Warner R. Waddell and Jeanette I. Waddell v. Commissioner of Internal Revenue

Warner and Jeanette Waddell appeal from the United States Tax Court’s rede-termination of an income tax deficiency. We consider whether the tax court properly characterized various aspects of the Wad-dells’ investment in computerized electrocardiogram (ECG) terminals.

Facts

In 1980, the Waddells went into the business of leasing ECG terminals and providing related services to health care providers. To that end, they purchased from Comp-U-Med, Inc. and its wholly owned subsidiary, Comp-U-Med Systems, four System 107 Computer ECG Terminals for the stated price of $27,500 each. They made a $2,500 downpayment on each terminal and executed a seven-year recourse promissory note for the balance of $25,000 per terminal. In addition, they entered into a franchise agreement for the terminals. The Waddells received the right to have ECGs analyzed by Comp-U-Med’s computers, Comp-U-Med billing services and training programs, a service contract for the terminals, the fight to use Comp-U-Med’s name and methods, and other consideration. In return, the Waddells agreed to pay a franchise fee of $500 per terminal and a royalty of $3,000 in the first year and fifty cents per ECG processed by…