Branding Taxation

Branding is important not only to businesses, but also to the economy. The intellectual property laws and tax laws should thus further the legitimate goals of encouraging and protecting brand investments while maintaining a sound tax base. Intellectual property protections for branding depend on advertisement and enforcement, both of which demand significant amounts of private investment by firms. Although one would expect similar tax treatments of both categories of investment, the categories are actually treated as vastly different for federal income tax purposes.

Under the current tax system, advertising costs incurred to foster brand equality are generally expensed whereas litigation costs incurred to protect that enhancement of value are generally capitalized and amortized over time (with the exception of costs related to unfair competition claims, which have been held to be currently deductible). This Article explores these and other tax distinctions for brand building and brand enforcement and makes appropriate recommendations when current rules lack theoretical justification. The chief recommendations are as follows: First, the tax law should be changed to require the capitalization of advertising campaign expenditures that strengthen, restore, or elevate a brand. Such expenditures can be analogized to improvement costs of tangible property, which have long been considered nondeductible capital expenditures.

Second, the current tax distinction between trademark infringement claims and unfair competition claims merely elevates form over substance. If substance is to prevail in tax jurisprudence, the litigation costs associated with both actions should be capitalized, reflecting that both are brought primarily to establish the taxpayer's trademark and not to recover income.