Did a fair-market-value purchase option turn a five-year hospital equipment lease into a sale if market value was nominal at the end?

Plain-English summary

Oakland audit said lessor bought hospital equipment tax paid, leased it substantially same form for five years, and collected 3% of equipment cost at commencement for obtaining/leasing. Some leases added fair-market-value purchase option. January 6 memo and sample lease/rider reviewed by Legal are absent.

Legal found forms indicated true leases. But material did not clearly show rider timing; counsel assumed rider negotiated on/about lease commencement. Record appeared to show no tax-avoidance artifice/sham and parties dealing good faith in high-technology, changing market where future price left to marketplace.

Under those assumptions, later fair market value could be nominal without converting bona fide option or true lease. Since lease remained true and tax-paid, 3% commencement service fee was not taxed.

Live 330.2522 publishes high-technology/good-faith result and fee conclusion but omits uncertainty about rider timing, assumption and absent evidence. PDF cites no statute, regulation, ruling or case.

Common questions

Did nominal end value automatically make option nominal from inception?

No. The source distinguished a genuine future fair-market-value option from a fixed nominal buyout.

Why did technology context matter?

The parties could not know future value in a rapidly changing field and agreed to let the market determine it later.

Was 3% service fee taxable?

No under these facts, because the underlying true lease was already in tax-paid status.

Was rider timing proved?

No. Memorandum says timing was not altogether clear and expressly assumes negotiation at or near lease commencement.

Would sham market-value label get same result?

The memorandum does not say so. It expressly relied on good faith and the absence of artifice.

Did source cite a tax statute or regulation?

No. Its result rests on described tax-paid/true-lease facts and reviewed-but-unpublished forms.

May another hospital-equipment lessor rely on this result?

No. It is internal advice based on absent forms and explicit assumption; actual option timing, market method, fees and current law must be checked.

Citations and references

• No statute, regulation, ruling or case — cited
• January 6 audit memo; sample lease/rider — reviewed/referenced but absent
• Tax-paid, substantially-same-form treatment — stated basis without proof
• February 25 HQ-Legal memo — explicit timing assumption and good-faith analysis
• Official Annotation 330.2522 — result without uncertainty/evidence limits

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.2522
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/330-2522.pdf

Original ruling text

State of California

Board of Equalization

Memorandum

To:

Oakland – Auditing (NJC)

From:

HQ - Legal (LS)

330.2522

Date:

Februrary 25, 1983

Subject:

This is in response to your memorandum of January 6, 1983. The subject taxpayer leases equipment to hospitals. All equipment leased is purchased tax paid and leased in substantially the same form as acquired. For its services of obtaining the equipment and leasing it, the lessor collects a service fee from the lessees at the time the leases commence. The service fee is 3% of the cost of the leased equipment. The lease period is five years and, in some cases, the lease provides the lessee with an option to purchase the equipment at leases end for "fair market value.'" Your memorandum indicated that sometimes this “fair market value” is a nominal amount. You wondered whether tax should apply to the 3% service fee. We have reviewed the sample lease form utilized by the taxpayer which you furnished us as well as the rider which provides the lessee with the option to purchase at “fair market value.” In our opinion, the form indicate that true leases are entered into pursuant to those forms. While it is not altogether clear from the material in hand, we assume that the option riders are negotiated on or about the same time the leases of the equipment, to which the riders pertain, commence. Furthermore, there appears to be no evidence that the parties to the leases were attempting to avoid tax through artifice or sham, rather, they were dealing in good faith knowing that in a high technology ever changing area, they would let the market place dictate the option price. Under these circumstances, the fact that fair market value might be nominal at leases end would not alter our conclusion that true leases with bonafide options to purchase are present here. Since the leases in question are true leases which are in a tax paid status, the 3% service fee which the lessor charges the lessee at the commencement of the leases is not subject to tax. LS:rar