Lease Strips and Viral Stock: Are They Dead Yet?

This White Paper explores some of the implications of the Long Term Capital Holdings decision. It covers the analysis of not only lease strips and their progeny, known as “viral stock,” but also other shelters that similarly involve a transfer of high-basis assets to an entity in a purported tax-free transaction followed by a sale of an interest in the entity.

THE LONG TERM CAPITAL HOLDINGS DECISION
The Long Term Capital Holdings Transactions

At the core of the Long Term Capital Holdings case is the lease strip, from which all the subsequent tax benefits emanate. A foreign corporation, Onslow Trading and Commercial LLC (OTC), presumably owned by non-U.S. persons but no one in particular, acquired rights to lease computer equipment or trucks as a lessee. OTC then immediately subleased its rights as lessee to another party, with the sublessee prepaying 92.5% of the rent due under the sublease. As a foreign corporation, OTC paid no U.S. taxes on the prepayment, nor did it pay taxes in any other country. OTC deposited the prepayment in the bank, and then pledged the bank account as security for its own lease obligation.

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