One Company’s Plan to - Save Money, Live Better

Wal-Mart’s State Tax Avoidance Schemes

Loopholes

Schemes vary by state

Wal-Mart only paid half the state rates for the last 10 years

Strategies have saved Wal-Mart hundreds of millions in state taxes

Real Estate Investment Trust

Originally created by Congress in 60s

intended to protect small investors

Not subject to corporate income tax

90% pay-out as dividends

Pitched by Ernst & Young in mid 90s

Detailed corporate restructuring

Create captive REIT

Real estate investment trust

50% voting power/value controlled by single corporation

Captive?

The Formula

Tax Break on REIT

Dividends

Parent Company Receives

Subsidiary Dividends Tax

Free

No State Taxes

Wisconsin in the Limelight

Fiscal Years 2000-2003

$852 million net profit

$3 million corporate income tax

Tax rate of .35%

WI has 7.9 % income tax rate

Before Ernst & YoungTrademark Holding Company (THC)

transfer trademarks, trade names and service markslicense marks back to original company

Louisiana assessed $15.4 million in back taxes under this schemeNew Mexico assessed Wal-Mart $11.6 million in 2006

Hearing officer noted WMR was created “for the primary purpose of reducing state income taxes for Wal-Mart Stores, Inc.”

Restructuring

Mid-90s corporate overhaul

8 new subsidiaries, including

Wal-Mart Stores East, Inc

Wal-Mart Property Company

Wal-Mart Real Estate Business Trust (Wal-Mart’s captive REIT)

Following Restructuring

Transfer property ownership to REIT

Land and stores

In 27 states

Non-unitary or separate entity states only

Do not require combined tax return

6

WAL-MART’S TAX DODGE

How Captive REITs WorkWal-Mart’s corporate tax structure is obviously complex - and that’s how the company wants it. The chart below helps illustrate the di!erent parties involved in a REIT strategy. The fact that all parties are owned by Wal-Mart raises questions about legality of this concept.

The Money Circle

All parties owned by Wal-Mart

Money wired through-out company

Turns rent into tax deduction

The Role of Ernst & YoungOriginally pitched to banks

Solely as method to reduce taxes

Q: What’s the business purpose?A: Reduction in state and local taxes.

Q: What if the press gets wind of this and portrays us as a “tax cheat”?

A: That’s a possibility...If you are concerned about possible negative publicity, you can counter it by reinvesting the savings in the community.

-from E&Y sales packages

E&Y’s AssurancesWal-Mart Vice President of Tax David Bullington

Received 25 page memo in 1997

Outlines likelihood of state taxation of REITS

REITS receive favorable tax treatment

Rent as non-arbitrary shifting of income

Express viable business and legal reasons

State-by-state success analysis

E&Y Virginia Analysis

Silence Recommended

“We don’t think there is much the state taxing authorities can do to mitigate those savings to Wal-Mart, however

some states might attempt something if they had advance notification. We think the best course of action is to keep

the project relatively quiet.”*

*Memorandum from Ernst & Young to Wal-Mart Stores, Inc. regarding “Wal-Mart State Tax Project.” April 30, 1996.

Business ReasonsVice President of Tax David Bullington pleads:

Centralizing PayrollLicensing and Real Estate FunctionsCreating an organizational structure representative of how they want to manage the businessProtecting officers, directors and shareholders from litigation

And yet “No studies have been conducted....to quantify the consequences of the reorganization.”

North Carolina AssessmentApril 2, 2002 - Department of Revenue began an audit

In 2005 Wal-Mart filed combined returns for 1999-2002Paid $33 million

Wal-Mart sued the state for refund in 2007Department of Revenue defended the assessment

Income tax returns did not show “true” earningsMethod of accounting did not reflect incomeBusiness conducted to distort “true net” income

Court Decision

Superior Court Judge Clarence E. Horton Jr. ruled“There is not evidence that the rent transaction, taken as a whole, has any real economic substance apart from its beneficial effect on plaintiffs’ North Carolina tax liability. It is particularly difficult for the court to conclude that rents were actually ‘paid,’ when they are subsequently returned to the payor corporation.”

Wisconsin files notice of field audit, June 2002

Method of paying rent on 87 WI properties

Considered “abuse and distortion of income”

Alleged $18 million in back taxes plus interest and penalties

1998 - 2000

Wisconsin Assessment

Legal OverviewNew Mexico, Tax Hearing Officer

“The trademark holding company was created for the primary purpose of reducing state income taxes.”

North Carolina, Judge Horton“There is no evidence that the rent transaction, taken as a whole, has any real economic substance apart from its beneficial effect on plaintiff’s North Carolina tax liability”

Wisconsin, Department of Revenue“[The] abuse and distortion of income...is plainly intended for no purpose other than tax avoidance.”

Italian Subsidiary2007, Illinois issued a $21 million Notice of Deficiency

WMGS Services, subsidiary of Wal-Mart Property Company, created in 2001

Small office in Turin only operating unit of WMGS

Controls billions in Wal-Mart property

80/20 - domestic subsidiary conducts 80% of business overseas

“Foreign” operations tax exempt

Avoiding Combined Reporting

Illinois uses combined apportionment method

Requires inclusion of REIT income on tax return

Unlike NC and WI

REIT methods no good

Foreign 80/20 subsidiaries excluded from unitary group

Wal-Mart paid $26.4 million assessment in Illinois “Under Protest”

Director of Illinois Department of Revenue, Brian Hamer

Misuse of 80/20 company “shocking to the conscience”

“These kinds of manipulations clearly were never contemplated by the state legislatures...It ought to have been clear to business that this was highly questionable conduct.”

Payment Under Protest

Initially for executives - “key man insurance”

COLI for associates pitched as tax benefit in 1993

Policyholder pays substantial premium for 3 years

Borrow back at high interest rate

Interest payments tax deductible

When insured dies, company receives payout

Corporate Owned Life Insurance

350,000 enrolled between 1993 and 1995

All employees age 18-70

Participating in company benefit program

Corporation Grantor Trust established in Georgia

Guarantees “insurable interest” in all employees

Wal-Mart admits intent to reduce income taxes

Pleads need to offset rising health care costs

Wal-Mart COLI Program

Federal Government Intervenes

1996 Congressional legislation effectively ends COLI tax benefits

IRS challenged pre-1996 COLI tax deductions

Wal-Mart settled with IRS in 2002

Suffered significant tax liability

Wal-Mart canceled policies in 2000

Lost Texas class action in 2004

no “insurable interest” in lives of hourly employees

Settled Oklahoma class action in 2005 for $5 million

Employees did not benefit or consent

Florida men seeking class action status in COLI case

Claim Wal-Mart made $9.6 million on 135 deaths

Wal-Mart suing insurance company for loss of tax benefit

Wal-Mart COLI Litigation

Questions?