I
105TH CONGRESS
2D SESSION
H. R. 3641
To amend the Internal Revenue Code of 1986 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
APRIL 1, 1998
Mr. BUNNING of Kentucky (for himself, Mr. HOUGHTON, and Mr. ENGLISH
of Pennsylvania) introduced the following bill; which was referred to the
Committee on Ways and Means
A BILL
To amend the Internal Revenue Code of 1986 to allow capital
gain treatment on the transfer of a franchise in connec-
tion 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. TREATMENT OF TRANSFERS OF FRANCHISES
IN CONNECTION WITH TRANSFER OF EXIST-
ING 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 substitut-
ing ‘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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