Tax Aspects of Franchising, written by Bruce S. Schaeffer, Esq., discusses the legal environment and history of franchising in the United States before analyzing the tax and legal aspects of franchising.  

This Portfolio examines federal and state regulation of franchises, start-up considerations, the different treatment of franchisor and franchisee, area development agreements, and many other aspects of operating a franchise.  It explores in depth the tax issues involved in franchise advertising, personal holding company and S corporation considerations, state and local taxation of franchises, and succession planning for franchisees. 

In addition, it covers such specific topics as 

• Franchising, its legal environment, the types of franchise arrangements, its history, and development 
• The economics of a franchise, franchising in the 1980’s and 1990’s, and franchising since 2000 
• Franchise transfers and retransfers, along with coverage of the legislative history, characterization, and recognition of receipts by the franchisor 
• A general overview of multiple unit transactions, pooled advertising funds, passive royalty income, and more
  

Tax Aspects of Franchising allows you to benefit from:

• Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area
• Invaluable practice documents
  
• Plain-English guidance from world-class experts
• Real-world and in-depth analysis that lets you explore various options
• Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more
• Alternative approaches to both common and unique tax scenarios

This Portfolio is part of the U.S. Income Portfolios Library, a comprehensive series that includes more than 200 Portfolios, which covers every federal tax topic with expert, in-depth analysis, and offers commentary on a wide range of federal taxation topics, including Compensation Planning, Deductions and Credits, Partnerships and Corporations, Special Pass-Through Entities, Corporate Reorganizations, Real Estate, Procedure and Administration, and more. 

Detailed Analysis

I. Franchising and Its Legal Environment

A. Types of Franchise Arrangements

B. History and Development

C. Economics of a Franchise

D. Franchising in the 1980s and 1990s

E. Franchising Since 2000

F. International Franchising

G. Regulation of Franchise Sales and Disclosure

1. The FTC Franchise Disclosure Rule

2. State Regulatory Activity

H. Franchise Company Mergers and Acquisitions

II. Franchise Transfers and Retransfers

A. In General

B. Legislative History

C. Characterization and Recognition of Receipts by the Franchisor

1. Initial Franchise Fees

2. Royalties, License Fees or Service Fees

3. Master License Fees

4. Subsequent Transfer Fees

D. Deductibility of Franchise Costs by Franchisees

1. Initial Franchise Fees

a. Prior Law

b. Current Law - Present Cost of Acquisitions - Amortizable Franchise Fee

2. Present Discounted Value of Right to Deduct Initial Franchise Fee

3. Master License Fees

4. Subsequent Transfer Fees

E. Different Treatment of Franchisor and Franchisee

F. A Modest Proposal - The Overriding Royalty

G. Purchases of Existing Franchise Operations at a Premium: Goodwill or Franchise Rights?

H. Canterbury v. Comr.

1. Introduction

2. Goodwill and Going Concern Value

a. Normal Business Context

b. Normal Franchise Context

(1) Goodwill

(2) Going Concern Value

c. Unique McDonald's Facts

3. IRS Arguments in Canterbury

a. Franchisor's “Franchisee Fee” for New Franchises Establishes Amount that Can Be Amortized as “Franchise Fee”

b. Purchaser of Operating Franchise May Not Amortize Amount as a Franchise Fee Greater than Amount Original Franchisee Paid

c. Purchaser of Operating Franchise Acquires Other Nonamortizable Assets Such as Goodwill and Large Portion of Purchase Price Should Be Allocated to Those Intangibles

I. Section 1060 Requirements Regarding Transfers and Retransfers

1. Legislative History of § 1060

2. Allocation of Consideration Under the Residual Method

3. Required Reporting and Compliance

III. Multiple-Unit Transactions

A. In General

B. Subfranchising Arrangements

1. Legal and Regulatory Aspects

2. Tax Accounting

3. Financial Accounting

C. Area Development Agreements

1. Legal and Regulatory Aspects

2. Tax Accounting

3. Financial Accounting

D. Area Representative Agreements

1. Legal and Regulatory Aspects

2. Tax Accounting

3. Financial Accounting

E. Brokers

1. Legal and Regulatory Aspects

2. Tax Accounting

3. Financial Accounting

IV. Pooled Advertising Funds

A. Purpose

B. IRS Position

1. Seven-Up Company

2. Ford Dealers Advertising Fund Co. - The Issue Resurrected

3. Nonacquiescence: Rev. Ruls. 74-318, 74-319

4. Continued Litigation - Insty-Prints, etc.

C. Tax Status of Fund

1. Form of Fund Entity

2. Is Fund a Separate Taxpayer?

D. Payments to Fund

1. Includibility in Income for Tax Purposes

2. Deductibility for Tax Purposes

E. Planning Considerations

F. One-Year Deferral of Advance Payments

G. Conclusion

V. Passive “Royalty” Income: Personal Holding Company and S Corporation Considerations

A. In General

B. Personal Holding Companies

1. Statutory Requirements

2. Legislative Purpose and History

3. Case Law - Franchising

4. Case Law - “Compensation for Services” v. “Royalty Income”

5. Recommendations

C. S Corporations

VI. State and Local Tax “Nexus”

A. Background

B. Due Process

C. Commerce Clause

D. Income Tax Nexus

1. New York

a. “Doing Business”

b. Jurisdiction

c. “Employing Capital”

d. “Allocation Formula”

2. New Mexico

a. “Engaging in Business”

b. “Leasing Property”

3. South Carolina

4. New Jersey

5. Multistate Tax Commission

a. Voluntary Disclosure Process; Initial Taxpayer Contact

b. Preparing the Voluntary Disclosure Offer

c. Forwarding the Offer to the States

d. Executing the Agreements

e. Program Disclosure Policies

E. Sales Tax Nexus

1. In General

2. New York

a. Appellate Division

b. Court of Appeals

F. Other Forms of Nexus

G. Royalty Add Back Statutes - Be Careful What You Ask For

H. Conclusion

VII. Succession Planning for Franchisees

A. In General

B. Restrictions on Transfer

C. Permission to Transfer

D. Transfers to a Spouse - Overfunding the Marital Share

E. Valuation

1. Empirical Studies

2. Statutory Changes

3. Case Law

4. Discounts for Family Transfers

F. Shifting Income Tax Liabilities

G. Availability of § § 6166 and 2057

Working Papers

Table of Worksheets

Worksheet 1 Franchise Organizations, Information Sources & Select Bibliography

Worksheet 2 Franchisee Specific Succession Planning Checklist

Worksheet 3 Checklist for Franchise Valuations

Worksheet 4 Form 8594 - Asset Acquisition Statement Under § 1060

Worksheet 5 Sample Nexus Questionnaires

Bibliography