Wal-Mart's REITs would simply take a hefty tax deduction for paying dividends to another subsidiary,... then not report earnings

Court docs: Wal-Mart plotted strategy in 'Tax Shelter Room' | Jason Rhyne | Published: Tuesday October 23, 2007
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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.
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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. ...