Court Points Out Tax Distinction Between A Lease and a Sale and Deals With Ability to Increase Partnership Basis

The petitioner, a doctor, had various entities that he controlled that utilized certain items of equipment.  The petitioner acquired a CT scanner with a five-year life.  The scanner was leased by one of the petitioner's entities that provided that the lessee could buy the scanner at a below market price.  One of the entities deducted the rent amount received for the "lease" of the scanner and another entity deducted depreciation, with both deductions flowing through to the petitioner.  The IRS denied the deductions and the court agreed.  The court determined that the substance of the transaction was a conditional sale primarily based on the fact that the lessee had the option at the end of the lease term to buy the scanner at a nominal (below market) price.  The petitioner also formed, with two others, a limited liability company (LLC) that was taxed as a partnership.  The LLC managed the scanner.  The LLC, for the tax year at issue, had a large loss which petitioner claimed on his own return.  IRS denied the denied the deductible loss due to lack of basis in the LLC.  The petitioner claimed he had sufficient basis in the LLC via the scanner "lease".  The court disagreed, holding that the lease was not a partnership liability because the "lease" transaction was a conditional sale that was not transferred to the LLC.  The scanner transaction was specifically non-transferable and non-assignable.  Coastal Heart Medical Group, Inc., et al. v. Comr., T.C. Memo. 2015-84.


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