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OFFSHORE EXECUTIVE SERVICE LEASING RENTS TAX TROUBLES

April 07, 2003

Taxpayers who buy into clever arrangements to hide income overseas should heed an oft-forgotten principle of the tax law:

"The IRS is not required to be stupid."

Consider the executive who talks his employer into this one:

"I am resigning."

"Don't clean out my desk, though. I am going to work for a foreign leasing company. It will contract my services through a domestic leasing company, and you can obtain my services through them. Oh, I own both of leasing companies. You can skip all of that withholding stuff. Just pay the leasing company my seven-figure salary."

"It's a great deal. I won't take any U.S. salary out of my offshore company, so all my income will now be tax free."

So: same guy, same job, but no U.S. income. As long as the IRS swallows it.

BUT THEY DON'T.

Last week the IRS issued Notice 2003-22 to stop these arrangements. The notice says that the IRS will assert the leasing arrangement lacks substance and will be ignored. The arrangements are also a "listed" transaction that will be subject to registration with the IRS by promoters, who also must maintain lists of participants in these arrangements. Employers are now on notice that they can get into trouble for facilitating these deals.

The moral? The IRS may sometimes act stupid, but it isn't required.

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