Judge Nega has a quick refresher today on what is an equipment purchase (payments not deductible but capitalized) and what is an equipment lease (rent deductible if qualified under Section 162).

Here the equipment is a high-tech (but short-lived) CT scanner, acquired by Dr. Anil V. Shah and passed around to various entities under his control. Judge Nega sorts out the purchase-vs-lease issue (among others, principally the active-passive Section 469 miasma, with a constructive dividend thrown in), in Coastal Heart Medical Group, Inc., et al., 2015 T. C. Memo. 84, filed 5/4/15.

The CT scanner came from Siemens and had a five-year useful life (technology advancing at warp speed rendering old devices obsolete). The lease had a coequal term, and provided for purchase by the “lessee” at a price below FMV. One of Doc Shah’s entities deducted rent for the CT scanner, and the other deducted depreciation. And of course both flowed through to Doc Shah.

I give Doc Shah a Taishoff “good try.”

Judge Nega, on the other hand, gives Doc Shah a heart-stopping result (sorry, guys).

“Although there are no specific provisions in the U.S. tax laws governing the differentiation of true leases and conditional purchases, the substance of the transactions, not the form, will govern the nature of the lease. With respect to the transfer of equipment, courts have stated that factors indicating that a conditional purchase more likely exists include: (1) the lease term extends throughout the equipment’s entire useful life; (2) the sum of the rental payments approximately equals the cost of the equipment; and (3) the lessee has an option at the end of the agreement to purchase the equipment at a nominal or below-market price.” 2015 T. C. Memo. 84, at p. 14. (Citations omitted).

The Siemens lease is a purchase, guys, and there’s no deduction. 20% five-and-ten chop for Doc Shah.