Closing REIT loophole nets Maryland beaucoup dollars

The collection is from an undisclosed company - unnamed because of state tax confidentiality laws.

The REIT loophole issue, which focuses on the use of captive real estate investment trusts to avoid paying state corporate income taxes, has been in the national spotlight for going on two years now. In North Carolina, Wal-Mart saved millions of dollars in state tax bills by essentially transferring its properties to its own REIT and paying rent to itself, then writing it off as a tax deduction. These transactions were frequently followed by rather suspicious looking characters in black masks trudging back to Bentonville with big old gobs of money that could have gone to funding state programs.

North Carolina got wise to the scheme and assessed Wal-Mart for back taxes. Additional states have sought ways to close the loophole up, either through attacking it directly or by adopting combined reporting. Maryland is one of those states - last year Maryland Comptroller Peter Franchot announced that his state would no longer allow payments to captive REITs to be deducted from state tax returns. Now following its first publicized audit since then, Maryland will receive $10.8 million in back taxes for a 3-year period from the unnamed company.

We’ve chronicled again and again that Wal-Mart is one of the worst offenders in this area. Simply closing the loophole is one way to fix it. Adopting combined reporting is another. At least in Maryland’s case, the effort has already resulted in nearly $11 million coming back into the state treasury.

Maryland collects millions after closing tax loophole [Washington Post]

Associated Press
Monday, October 13, 2008; 4:09 PM

For the first time, Maryland is collecting millions of dollars in corporate income taxes from a company after closing a loophole involving real estate investment trusts, the state’s tax collector said today.

Last year, Comptroller Peter Franchot announced that Maryland will no longer allow payments to “captive” Real Estate Investment Trusts to be deducted from state corporate income tax returns, a change he estimated could bring in millions in revenue annually.

The $10.8 million owned by the company represents the first time an audit has been done and a tax liability has been settled in such a case, the comptroller’s office said.

“The vast majority of Maryland businesses play by the rules, but we will not allow a few large corporations to gain an unfair advantage by flouting our tax laws,” Franchot said in a statement.

The company was not named because of state tax confidentiality laws, said Joseph Shapiro, a spokesman for Franchot. The $10.8 million represents back taxes for three years, generally the limit for corporate audits, Shapiro said.

A Real Estate Investment Trust, or REIT, is a corporation or trust that limits activity to real estate operations. REITs must pay all their income to shareholders, who then pay taxes. As a result, REITs are normally exempt from federal and state tax.

Large companies with operations in more than one state have put together REITs to lower the taxes they pay in the states where they do business.

In Maryland, some retailers have found a loophole by forming a REIT and having their stores pay rent to it. The parent company then forms a subsidiary to be the “shareholders,” and the parent company receives dividends from the rent payments. In effect, the company pays rent to itself and gets the money through a tax-free REIT and deducts rent payments from its state tax bill.

Maryland approved a REIT statute in 1963, and the National Association of Real Estate Investment Trusts estimated in 2006 that Maryland was home to more than half the nation’s REITs.

Franchot’s office said a pending $5.7 million assessment in another REIT case is pending, and several audits are under way related to this form of tax-avoidance.

In a separate case, Baltimore City Circuit Court has affirmed an April 2008 Maryland Tax Court decision that found Classics Chicago Inc., a subsidiary of retailer Talbots Inc., liable for about $1.1 million in corporate income tax for 11 years from 1993 to 2003. The company also will pay interest along with 10 percent in penalties, Franchot’s office said.

The comptroller’s office described the case as the latest example of a crackdown on corporations that are avoiding taxes by using Delaware Holding Company tax schemes. The case is similar to a 2003 case against SYL Inc., in which a court found the company liable because of the presence of the parent company in Maryland and because the subsidiary had no economic substance, Franchot’s office said.

© 2008 The Associated Press

Posted by Corey Himrod on Tuesday, October 14, 2008

COMMENTS

I have only one thing to say: IT’S ABOUT TIME!!!!

Jane in N.Y. in
Wednesday, October 15 at 10:05 AM

Study says most corporations pay no U.S. income taxes
WASHINGTON (Reuters) - Most U.S. and foreign corporations doing business in the United States avoid paying any federal income taxes, despite trillions of dollars worth of sales, a government study released on Tuesday said.

The Government Accountability Office said 72 percent of all foreign corporations and about 57 percent of U.S. companies doing business in the United States paid no federal income taxes for at least one year between 1998 and 2005.

More than half of foreign companies and about 42 percent of U.S. companies paid no U.S. income taxes for two or more years in that period, the report said.

During that time corporate sales in the United States totaled $2.5 trillion, according to Democratic Sens. Carl Levin of Michigan and Byron Dorgan of North Dakota, who requested the GAO study.

The report did not name any companies. The GAO said corporations escaped paying federal income taxes for a variety of reasons including operating losses, tax credits and an ability to use transactions within the company to shift income to low tax countries.

With the U.S. budget deficit this year running close to the record $413 billion that was set in 2004 and projected to hit a record $486 billion next year, lawmakers are looking to plug holes in the U.S. tax code and generate more revenues.

Dorgan in a statement called the report “a shocking indictment of the current tax system.” Levin said it made clear that “too many corporations are using tax trickery to send their profits overseas and avoid paying their fair share in the United States.”

The study showed about 28 percent of large foreign corporations, those with more than $250 million in assets, doing business in the United States paid no federal income taxes in 2005 despite $372 billion in gross receipts, the senators said. About 25 percent of the largest U.S. companies paid no federal income taxes in 2005 despite $1.1 trillion in gross sales that year, they said.

(Reporting by Donna Smith, Editing by David Wiessler)REUTERS~~~~~~~~~~~~~~~~~~~NOTE: I want to know about that WalMart REIT set up in Italy. Since the $700bn “heist”,or otherwise known as a"bail-out" allows for FOREIGN investors to write-off toxic debt AT AMERICAN TAXPAYERS’ EXPENSE, could WalMart use that REIT to write off LOTS of debt,too?

ddrb in
Wednesday, October 15 at 10:58 AM

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