The Court of Appeals today affirmed a trial court’s ruling that Wal-Mart had been properly assessed more than $30 million in taxes, penalties and interest. The case is Wal-Mart Stores East, Inc. v. Hinton.
The tax strategy of Wal-Mart rejected by the Court involved the discounter transferring the ownership of its stores to a Delaware Real Estate Investment Trust headquartered in Arkansas.
Wal-Mart paid rent for its North Carolina stores to the REIT, and deducted those payments on its North Carolina tax returns. When the REIT paid out that income to its shareholders – which were other Wal-Mart entities – the REIT didn’t have to pay income tax. That’s because REITs don’t pay income tax so long as they distribute 90% of their income to their shareholders.
The $30 million assessment resulted from the Secretary of Revenue’s disregard of Wal-Mart’s restructuring, and his combination of the earnings of the various Wal-Mart entities involved. That power comes from G.S. §105-130.6, which authorizes him to “require the corporation to file a consolidated return of the entire operations of the parent corporation and its subsidiaries and affiliates,” upon a finding “that a report by a corporation does not disclose the true earnings of the corporation on its business carried on in this State.”
I’ll leave it to those of you who want the details to parse through the opinion, which discusses the construction of the statutory term “true earnings,” the constitutionality of the statute, and the validity of the substantial penalties assessed against Wal-Mart. But footnote 14 of the opinion is worth a mention if you, like me, don’t rank tax law as one of your favorite subjects. It’s a quote from Judge Learned Hand:
The words of . . . the Income Tax [Act] . . . merely dance before my eyes in a meaningless procession: cross-reference to cross-reference, exception upon exception couched in abstract terms that offer no handle to seize hold of leave in my mind only a confused sense of some vitally important but successfully concealed, purport.
The Wall Street Journal estimated that Wal-Mart’s tax strategy had saved it $230 million in taxes in dozens of states.