In a lease strip, the taxable income from use of an asset is separated from the depreciation deductions. The income is given to someone who does not pay US income taxes. The depreciation is kept by the US taxpayer.

The IRS explained a number of ways it plans to attack such transactions in a notice at the end of July. It also designated lease stripping arrangements as “listed transactions,” meaning that arrangers must report any deals to the IRS as tax shelters and taxpayers who participate in them must disclose the details. The announcement is Notice 2003-55.

The IRS also insisted in a separate announcement in late July that section 482 of the US tax code can be invoked to reallocate income between parties to a transaction even though they are not related. Section 482 gives the IRS broad authority to reallocate income and deductions between parties who are “owned or controlled directly or indirectly by the same interests.” The IRS said the fact that two or more taxpayers acted “in concert or with a common goal or purpose” may be enough to invoke the section. However, it said it would not resort to the section in lease stripping transactions because two taxpayers do not automatically “act in concert” just because they did a deal together.  The conclusion is in Revenue Ruling 2003-96.

Norwest and Comdisco lost a lease stripping case in a US appeals court in June in a complicated cross-border transaction involving use of a partnership. The US tax court agreed with the IRS last year that the parties were not really partners since there was no substance to the transaction other than creation of tax benefits. The taxpayers failed to get the decision set aside on appeal. The case is Andantech L.L.C. v. Commissioner.