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Wal-Mart Fails In Bid To Block Tax Dispute Court Papers

by Leroy Baker,, New York

23 November 2007

A state judge has blocked an attempt by retail giant Wal-Mart to block public access to court documents related to a tax dispute.

The Wall Street Journal reported recently that Wal-Mart filed a protective order in October to seal future documents filed in its legal dispute with the state of North Carolina, but the motion has been rejected by Wake County Superior Court Judge Clarence Horton Jr., who agreed with the state attorney general that keeping the documents open is in the public interest. Documents already filed as part of the case will remain sealed.

The dispute erupted after Wal-Mart challenged the state's refusal to grant a $30.2 million tax refund, arguing that it has overpaid North Carolina's 6.9% income tax. However, the action has led the state to examine the potentially questionable strategy that Wal-Mart used to reduce its tax bill.

According to reports, prosecutors have accused Wal-Mart of transferring the ownership of its stores to a real-estate investment trust, a subsidiary of the company, and reducing its tax liability by taking deductions for rental payments which remained in the company.

Wal-Mart has defended the legitimacy of this strategy, and chided the WSJ for causing “unreasonable and undue annoyance and oppression of a party that is attempting to litigate a serious dispute with a public agency".

However, the case comes at a time when public awareness of 'abusive' tax shelters used by companies and wealthy individuals is growing, thanks to a high profile crackdown by the federal government, and legislative efforts to ban transactions that have little or no economic merit other than to reduce tax.

State governments are also becoming wise to the complex strategies that companies employ to reduce their state tax liabilities. In April, a report by the Center on Budget and Policy Priorities showed that Governors in six states had recommended that their state adopt a key reform to outlaw a variety of abusive income-tax-avoidance strategies practiced by large corporations. They joined eighteen states that had already adopted the reform, known as “combined reporting,” at of the start of 2007.

“Six governors decided this year, independently of one another, that it’s time to make their corporate tax systems fairer and stronger by adopting this reform,” announced Michael Mazerov, a senior fellow at the Center and the report’s author.

The Center's study reported that, to avoid state corporate income taxes, a number of large, multistate corporations have devised strategies to move profits out of the states in which they are earned and into states in which they will be taxed at lower rates - or not at all. They do this by creating subsidiaries largely or solely as tax shelters in “tax haven” states like Delaware, and then artificially shifting funds to them in the form of royalties or rent.

The report cited as an example the case of Wal-Mart, which has transferred ownership of all of its stores to the subsidiary metioned in the legal dispute with North Carolina.

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