26 U.S.C. § 1253 — Transfers of franchises, trademarks, and

Page 2365 TITLE 26—INTERNAL REVENUE CODE § 1253 Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF REPEAL Repeal applicable to taxable years beginning after Dec. 31, 1983, see section 492(d) of Pub. L. 98–369, set out as an Effective Date of 1984 Amendment note under sec- tion 170 of this title. § 1252. Gain from disposition of farm land (a) General rule (1) Ordinary income Except as otherwise provided in this section, if farm land which the taxpayer has held for less than 10 years is disposed of, the lower of— (A) the applicable percentage of the aggre- gate of the deductions allowed under section 175 (relating to soil and water conservation expenditures) for expenditures made by the taxpayer with respect to the farm land or (B) the excess of— (i) the amount realized (in the case of a sale, exchange, or involuntary conversion), or the fair market value of the farm land (in the case of any other disposition), over (ii) the adjusted basis of such land, shall be treated as ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle. (2) Farm land For purposes of this section, the term ‘‘farm land’’ means any land with respect to which deductions have been allowed under section 175 (relating to soil and water conservation ex- penditures). (3) Applicable percentage For purposes of this section— If the farm land is disposed of— The applicable percentage is— Within 5 years after the date it was acquired ....................................... 100 percent. Within the sixth year after it was acquired ....................................... 80 percent. Within the seventh year after it was acquired ................................ 60 percent. Within the eighth year after it was acquired ....................................... 40 percent. Within the ninth year after it was acquired ....................................... 20 percent. 10 years or more years after it was acquired ....................................... 0 percent. (b) Special rules Under regulations prescribed by the Secretary, rules similar to the rules of section 1245 shall be applied for purposes of this section. (Added Pub. L. 91–172, title II, § 214(a), Dec. 30, 1969, 83 Stat. 572; amended Pub. L. 94–455, title XIX, §§ 1901(b)(3)(K), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1793, 1834; Pub. L. 98–369, div. A, title IV, § 492(b)(5), July 18, 1984, 98 Stat. 854; Pub. L. 99–514, title IV, § 402(b)(2), Oct. 22, 1986, 100 Stat. 2221; Pub. L. 113–295, div. A, title II, § 221(a)(85), Dec. 19, 2014, 128 Stat. 4049; Pub. L. 115–141, div. U, title IV, § 401(b)(32), Mar. 23, 2018, 132 Stat. 1204.) Editorial Notes AMENDMENTS 2018—Subsec. (a)(1). Pub. L. 115–141, § 401(b)(32)(A), struck out ‘‘during a taxable year beginning’’ after ‘‘disposed of’’ in introductory provisions. Subsec. (a)(1)(A). Pub. L. 115–141, § 401(b)(32)(B), sub- stituted ‘‘section’’ for ‘‘sections’’ and ‘‘for expendi- tures’’ for ‘‘and 182 (as in effect on the day before the date of the enactment of the Tax Reform Act of 1986) for expenditures’’. Subsec. (a)(2). Pub. L. 115–141, § 401(b)(32)(C), sub- stituted ‘‘section’’ for ‘‘sections’’ and struck out ‘‘or 182 (relating to expenditures by farmers for clearing land)’’ before period at end. 2014—Subsec. (a)(1). Pub. L. 113–295, § 221(a)(85)(A), struck out ‘‘after December 31, 1969’’ after ‘‘beginning’’ in introductory provisions. Subsec. (a)(1)(A). Pub. L. 113–295, § 221(a)(85)(B), struck out ‘‘after December 31, 1969,’’ after ‘‘taxpayer’’. 1986—Subsec. (a)(1)(A). Pub. L. 99–514 substituted ‘‘(as in effect on the day before the date of the enactment of the Tax Reform Act of 1986)’’ for ‘‘(relating to expendi- tures by farmers for clearing land)’’. 1984—Subsec. (a)(1). Pub. L. 98–369 struck out ‘‘, except that this section shall not apply to the extent section 1251 applies to such gain’’ after ‘‘of this sub- title’’ in last sentence. 1976—Subsec. (a)(1). Pub. L. 94–455, § 1901(b)(3)(K), sub- stituted ‘‘ordinary income’’ for ‘‘gain from the sale or exchange of property which is neither a capital asset nor property described in section 1231’’. Subsec. (b). Pub. L. 94–455, § 1906(b)(13)(A), struck out ‘‘or his delegate’’ after ‘‘Secretary’’. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2014 AMENDMENT Amendment by Pub. L. 113–295 effective Dec. 19, 2014, subject to a savings provision, see section 221(b) of Pub. L. 113–295, set out as a note under section 1 of this title. EFFECTIVE DATE OF 1986 AMENDMENT Amendment by Pub. L. 99–514 applicable to amounts paid or incurred after Dec. 31, 1985, in taxable years ending after such date, see section 402(c) of Pub. L. 99–514, set out as an Effective Date of Repeal note under former section 182 of this title. EFFECTIVE DATE OF 1984 AMENDMENT Amendment by Pub. L. 98–369 applicable to taxable years beginning after Dec. 31, 1983, see section 492(d) of Pub. L. 98–369, set out as a note under section 170 of this title. EFFECTIVE DATE OF 1976 AMENDMENT Amendment by section 1901(b)(3)(K) of Pub. L. 94–455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94–455, set out as a note under section 2 of this title. EFFECTIVE DATE Pub. L. 91–172, title II, § 214(c), Dec. 30, 1969, 83 Stat. 573, provided that: ‘‘The amendments made by this sec- tion [enacting this section] shall apply to taxable years beginning after December 31, 1969.’’ SAVINGS PROVISION For provisions that nothing in amendment by Pub. L. 115–141 be construed to affect treatment of certain transactions occurring, property acquired, or items of income, loss, deduction, or credit taken into account prior to Mar. 23, 2018, for purposes of determining li- ability for tax for periods ending after Mar. 23, 2018, see section 401(e) of Pub. L. 115–141, set out as a note under section 23 of this title. § 1253. Transfers of franchises, trademarks, and trade names (a) General rule A transfer of a franchise, trademark, or trade name shall not be treated as a sale or exchange of a capital asset if the transferor retains any Page 2366 TITLE 26—INTERNAL REVENUE CODE § 1253 significant power, right, or continuing interest with respect to the subject matter of the fran- chise, trademark, or trade name. (b) Definitions For purposes of this section— (1) Franchise The term ‘‘franchise’’ includes an agreement which gives one of the parties to the agree- ment the right to distribute, sell, or provide goods, services, or facilities, within a specified area. (2) Significant power, right, or continuing in- terest The term ‘‘significant power, right, or con- tinuing interest’’ includes, but is not limited to, the following rights with respect to the in- terest transferred: (A) A right to disapprove any assignment of such interest, or any part thereof. (B) A right to terminate at will. (C) A right to prescribe the standards of quality of products used or sold, or of serv- ices furnished, and of the equipment and fa- cilities used to promote such products or services. (D) A right to require that the transferee sell or advertise only products or services of the transferor. (E) A right to require that the transferee purchase substantially all of his supplies and equipment from the transferor. (F) A right to payments contingent on the productivity, use, or disposition of the sub- ject matter of the interest transferred, if such payments constitute a substantial ele- ment under the transfer agreement. (3) Transfer The term ‘‘transfer’’ includes the renewal of a franchise, trademark, or trade name. (c) Treatment of contingent payments by trans- feror Amounts received or accrued on account of a transfer, sale, or other disposition of a fran- chise, trademark, or trade name which are con- tingent on the productivity, use, or disposition of the franchise, trademark, or trade name transferred shall be treated as amounts received or accrued from the sale or other disposition of property which is not a capital asset. (d) Treatment of payments by transferee (1) Contingent serial payments (A) In general Any amount described in subparagraph (B) which is paid or incurred during the taxable year on account of a transfer, sale, or other disposition of a franchise, trademark, or trade name shall be allowed as a deduction under section 162(a) (relating to trade or business expenses). (B) Amounts to which paragraph applies An amount is described in this subpara- graph if it— (i) is contingent on the productivity, use, or disposition of the franchise, trademark, or trade name, and (ii) is paid as part of a series of pay- ments— (I) which are payable not less fre- quently than annually throughout the entire term of the transfer agreement, and (II) which are substantially equal in amount (or payable under a fixed for- mula). (2) Other payments Any amount paid or incurred on account of a transfer, sale, or other disposition of a fran- chise, trademark, or trade name to which paragraph (1) does not apply shall be treated as an amount chargeable to capital account. (3) Renewals, etc. For purposes of determining the term of a transfer agreement under this section, there shall be taken into account all renewal op- tions (and any other period for which the par- ties reasonably expect the agreement to be re- newed). (Added Pub. L. 91–172, title V, § 516(c)(1), Dec. 30, 1969, 83 Stat. 647; amended Pub. L. 94–455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834; Pub. L. 101–239, title VII, § 7622(a)–(c), Dec. 19, 1989, 103 Stat. 2377; Pub. L. 101–508, title XI, § 11701(i), Nov. 5, 1990, 104 Stat. 1388–508; Pub. L. 103–66, title XIII, § 13261(c), Aug. 10, 1993, 107 Stat. 539; Pub. L. 104–188, title I, § 1704(t)(47), Aug. 20, 1996, 110 Stat. 1889; Pub. L. 108–357, title VIII, § 886(b)(3), Oct. 22, 2004, 118 Stat. 1641.) Editorial Notes AMENDMENTS 2004—Subsec. (e). Pub. L. 108–357 struck out heading and text of subsec. (e). Text read as follows: ‘‘This sec- tion shall not apply to the transfer of a franchise to en- gage in professional football, basketball, baseball, or other professional sport.’’ 1996—Subsec. (d)(4). Pub. L. 104–188 provided that sec- tion 11701(i) of Pub. L. 101–508 shall be applied as if ‘‘subsection’’ appeared instead of ‘‘section’’ in the ma- terial proposed to be stricken. See 1990 Amendment note below. 1993—Subsec. (d)(2) to (5). Pub. L. 103–66 added pars. (2) and (3) and struck out former pars. (2) relating to deduction of certain payments for transfer of a fran- chise, trademark, or trade name not treated as sale or exchange of capital asset, (3) relating to treatment of amounts paid or incurred on account of transfer, sale, or other disposition of a franchise, trademark, or trade name to which pars. (1) and (2) did not apply, (4) relat- ing to renewals for purposes of determining term of transfer agreement under this section or period of am- ortization under this subtitle, and (5) relating to rules applicable to this subsection. 1990—Subsec. (d)(4). Pub. L. 101–508, § 11701(i), which directed the substitution of ‘‘under this section or any period of amortization under this subtitle for any pay- ment described in this section’’ for ‘‘or any period of amortization under this section’’, was executed by making the substitution for ‘‘or any period of amorti- zation under this subsection’’. See 1996 Amendment note above. 1989—Subsec. (d)(1). Pub. L. 101–239, § 7622(a), sub- stituted ‘‘serial payments’’ for ‘‘payments’’ in heading and amended text generally. Prior to amendment, text read as follows: ‘‘Amounts paid or incurred during the taxable year on account of a transfer, sale, or other dis- position of a franchise, trademark, or trade name which are contingent on the productivity, use, or dis- position of the franchise, trademark, or trade name transferred shall be allowed as a deduction under sec- tion 162(a) (relating to trade or business expenses).’’ Page 2367 TITLE 26—INTERNAL REVENUE CODE § 1254 Subsec. (d)(2). Pub. L. 101–239, § 7622(b), designated ex- isting provisions as subpar. (A), inserted subpar. head- ing, redesignated former subpars. (A) to (C) as cls. (i) to (iii), respectively, and former cls. (i) and (ii) of former subpar. (B) as subcls. (I) and (II), respectively, of cl. (ii), and added subpar. (B). Subsec. (d)(3) to (5). Pub. L. 101–239, § 7622(c), added pars. (3) to (5). 1976—Subsec. (d)(2)(C). Pub. L. 94–455 struck out ‘‘or his delegate’’ after ‘‘Secretary’’. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2004 AMENDMENT Amendment by Pub. L. 108–357 applicable to property acquired after Oct. 22, 2004, see section 886(c)(1) of Pub. L. 108–357, set out as a note under section 197 of this title. EFFECTIVE DATE OF 1993 AMENDMENT Amendment by Pub. L. 103–66 applicable, except as otherwise provided, with respect to property acquired after Aug. 10, 1993, see section 13261(g) of Pub. L. 103–66, set out as an Effective Date note under section 197 of this title. EFFECTIVE DATE OF 1990 AMENDMENT Amendment by Pub. L. 101–508 effective, except as otherwise provided, as if included in the provision of the Revenue Reconciliation Act of 1989, Pub. L. 101–239, title VII, to which such amendment relates, see section 11701(n) of Pub. L. 101–508, set out as a note under sec- tion 42 of this title. EFFECTIVE DATE OF 1989 AMENDMENT Amendment by Pub. L. 101–239 applicable to transfers after Oct. 2, 1989, but not applicable to any transfer pursuant to a written binding contract in effect on Oct. 2, 1989, and at all times thereafter before the transfer, see section 7622(c)[(e)] of Pub. L. 101–239, set out as a note under section 167 of this title. EFFECTIVE DATE Section applicable to transfers after Dec. 31, 1969, ex- cept that subsec. (d)(1) shall, at the election of the tax- payer (made at such time and in such manner as the Secretary or his delegate may by regulations pre- scribe), apply to transfers before Jan. 1, 1970, but only with respect to payments made in taxable years ending after Dec. 31, 1969, and beginning before Jan. 1, 1980, see section 516(d)(3) of Pub. L. 91–172, set out as a note under section 1001 of this title. § 1254. Gain from disposition of interest in oil, gas, geothermal, or other mineral properties (a) General rule (1) Ordinary income If any section 1254 property is disposed of, the lesser of— (A) the aggregate amount of— (i) expenditures which have been de- ducted by the taxpayer or any person under section 263, 616, or 617 with respect to such property and which, but for such deduction, would have been included in the adjusted basis of such property, and (ii) the deductions for depletion under section 611 which reduced the adjusted basis of such property, or (B) the excess of— (i) in the case of— (I) a sale, exchange, or involuntary conversion, the amount realized, or (II) in the case of any other disposi- tion, the fair market value of such prop- erty, over (ii) the adjusted basis of such property, shall be treated as gain which is ordinary in- come. Such gain shall be recognized notwith- standing any other provision of this subtitle. (2) Disposition of portion of property For purposes of paragraph (1)— (A) In the case of the disposition of a por- tion of section 1254 property (other than an undivided interest), the entire amount of the aggregate expenditures or deductions de- scribed in paragraph (1)(A) with respect to such property shall be treated as allocable to such portion to the extent of the amount of the gain to which paragraph (1) applies. (B) In the case of the disposition of an un- divided interest in a section 1254 property (or a portion thereof), a proportionate part of the expenditures or deductions described in paragraph (1)(A) with respect to such property shall be treated as allocable to such undivided interest to the extent of the amount of the gain to which paragraph (1) applies. This paragraph shall not apply to any expendi- tures to the extent the taxpayer establishes to the satisfaction of the Secretary that such ex- penditures do not relate to the portion (or in- terest therein) disposed of. (3) Section 1254 property The term ‘‘section 1254 property’’ means any property (within the meaning of section 614) if— (A) any expenditures described in para- graph (1)(A) are properly chargeable to such property, or (B) the adjusted basis of such property in- cludes adjustments for deductions for deple- tion under section 611. (4) Adjustment for amounts included in gross income under section 617(b)(1)(A) The amount of the expenditures referred to in paragraph (1)(A)(i) shall be properly ad- justed for amounts included in gross income under section 617(b)(1)(A). (b) Special rules under regulations Under regulations prescribed by the Sec- retary— (1) rules similar to the rule of subsection (g) of section 617 and to the rules of subsections (b) and (c) of section 1245 shall be applied for purposes of this section; and (2) in the case of the sale or exchange of stock in an S corporation, rules similar to the rules of section 751 shall be applied to that portion of the excess of the amount realized over the adjusted basis of the stock which is attributable to expenditures referred to in subsection (a)(1)(A) of this section. (Added Pub. L. 94–455, title II, § 205(a), Oct. 4, 1976, 90 Stat. 1533; amended Pub. L. 95–618, title IV, § 402(c)(1)–(3), Nov. 9, 1978, 92 Stat. 3202; Pub. L. 97–354, § 5(a)(37), Oct. 19, 1982, 96 Stat. 1696; Pub. L. 99–514, title IV, § 413(a), Oct. 22, 1986, 100 Stat. 2227; Pub. L. 100–647, title I, § 1004(c), Nov. 10, 1988, 102 Stat. 3387.) Editorial Notes AMENDMENTS 1988—Subsec. (a)(4). Pub. L. 100–647 added par. (4).