Sec. 1253 deductions may be available for the cost of acquiring public franchises prior to Sec. 197.

• Author: Blumenreich, Richard G.

The Tenth Circuit's decision in Tele-Communications, Inc. (TCI), 12 F3d 1005 (1993), aff'g 95 TC 495 (1990), should now pave the way for taxpayers to change their accounting method and claim deductions under Sec. 1253 for the cost of "public franchises," such as municipal cable television franchises, FCC television and radio licenses, and other governmental licenses and permits, acquired on or before Aug. 10, 1993. (Public franchises acquired after Aug. 10, 1993 (or July 25, 1991, if an election is made) are subject to 15-year amortization under Sec. 197.) In the past, many taxpayers treated the cost of acquiring a public franchise as a nondeductible, nonamortizable asset. In TCI, the Tenth Circuit held that the taxpayer was allowed deductions under Sec. 1253 relating to the cost of acquiring a cable television franchise. The court rejected the IRS's argument that a public franchise, such as the cable television franchise involved, was not a "franchise" for purposes of Sec. 1253. Generally, a purchaser of a public franchise must obtain the Service's consent (by filing Form 3115, Application for Change in Accounting Method) before changing its tax treatment of the cost.

Prior treatment of public franchises under Sec. 1253

Before the enactment of Sec. 197, deductions for the cost of acquiring a franchise were governed by Sec. 1253(d). Generally, lump-sum payments for franchises acquired on or before Oct. 2, 1989 were deductible ratably over 10 years (Sec. 1253(d)(2), before its amendment by the Revenue Reconciliation Act of 1989). Lump-sum payments for franchises acquired after Oct. 2, 1989 also were deductible ratably over 10 years, if the amount paid did not exceed $100,000, and the taxpayer could elect to deduct larger lump-sum payments ratably over 25 years (Sec. 1253(d)(2)(B) and (d)(3)(B), before their repeal by the Revenue Reconciliation Act of 1993 (RRA)). Franchises acquired in return for a series of contingent serial payments were (and still are) deductible as payments are made (Sec. 1253(d)(1), unaffected by the RRA)).

Sec. 1253(b)(1) broadly defines the term "franchise" to include "the right to distribute, sell, or provide goods, services, or facilities, within a specified area." However, it has been unclear whether this definition includes public franchises. Some taxpayers treated these franchises as nondeductible, nonamortizable costs, while others took the position that such costs were deductible under Sec. 1253.

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