Websites and intangible asset amortization under 26 U.S.C. s. 197: a marriage that bears little fruit.

• Author: Bowen, Christopher H.

1. INTRODUCTION II. GOGOL AND MICROEVIL: THE CORPORATE TAKEOVER FROM THE SILICON VALLEY III. WEBSITES AS INTELLECTUAL PROPERTY A. Copyright 1. Copyright Requirements in General a. originality b. Fixation in a Tangible Medium c. Subject-Matter Under 17 U.S.C. [section] 102 2. Copyright Law Applied to Websites and Computer Software B. Patents and Websites C. Trademarks and Websites IV. The Evolution of Tax Law for Intangible Assets A. Amortization in a Nutshell B. A Brief History of the Amortization of Intangible Assets 1. The Beginning of Intangible Asset Amortization and Section 167 2. Newark Morning Ledger Co. v. United States and the 1993 Revenue Reconciliation Act a. Newark Morning Ledger Co. v. United States b. 1993 Revenue Act 3. Section 197 in Brief V. THE TAXATION OF WEBSITES: INTELLECTUAL PROPERTY AND COMPUTER SOFTWARE A. Section 197, Its Regulations, and Revenue Procedure 2000-50: Their Application to Websites 1. Section 197 and Its Regulations a. Patents b. Copyrights c. Trademarks 2. Revenue Procedure 2000-50 and Other Tax provisions B. Section 197 Applied to the Acquired Gogol Intellectual Property Rights in the Microevil Hypothetical 1. The Web Browser 2. Patents for Website Software 3. Copyrights of the Software 4. Trademark of the Gogol Domain Name and Name Gogol as a Corporate Name C. Potential Solutions to the Problem 1. Regulatory Action 2. Congress VI. CONCLUSION I. INTRODUCTION

   Websites are not only an important part of our electronic lives, they are an important financial and business asset in their own right. (1) With the growth of the internet as a commercial, informational, and recreational resource, companies utilize websites as an important part of their corporate financial portfolio and structure. The increased value of websites that comes from this growth has made websites a valuable asset that companies seek to use as they would other business assets. (2) one important consideration is how the value of websites will be treated upon sale or exchange. In other words, is the website an asset that can be merely capitalized and act as a recovery of basis, (3) or can it be amortized and written off before being sold to a different buyer? (4)

   The tax code and regulations provide several potential methods to answer this question. This Comment will explore the interactions between some of those tax code provisions, specifically 26 u.S.C. [section] 197, and to a lesser degree, I.R.S. Revenue Procedure 2000-50, and the intellectual property rights associated with websites. Part II of this Comment presents a hypothetical, which will demonstrate how a website's intellectual property rights interact with some of the current tax laws. Part III will briefly explore how the intellectual property rights of copyright, patent, and trademark apply to websites, with particular emphasis on the issues that copyrights have with websites. Part IV will explore the history of intangible asset amortization, which culminated in the creation of 26 U.S.C. [section] 197 in 1993. Part IV will discuss the way websites' intellectual property rights interact with section 197 and Revenue Procedure 2000-50. Part V of this Comment will discuss conclusions and some potential solutions for the problems presented by the tax code and regulations.

2. GOGOL AND MICROEVIL (5): THE CORPORATE TAKEOVER FROM THE SILICON VALLEY

   Let us pretend that there exists a company called Microevil, Inc. This company, flush with cash from a release of an operating system upgrade that no one needed, but that the company "encouraged" its customers to use, looks out upon the tech landscape and finds a plucky Silicon Valley company, called Gogol, that created a web browser, which has become all the rage on the internet. Microevil decides that it wants to acquire Gogol and all of the software, patents, copyrights, trademarks, and other assets that Gogol has.

   At the time of Microevil's purchase attempt, Gogol has the following rights that are germane to the problem at issue in this comment (6): First, Gogol has the web browser itself, on which it holds some registered copyrights. Second, Gogol holds a patent that covers at least some of the software that runs its browser. Third, Gogol has registered copyrights that protect some of the software. Fourth, Gogol holds a trademark on its corporate name and the name of its browser. (7) All of these assets are sought by Microevil in its acquisition of Gogol.

   Microevil succeeds in its quest and Gogol is now nothing more than the trademarked name of a web browser and search engine, which is a wholly owned piece of the Microevil Empire. At the end of the year, Microevil's CEo and board calls you, their intrepid attorney, into the boardroom to explain to them the tax ramifications of the acquisition of Gogol's intellectual property rights. (8) You understand the intellectual property implications of the transferred rights that Microevil acquired earlier that year, but you need a moment to think of the tax ramifications of the Gogol acquisition. You know that the bottom line increased with increased ad sales, but you wonder now if some sort of loss exists that you can deduct from these profits. (9) Then you remember from the mists of a tax class or CLE you attended about how intellectual property rights are sometimes called intangible assets. Success! Microevil may have some deductions for this year's corporate tax return. First, let us see how all of these intellectual property rights and tax provisions work. Then, we will see how they work for Microevil and your report to the CEO and Board.

3. WEBSITES AS INTELLECTUAL PROPERTY

   All of the major categories of intellectual property may offer protection to websites. (10) Although this fact is true, this Comment will focus more closely on copyrights because copyrights pose some of the most interesting issues for the tax law discussed in this Comment. (11) However, at least a brief discussion of the patent and trademark issues surrounding websites is necessary to provide a full picture of the intellectual property landscape that websites occupy. Accordingly, after a more lengthy discussion of the copyrights a website may qualify for, a brief discussion of a website's potential patents and trademarks will follow.

   1. Copyright

      Since December 1980, computer programs can be protected by copyrights. (12) Websites are a form of computer software that courts and regulators analyze in those terms. When it comes right down to the nitty-gritty, websites are simply another form of computer software. Although a website may have specialized uses (e.g. Amazon.com for the sale of goods, Google as a search engine, or CNN.com for news and current events information), at their core, websites are simply another form of computer program. Therefore, websites must be analyzed as a type of computer software, and computer software is a suitable format for protection through copyrights. (13)

      Where this maxim becomes more difficult is how the classification of the software as copyrightable affects its tax status under section 197, which the Comment discusses later. (14) on the other hand, this section of the Comment concerns only how the nature of a website affects how copyright law applies to it. In that vein, two separate copyright questions arise in the context of a website: (1) whether the software that runs, operates, and allows the website to function can be copyrighted; and (2) whether the actual material posted on the website can be protected by copyrights. (15) This section will address these two issues in turn, and will then address how the two forms of protection may, sometimes, interact.

      1. Copyright Requirements in General

      All copyrights, including computer programs and software, must comply with the limitations Congress placed on the right. Therefore, websites must be a work of authorship that is both original and fixed in some tangible medium. (16) If the website, in either its programming and software or its content, is not a work of original authorship, the website will not be copyrighted at all. Finally, the work a party seeks to protect must be within the sphere of copyright protection. In other words, the work must fit into one of the eight delineated categories in section 102, or the work will not be eligible for copyright protection. (17) Thus, I will begin this section with a brief recitation of the two core copyright concepts and the subject matter copyright protects. Then, I will analyze how the elements affect websites.

      1. Originality

         For a work of authorship to be copyrighted, it must be original. (18) In the words of Justice O'Connor, "[t]he sine qua non of copyright is originality." (19) The Supreme Court, in detail, explained that originality was important because it went to the very essence of the power the Constitution granted Congress. (20) Thus, for any material to be copyrighted, it must be an original work.

         The question facing the Court in Feist v. Rural Telephone Co., however, was what originality exactly meant within the 1976 Copyright Act ("the 1976 Act"). The Court noted that the 1976 Act did not change the definition of original works. (21) No new doctrines needed to be formulated to deal with this issue. Instead, the Court looked to its own jurisprudence in the subject and made the following observations and decisions that shaped the meaning of originality for copyrights: unlike patents, where the work in question must be novel, (22) copyright, where the work must be original, imposes a far lower standard for the applicant or work to meet. (23) The work need only be slightly original. (24) Indeed, if two separate authors create the same exact work independently of the other, the works are still original and eligible for copyright protection. (25) Thus, originality is not a high bar for a work to meet.

         Despite the low bar that a work must meet to be original under the 1976 Act, not all works meet this level of creativity. The greatest...