Wal-Mart Loses North Carolina Tax Battle

A judge says the retailing giant can't get a tax break for paying rent to REITS it owns.
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A North Carolina judge has ruled that Wal-Mart (WMT) - Get Report shouldn't get a tax break for being its own landlord.

The decision, reported in

The Wall Street Journal

, marks a setback for the giant retailer's strategy of paying tax-deductible rent to itself via two real estate investment trusts. The REITs own Wal-Mart's stores, but through subsidiaries, Wal-Mart owns 99% of the REITs.

The arrangement saved Wal-Mart some $230 million over four years in dozens of states, according to the

Journal

.

Clarence F. Horton Jr., a North Carolina state-court judge, wrote in an order that "there is no evidence that the rent transaction, taken as a whole, has any real economic substance," other than reducing Wal-Mart's taxes, according to an

AP

report. The order was signed Dec. 31 but not filed until Friday.

Wal-Mart said it was studying the decision and hadn't decided whether to appeal, according to the media reports.

North Carolina said in 2005 that Wal-Mart could not deduct the REIT payments from its taxes, and Wal-Mart paid what the state said it owed, the

Journal

report noted. But the retailer filed a lawsuit in March 2006 challenging the state's decision.

Wal-Mart shares ended Friday down 66 cents at $45.72.

This article was written by a staff member of TheStreet.com.