§1253 — Title 26 Internal Revenue Code | U.S. Code

Summary

If the person who gives up a franchise, trademark, or trade name keeps important control or an ongoing interest, the transfer is not treated like selling a capital asset. A franchise means a deal that lets one party sell, distribute, or provide goods, services, or facilities in a set area. Important control can include things like blocking assignments, ending the deal at will, setting quality or equipment rules, forcing the buyer to sell or advertise only the seller’s products, requiring the buyer to buy supplies from the seller, or getting payments tied to how much the franchise is used if those payments are a big part of the deal. Renewals count as transfers. Payments that depend on how much the franchise, trademark, or trade name is used are treated as non‑capital proceeds. If such payments are made at least once a year for the whole term and are about equal each year (or follow a fixed formula), they can be deducted as a business expense. Other payments must be put on the capital account. When figuring the agreement’s length, include all renewal options and any periods the parties reasonably expect to renew.

Title 26, §1253

Internal Revenue Code — Source: USLM XML via OLRC

(a)A transfer of a franchise, trademark, or trade name shall not be treated as a sale or exchange of a capital asset if the transferor retains any significant power, right, or continuing interest with respect to the subject matter of the franchise, trademark, or trade name.

(b)For purposes of this section—

(1)The term “franchise” includes an agreement which gives one of the parties to the agreement the right to distribute, sell, or provide goods, services, or facilities, within a specified area.

(2)The term “significant power, right, or continuing interest” includes, but is not limited to, the following rights with respect to the interest transferred:

(A)A right to disapprove any assignment of such interest, or any part thereof.

(B)A right to terminate at will.

(C)A right to prescribe the standards of quality of products used or sold, or of services furnished, and of the equipment and facilities used to promote such products or services.

(D)A right to require that the transferee sell or advertise only products or services of the transferor.

(E)A right to require that the transferee purchase substantially all of his supplies and equipment from the transferor.

(F)A right to payments contingent on the productivity, use, or disposition of the subject matter of the interest transferred, if such payments constitute a substantial element under the transfer agreement.

(3)The term “transfer” includes the renewal of a franchise, trademark, or trade name.

(c)Amounts received or accrued on account of a transfer, sale, or other disposition of a franchise, trademark, or trade name which are contingent on the productivity, use, or disposition of the franchise, trademark, or trade name transferred shall be treated as amounts received or accrued from the sale or other disposition of property which is not a capital asset.

(d)(1)(A)Any amount described in subparagraph (B) which is paid or incurred during the taxable year on account of a transfer, sale, or other disposition of a franchise, trademark, or trade name shall be allowed as a deduction under section 162(a) (relating to trade or business expenses).

(B)An amount is described in this subparagraph if it—

(i)is contingent on the productivity, use, or disposition of the franchise, trademark, or trade name, and

(ii)is paid as part of a series of payments—

(I)which are payable not less frequently than annually throughout the entire term of the transfer agreement, and

(II)which are substantially equal in amount (or payable under a fixed formula).

(2)Any amount paid or incurred on account of a transfer, sale, or other disposition of a franchise, trademark, or trade name to which paragraph (1) does not apply shall be treated as an amount chargeable to capital account.

(3)For purposes of determining the term of a transfer agreement under this section, there shall be taken into account all renewal options (and any other period for which the parties reasonably expect the agreement to be renewed).

Notes & Related Subsidiaries

Editorial Notes

Amendments

2004—Subsec. (e). Pub. L. 108–357 struck out heading and text of subsec. (e). Text read as follows: “This section shall not apply to the transfer of a franchise to engage in professional football, basketball, baseball, or other professional sport.” 1996—Subsec. (d)(4). Pub. L. 104–188 provided that section 11701(i) of Pub. L. 101–508 shall be applied as if “subsection” appeared instead of “section” in the material proposed to be stricken. See 1990 Amendment note below. 1993—Subsec. (d)(2) to (5). Pub. L. 103–66 added pars. (2) and (3) and struck out former pars. (2) relating to deduction of certain payments for transfer of a franchise, trademark, or trade name not treated as sale or exchange of capital asset, (3) relating to treatment of amounts paid or incurred on account of transfer, sale, or other disposition of a franchise, trademark, or trade name to which pars. (1) and (2) did not apply, (4) relating to renewals for purposes of determining term of transfer agreement under this section or period of amortization under this subtitle, and (5) relating to rules applicable to this subsection. 1990—Subsec. (d)(4). Pub. L. 101–508, § 11701(i), which directed the substitution of “under this section or any period of amortization under this subtitle for any payment described in this section” for “or any period of amortization under this section”, was executed by making the substitution for “or any period of amortization under this subsection”. See 1996 Amendment note above. 1989—Subsec. (d)(1). Pub. L. 101–239, § 7622(a), substituted “serial payments” for “payments” in heading and amended text generally. Prior to amendment, text read as follows: “Amounts paid or incurred during the taxable year on account of a transfer, sale, or other disposition of a franchise, trademark, or trade name which are contingent on the productivity, use, or disposition of the franchise, trademark, or trade name transferred shall be allowed as a deduction under section 162(a) (relating to trade or business expenses).” Subsec. (d)(2). Pub. L. 101–239, § 7622(b), designated existing provisions as subpar. (A), inserted subpar. heading, redesignated former subpars. (A) to (C) as cls. (i) to (iii), respectively, and former cls. (i) and (ii) of former subpar. (B) as subcls. (I) and (II), respectively, of cl. (ii), and added subpar. (B). Subsec. (d)(3) to (5). Pub. L. 101–239, § 7622(c), added pars. (3) to (5). 1976—Subsec. (d)(2)(C). Pub. L. 94–455 struck out “or his delegate” after “Secretary”.

Statutory Notes and Related Subsidiaries

Effective Date

of 2004 AmendmentAmendment by Pub. L. 108–357 applicable to property acquired after Oct. 22, 2004, see section 886(c)(1) of Pub. L. 108–357, set out as a note under section 197 of this title.

Effective Date

of 1993 AmendmentAmendment by Pub. L. 103–66 applicable, except as otherwise provided, with respect to property acquired after Aug. 10, 1993, see section 13261(g) of Pub. L. 103–66, set out as an

Effective Date

note under section 197 of this title.

Effective Date

of 1990 AmendmentAmendment by Pub. L. 101–508 effective, except as otherwise provided, as if included in the provision of the Revenue Reconciliation Act of 1989, Pub. L. 101–239, title VII, to which such amendment relates, see section 11701(n) of Pub. L. 101–508, set out as a note under section 42 of this title.

Effective Date

of 1989 AmendmentAmendment by Pub. L. 101–239 applicable to transfers after Oct. 2, 1989, but not applicable to any transfer pursuant to a written binding contract in effect on Oct. 2, 1989, and at all times thereafter before the transfer, see section 7622(c)[(e)] of Pub. L. 101–239, set out as a note under section 167 of this title.

Effective Date

Section applicable to transfers after Dec. 31, 1969, except that subsec. (d)(1) shall, at the election of the taxpayer (made at such time and in such manner as the Secretary or his delegate may by

Regulations

prescribe), apply to transfers before Jan. 1, 1970, but only with respect to payments made in taxable years ending after Dec. 31, 1969, and beginning before Jan. 1, 1980, see section 516(d)(3) of Pub. L. 91–172, set out as a note under section 1001 of this title.

§1253 Transfers of franchises, trademarks, and trade names

Summary

Title 26, §1253

Notes & Related Subsidiaries

Editorial Notes

Amendments

Statutory Notes and Related Subsidiaries

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Regulations

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