, prior to that date of first use the mark is only an idea that generally has no significant value. Once the mark has been used on the goods or services, it is an amortizable Section 197 intangible. Upon its sale, with a business, or separately therefrom, the purchase costs are amortized over 15 years. Actually, under IRC Section 197, the sale of a trademark is considered to be the sale of a business or a substantial portion thereof. However, under the intangibles regulations, there is an exception in that the purchase of a trademark or trade name is not considered to be the purchase of a trade or business if it is included in computer software, a film, a sound recording, a videotape, a book or other similar property, including a patent or copyright; if the value of the trademark is nominal; or if the taxpayer irrevocably disposes of it immediately after its purchase.¹

Another exception is if the acquired trademark is not a purchase of all substantial rights under the principles of IRC Section 1253.² Also, unlike patents or trade secrets, the costs to create the trademark, including the costs to register the trademark, are amortizable over 15 years under IRC Section 197. Because an intent-to-use trademark application can be filed prior to actual use of the mark, such an application constitutes a separate asset, at least prior to actual use. After actual use commences, the costs of the trademark application are apparently merged with the other costs of the trademark.

For federal taxation purposes, a trade name is identical to a trademark, i.e., upon its adoption it is an amortizable Section 197 intangible.

Whether an Internet domain name is also a Section 197 intangible may depend on the extent to which the domain name also serves as a trademark or trade name.

If a trademark, service mark, or trade name created by the taxpayer is abandoned, then the amount reflecting the cost basis of any such capital asset can be deducted in the year of the loss under IRC Section 165. But, if the trademark was purchased and then becomes worthless, under IRC Section 197(f)(1)(A) the purchase costs of the trademark cannot be written off until all amortizable Section 197 intangibles purchased with it are also disposed of or become worthless.