Legal News

In Tax Case, Wal-Mart Still Singing Carolina Blues

By Ashby Jones

Wall Street Journal corporate-tax reporter Jesse Drucker filed this dispatch on Wal-Mart’s latest loss down in North Carolina.

Wal-Mart can’t catch a break in the Tar Heel State. On Tuesday, the North Carolina Court of Appeals ruled against Wal-Mart in a tax-shelter case involving the company paying itself rent and then deducting the amount from its taxes. Click here for the opinion; here for a link to the LB post after Wal-Mart lost at the lower-court level.

The dispute arose from Wal-Mart’s use of a real-estate investment trust. More than a decade ago, the company transferred ownership of its stores to a pair of REITs, of which Wal-Mart owned 99%, then paid tax-deductible rent to the REITs to use the stores.

REITs pay no corporate income tax as long as they pay at least 90% of their income to shareholders as dividends. However, those REITs were owned by Wal-Mart subsidiaries based in Delaware and therefore owed no tax on the receipt of those dividends. The result: Wal-Mart turned rental payments to itself into state-deductible expenses, even though the money never left the company.

For a four-year period, the setup saved the retailer $230 million in taxes in dozens of states, the Wall Street Journal estimated in a page-one 2007 article.

In 2005, North Carolina tax authorities challenged the REIT tax benefits. Wal-Mart paid the bill sought by the state, and in March 2006 sued for a refund of $33.5 million in taxes, interest and penalties.

In December of 2007, a North Carolina Superior Court judge ruled against Wal-Mart, declaring the transactions had no "real economic substance apart from its beneficial effect" on Wal-Mart's taxes.

On Tuesday, the Court of Appeals concurred, again ruling for the state.

The company could still appeal to the state's Supreme Court. A company spokeswoman said: "All taxpayers should be able to rely on clearly defined laws that are reasonably and fairly enforced. And we are reviewing this decision and evaluating our next steps."

Full post as published by Law Blog - WSJ.com on May 19, 2009 (boomark / email).