Foreign Deferred Compensation Scheme By J. Richard Duke, J.D., LLM

Adverse publicity, as well as the strong position of the IRS, is bringing an end to this planning technique.  The adverse publicity comes from Forbes and the Irish Times. The Forbes article makes a scathing attack on various techniques used to defer U.S. income taxation.  At page 128, the Forbes article states: A good example is the Irish employee-leasing company scheme.  Here a dentist, doctor or small-business owner signs an employment contract with a foreign (usually Irish) employee-leasing company, which then leases his services to a U.S. leasing company, which in turn leases his services back to his business or practice.  As part of his employee contract with the Irish company, most of his salary is diverted into a nonqualified deferred-compensation plan, and held in a so-called Rabbi trust in a Caribbean tax haven [does not have to be in the Caribbean], where it grows tax free. Deferred compensation plans can be legal.  But normally an employer can't deduct deferred pay until it's paid to the employee and reported on his tax return.  In this deal the business deducts the full pay package now--it has, after all, paid the Irish company the full amount.  Yet the "leased employee" only reports the income he currently receives, which doesn't include the deferred comp.  One "more likely than not" opinion written for this shelter ignores what experts call its Achilles' heel: the relationship between the leased employee and the organization he's ultimately leased back to. The shelter promoters are shameless with their fees.  One Chicago-area CPA was horrified to find that, after being flown to Florida for a sales pitch, a doctor-client had paid a rich $55,000 to set up the plan.  In this scheme, both the leasing companies and the trust manager also claim fat annual fees. Second, several days after the Forbes article appeared, the Irish Times published an article entitled "Magazine says U.S. citizens use Irish firms to dodge tax."  The article states: The Department of Finance also expressed concern about the practice yesterday. IDA [Industrial Development Authority] Ireland, which promotes the economy to international investors and has been particularly successful in winning U.S. investment, will be concerned its job will now be more difficult as a result of the revelations. The article goes on the state that the Revenue department in Ireland was not aware of this "scheme" until the article appeared in Forbes. Position of the Internal Revenue Service on these leasing arrangements At the 19th Annual International Tax Conference, Miami, Florida, sponsored by The Florida Bar, January 25-26, 2001 ("International Tax Conference"), two high-level IRS agents spoke. One of the presenters stated that the Irish employee leasing arrangement is a serious target of the IRS. Also, the IRS handed out a U.S. Department of Justice release dated December 7, 2000, entitled "Red Bluff Man Indicted in Massive International Tax Evasion Scheme."  This notice states " … a federal grand jury returned an indictment charging Neil R. Brown of Red Bluff, CA, with 21 criminal tax counts, alleging a massive tax loss to the United States due to a scheme using foreign corporations and trusts to move millions of dollars through the international banking system." According to this release, one of the tax evasion schemes used by Mr. Brown is the employee leasing program for employees of professional corporations through an Irish leasing company.  After the leasing arrangement was established, and compensation was deferred and transferred to the Irish leasing company, Mr. Brown (the promoter) was having part or all of the money in Ireland returned to these employees of professional corporations. I spoke with the IRS presenters at the International Tax Conference about this employee leasing arrangement.  Several doctrines will be used to attack this employee leasing arrangement: (i) substance over form; (ii) pre-arrangement; (iii) pre-arrangement among the parties setting up the transaction; and (iv) real presence of the Irish leasing company is the U.S. corporation. The IRS agents are aware that in each employee leasing arrangement, the same parties are involved with each transaction.  The lawyer or law firm that drafts the documents works with the same person or persons who own an Irish leasing company.  Then, the Irish leasing company contracts with a domestic corporation (generally Nevada or Delaware) that is owned partly or wholly by the same lawyer or lawyers. This pre-arrangement shows that the real party in control is the U.S. (domestic company and its shareholder or shareholders–the lawyer or lawyers), not the Irish leasing company.  Therefore, the relationship between the U.S. employee and the Irish leasing company is not real. Richard Duke Reprinted in part from The Offshore Tax Seminar Manual Copyright, 2002, All rights reserved. Co-author of The Offshore Tax Seminar Manual http://www.offshorepress.com/offshoretaxmanual.htm

About the authors: Vernon Jacobs is a CPA who provides tax accounting and consulting services for clients with international interests. He edits and publishes the online International Wealth Protection Reports ..  J. Richard Duke , JD, LLM is an attorney who specializes in international tax law and is an Adjunct J. Richard Duke is a Professor of international tax law. and a practicing attorney in the international specialty.  He is a Consulting Editor for the online International Wealth Protection Reports Sponsored by Offshore Press, Inc .., Copyright, 2002, all rights reserved. Offshore Press, Inc., Box 8194, Prairie Village, KS 66208. Phone (913) 362-9667. Email to Offshore Press   Vernon K. Jacobs, Webauthor . .