Trademarks and trade names after the RRA.

• Author: Smith, Annette B.
• Position: Revenue Reconciliation Act of 1993

Companies with expenditures in connection with trademarks and trade names must determine how to treat such costs in light of Sec. 197, enacted as part of the Revenue Reconciliation Act of 1993 (RRA). Although Sec. 197 is beneficial in most instances, the ability of companies to amortize costs associated with trademarks and trade names is unclear if the trademark or trade name existed before Sec. 197 was enacted, but the costs were incurred afterward. Since guidance on Sec. 197 is not anticipated in the near future, companies must make judgments now about how to treat such costs.

The first step in analyzing the treatment of trademark and trade name costs is to determine whether such costs must be capitalized. Although most costs associated with trademarks and trade names are required to be capitalized, the courts have consistently held that certain expenses are deductible under Sec. 162. It is important to note that the determination of which costs must be capitalized or deducted was not affected by the enactment of Sec. 197. Examples of deductible costs include expansion costs attributable to advertising and promotional expenses, litigation expenses incurred by a losing party, settlement payments for lost profits or past royalties, and contingent serial payments under Sec. 1253(d)(1).

The next step is to determine the treatment of the capitalized costs under Sec. 197. Trademarks and trade names acquired or created after Aug. 10, 1993 are considered Sec. 197 intangibles. Thus, the costs associated with acquiring or creating these trademarks and trade names (i.e., those properly chargeable to a capital account) are subject to amortization over a 15-year period. in addition to these costs, there are many costs associated with trademarks and trade names that are incurred subsequent to the acquisition or initial registration (e.g., renewals, expansion costs and litigation costs).

Federal trademark registrations are renewable for additional 10-year terms, and can be renewed indefinitely. The costs associated with trademark and trade name renewals is one cost that is specifically addressed in Sec. 197. The costs associated with a trademark or trade name renewal are treated as an acquisition of a new Sec. 197 intangible. Thus, the costs associated with such renewals are subject to 15-year amortization. On the trademark or trade name renewal, the costs of original issuance or a prior renewal cannot be written off, but must continue to be amortized...