In a ruling Friday, Judge Clarence Horton Jr. turned back the giant retailer's argument that the state improperly assessed its corporate income tax bill for the four fiscal years that ended Jan. 31, 2002. Instead, the judge agreed with the state Department of Revenue's contention that Wal-Mart was trying to game the system by using tax shelters that sought to obfuscate the retailer's "true earnings" in North Carolina.

"We are pleased with the ruling in the Wal-Mart case because it validates the Department's position that taxes must be applied fairly and equitably to everyone who lives or does business in our state," spokeswoman Kim Brooks said. "This isn't just a victory for the Department of Revenue, it is really a victory for every North Carolina taxpayer."

Wal-Mart hasn't decided whether to appeal, spokesman John Simley said.

"Because of the possibility of an appeal," he added, "we won't comment on the details of the case. However, we believe that all taxpayers should have the right to rely on clearly defined tax laws that are reasonably and fairly enforced."

The state's legal victory won't mean a windfall for the state. Wal-Mart already has paid the taxes it owed, plus interest and penalties assessed by the state, and was seeking a refund.

The judge also ruled in the state's favor in a companion lawsuit filed by Sam's Club, the warehouse chain owned by Wal-Mart. Sam's Club was seeking a $3.5 million tax refund from the state.

The Wal-Mart case, which produced a 6-foot-high stack of legal documents, achieved some notoriety in November as a result of Wal-Mart's efforts to bar the public from viewing future court filings. Wal-Mart filed a motion seeking a protective order sealing future documents after The Wall Street Journal posted some of the filings online.

In November, Horton denied Wal-Mart's request for a protective order.

At the heart of Wal-Mart's lawsuit against the state, which was filed in March 2006, was an intricate corporate structure involving a real estate investment trust and a REIT holding company. During the period at issue, Wal-Mart was the sole owner of a REIT holding company, Wal-Mart Property Co., which in turn owned the majority of the REIT, Wal-Mart Real Estate Business Trust.

In effect, Wal-Mart used this structure to pay rent to itself and to pay dividends to the different entities in a way that lowered its state taxes.

Wal-Mart contended that it had legitimate business reasons for this byzantine arrangement, but Horton did not buy that argument.

"There is no evidence that the rent transaction, taken as a whole, has any real economic substance apart from its beneficial effect on [Wal-Mart's] tax liability," Horton ruled. "It is particularly difficult for the court to conclude that rents were actually 'paid,' when they are subsequently returned."