Case 15-66

Case 15-66

Digitial X-Ray, has introduced a new line of equipment that many revolutionize the medical profession.  Because of the new technology involved, potential users of the equipment are reluctant to purchase the equipment, but they are willing to enter into a lease arrangement as long as they can classify the lease as an operating lease.  The new equipment will replace equipment that Digital X-Ray has been selling in the past.  It is estimated that a 25% loss of actual equipment sales will occur as a result of the leasing policy for the new equipment.

Management must decide how to structure the leases so that their customers can treat them as operating leases.  Some members of management want to structure the leases so that Digital X-Ray, as lessor, can classify the lease as a sales-type lease and thus avoid a further reduction of income.  Others believe that they should treat the leases as operating leases and minimize the income tax liability in the short term.  

They are uncertain as to how leases could be structured to permit the lessee to treat the lease as an operating lease and the lessor to treat it as a sales-type lease. You are asked to respond to this question.