Is Franchise Fee deductible?
In general, the IRS has specifically allowed "Franchise fees and related acquistion expenses related to a new business venture" as an allowable business deduction.
The Franchise fees are considered a "Section 197 intangible asset" and must be amortized over 180 months or 15 years. The IRS tax code states that a taxpayer "must amortize these costs if you hold the section 197 intangibles in connection with your trade or business or in an activity engaged in for the production of income".
I think a bigger question is whether or not you can deduct the entire franchise fee in the year incurred as the business did not materialise! From the various research that I have done I think you may have a case to write-off the entire costs in the year incurred.
I think it is worth discussing with your CPA and let him make a determination whether or not the facts and circumstances of the franchise fees paid in connection with the failed business can be deducted in year incurred.
By the way, I would try and recover your franchise fee paid and it might be worth hiring an attorney to look into this case, assuming the amount paid is in excess of $10-15,000.