I
106TH CONGRESS
1ST SESSION
H. R. 2402
To amend the Internal Revenue Code of 1986 to establish a 15-year recovery
period for franchise property, to provide a shorter recovery period for
the depreciation of certain leasehold improvements, to allow capital gain
treatment on the transfer of a franchise in connection with the transfer
of an existing business, and for other purposes.
IN THE HOUSE OF REPRESENTATIVES
JUNE 30, 1999
Mr. LEWIS of Kentucky (for himself, Mr. ENGLISH, Ms. DUNN, Mr. CAMP,
Mr. RAMSTAD, Mr. HAYWORTH, Mr. PAUL, and Mr. NORTHUP) intro-
duced the following bill; which was referred to the Committee on Ways
and Means
A BILL
To amend the Internal Revenue Code of 1986 to establish
a 15-year recovery period for franchise property, to pro-
vide a shorter recovery period for the depreciation of
certain leasehold improvements, to allow capital gain
treatment on the transfer of a franchise in connection
with the transfer of an existing business, and for other
purposes.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ‘‘Small Business Fran-
chise Tax Relief Act of 1999’’.
SEC. 2. CLASS LIFE FOR FRANCHISE OPERATIONS.
(a) IN GENERAL.—Section 168(e)(3)(E) of the Inter-
nal Revenue Code of 1986 (classifying certain property as
15-year property) is amended by striking ‘‘and’’ at the end
of clause (ii), by striking the period at the end of clause
(iii) and inserting ‘‘, and’’, and by adding at the end the
following new clause:
‘‘(iv) any section 1250 property which
is a franchise operation subject to section
1253.’’.
(b) CONFORMING AMENDMENT.—Subparagraph (B)
of section 168(g)(3) of such Code is amended by inserting
after the item relating to subparagraph (E)(iii) in the
table contained therein the following new item:
‘‘(E)(iv) .................................................................................
20 ’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to property which is placed in serv-
ice on or after the date of the enactment of this Act and
to which section 168 of the Internal Revenue Code of 1986
applies after the amendment made by section 201 of the
Tax Reform Act of 1986. A taxpayer may elect (in such
form and manner as the Secretary of the Treasury may
prescribe) to have such amendments apply with respect
to any property placed in service before such date and to
which such section so applies.
SEC. 3. RECOVERY PERIOD FOR DEPRECIATION OF CER-
TAIN LEASEHOLD IMPROVEMENTS.
(a) 10-YEAR
RECOVERY
PERIOD.—Subparagraph
(D) of section 168(e)(3) of the Internal Revenue Code of
1986 (relating to 10-year property) is amended by striking
‘‘and’’ at the end of clause (i), by striking the period at
the end of clause (ii) and inserting ‘‘, and’’, and by adding
at the end the following new clause:
‘‘(iii) any qualified leasehold improve-
ment property.’’.
(b) QUALIFIED LEASEHOLD IMPROVEMENT PROP-
ERTY.—Subsection (e) of section 168 of such Code is
amended by adding at the end the following new para-
graph:
‘‘(6) QUALIFIED
LEASEHOLD
IMPROVEMENT
PROPERTY.—
‘‘(A) IN
GENERAL.—The term ‘qualified
leasehold improvement property’ means any im-
provement to an interior portion of a building
which is nonresidential real property if—
‘‘(i) such improvement is made under
or pursuant to a lease (as defined in sub-
section (h)(7))—
‘‘(I) by the lessee (or any subles-
see) of such portion, or
‘‘(II) by the lessor of such por-
tion,
‘‘(ii) such portion is to be occupied ex-
clusively by the lessee (or any sublessee) of
such portion, and
‘‘(iii) such improvement is placed in
service more than 3 years after the date
the building was first placed in service.
‘‘(B) CERTAIN
IMPROVEMENTS
NOT
IN-
CLUDED.—Such term shall not include any im-
provement for which the expenditure is attrib-
utable to—
‘‘(i) the enlargement of the building,
‘‘(ii) any elevator or escalator,
‘‘(iii) any structural component bene-
fiting a common area, and
‘‘(iv) the internal structural frame-
work of the building.
‘‘(C) DEFINITIONS AND SPECIAL RULES.—
For purposes of this paragraph—
‘‘(i) COMMITMENT TO LEASE TREAT-
ED
AS
LEASE.—A commitment to enter
into a lease shall be treated as a lease, and
the parties to such commitment shall be
treated as lessor and lessee, respectively.
‘‘(ii) RELATED PERSONS.—A lease be-
tween related persons shall not be consid-
ered a lease. For purposes of the preceding
sentence, 
the 
term 
‘related 
persons’
means—
‘‘(I) members of an affiliated
group (as defined in section 1504),
and
‘‘(II) persons having a relation-
ship described in subsection (b) of
section 267; except that, for purposes
of this clause, the phrase ‘80 percent
or more’ shall be substituted for the
phrase ‘more than 50 percent’ each
place it appears in such subsection.’’
(c) REQUIREMENT TO USE STRAIGHT LINE METH-
OD.—Paragraph (3) of section 168(b) of such Code is
amended by adding at the end the following new subpara-
graph:
‘‘(G) 
Qualified 
leasehold 
improvement
property described in subsection (e)(6).’’.
(d) ALTERNATIVE SYSTEM.—The table contained in
section 168(g)(3)(B) of such Code is amended by inserting
after the item relating to subparagraph (D)(ii) the fol-
lowing new item:
‘‘(D)(iii) .................................................................................
10 ’’.
(e) EFFECTIVE DATE.—The amendments made by
this section shall apply to qualified leasehold improvement
property placed in service after the date of the enactment
of this Act.
SEC. 4. TREATMENT OF TRANSFERS OF FRANCHISES IN
CONNECTION WITH TRANSFER OF EXISTING
BUSINESS OPERATION.
(a) CAPITAL GAIN TREATMENT.—Section 1253 of
the Internal Revenue Code of 1986 (relating to transfers
of franchises, trademarks, and trade names) is amended
by adding at the end the following new subsection:
‘‘(f) EXCEPTION FOR TRANSFERS OF FRANCHISES IN
CONNECTION WITH EXISTING BUSINESS OPERATION.—
‘‘(1) IN
GENERAL.—Subsection (a) shall not
apply to the transfer of a franchise to an eligible
transferee if—
‘‘(A) the trade or business which is the
subject matter of the franchise has been ac-
tively carried on for not less than 2 years as of
the date of the transfer,
‘‘(B) the transferee acquires the right to
operate such trade or business in connection
with such transfer, and
‘‘(C) the transferee and the transferor are
not related persons (as defined in section
197(f)(9)(C)).
‘‘(2) ELIGIBLE TRANSFEREE.—For purposes of
paragraph (1), the term ‘eligible transferee’ means—
‘‘(A) an individual,
‘‘(B) any domestic corporation all of the
stock in which is owned by an individual and
the members of such individual’s family (within
the meaning of section 267(c)(4)),
‘‘(C) a corporation—
‘‘(i) which meets the requirements of
section 
1361(b) 
(determined 
by 
sub-
stituting ‘35’ for ‘75’ in paragraph (1)
thereof), and
‘‘(ii) which meets the requirements of
section 1202(d) (determined by treating
such transfer as the issuance referred to in
such section), or, in the case of a corpora-
tion which is not a C corporation, would
meet such requirements (as so determined)
were it a C corporation, or
‘‘(D) a partnership which would meet the
requirements of subparagraph (B) or (C) if it
were a corporation and interests in the profits
or capital of the partnership were stock.’’.
(b) EXCEPTION FROM ORDINARY INCOME RECAP-
TURE
ON
DISPOSITION
OF
AMORTIZED
FRANCHISE
COST.—Paragraph (7) of section 197(f) of such Code is
amended by adding at the end the following new sentence:
‘‘The preceding sentence shall not apply to any franchise
to which section 1253(a) does not apply by reason of sec-
tion 1253(f).’’
(c) MAXIMUM RATE OF TAX.—Subsection (a) of sec-
tion 1201 of such Code (relating to alternative tax for cor-
porations) is amended by striking ‘‘plus’’ at the end of
paragraph (1) and by striking paragraph (2) and inserting
the following new paragraphs:
‘‘(2) 20 percent of the lesser of—
‘‘(A) the net capital gain determined by
taking into account only gain and loss attrib-
utable to transfers of franchises to which sec-
tion 1253(a) does not apply by reason of sec-
tion 1253(f), or
‘‘(B) the net capital gain (or, if less, tax-
able income) for the taxable year, plus
‘‘(3) 35 percent of the excess (if any) of—
‘‘(A) the net capital gain (or, if less, tax-
able income) for the taxable year, over
‘‘(B) the amount of net capital gain taken
into account under paragraph (2).’’.
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to transfers after the date of the
enactment of this Act.
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