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Tax court gives McDonald's franchises "a break today." (Brief Article)

When a franchise is acquired, the portion of the purchase price allocable to the franchise (as well as trademarks and trade names) may be deducted over 25 years if, as is typical, the franchisor maintains a degree of control over the franchisee's business conduct. (The amortization period will be reduced to 14 to 16 years if HR 11 is enacted.)

However, the portion of the purchase price allocable to goodwill may not be amortized.

In a significant decision, Canterbury v. Commissioner, the Tax Court concluded goodwill existed in a franchise acquisition but, because it was "franchise" goodwill rather than "business" goodwill, it was amortizable for tax purposes.

Goodwill is loosely defined as the value attributable to the expectancy of continued customer patronage. If, however, a customer's decision to patronize is attributed to the goodwill inherent in the "system," the goodwill that exists is considered franchise goodwill.

In this case, franchise goodwill was present because statistics indicate that a new McDonald's franchisee will, within a week, reach the level of sales it will average over the first year and that sales tend to stay constant through the life of the franchise.

On this basis, the franchise itself acted as the repository of goodwill and there was no goodwill separate from that inherent in the franchise.

Observation: This decision, which is expected to survive an IRS appeal, should apply with equal force to virtually any franchise. In essence, it makes the entire cost of a franchise--whether allocable to tangible or intangible assets--tax deductibte.
COPYRIGHT 1992 American Institute of CPA's
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Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Publication:Journal of Accountancy
Article Type:Brief Article
Date:Nov 1, 1992
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