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Unfortunately, a recent decision by the state Court of Appeals undermines theGeneral Assembly’s goal. While the decision reached therighg result, it did so for the wronh reasons, and in the process introducerd further uncertainty into North Carolina’e already-complicated corporate tax system. The case involvede a complex scheme by to reduce its statstax burden. Wal-Mart tried to do this by transferrin g all of its North Carolina stores into a Delaware real estateinvestmenf trust. The properties were then leasecd back from the trust toa Wal-Mary subsidiary that operated the Why do this? Because Delaware imposes practically no tax on real estatr investment trusts.
Therefore Wal-Mart escaped tax on the received bythe trust. the operating company was able to deductfthe “rents” it paid to the thereby reducing North Carolina taxes. The bottomk line was that by moving the storesd to theDelaware trust, Wal-Mart reduced its North Carolina taxes by about $24 million over a five-yea period. Clearly, the transfe of the stores had no businesss purpose other than to avoidstate taxes. As such, it was a tax sham and shoulrd have been struck down forthis reason.
The Court of however, declined to decide the case onthe straight-forwardf basis that Wal-Mart’s purpose in transferring its stores was tax Instead, the Court ruled against Wal-Marft based on an interpretation of the North Carolinaa corporate tax statutes that significantly expands the ’s authority to requiree affiliated entities (like the real estate trust and the operating company) to combine their income for tax purposes.
In Nortg Carolina, separate entities (even if affiliated) generally must file separate tax According tothe Court’s decision, any time related companies engage in a “unitary business,” the Department of Revenue has the authorityy to require them to combine their income for tax purposes. The proble m is that the Court gave no clear and there is none inthe statutes, as to when the Departmenr of Revenue will exercise its new-found authoritg to force companies to combine their income.
Compounding this uncertainty is the fact that until instructed otherwise by the Department of Revenue, corporate taxpayers are required as a mattere of statute to file separate returns for separate entities. By the time a corporationb receives the instruction that it must file a combine return formultiple entities, the corporatiomn may be subject to interest and penalties, as Wal-Maryt was to the tune of over $4 North Carolina has made considerable efforts to make the statwe a more attractive home for These efforts include the creationb of the , which has issued consistent and well-reasoner opinions, as well as a currentg bill in the General Assembly to reducer the corporate tax rate.
The hope is that lower taxesd will increase the number of businesses locatingt inNorth Carolina. But businesses seek The uncertainty created bythe Court’sd decision in the Wal-Mart case undermines the efforts to attract and retain businessesd in North Carolina.
Thursday, December 9, 2010
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