The IRS Office of Chief Counsel has informally ruled (General Legal Advice Memorandum 2014-004; the “GLAM”)^[1] that payments made by manufacturers to their franchisees under “facility image upgrade programs” are immediately includible in the taxable income of the franchisees.  The franchisees then may obtain an offsetting deduction only through depreciation of the property upgrades, typically over a 15-year period for retailers.^[2]

In a recent blog post,^[3] we discussed the IRS’s views of the tax treatment of the manufacturer in connection with these types of payments.  The IRS held that the manufacturer could deduct the payments immediately.  As we observed in the prior post, “Unspoken is the possibility that the IRS would require the construction support payment to be treated as income to the retailer when received.  See, e.g., John B. White, Inc. v. Commissioner, 55 T.C. 729 (1971), aff’d per curiam, 458 F.2d 989 (3d Cir. 1972) (incentive payment by car manufacturer to dealer to move to a better neighborhood must be included in dealer’s income).”  With its new guidance discussed in this post, the IRS has dropped the other shoe and held that the retailer must include the amount in income immediately.^[4]

The GLAM involved various types of payments made by automobile manufacturers to their dealers.  The reasoning is not specific to the automotive industry, however, and could apply to any type of manufacturer/franchisee relationship.  Indeed, the IRS might apply the Chief Counsel’s views to other franchise relationships as well, e.g., in the hospitality industry, where the franchisor seeks to financially support specific features of its franchisees.Continue Reading IRS Rules that “Image Upgrade” Payments by Manufacturers to Franchisees Are Taxable