Monte chats with attorney and tax expert Paul Keating
[Commercials]
Monte: Hello, everyone. This is Monte Cahn, host at Domain Masters. Thanks for listening in. As everyone knows, we did a number of interviews at the T.R.A.F.F.I.C. East Conference. It was pretty exciting. I think we had 90 minutes of interviews with all kinds of folks that were on panels and also that participated in the event. We had a very successful T.R.A.F.F.I.C. East attendance and also presentation; and conducted the industry's first domain auction – live auction with an auctioneer. And walked away selling $439,000 worth of domain names, so it was a pretty cool event and I had a, I interviewed a bunch of auctioneers and found one here in Florida that was really great and was good with the crowd and he was a stand up comedian half the time as well, cracked everybody up but the bottom line was we had good participants in the audience and some great sales done. The highest domain name sold two weeks ago was Consulting.com for $180,000; it went to the folks at IREIT, which is Mark Ostrowski and their gang over there, which I've had on my show before. They also bought a couple other domain names: Bachelor.com, .net, and .org for $125,000, so that was a good pool by them. Some other domain names that were purchased were SoapOperas.com for $55,000, and a number of domain names in the five, four, five figures. And so it's been a pretty successful event and there was a lot of good content. I participated on four panels. As a matter of fact, my guest after the commercial is Paul Keating and Paul is an attorney and a tax expert and he's located in Barcelona, Spain, so he's doing us a big favor by being up at 1:00 o'clock in the morning and doing our interview. But I was on a panel with him and met him for the first time and had a great time playing golf with him and he's a very knowledgeable attorney. We're going to put him up on our partner's page and for all you, everyone looking for a kick-ass tax and legal expert that also knows International law and also's an expert in setting up International presence and corporations for your domain name holdings and the advantages of that, we're going to go over a number of those things tonight, including the advantages of going offshore, some hijacking issues and the amortization of domain names. And Paul's going to give us a good background of some of the things that we talked about of some of things we talked about on the panel at T.R.A.F.F.I.C. but also touch on some other items as well that weren't discussed there.
Just to give everybody an update, last week we didn't do a show because we were basically knocked out due to Hurricane Wilma. And Wilma just kicked the crap out of us; came in from the west coast of Florida and came in as a Category 1 on the west coast and turned into a Category 3 by the time it hit us. It actually picked up speed over the Everglades and we, personally, I lost two of my cars, windows blew out and I'm operating on generator. I'm still without power, half my staff is without power but my team here at Moniker really pulled together and got our office up and running on generator and we operated on generator all week and we answered the phones and although everyone experienced some damage to their houses or cars or boats, we really all worked together as a team and my staff really did a great job of getting us up to speed. And WebMasterRadio got knocked out as well so that's why you didn't have a live show last week but they got up on their feet, I think yesterday or today and so we're broadcasting live for the first time; everybody's safe.
So in any case, I'm going to break for commercial, pay some bills and come back on with Paul Keating and discuss some tax and legal issues for domainers.
[Commercials]
Monte: Hey, folks, welcome back to the show. My first guest tonight is Paul Keating. Paul has been practicing law since 1983 and he used to be with a firm, and a partner, in the firm Carroll, Burdick & Mcdoe, I'm sorry, McDonald.
Paul: That's right.
Monte: And it was a 93 attorney firm and Paul later relocated to Barcelona, Spain, where I guess he met his beautiful wife and he decided to relocate there, and now he's practicing law in Spain and specializes in finance, international tax planning, intellectual property. He continues to represent domain portfolio holders on all matters related to their activities, including business structure, financing, leasing, IP transfers and UDRP processing and related litigation. As I mentioned before we were on a panel, actually two panels together and I really was impressed with Paul's knowledge of the domain industry and more so on international tax and international property law. Paul, welcome to the show.
Paul: Well, thanks very much, Monte; pleasure, after hearing what you all went through in Miami, I'd say, you walk on water.
Monte: [laughs] Yeah, yeah; I even got my sandals on today.
Paul: It's amazing.
Monte: Definitely; I know you were stuck a little bit too
Paul: It's amazing [inaudible] . . .
Monte: Yeah, you were stuck a little bit too after the event. It was so interesting because everybody started bugging out of the conference a little bit early thinking that this was going to be a doozey of a storm, didn't think they were going to get out and although it did hit us late it was a doozey, I'll tell ya.
Paul: It didn't sound like that. I stuck it out; I was there until Monday. Finally in desperation I drove all the way to Ft. Myers and had actually, had actually no problems there; the airport was open, flew home, no problem at all.
Monte: Well, that's great, that's great. Well, uh, . . .
Paul: You got stuck on the east coast and it just got hammered.
Monte: Yeah, yeah, it sure did. It sure did. Well, first of all, I want to thank you for being on the show. I know its 1:00 o'clock in the morning there and I know you have a lot of pressing issues, so for you to take the time and be on the broadcast, is a real tribute to what we're doing in the domain community and I really appreciate your time.
Paul: Well, I really appreciate you for inviting me on.
Monte: Right. And some of the things that I'd like to talk to you about are actually the things that you specialize in is to cover some of the areas that we discussed at T.R.A.F.F.I.C. and to maybe go into a little bit more detail about some of these items so tonight I would like to cover the advantages of going offshore, you know, incorporating offshore and maybe the differences of, maybe discussing the differences of going offshore as a corporation and then of course, covering that its okay, obviously, to have domain names registered with a US-based registrar but as long as you're incorporated offshore, some of those advantages from a tax standpoint; the domain hijacking issues that we discussed on the panel and theft as a potential claim and some of the depreciation and amortization issues for domain names.
Paul: Sure, be happy to. How ‘bout we cover hijacking first, ‘cause its kind of an isolated issue versus the other ones?
Monte: Yeah, that sounds great. And obviously hijacking has been and continues to be one of the top focus points of the domain industry. It's something that increased quite a bit since ICANN changed their transfer al(?) policy between registrars and I'd be interested in hearing your take on how this is all going from a legal standpoint and what you're seeing for your clients.
Paul: Well, uh, let's see, one of my main frustrations in being involved from the litigation side or dispute side of domain names is that we are all, at least as lawyers and portfolio holders, are rather burdened by the set of very, very bad cases that came out in what I call the Wild, Wild West Days of the domain world, where you had people clearly, um, trying to sell coca-cola.com to Coca-Cola.
Monte: Right.
Paul: And that resulted in this just litany of bad case law that everybody cites against us now. And I'm really out there plugging, trying to find new theories to apply to this, to kind of try to get the domain name business, kind of more into mainstream, at least in terms of how judges look at domain holders, especially large portfolio holders like many of my clients. And so one of the theories that we're coming up with is in the theft concept. Before this, and even now, the claims that you could make in a theft arrangement is assuming the registrar is unable to or unwilling to recapture your domain for you or in the event you simply didn't realize that it had been hijacked until [inaudible] start to deal with it on an informal basis, the available claims that you have, litigation-wise, were relatively narrow and limited and they have a lot of defenses that you come up against. But one of the things that I'm exploring more and more and we're actually, I'm actually pressing a case in California on this claim, this theory, is just simply describing this theft, theft of property. And the advantage that you get there is that most state laws have, most states have separate laws on theft of property and all of them say that no matter how long a person has held a stolen property and how they obtained it, it's still stolen. And they never had proper title to it so the title can always revert back to the original owner. And of course the only problem we face here is classifying domain names as property under state law.
Monte: Right.
Paul: And there've been . . . California's a great jurisdiction for this because the Kremin case came out and absolutely, the 9th Circuit, anyway, came right out and contradicted what they said in 1999 and said that a domain name was in fact property and could be converted or in other words, stolen.
Monte: Right.
Paul: Uhm, there's some case in Virginia that folks thought of being service contracts and other cases that deal with it, describing it as service contract in terms of specific claims. It's important to know that the nature of the claims that they are issuing these rulings in connection with are things like liens and attachments and things like that; rights of seizure in a civil case where you're not alleging theft at all; and the problem is that in a lien or a seizure, really the court has to issue an instruction to the average Sheriff or Constable; then go out there to this particular place and go get that piece of property and bring it back to me, as the judge. And then I will give it to the plaintiff. And with, you know, nefarious things like domain names, it's very difficult to issue those instructions. So the courts are very shy about doing it and they've always, they have always been very conservative and in allowing foreclosures, liens, seizures that are not, that are not . . . when the property's not capable of a specific instruction to a very basically educated person.
Monte: Right.
Paul: But I still think, I think, as there's more and more . . .
Monte: Now, there's, there's . . .
Paul: . . . as more and more judges become knowledgeable, that I think more and more people are actually going to take the line of California; there's a case in Colorado, there's a case in Louisiana. There's the entire bankruptcy rules that all describe these things as property and have for many years. So I think it's a good avenue and I would really like to see more, more cases brought in connection with hijacking and in other areas of domain loss so that we can start creating and building this backing for the industry as a whole.
Monte: Now, um, now you covered a couple, a couple areas within the United States, so of course we're all familiar with the Sex.com case which was in the 9th District Court of California. Now, you mentioned Colorado and Louisiana; those are treating the names or domain name theft cases as property as well and do you have the domain names that were involved in those particular cases?
Paul: I don't have the domain names off the top of my head. If anybody's interested, I'll be happy to email them to you, Monte, and you can put them on your site and we can otherwise publish them. Um, [inaudible]
Monte: Alright, well, great, because that's a . . .
Paul: . . . citation of the case which I'm happy to provide later.
Monte: Right, because those actually, the more of those that happen . . . now, now, where you live, which, you know, is in Europe, how does International law treat these types of cases? Are they more strict? Has there been any precedents set internationally regarding domaining theft and what's going on over there?
Paul: That's a great question. Um, there haven't been any as far as I've been able to uncover and I've been working on this year as well, with the idea of kind of writing a little “cookbook” on how to do it. Most people here are relying entirely on using the registrar process. Litigation here is very, very different from litigation in the United States. It takes years to do anything. So people look at litigation as just the absolute ultimate forum in which to resolve any form of dispute. So as a result there have not been . . . people tend not to use this process; and secondly, the judicial reporting process in Europe as a whole is no where near as complete and wholesome as it is in the United States.
Monte: Right, right. And unfortunately, there's a couple of very known registrars in Europe that are responsible for harboring the hijacked domain names that are stolen from others. One being Ghandi, which is in France and there's a couple others throughout Europe; and then of course some in Korea and Asia, but it's a shame that the European community and the legal aspects of that particular . . . nobody's ever done anything there. I'm wondering what would happen in a place like France who [laughs] is slow to move on anything, but, uh, going after a National organization that's in their country.
Paul: Well, don't tell the French that they're slow about moving. [chuckles]
Monte: [laughs]
Paul: But, I think the more . . . the more efficient way of doing that is getting together and hammering ICANN and getting them to actually terminate the contract with them. ICANN has to fundamentally police this concept, otherwise, it won't work from that perspective. For example, as a domain name, for the domain name registrant, the owner of a domain name, I can not sue a registrar for violating the registrar's contract with ICANN.
Monte: Right, right.
Paul: Um, I'm not considered to be a party to that agreement and as a matter of fact, the actual contract itself, with all of the registrars, in fact say that there is no third party beneficiary and no third party can sue, any . . . either of us, whether ICANN or the registrar, for violation of any contract provisions stated in this agreement. That's even in their brand-new 2005 agreement. And its . . . I understand the reason its there from the parties standpoint, but it is a shame because it removes a large degree of pressure that can be applied against the registrar and indirectly against everybody up the food chain.
Monte: Right, right. Well, the good news is that at least some of the, some of us registrars are being recognized for preventing these things like these hijacking and doing everything we can to cooperate with other registrars that claim domain names are hijacked and . . .
Paul: I agree, and I want to be probably the 99,000th person that's congratulated you on [laughs] getting that award; it was a very good thing, a very good thing.
Monte: Yeah, that was a, it was nice to be recognized, and those of you who don't know, we won an award of excellence for preventing hijacking in our industry; one of three registrars that won that award. Fabulous was one and so was DirectNeck; because you know, we go out of our way to make sure that hijackings are prevented and furthermore, that we cooperate when there are domain names that have been stolen, to make sure that they get back to their rightful owner. So luckily to date, since 1999, since our inception, we've never had a lost or stolen domain name as a result of our efforts. And I owe that to the hard work of our staff and everybody that takes this seriously in my office, because we look at that as protecting, you know, our registrar or registrant's assets and look at much different than just a domain name, so that's the reason for doing that. So . . .
Paul: Yeah, and hat's off to you and I really hope that your ability and your diligence continues. I think it's a good thing for registrars to act in that way.
Monte: Thank you. So moving on to staying on the topic of being offshore, since we covered a little bit of the international law from a domain hijacking standpoint and what hasn't occurred, what are some of the advantages of going offshore as a domain name holder and corporation that holds domain names? And where would say are some of the top places to incorporate these days? You know, a lot of people are looking at various places across the world to incorporate now that they're going offshore and trying to, you know, safe harbor tax, you know, their tax potential, you know, exposure by doing so. So maybe we can walk through some of that with you.
Paul: I'd be happy to; and I would like to stay away from specific advise, because, number one, it seems as though a great tax plan structure is created, the more publicity that's given to it is generally its own death knell, because governments tend to regulate around it. So I'm happy to . . . its also a very, very specific area and its, kind of each plan is unique to each person's situation but I'm happy to discuss it generally.
Monte: Okay. Let's talk generally and lets try to get, you know, try to give the listeners some good hints about what they should be doing when thinking about offshore and, you know, maybe, you know, top four, five places to incorporate and why.
Paul: Well, its . . . I'll try. There are two main benefits of going offshore. One is, if done properly it can greatly assist you in limiting any residual liability stemming from your portfolio. As any portfolio holder has, you know, you have an experience of acquiring a list of dropped domains or a list of domains you almost never have the ability to do a decent check of them before you have to buy them. They're usually an all or nothing kind of deal. And they're really . . . once you've acquired a domain name, unless you have a friendly registrar, there's really no way to unregister your domain name, formally. You can dump it into a registrar's dump basket but that's still sitting out there as registered.
Monte: Right.
Paul: So the main, one of the main benefits is limitation of liability. I mean, everybody tends to stop thinking about disputes after you talk about a UDRP; well, you win or you lose and well, I can default and lose or I can lose after putting together a great argument and that's it – all I have to do is give up the domain name and, or its given up for me, and I walk away. But that's not the end of the story, then. The trademark holder who complained has the right to seek damages from you. And the damages begin at all gross revenues that you ever earned utilizing this domain name, minus only those expenses that you can prove where required in order to earn the gross revenue.
Monte: Okay . . .
Paul: You're looking at a huge amount of money, potentially. You're also looking at potentially legal fees, bail and court costs, certainly; not to mention people chasing you around trying to secure payment on their judgment. So if done properly and structured properly, you can insulate yourself from this kind of personal liability. I'm constantly amazed when I was in Miami the number of portfolio holders who have substantial portfolios in their own personal names still. I think its just a disaster waiting to happen for them.
Monte: Now, when you say properly versus improperly, so just not incorporating offshore isn't the answer, but what's a proper . . . what do you mean by properly, what's the proper way to do it.
Paul: Well, the proper way of doing it is to form an appropriate entity offshore, in a jurisdiction that's (these are in my words) not going to roll over and play dead and just simply deliver any documents that's requested of it, alright? You know, secrecy, or confidentiality, rather, becomes a key word. The other thing that's perhaps even more important than that is dependent upon the portfolio, the domainer themselves. Do they . . . having created an entity offshore, do they treat it as a separate legal person or do they treat it really as their own pocket, okay? So you can go out and create the most elaborate structure in the world, but if you misuse it, people are going to go right through the corporation and come straight to you. And they would be able to do that even if you incorporated on California, New York, New Orleans, wherever. Louisiana, wherever. If you don't treat a corporation as though it was a living person – you don't follow the corporate formalities, you never issue the stock certificate, and you dip into the company bank account whenever you feel like going off on vacation, that sort of thing – then the court's not going to treat it as though it was a real company and then they're going to allow any plaintiff . . .
Monte: . . . to go right after you . . .
Paul: . . . to go after you personally.
Monte: Right.
Paul: So, you know . . . what I'm against are people who get their tax and liability planning from the back of the magazine in the back of the United Airlines plane on their way off to Panama for vacation. Okay? You know, buy your own shell corporation for $1,200, kind of thing. You're gonna get what you pay for in that regard and you're not going to really get any of the benefits that we're talking about. So that's the bad way to do it. Okay?
Monte: Okay.
Paul: Um, and the second benefit that you get from this is that you get the ability to do some tax planning. You don't get to permanently and forever avoid paying Uncle Sam, but it does allow you a great deal of leeway in terms of deferring taxes, and that can be very important. If you think about the fact that, say every hundred dollars that I earn a net profit, I have to pay, well, depending upon what state you're living in, somewhere between 30% and perhaps as much as 52% in taxes, you can appreciate, well, the answer to the question, which is kind of, um, rhetorical, which is, if I didn't have to pay that today, and I could reinvest that money in my business ($52 out of every $100), how much more money could I earn . . .
Monte: Right.
Paul: . . . so you're dealing with a geometric progression of wealth. And then, when after the deferral process is over, and you start utilizing the revenue for your own benefit, then you can start scheduling your tax payments out and planning them out, that you're actually paying the money after you've used it to generate the wealth.
Monte: Now at what point, at what point, because this always a question that comes up, do you start claiming the income? And I guess that varies for different people, at different times, but what's the general rule of thumb that you advise your clients on that matter?
Paul: Well, there's two . . . that's a huge issue. I mean, it depends on where you're a resident of for tax purposes, where you're a citizen of for passport purposes but I guess the rule of thumb that would apply to everybody (and there may be other rules that would be more restrictive than this) but the rule of thumb generally is if you start receiving the benefit from it directly, you take the money and you use the company credit card to buy your car, you use the company credit card to go on vacation, or you take the money when you come, you know, if you're formed in Panama and you go to Panama and collect a bundle of cash and go back home, that's clearly income. That's also tax evasion. That's not the programs that we set up. Um, its more complicated if you're a U.S. citizen, because we have the benefit of paying taxes on our global income, regardless of where we earn it and regardless of where we reside. But there are still, nevertheless, planning tools that you can implement to minimize that and to defer it.
Monte: Such as?
Paul: Well, you can . . . you can engage in joint ventures with people such that, by contract, you have essential control over what you really need to control, which is the transfer of domains. Okay? You can . . . and you do the joint venture along with a non-U.S. citizen so that you satisfy a very complex set of rules called the Controlled Foreign Incorporation Rules. And through a combination of joint ventures, you can utilize trust vehicles, you can utilize a number of other vehicles, that are . . . it would require a significant amount of time to go through each one of them and why, but there are vehicles out there you can utilize to defer all or a portion of the monetization value of the domain.
Monte: Right. And then, I would assume you could take some kind of annual allocation for your work that's involved in the corporation and still, you know, get the benefits of that deferred income and the tax portions of that deferred income over time?
Paul: Correct. You could, for example, form an S-company, an S-corporation in your particular jurisdiction where you live and that S-corp. could have a legitimate lease agreement to monetize some portion of the domain portfolio or all of it. And as long as all the other rules are met – the I's are dotted and the T's are crossed – then your revenue can be limited to what you actually take out of that s-corp.
Monte: Got it.
Paul: So the rest of it is running and regenerating wealth for you . . . for the owners of the entity, to be more precise; so . . .
Monte: Right. Okay, so, um, . . .
Paul: . . . its something that can't . . . that's why I said its very specific for every person. There's really no, you know, it's not instant soup, you know, you add boiling water to create plan, [inaudible], um, and if done well, its perfect. If not done well, it can be a disaster. I mean, there are a lot people who have offshore companies {inaudible] in Caymans and Panama but they're really, you know, they're really not separate.
Monte: Right, right.
Paul: They're the same people in the same breath would say, I sold my domain, XYZ.com, for $6 million; but if you do the WhoIs.com look up, you know, the WhoIs.se and you look at the history, well the history is another third party out there that's supposed to be the owner of this, so why is this person running around claiming that he sold or she sold this domain name that she used to own or that she did own, etc. I mean, that's just bad planning. If you transfer the ownership into a proper structure that's offshore, its no longer yours. It's the company's. Alright?
Monte: Right.
Paul: You have to live that mantra; you can't just set it up on a piece of paper and then forget about it.
Monte: Well, what countries are typically the best countries to set up these offshore entities these days? ‘Cause you mentioned Nevis and you mentioned Panama, which was real popular, I guess, a couple years ago and I guess its perceived as being popular in addition to Caracal and you know, some of the islands in the Caribbean and that kind of stuff.
Paul: Well, as a rule of thumb, I try and stay away from any jurisdiction where the impact of reading the address on a business card would be, Uh-huh, you're avoiding taxes.
Monte: [laughs]
Paul: So, that takes . . . and I also avoid any jurisdiction that's signed an informational tax exchange treaty with the United States, where they're agreeing to provide tax information for matters pertaining to fraud. Right?
Monte: Right.
Paul: And the reason I do that is that the IRS takes the position that if you're evading taxes in the United States, its fraud. Well, certain countries, although they've signed a treaty with the United States, say, well, wait a minute, when we say fraud, we meant fraud in our country, not fraud in your country. Okay? And not tax evasion. But that's a political decision, so if the wind of politics changes in that country, you can find yourself on the losing end because of your tax related information and disclosures to your own private jurisdiction has now been shared with the United States government or Canadian government or any other jurisdiction where you may have a tax liability. Um. So I stay away from those kinds of countries, so that rules out companies like Nevis, countries like Nevis. Panama's not so bad; it has some distinct advantages. It's an English-speaking country, you don't have a currency exchange problem. They have pretty good bank secrecy laws and tax secrecy laws. I favor jurisdictions that actually, believe it or not, have tax treaties with the United States. Luxembourg is one of them, it's a very good one. Because simply, it passes the smell test. You give a business card that says Luxembourg on it and everybody says, hah, what a beautiful place . . .
Monte: Oh, yeah.
Paul: They never think about it as a, a . . .
Monte: A tax shelter country.
Paul: Yeah . . . I don't like to use such words, but they don't think of it as a beneficial place for tax purposes, let's put it that way.
Monte: Right, and [inaudible] . . .
Paul: And surprisingly enough, the United States has its own saving, you know. If you wanted to pick up your business and house, lock, stock and barrel, and move to the U.S. Virgin Islands, you could save a substantial amount of your taxes.
Monte: Oh, really? Like if you were to locate to St. Thomas, St. Johns, any of the Virgin Islands?
Paul: Yeah. Yeah. But you have to satisfy the residency requirements there. Because its part of the United States, they can't prohibit you from moving there – but you have to actually move there. You can't just maintain a fake address or buy a condo and never go there, kind of thing.
Monte: Right.
Paul: You have to follow the rules. [inaudible] . . . they're very strict in applying the rules.
Monte: Now how are the U.S. Virgin Islands protect . . . what differs there than does in the United States? Are you saving, um, are you saving your normal income, your normal . . .?
Paul: Well, you have no state tax equivalent, and you have a greatly reduced Federal tax obligation because its an area of the U.S., as a matter of its political policy, has decided needs more people to retain more income so that people will go there and develop businesses and it'll be an attractive place for tourism, etc., etc., etc.
Monte: Oh. Hence, the reason why a lot of pharmaceutical companies located to Puerto Rico.
Paul: Mm hmm; there you go.
Monte: Okay, got it.
Paul: So, I mean, its funny, because the U.S. and IRS are always running around banging pots and pans all over the world and screaming about other jurisdictions that have similar situations but they never, ever want to talk about their own; or our own, since I'm an American citizen. [laughs]
Monte: Right, right.
Paul: But Luxembourg has some very, very interesting alternatives to that, which fall very neatly into the domain concept. See, domain names . . . the only reason that this concept really works so well in the domain name business is that the question is where is a domain name located? Right? Well, since a domain name is a form of intellectual property, its located wherever the owner is located, right? With certain exceptions. And for that part, you could be that registrant anywhere. You just put the company there. The company owns all the domain names. All the money that is used to pay the registration all comes from the company - doesn't come from you, it comes from the company – that company leases its domain names to somebody else to monetize. A certain amount of restrictions apply. For example, if you have domain names that are resolving into actual web pages, you want to make sure you know where those individual web pages are being hosted, because some countries, Spain for example, France, UK, and the U.S. to a much lesser extent but they're going to be moving in that direction, all say that where the web page is hosted is where the business is and where the money is earned.
Monte: Right.
Paul: So you want to try, you want to really understand the concepts that you're dealing with and move as many of those things offshore so that you can satisfy all of these rules. And technology . . . I mean, European data centers and hosting centers are just as good as the ones in the States. They may not be located next door, but they're a phone call away and they all have, you know, 24/7 service desks, they all speak any language you want them to speak and they do a good job. So there's no reason not to; there's no technological reason not to. You may have a relationship that you want to protect with someone, but that's different story, a different basis for a decision.
Monte: Right. Hey, I'm getting a couple questions on the forum. Neddolls asking, what's involved in transferring personal property into a business entity?
Paul: Ah, depends on where you're located, but if you're in the U.S., and it depends upon the nature of the business entity as to whether it does you any good, but there's a Federal statute called Section 351, and Section 351 basically says, if I take a piece of property and I contribute it to a company, corporation, S-corporation, LLC, etc., and in exchange for that, I receive the stock of the company (lets keep the example really simple – I own this company 100%). And I take 1000 domain names and put it into the company in exchange for that the company gives me the stock certificates, evidencing 100% of ownership; there's no tax consequence to that. I don't have a gain that I need to recognize for income tax purposes. What I have is a piece of paper, the stock certificate, that's worth exactly what my domain names were worth on a cost basis, a tax basis, what I paid for them, minus what I've already amortized, if I've amortized anything. And when I sell that piece of paper, then I have a taxable gain, and the gain is the difference between what I sold it for and what my original tax basis was, when I did the domain-stock exchange.
Monte: Right, right. Okay, good.
Paul: So . . .
Monte: Okay. Now, one other question. Are you familiar with the 2257 Rules that the adult communities are dealing with right now?
Paul: Yes. I mean, I'm not an expert in it but because it pretty much touches any portfolio, I have to understand it, so . . .
Monte: So, one of the big questions is, are you protected anymore? So, a lot of companies are relocating offshore due to that issue and you know, mainstreamers are locating offshore just like, for the reasons that you were explained as well. But are you protected anymore if your registrar's in the United States versus International? So, you know, we've always stood by, from a (?) perspective, it doesn't matter where you are, you're going to have to abide by those things, but if you're with a U.S.-based registrar, like Moniker, does it matter that you're with an International registrar, if you're located, your corporation, your business and your hosting is offshore, is there any advantage to also working with an International registrar?
Paul: Uh, there is. There's one large advantage, and really only one, and that is that in the event of litigation, its far more difficult for the plaintiff to obtain information from an offshore registrar than it is a domestic U.S. registrar. Um, case in point. I was recently involved in helping someone defend against a “spim” case (spam and instant messaging), and the plaintiff in this case (who I can't name) actually filed a lawsuit about six months, actually six months before they served it on the defendant. They filed this lawsuit as Plaintiff vs. John Doe, okay? And then they took that complaint and used it as a basis for the attorney for the plaintiff issuing subpoenas to anyone he felt or she felt like issuing them to: banks, Paypal, registrars, hosting companies, anybody. Okay? And they just specified the information to be responded, to which needed to be responded. And, it was shocking just how many people simply responded. Banks. They just, they issue a subpoena – the complaint would be John Doe, not name anybody. The subpoena would be issued saying, Give me all of Monte Cahn's banking records. . .
Monte: Right.
Paul: . . . And the bank would give it to them. Ah, the registrar, in many cases, would give it to them, without even objecting, without asking any questions at all. Now, going offshore is a large step in preventing that sort of thing. Um, I will say that the issuance of subpoenas is a valid process and, and as you know, Monte, from getting a subpoena, if it's validly issued, you can't say no. You have to give that information. All you can do is object on the basis that the subpoena is overly broad or unduly burdensome or some such. But that really just boils down to a negotiating process with the issuing attorney, and eventually at least some information is going to be produced. So the major advantage of using a registrar that is offshore is exactly that. You, you . . . unless the registrar is just going to voluntarily comply, or unless the plaintiff is just so serious about going and getting you, that they actually go through some very complex procedures in order to have a subpoena issued outside the United States, they're never going to get the information. And in many countries, they don't recognize private discovery, like we do in the United States. In Spain, for example, if I'm involved in a lawsuit, in a lawsuit here as an attorney, I have to ask the judge to ask the other side the question. And the judge can say, No, I don't need to know that.
Monte: Oh, I see.
Paul: Or, That's confidential; I don't think they need to give that. And if I want to re-see a document, I have to describe exactly what that document is, you know, letter to Monte Cahn, dated November 2, 2005. So, they tend not to want to . . . people in the United States, lawyers in the United States get very nervous when they have to go and conduct discovery overseas. Right? That is a benefit. I'm sorry; just go form another registrar overseas, Monte, and you can get all that business.
Monte: Well, actually, we're doing that.
Paul: Good [laughs].
Monte: Uh, we have twelve registrars, so we're always looking for good registrars offshore.
Paul: [inaudible]
Monte: Matter of fact, I think we'll engage your services to do that.
Paul: Okay.
Monte: [laughs] So in any case, okay . . . lets move on to the way people recognize domain names in terms of property from a tax standpoint – the amortization and depreciation of domain names. And this was a very interesting subject that we discussed on the panel and it answers a lot of questions because there's a huge variance in what people are doing. Some of the corporations that have bought portfolios versus some of the individuals that bought domain names and there's amortization philosophy that ranges greatly between two to fifteen years and how people are treating it. So, give us your take on what's happening in the industry currently, why people are treating it differently and what you recommend as a tax attorney and specialist in this area of what people should be doing.
Paul: Okay. You're absolutely correct. There's a huge spectrum and it actually runs from people who are expensing the domain, the cost of the domain, in the year that they acquire it, which is in my opinion and most people's opinion is not sustainable as an opinion. That as a basis is absolutely wrong. And if you get caught doing that, then you're . . . the penalty that you're going to pay is the back taxes, the penalty for having done it, plus interest on the amount that you didn't pay. So that's just waiting for the truck to hit you while you're standing in the middle of the intersection. There's a, in terms of amortization, there's a range. Many companies, for example, Martex has disclosed in their SEC filings that they use anywhere between 12 and, I think its, 64 months as their amortization schedule.
Monte: And what do they base the different time period on? I mean, what are they saying this 12 versus . . .
Paul: [laughs] I wish I knew. I've been trying to find that out from them for awhile and if they're listening, I would love to learn to just know what the basis is, because I can't sustain it. I don't understand it, other than an argument that goes something like this: that we don't believe that we will be earning any money from this domain name after between 12 and 64 months. We think that it will be an absolutely useful - useless – piece of property and in fact, by that time, we will have abandoned it. That's really the only argument that you could make. Amortization is an economic concept. All you're doing is allocating the purchase price, or the creation price of the property over the period of time in which its actually generating revenue. Okay?
Monte: Okay.
Paul: You're just matching up kind of an expense concept with the revenue concept. That's the only basis that they can do it. The IRS has privately said, unofficially, they've never issued a public – a private – letter ruling about this, and they have stated that they will not do so. But they said that they would recognize a 15 year amortization for any domain name that has been acquired or created after August 10th, 1993, which, I think, covers just about every one of them.
Monte: Except for the very early lucky registrants.
Paul: Yeah, but then their costs are almost nothing anyway, so . . .
Monte: Right, right.
Paul: I mean, they're not the ones who are buying and selling for hundreds of thousands or millions of dollars, so for them its just an argument of whether I amortize, what, $100? Something like that. So, that's pretty much nothing. But the reason you want to amortize it is because, again, remember when we talked about minimizing taxes, it's the geometric progression of your wealth. You know, the money that I don't spend on taxes I can reuse and invest in my business. And so, amortization gives you a non-cash expense. You haven't paid any money out; you already did that. It just allows you to record this expense as though you paid it out this year (or a portion of it) and you get to reduce your tax bill. So you can imagine, if I don't amortize, if I bought a domain name for $100,000 or, lets make it easy, $150,000, its very different if I can deduct $15,000 worth of profit or approximately $6,000 worth of income taxes every year for 15 years, as opposed to doing nothing. Right?
Monte: Right.
Paul: What would you do with that extra $6,000 every year? What would that be worth at the end of the 15 year period? It would be a lot of money. So, doing nothing with it seems like a financial waste. So, that's why you want to amortize it. So the question then becomes, how? There's some very specific rules in the Internal Revenue Code and not withstanding the IRS's position, non of them really apply to domain names. There's a section involved – 197, if my memory at this hour is serving me correctly – and it provides a list of what properties can be amortized and if they're in this list, then it can be amortized over 15 years; if its not on the list, you can't amortize it, period. That's just Congress. They said no. So there's a list, things that domain names might fall into but they really don't when you think about it. They're not really a trademark, because a trademark is a source indicator. Remember, Nike shoes come from Nike Corporation. Uh, someone in the PPC business, today its being monetized by one person, next day its being monetized by another person or its being run through Fabulous or Google or HitFarm or any number of people who are generating contextually related results that are based upon current day search criteria. Okay? So the same domain name two years ago would not generate the same search results as it does today. It's not source indicator.
Monte: I see.
Paul: So its not a trademark. Its not a service contract; you know, we kind of went through the same analysis as the theft of property. And even if it is a service contract, it has an indefinite life, so you can't pin it on anything.
Monte: Even if it's a subscription where you have a begin date or an end date, unless you renew it?
Paul: Well, you can amortize service contracts, like leases or long term employment contracts, that you buy along with a business, for example . . .
Monte: A subscription wouldn't be classified in that category . . .
Paul: The term of that includes every single renewal option that's in your control to renew. Right? So with a domain name, you're in control of the re-registration process. You have the absolute right to re-register it. So it really doesn't have . . . its useful life goes on forever.
Monte: Right. I guess so. Well, not forever, because what about, well, the predicted life of a human being, but then you can pass it down to another member in your family, so I guess so.
Paul: Yeah. Or put it into a corporation which has an indefinite life in and of itself.
Monte: Right, right.
Paul: It still is up to the registrant to decide and therefore, that's what's always given as the problem. Its also not a government license. You know, a government license is kind of like taxi medallions or liquor licenses. Its something that the government had and then it gave to you. But domains are not that way. The registrar doesn't own anything and they're not licensing anything to you; they're just, they're allowing you to reserve a name, period.
Monte: I see.
Paul: But they're not licensing the right to do something, because in order to license the right, you have to have had the right to use it and own it and possess it yourself. Right? Which doesn't exist. So it doesn't really fall into anything. There is a Safe Harbor that says, well, if its not listed in the list and it doesn't have a useful life that you can reasonably calculate, you can still use 15 years, but that only applies to intellectual property that's created, not intellectual property that's acquired from someone else. That takes a lot of them right off the list. I mean, anything you acquired in a drop – no; anything you acquired in a portfolio auction – no; you had to go out there and register. So, what are we amortizing over 15 years? Well, $7.95. Right?
Monte: Oh, I see.
Paul: So it's a waste of time. And then there's one person out there that's kind of a tax guru. He's a CPA in New York and he's come up with this theory that you kind of have to create two baskets of value for any domain: one is, you know, the trademark value and the inherent value. Trademark value is if it could be protected as a trademark, would it be valuable? Apples for apples. You know, selling apples or is it apples for selling computers? So Apple.com for computers has a very high trademark value.
Monte: Right.
Paul: Um, Hotels.com has a zero value for trademark purposes because its descriptive of hotels.
Monte: Oh, I see.
Paul: Inherent value is the side of life that says, Okay, forget the trademark stuff, do a lot of people click on it? Or type it in? If the answer is yes, then it has a high value, inherent value. The trademark portion of the value is amortized over 15 years and the inherent value is not amortized at all. And that's . . . you can appreciate someone who has 5,000 domain names trying to go through this, right? They have to value every single domain name in their portfolio. Then they have to tell their accountant that they're going to keep track of two different values for every domain name [chuckles], right, it'll be a disaster. I'd rather just rely on the unofficial position of the IRS and say, Okay, 15 years. Or, do what Martex does, which says we're going to say that its this period of time because our expectation is – and our experience is (which is very important) – we do not hold domain names for longer than this period of time. Alright? But if you're experience is that you're holding domain names for longer and longer and longer periods, then you have to constantly be addressed . . . extending that amortization for every new domain name that you acquiring. Right? The old ones keep the old amortization schedules, because you can't change them once you set them, but the new ones kind of get readjusted based upon your then current experience at the time you acquired it . . .
Monte: I see.
Paul: . . . and so, if in the beginning you said, Oh, no way am I going to be in this business after three years, so three years is fine; but in the third year you're starting to acquire domain names that have 6X cost or six times revenue valuations and ten times revenue valuations, so the expectation is that you're going to hold them for that long a period of time. That's what the price was based on. So for you take a lesser period of time for amortization is kind of inconsistent.
Monte: Right.
Paul: That's a really boring subject.
Monte: Yeah, yeah, but you know what? It's boring, it may seem boring, but a lot of people ask these questions. I mean, as you know, I had Evan Birdie on, which is our accountant, and he takes care of a lot of clients and you know, everybody really responded well to some of the accounting issues that were evolved around domain names. He particularly focused in on how to incorporate within the United States, the various options and advantages, you know, LLC versus S-corporation versus Partnership and that kind of stuff and then he's not an offshore specialist so he wasn't able to answer a lot of those questions but you know, a lot of the legal guests that I have on the show, they actually inspire the most questions and actually my audience gets the most out of it so you may think, I know its your everyday work in life but these guys always want to know how to treat their assets.
Paul: Well, first of all, they have some huge assets.
Monte: Yeah, yeah. A lot of these guys monetize their domain names . . .
Paul: Yeah, I heard that show, that was in May, wasn't it? After the T.R.A.F.F.I.C. West?
Monte: Yep.
Paul: Yeah. I remember that. He had a great point about S-corporations.
Monte: Yep, yep.
Paul: Very good plan.
Monte: Hey, um, what about treating domain names as inventory if you're buying and selling them? Because that was a question that came up at T.R.A.F.F.I.C. West as well and I have somebody that's on the board that's asking that question, too. So, I'm in the business to buy and then sell; buy and then sell. So, can I treat the domain names like inventory in that particular case?
Paul: Yeah, uh, I believe that you can, as long as you are in that business. So if I'm buying and selling – and that's all I'm doing – I'm not . . .
Monte: . . . not monetizing them, just [inaudible] buy them [inaudible] . . .
Paul: I may be monetizing them, but I'm only monetizing them for very short periods of time; my holding periods for domains is very short, less than a year, for example. Then, I see no reason why you couldn't treat it as inventory because that is in fact the inventory of your business, but if you're just doing occasional buying and selling; you own a thousand domain names and you buy and sell maybe 50 or 100 a year, I don't know that you're necessarily in the business of buying and selling domain names.
Monte: Right, right.
Paul: So that's a very specific and narrow niche for people. You know, it might apply to people, you know, if the sado.coms of the world were actually acquiring domain names instead of just having them given to them to sell, then they could . . . it's a bad example because they're not in the U.S. but they get treated that way . . .
Monte: Right.
Paul: Which actually reminds me of something I meant to say going offshore is, one of the things that you can do going offshore is you can amortize very, very quickly. In many places, for example Luxombourg allows you two year amortization schedule; a maximum of three. And so, you can take advantage of more aggressive and business friendly rules that exist outside the United States.
Monte: Oh, its great. So, just to wind up the broadcast, one thing I'd like everybody to walk away with is a couple key points or a couple key tips to make their business operate better as domainers you know, so they walk away better with things that they've learned.. What are the top three or four suggestions that you would make to those out there who are in the categories of monetizing their domain names, or selling their domain names and the way to treat them.
Paul: Okay, first of all, stop expensing your domain name acquisitions. It's just going to get you into trouble. Go see your accountant and have your accountant go through the Tax Code and if there's any questions, certainly call me or any other tax specialist – so stop doing that immediately. Two, I would . . . even if you're not going to move off shore, I would seriously think about putting your entire portfolio in a separate entity and not having them registered in your own name. And an S-corporation is a perfect vehicle for that. The next item is, if you're making . . . if you're netting, say, $200,000 . . . well, between $150,000 and up (and when I say net, its after your living expenses, so that's a net that you're not spending on your own personal stuff), then I'd say you might actually be a good candidate for an offshore plan, at least, you know, you should investigate it, whether its with me or somebody else, I think it would be beneficial for you to investigate it for the liability limitations as well as the potential tax deferral. But don't do your tax planning on the basis of , you know, the last couple of pages of the United Flight Magazine.
Monte: [laughs]
Paul: That's, that's . . . that's just a rip-off. That's the way, unfortunately, a lot of people get their money down in largely Caribbean countries but they also take your money and say, Well, your personal tax problem is your own personal tax problem, and you don't, you're kind of left high and dry if there's an issue.
Monte: Well, that was a, that's some great advise, Paul and I have posted your contact information on the board. For those of you listening, please contact Paul to get any kind of advise on International tax law, setting up your corporations offshore, any of the issues and topics that we discussed. His telephone number is, of course, 011 if you're calling from the United States, but the telephone number is 34-63-937-1448; he can also be reached by email at prkeating (that's P-R-K-E-A-T-I-N-G) @renovaltd.com. And [inaudible] on the board and I am also adding Paul as a legal reference and partner in our partner's page on Moniker.com, probably this week. So anyone can come to Moniker.com, go to our partner's page, under legal resource section and you'll see his name and his email and be able to link to him and I highly recommend you, everyone listening, you use his services and get in touch with him. Is there any, any other things you'd like to add? About your contact or how people can get a hold of you?
Paul: Yeah, just two, please: one is, I'm in Spain, so that's 9 hours ahead of California and 6 hours ahead of the East Coast, so please, bear that in mind when you call.
Monte: [laughs] Yeah, don't be [inaudible] when you call . . . [inaudible] . . . ask for an interview at 7 o'clock at night, which is 1 o'clock in the morning your time. [laughs]
Paul: Yeah, no, you won't get any answer. The other way is, I'm a big avid user of Skype, so my Skype id is PRK-Spain is my personal one and you can reach me there, through there any time, whether its at the office or whether its online at home. I didn't really respond.
Monte: Well, this was a very informative show. I really appreciate your time and I know, again, I appreciate your busy schedule and the fact that it's now 2 o'clock in the morning, your time, and so I really appreciate your time and I would like to have you on for another show in the future to do some follow up stuff on some of the legal conversations and some of the things that are going on in the community.
Paul: I'd be happy to, Monte.
Monte: Great.
Paul: And don't forget to register everything at Moniker, right?
Monte: Yeah. Thank you very much. Appreciate it. So have a great two or three hours left of your sleep and I know you have a busy day tomorrow.
Paul: I do, but I'm going to play loafer when I get to the office before 9:30 or so.
Monte: And you guys get cut off at like 2 o'clock, nap, and have a big lunch and . . .
Paul: No, no, no. . .
Monte: . . . and go out and party all night . . .
Paul: That's old hat, that's old hat.
Monte: [laughs]
Paul: People really work [inaudible] . . . they're in the office by 9 and they're going home at 8; they take a long . . . a lot of people take a long lunch break, but the long lunch break here is 2 hours and you don't get to go home and go to sleep, you don't get to sleep on your sofa, so . . . usually, it's more, you know, American Capitalism is coming to Europe, notwithstanding the French.
Monte: [laughs] Oh, screw the French.
Paul: Screw the French. – Now, I didn't say that, I didn't say that.
Monte: No, I did. [laughs] So, anyway, thanks a lot, Paul, I appreciate it.
Paul: You're welcome, Monte. Take care. Alright.
Monte: Alright, folks. That wraps up a great DomainMasters Show. I think we're up to date on our archives given the week of disaster here from Hurricane Wilma but if you go to Moniker.com or WebMasterRadio.fm, the archives should be caught up to date. We're still working on the transcribed versions of all of our archives. I think we're catching up quickly on that, as well. And, next week, depending on whether I'm heading to AdTech or not, in New York, I might be doing a live show right on the show floor there as well. I'm just debating on what I'm going to do still because I'm operating still on generator and have to think about the family and figure out what's going on there. But next week probably a show either at AdTech or right here in the offices or at the studio at WebMasterRadio.fm. So, again, join me next week for another live broadcast of DomainMasters. Be the master of your domain, and I will see you next week. Thank you.
[Commercials]
| Back to Index |