A Transaction Was a Lease

A Transaction Was a Lease

September 15, 2010

A transaction was a lease despite a fixed-price purchase option.

A couple leased a truck from a Ford dealer for fixed monthly payments over a 48-month lease term. They had an option at the end of the lease to buy the truck for $17,612, which was 102% of the expected value at the end of the lease. If they did not exercise the option, then they would have to pay a “termination fee” of $395.

The couple argued they owned the truck from the start because the “lease” was an installment sale.

The US Tax Court said no. The purchase option was not nominal. It was 40% of the original cost of the truck and slightly more than the truck was expected to be worth at the end of the lease. The couple was not reasonably certain to exercise it. The judge also noted that the lease required the couple to pay an extra “excess mile charge” for each mile they drove the truck above 11,294 miles a year, which is more typical of a lease than a sale.

The case is Arthur E. Boyce v. Commissioner. The Tax Court released its decision in late August.

The case is interesting because the IRS has been challenging big-ticket leases on audit that have fixed-price purchase options.

Keith Martin