Franchisees Not ‘Having It Their Way’With Estate Tax Rules

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By Allyson Versprille

Nov. 1 — Owners of popular fast-food restaurant franchises are one group the IRS is hearing from as it sifts through thousands of comments on proposed estate tax rules.

Among the more than 8,000 comments that have been submitted in response to the proposed Internal Revenue Service regulations (REG-163113-02) on valuation discounts under tax code Section 2704, are remarks from franchise owners for chains including Burger King, Dunkin’ Donuts and 7-Eleven. The rules would make changes to the valuation of interests in family-owned businesses for estate, gift and generation-skipping transfer tax purposes.

Franchisee concerns align with past critiques of the regulations: that the IRS is seeking to eliminate discounts taken for lack of marketability and lack of control that make assets in family-owned businesses harder to sell. At a Sept. 30 American Bar Association Section of Taxation conference, Catherine V. Hughes, the Treasury Department’s estate and gift tax attorney-adviser, said there has been “a lot of misunderstanding” about the proposed rules, and that they aren’t intended to do away with minority discounts.

Robert Branca, vice chairman of the Coalition of Franchisee Associations Inc. and a multistate franchisee for Dunkin’ Donuts, told the IRS in a Sept. 29 letter that “franchises are especially vulnerable if these regulations are amended because of factors particular to franchising that naturally depress a business’ price.”

The Office of Advocacy in the U.S. Small Business Administration sided with small business owners like franchisees in a Nov. 1 letter.

Valuing an Interest

Branca said eliminating discounts for lack of marketability, minority ownership status and lack of control would be unfair to franchise owners. Shares in a franchise aren’t like “publicly traded shares of companies like Bank of America that can be routinely and easily sold for a publicly known value on an open market at arm’s length,” he said.

“A franchise inherently becomes less valuable for every second ticking by after a franchise agreement is signed; ownership of a franchise is only for a set, continually declining term of years. There is no certainty of renewal for an additional term,” Branca said. “The traditional methods of business valuation that the IRS applies simply do not accurately capture vital facts that affect value.”

Branca said another aspect that makes valuing an interest in a franchise more difficult than in a non-franchised family business is the existence of “an omnipotent third party” in franchise transfers: the franchisor.

Franchisors typically possess certain rights including the power to apply substantial fees on a transfer, and even deny them outright, he said. “Transferees often price the uncertainty created by these franchisor rights into the purchase price, knowing that the time and money spent on due diligence, negotiation, attorneys and accountants can be completely lost,” Branca said.

“However, perhaps the most discounting factor in valuation of an interest in a franchise is the severely limited pool of buyers,” he said. Only an approved franchisee of the company is eligible to buy at all, he noted.

Branca has requested to speak at the scheduled Dec. 1 public hearing on the proposed regulations.

Burger King, 7-Eleven

Rob W. Gerasimowicz Sr., a franchisee who runs six Burger King franchises in Texas, expressed similar concerns.

“As the franchise model dictates, and due to the pre-determined lifespan of a franchise agreement, the value of my business declines with every passing minute,” he wrote in an Oct. 11 letter to the IRS. “Further, the franchise model gives my franchisor the ability to place substantial restrictions on how and to whom I transfer my business,” he said.

Gerasimowicz said the proposed regulations will make it harder for him to transfer his franchises to his three children. “Successorship” can be costly because it requires money for mandatory remodeling, taxes and franchise fees, he said.“We cannot absorb the Government taking our cash reserves which we built based on the existing estate tax laws,” he said.

Bill Keller, owner and president of 16 Burger King franchises in Kentucky, in an Oct. 10 letter agreed that the regulations would prevent him from passing on his business to his family.

Additionally, an anonymous commenter, who said he has been a franchisee for several 7-Eleven stores since 1989, wrote Oct. 11 that the rules would “compel” family members that inherit his business to “reduce payroll and possibly even layoff or terminate some employees” in order to pay off the additional estate tax.

Small Business Administration

In a Nov. 1 letter, the Office of Advocacy in the Small Business Administration said that small business owners and representatives—such as franchisees—have come to it with concerns that the proposed rules “do not estimate the burden imposed by the proposal or contemplate less burdensome alternatives.”

“Because the IRS certified that the proposed rules will not have a significant economic impact on a substantial number of small entities, and because the statement in support of the certification lacks a factual basis, Advocacy recommends that the IRS publish for public comment either a supplemental Regulatory Flexibility Act (RFA) assessment with a valid factual basis or an Initial Regulatory Flexibility Analysis (IRFA),” the group said in the letter.

The office also encouraged the IRS to extend the comment period for the proposed regulations by 60 days. Currently the comment period is set to close Nov. 2.

To contact the reporter on this story: Allyson Versprille in Washington at

To contact the editor responsible for this story: Meg Shreve at

For More Information

The letter from the Office of Advocacy in the Small Business Administration is at’s letter is at’s letter is at’s letter is at letter from an anonymous 7-Eleven franchisee is at

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