Court docs: Wal-Mart plotted strategy in 'Tax Shelter Room' Jason Rhyne

Published: Tuesday October 23, 2007



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Print This Email This Accounting firm urged caution in 'post-Enron environment' When the Wal-Mart corporation sent out a 2001 plea to heavy-hitting accounting houses requesting some bright ideas about how the retail giant might be able to pay less in state taxes, Ernst & Young LLP was eager to pitch in. But after being challenged by North Carolina's attorney general, the big-time firm's secret tax-slashing strategies have come to light in an array of revealing materials filed in court. "Big companies hardly ever discuss how outside accountants, lawyers and investment bankers help them cut their tax bills," reports Jesse Drucker of the Wall Street Journal, who writes that the court filings offer "a rare window into accountants' role in generating tax-reduction ideas at one major company." Drucker says that after their hiring, Ernst & Young "swung into action. Senior tax experts at the big accounting firm swapped ideas via email and in a series of meetings. At least one gathering, according to an internal Ernst & Young calendar, took place in Wal-Mart's headquarters in the 'Tax Shelter Room.'" Among the revelations in the documents, according to the Journal, is evidence that Wal-Mart aggressively capitalized on its move a decade ago to transfer ownership of the company's stores to real estate investment trusts (REITs), subsidiaries that are exempt from federal tax provided that 90% of income is paid out in shareholder dividends. In California, Wal-Mart followed the firm's advice to claim tax deductions on shareholder dividends that were technically never paid. Exploiting a loophole in California law that doesn't require dividend recipients to list that money as taxable income, Wal-Mart's REITs would simply take a hefty tax deduction for paying dividends to another subsidiary, which in turn would opt not to report the earnings. The practice resulted in a dramatic savings on tax bills in the state. California's Franchise Tax Board, the state's income-tax agency, has since put the strategy on its list of "Abusive Tax Shelters," the paper reports. The current North Carolina case also involves real estate trusts. "In Texas," continues the Journal, "Ernst & Young helped Wal-Mart set up a somewhat more common tax-cutting vehicle. Under Texas law at the time, a limited partner from out of state was exempt from Texas's corporate franchise tax. As a result, scores of companies, including Wal-Mart, reorganized their Texas operations into limited partnerships." State lawmakers closed that loophole earlier this year. Other strategies were floated as well by the firm, including "a 37-page proposal laying out a smorgasbord of 27 potential tax strategies, most tailored to a particular state's tax code." One of those ideas was even accompanied by a warning: "Note that in a 'post-Enron' environment and amidst the focus on 'tax haven' operations, this strategy is expected to get more scrutiny by the IRS, as well as some states," the note read, according to the paper. Regarding the so-called "Tax Shelter Room," Wal-Mart's former vice president for tax policy, David Bullington, said in a deposition to North Carolina officials that the name was actually just "a bit of a pun" referencing the use of the conference room in staging safety drills.

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