The Wall Street Journal: ONG, financiación del terrorismo

Mistrial Hurts Bid to Thwart Funding of Extremists

By GLENN R. SIMPSON and EVAN PEREZOctober 23, 2007; Page A8
In a setback for the government's efforts to cut off fund raising for Islamic extremists, a federal judge in Dallas declared a mistrial on most charges in the largest U.S. terror-financing case.
Prosecutors are expected to retry the Holy Land Foundation for Relief and Development and five of its leaders after an unusual courtroom dispute when three jurors disagreed with some of the acquittals being read by a jury foreman.

U.S. District Judge A. Joe Fish sent the jurors back to resolve their differences, but after about an hour the jurors told him 11 of the 12 felt that a unanimous decision couldn't be reached on most of the charges. The jury had agreed on some acquittals. But on the others the judge declared a mistrial.

The Justice Department, citing a gag order by the judge, declined to comment. Defense lawyers said the mistrial showed the government's case is fatally flawed.

It isn't clear whether the collapse of the case will affect how the Justice Department handles other pending cases involving alleged terror actions. One such case involves the Islamic American/African Relief Agency, which, along with five of its employees, was indicted earlier this year on charges including money laundering and violating sanctions against Iraq, prior to the U.S. invasion. The Treasury Department designated the charity as a terror group.

The Holy Land foundation was one of the biggest Islamic charities in the U.S. before it was raided and shut down by the Treasury Department in December 2001. It said that it focused on disaster relief, and aiding Muslim children and families left homeless or poor by the Israeli-Palestinian conflict.

FBI agents and Israeli officials, however, testified in the two-month trial that Holy Land funneled millions of dollars to Hamas, which has carried out suicide bombings in Israel. The U.S. government designated Hamas a terrorist group in 1995, making financial transactions with it illegal. President Bush announced the seizure of Holy Land's assets in December 2001, calling the action "another step in the war on terrorism."

Prosecutors put on a lengthy, complex case alleging a wide-ranging conspiracy by Islamic militants stretching back to the 1980s. Charges included material support for a terrorist organization, money laundering, racketeering and tax violations.

Defense lawyers said the activists were seeking to provide humanitarian aid to their distressed brethren in Gaza and the West Bank, and emphasized the lack of any direct connection between money raised in the U.S. and suicide bombings in Israel.

The case was closely followed by other Islamic groups in the U.S. and the greater Islamic community, which says Muslims in this country have come under unfair scrutiny since the Sept. 11, 2001, terror attacks.

"It seems clear that the majority of the jury agreed with many observers of the trial who believe the charges were built on fear, not facts, " said Parvez Ahmed, chairman of the Council on American-Islamic Relations. "This is a stunning defeat for prosecutors and a victory for America's legal system."

Prosecutors believe they may have relied too heavily on witnesses and evidence from Israel that was discounted by the jury, and that the prosecution was unnecessarily complex when the laws are written broadly enough to present various acts as clear and simple violations, according to a person familiar with their thinking.

"Conspiracy theories just don't go over well in jury cases," counterterrorism analyst Douglas Farah said.

Write to Glenn R. Simpson at glenn.simpson@wsj.com and Evan Perez at evan.perez@wsj.com

The Wall Street Journal: Asesores contables y estrategias tributarias

Inside Wal-Mart's BidTo Slash State Taxes
Ernst & Young Devises Complex Strategies;California Pushes Back

By JESSE DRUCKEROctober 23, 2007; Page A1
In May 2001, Wal-Mart Stores Inc. issued an appeal to big accounting firms: Find us creative new ways to cut our state tax bills.

Ernst & Young LLP swung into action. Senior tax experts at the big accounting firm swapped ideas via email and in a series of meetings. At least one gathering, according to an internal Ernst & Young calendar, took place in Wal-Mart's headquarters in the "Tax Shelter Room."

Wal-Mart decided to hire Ernst & Young to help devise complex tax strategies to use in at least four big states. The accounting firm, for example, helped Wal-Mart take tax deductions in California for dividends it never actually paid. And in Texas, Ernst & Young advised, the giant retailer could exploit a wrinkle in the tax law involving limited partners from out-of-state -- a maneuver subsequently shut down by the state's legislature.

Big companies hardly ever discuss how outside accountants, lawyers and investment bankers help them cut their tax bills. But Ernst & Young's contributions to Wal-Mart's state-tax minimization project are outlined in a raft of documents filed in recent months in North Carolina state court, where the state's attorney general is challenging a Wal-Mart tax-cutting structure involving real-estate investment trusts. The material, which includes company emails and memos, provides a rare window into accountants' role in generating tax-reduction ideas at one major company.

Companies often assert that tax savings are simply happy byproducts of transactions pursued for other business reasons. But documents from the North Carolina case indicate that Wal-Mart, from the outset, had one primary purpose: cutting its state income taxes. Ernst & Young worked to fulfill that goal. In 2002, for example, the accounting firm delivered a 37-page proposal laying out a smorgasbord of 27 potential tax strategies, most tailored to a particular state's tax code. It described one of them as "a very aggressive strategy with considerable risk."

Lawmakers and law-enforcement officials have taken a keen interest in tax advice provided by the Big Four accounting firms and other consultants. In August, U.S. Senate investigators sent letters to at least 30 companies asking for details of potentially aggressive tax arrangements, including the names of tax professionals and law firms that advised on the deals. In May, four current and former Ernst & Young partners were indicted for their tax-shelter work. Two years ago, KPMG LLP agreed to pay $456 million to settle government charges that it promoted abusive shelters to individual taxpayers.

Publicly traded companies reduced their federal income taxes by about $12 billion in 2004 through potentially abusive tax transactions, according to Internal Revenue Service data. Some experts say companies save far more than that each year through elaborate tax-cutting maneuvers.

A Wal-Mart spokesman, citing ongoing litigation, declined to comment on any of the tax work by Ernst & Young, which also set up the tax maneuver that North Carolina has challenged. In court papers, Bentonville, Ark.-based Wal-Mart has said that some transactions implemented by Ernst & Young were intended to cut taxes, but also to more efficiently manage its real estate and potentially help raise capital. A spokesman for Ernst & Young says the tax deals for Wal-Mart "occurred years ago when such tax structures were not uncommon."

Cookie-Cutter Shelters
Tax-enforcement authorities often regard complex corporate transactions that serve no business purpose other than to reduce taxes to be improper tax shelters. In recent years, authorities have cracked down on cookie-cutter tax shelters mass marketed by accounting and law firms. But these days, it is common for advisers to help large companies such as Wal-Mart to develop individually tailored tax-cutting strategies, according to people who work on such deals.
Wal-Mart's 2001 letter to accounting firms got right to the point. It began: "Wal-Mart is requesting your proposal(s) for professional tax advice and related implementation services in connection with minimization of state income taxes in the following states: Arizona, California, Florida, Illinois, Indiana, Michigan, Minnesota, and Pennsylvania."

State income-tax rates for corporations average about 6.9%, and come on top of a federal statutory rate of 35%. Tax rates vary from state to state, and some states have no corporate tax at all on certain income. That provides ample opportunity for so-called tax arbitrage, in which companies allocate expenses and revenues between states in order to minimize taxes owed. That practice has been going on for decades. Some such strategies are perfectly legal. The government considers others to be abusive. States often try to crack down, but the tax-enforcement staffs of many states are smaller than the tax departments of some big companies.
Wal-Mart set aside about $526 million for state and local income taxes last year, not including its substantial property-tax bills, according to the company's financial reports. But its various state tax-cutting strategies seem to have had an impact. On average, Wal-Mart has paid taxes at a rate equal to about half of the average statutory state rate over the past decade, according to an analysis of the company's regulatory filings by Standard & Poor's Compustat.

Wal-Mart has switched state income-tax strategies several times over the past 15 years, coming up with new approaches as states attack existing ones, court records show. In the early 1990s, it employed an "intangibles holding company," a unit operating in tax-friendly Delaware into which it transferred ownership of its brand names such as Sam's Club. It then made payments to that unit for use of those brands, deducting them as expenses from its taxable income in other states, according to court records. That strategy fell out of favor after several states successfully challenged Wal-Mart and other companies in court over the maneuver.

About a decade ago, Wal-Mart adopted another approach, following advice from Ernst & Young. Wal-Mart transferred ownership of its stores to various in-house real-estate investment trusts. REITs pay no corporate income tax as long as they pay out at least 90% of their income to shareholders as dividends, which are usually taxed. Wal-Mart paid tax-deductible rent to those REITs. For one four-year period, the setup saved the retailer an estimated $230 million on its tax bill, even though the rent payments never left the company.

That strategy was the focus of a Wall Street Journal article in February. Since then, at least six states, including New York, Illinois, Maryland and Rhode Island, have passed laws attempting to prohibit the maneuver, which also has been used by banks and other retailers such as AutoZone Inc. The practice is being challenged by tax authorities in at least four other states, court records show.

After Wal-Mart hired the firm in 1996 to implement the REIT strategy, an Ernst & Young tax executive urged his team to be discreet, according to a staff memo included in North Carolina court records. "We don't think there is much the state taxing authorities can do to mitigate these savings to Wal-Mart, however some states might attempt something if they had advance notification," he wrote. "We think the best course of action is to keep the project relatively quiet....there just seems to be too many opportunities for it to get out to the press or financial community and we all know they are difficult to control, particularly when we are dealing with a client as well-known as Wal-Mart."

David Bullington, Wal-Mart's vice president for tax policy, said in a deposition that he began feeling pressure to lower the company's effective tax rate after the current chief financial officer, Thomas Schoewe, was hired in 2000. Mr. Schoewe was familiar with "some very sophisticated and aggressive tax planning," Mr. Bullington said, according to a transcript of the deposition, taken by the North Carolina attorney general's office in July. "And he ride herds [sic] on us all the time that we have the world's highest tax rate of any major company."

Compared with many other large multinational companies, Wal-Mart has a small presence in foreign countries with low tax rates, reducing opportunities to shift income overseas for tax purposes.

The May 2001 invitation to provide advice came from Wal-Mart's then senior director for income tax, Wyman Atwell. Most of the states he named in the letter had provisions in their tax codes that prevented the REIT strategy from easily providing tax benefits, according to several people familiar with the matter.

In addition to advising Wal-Mart on tax issues, Ernst & Young served as its outside auditor, which meant that its accountants had to pass judgment on advice rendered by colleagues who did the tax work. That's permissible for accounting firms, so long as tax-consulting fees aren't contingent on a client's tax savings. Rules instituted in 2005 prohibit accounting firms from pitching certain types of "aggressive" tax structures to audit clients. An Ernst & Young spokesman said the work for Wal-Mart "complied fully with the independence rules at the time regarding tax advice provided to audit clients."

'Domestic Restructuring'
As Ernst & Young worked on its proposals, one high-ranking tax partner sent an email to a colleague addressing a concern often faced by companies: how to describe a tax-driven transaction in a way that won't create problems later on with tax authorities. "You asked if we have a document that details how the tax savings will work, how much they will save....We really don't have anything like that except for the sales document, partly because we have avoided calling this a 'tax' project, to show that we did not have a tax savings motivation, rather it is a 'domestic restructuring' project," he wrote.

That November, Ernst & Young sent Wal-Mart an "engagement letter" to confirm the scope of its work to cut the company's state tax burden. The letter said the accounting firm's fees would be at least $2.5 million, with potential additional fees to be determined later.

California was a key state for Ernst & Young's project. Its tax system is among the most stringent in the country. Many states only tax income from operations within their own borders -- called the separate-reporting method -- which makes it easier for companies to shift taxable income out of reach of tax authorities in those states. But "combined reporting" states such as California total up all profits of a company's domestic or world-wide operations, regardless of what state they're in, then allocate a portion of those profits to their states.

Ernst & Young dreamed up a novel way to sidestep combined-reporting requirements in California. It used an unusual type of dividend to transfer income from one subsidiary to another in such a way that the second unit wouldn't be taxed.

Here's how it worked: When REITs pay dividends to their shareholders, they can deduct those payments from their taxable income. The federal government permits REITs to take deductions for dividends before they're actually paid -- a provision intended to give them extra time to make payments. Such dividends are called "consent dividends" because the recipients must consent to record the unpaid dividends as taxable income.

Ernst & Young argued that California law permitted REITs to deduct such consent dividends, but that the state law didn't also require recipients of the consent dividends to count them as taxable income, according to one person who worked on the transactions. The accounting firm proposed a strategy in which the Wal-Mart REIT would claim a tax deduction for paying consent dividends to its parent, but the unit receiving the dividends wouldn't record them as income for tax purposes. The bottom line: Wal-Mart could reduce its taxable income in California by an amount equal to the total consent dividend payments it recorded, thereby cutting its tax bill.

Two years later, California's Franchise Tax Board, the state's income-tax agency, put the strategy on its list of "Abusive Tax Shelters." Wal-Mart's Mr. Bullington said in his deposition that California tax authorities have protested various tax benefits taken by the retailer since 1998. California also is in litigation with a big bank, City National Corp., over a similar strategy.
Out-of-State Partner

In Texas, Ernst & Young helped Wal-Mart set up a somewhat more common tax-cutting vehicle. Under Texas law at the time, a limited partner from out of state was exempt from Texas's corporate franchise tax. As a result, scores of companies, including Wal-Mart, reorganized their Texas operations into limited partnerships. The general partner, which was subject to state taxation, was typically a subsidiary based in Texas. But the limited partner, often owning as much as 99.9% of the entity, would be based in Delaware or another tax-friendly state. The result: up to 99.9% of the profits of the Texas operation would flow to that out-of-state limited partner, making that income tax-free.

Texas's state legislature eliminated that option when it revamped its tax laws earlier this year.
Wal-Mart also agreed to buy other complex tax shelters from Ernst & Young to cut taxes in Arizona and Michigan, the court documents show. One Ernst & Young document said Wal-Mart would cut its state income taxes by about $18 million, although that document didn't make clear the time period or the states included in that figure.

In August 2002, Ernst & Young proffered the new list of 27 additional tax-cutting approaches. It isn't clear if Wal-Mart adopted any of them. One of the proposals was accompanied by the following warning: "Note that in a 'post-Enron' environment and amidst the focus on 'tax haven' operations, this strategy is expected to get more scrutiny by the IRS, as well as some states."

As for Wal-Mart's "Tax Shelter Room," North Carolina officials asked Mr. Bullington about the odd name. In his deposition, the Wal-Mart vice president said the moniker was "a bit of a pun," stemming from the conference room's use by tax-department employees to conduct safety drills for natural disasters such as tornadoes.

Wal-Mart, he said, no longer has a room by that name.
Write to Jesse Drucker at jesse.drucker@wsj.com