Saturday, January 5, 2008
Walmart Loses REIT Tax Strategy Refund Gimmick
The Wall Street Journal reports that Walmart lost the ruling in the case of Walmart Stores East Inc. vs. Reginald S. Hinton, Secretary of Revenue of the State of North Carolina (court ruling), a closely watched tax-shelter case involving an arrangement in which the retailer essentially paid rent to itself and then deducted the amount from its taxes. The judge dismissed Wal-Mart's suit, in which it sought a refund of $33.5 million in taxes, interest and penalties that it paid after state tax authorities determined it had underpaid by that amount....The dispute arose from Wal-Mart's use of a real-estate investment trust. A decade ago, the company transferred ownership of its stores to two REITs, of which Wal-Mart owned 99%, then paid tax-deductible rent to the REITs to use the stores. ...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 an estimated $230 million on its tax bill in dozens of states.And the article also goes on to say that three other states are following suit, literally, and six other states are in the process of closing this tax loophole. For the record, this tax evasion strategy used by Walmart was concoted by Ernst & Young, where four partners have been indicted for creating illegal tax shelters for clients. Why on earth would Walmart want to save pocket change using a blatantly transparent tax gimmick? Not only do they have to pay it all back, they also sustain substantial damage to the brand name along with a public relations disaster on their hands, which wasn't one of their stronger areas in the first place.
With their recent green makeover, the company had just started to claw back some much needed respect from consumers, but this case flushes it all down. Walmart and corporate profits are again synonymous, and will remain so well in to the near future. Accompanied by a slow bleed of one state after another heaping penalties on them, along with a drain on earnings and a fall in share price.
What can we say? Never mess with the IRS.
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