Section 24368.1 - Election to Amortize Trademark and Trade Name Expenditures(a) In General. (1) Section 24368.1 provides that a taxpayer may elect to treat any trademark or trade name expenditure (defined in Section 24368.1(b) and subsection (b) of this regulation) paid or incurred during an income year beginning after December 31, 1960, as a deferred expense. Any expenditure so treated shall be allowed as a deduction ratably over the number of continuous months (not less than 60) selected by the taxpayer, beginning with the first month of the income year in which the expenditure is paid or incurred. The term "paid or incurred," as used in Section 24368.1 and this regulation, is to be construed according to the method of accounting used by the taxpayer in computing net income. See Section 23033. An election under Section 24368.1 is irrevocable insofar as it applies to a particular trademark or trade name expenditure, but separate elections may be made with respect to other trademark or trade name expenditures. See paragraph (3) of this subsection. See also subsection (c) of this regulation for time and manner of making election.(2) The number of continuous months selected by the taxpayer may be equal to or greater, but not less, than 60, but in any event the deduction must begin with the first month of the income year in which the expenditure is paid or incurred. The number of months selected by the taxpayer at the time it makes the election may not be subsequently changed but shall be adhered to in computing net income for the income year for which the election is made and all subsequent income years.(3) Section 24368.1 permits an election by the taxpayer for each separate trademark or trade name expenditure. Thus, a taxpayer who has several trademark or trade name expenditures in an income year may elect under Section 24368.1 with respect to some of such expenditures and not elect with respect to the other expenditures. Also, a taxpayer may choose different amortization periods for different trademark or trade name expenditures with respect to which it has made the election under Section 24368.1.(4) All trademark and trade name expenditures are properly chargeable to capital account for purposes of Section 24916(a), relating to adjustments to basis of property, whether or not they are to be amortized under Section 24368.1. However, the trademark and trade name expenditures with respect to which the taxpayer has made an election under Section 24368.1 must be kept in a separate account in the taxpayer's books and records. See subsection (c) of this regulation. See also Section 24916(h) and Reg. 24916(d) for adjustments to basis of property for amounts allowed as deductions under Section 24368.1 and this regulation.(b) Trademark and Trade Name Expenditures Defined. (1) The term "trademark and trade name expenditures," as used in Section 24368.1 and this regulation means any expenditure which--(A) Is directly connected with the acquisition, protection, expansion, registration (federal, state, or foreign), or defense of a trademark or trade name;(B) Is chargeable to capital account; and(C) Is not part of the consideration or purchase price paid for a trademark, trade name, or a business (including goodwill) already in existence. An expenditure which fails to meet one or more of these tests is not a trademark or trade name expenditure for purpose of Section 24368.1 and this regulation. Amounts paid in connection with the acquisition of an existing trademark or trade name may not be amortized under Section 24368.1 even though such amounts may be paid to protect or expand a previously owned trademark or trade name through purchase of a competitive trademark. Similarly, the provisions of Section 24368.1 and this regulation are not applicable to expenditures paid or incurred for an agreement to discontinue the use of a trademark or trade name (if the effect of the agreement is the purchase of a trademark or trade name) nor to expenditures paid or incurred in acquiring franchises or rights to the use of a trademark or trade name. Generally, Section 24368.1 will apply to expenditures such as legal fees and other costs in connection with the acquisition of a certificate of registration of a trademark from the United States or other government, artists' fees and similar expenses connected with the design of a distinctive mark for a product or service, litigation expenses connected with infringement proceedings, and costs in connection with the preparation and filing of an application for renewal of registration and continued use of a trademark.(2) Expenditures for a trademark or trade name which has a determinable useful life and which would otherwise be depreciable under Sections 24349 to 24354, inclusive, must be deferred and amortized under Section 24368.1 if an election under Section 24368.1 is made with respect to such expenditures.(3) The following examples illustrate the application of Section 24368.1: EXAMPLE (1).
X Corporation engages an artist to design a distinctive trademark for its product. At the same time it retains an attorney to prepare the papers necessary for registration of this trademark with the Federal Government. The fees of both the artist and the attorney may be amortized under Section 24368.1 over a period of not less than 60 continuous months.
EXAMPLE (2).
Y Corporation wishes to expand the market served by its product. It acquires a competing firm in a neighboring state. The contract of sale provides for a purchase price of $250,000 of which $225,000 shall constitute payment for physical assets and $25,000 for the trademark and goodwill. No part of the purchase price may be amortized under Section 24368.1.
EXAMPLE (3).
M Corporation brings suit against N Corporation for infringement of M's trademark. The costs of this litigation may be amortized under Section 24368.1.
(c) Time and Manner of Making Election. (1) A taxpayer who elects to defer and amortize any trademark or trade name expenditure paid or incurred during an income year beginning after December 31, 1960, shall, within the time prescribed by law (including extensions thereof) for filing its tax return for that year, attach to its tax return a statement signifying its election under Section 24368.1 and setting forth the following: (A) Name and address of the taxpayer, and the income year involved;(B) An identification of the character and amount of each expenditure to which the election applies and the number of continuous months (not less than 60) during which the expenditures are to be ratably deducted; and(C) A declaration by the taxpayer that it will make an accounting segregation on its books and records of the trademark and trade name expenditures for which the election has been made, sufficient to permit an identification of the character and amount of each such expenditure and the amortization period selected for each expenditure.(2) The provisions of paragraph (1) of this subsection shall apply to tax returns and statements required to be filed after December 31, 1960.Cal. Code Regs. Tit. 18, § 24368.1
1. New section filed 1-6-69; effective thirtieth day thereafter (Register 69, No. 2).[FN*]
This regulation is substantially the same as Section 26 CFR 1.177-1 .1. New section filed 1-6-69; effective thirtieth day thereafter (Register 69, No. 2).