Abandoned Franchise Value

[astanleycpa]

Client abandoned 15yr franchise service business (as a sole prop), then started over as an S-Corp on his own.

He lost customer files, phone #s, goodwill and advertising, but all the equipment was his to keep.

He had finished paying the initial franchise fees and franchisor wanted to charge him extreme amount to renew the franchise.

He wants to take large $ deduction for lost value of abandoning the franchise structure.

Can this be done and if so, what is best way to do ?

[RoyDaleOne]

If 197 asset, can write off in year of abandonment.

[Gail in Virginia]

He can't write off value on an intangible, only unrecovered costs. If he never deducted any of the franchise fees previous to this, he can deduct them now. But if he previously deducted them, he has nothing left to write off. He will, of course, have deductions for any expenses that arise from this such as buying new signs, new letterhead, etc. But you cannot deduct something you have no basis in.

Besides, if the franchise had that much value, why did he abandon it instead of paying the new fee?

[RoyDaleOne]

How does one capitalize value? You capitalize cost. Did not know you wanted a tax 101 answer.

Now---

If you have properly capitalized the franchise costs as a Section 197 asset, the remaining amortized balance, if a loss can be expensed in the year

Cite:

197 Asset -----

(10) FRANCHISES, TRADEMARKS, AND TRADE NAMES.

(i) Section 197 intangibles include any franchise, trademark, or

trade name.

Basis ------

(ii) Except as otherwise provided in this section, basis is

determined under section 1011 and salvage value is disregarded.

Write-off --------

(B ) ABANDONMENT OR WORTHLESSNESS. The abandonment of an

amortizable section 197 intangible, or any other event

rendering an amortizable section 197 intangible worthless,

is treated as a disposition of the intangible

Value -----

(ii) EXCEPTIONS. For purposes of this paragraph (e)(2)--

(A) A trademark or trade name is disregarded if it is

included in computer software under paragraph ©(4) of

this section or in an interest in a film, sound recording,

video tape, book, or other similar property under paragraph

(c )(5) of this section;

(B ) A franchise, trademark, or trade name is disregarded if

its value is nominal or the taxpayer irrevocably disposes

of it immediately after its acquisition; and

[astanleycpa]

All of you came up with the same answer that I did - no basis, then no deduction.

Client insists there is a way to do it and other franchisers did it. I've asked for details and rec'd none of course.

Thought I might be missing a 'special' situation deduction.

Thanks for confirming what I was thought was the answer !