ANNAPOLIS | Maryland is for the first time collecting millions in corporate income taxes from a company after closing a tax loophole in 2007 on real estate investment trusts, Comptroller Peter Franchot said Monday.
The change no longer allows payments to “captive” real estate investment trusts to be deducted from state corporate income tax returns, which Mr. Franchot says could bring in millions in revenue annually.
The company owed $10.8 million but could not be identified because of confidentiality laws, said Joseph Shapiro, a Franchot spokesman. The money is back taxes for three years, generally the limit for corporate audits, he added.
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 in which 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 country’s REITs.
The comptroller’s office said a $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, the comptroller’s office said.
The 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, officials said.
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