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Note 13—Income Taxes
We have elected to be taxed as a REIT under the Code commencing with the year ended December 31, 1999. We have also elected for certain of our subsidiaries to be treated as taxable REIT subsidiaries ("TRS" or "TRS entities"), which are subject to federal and state income taxes. All entities other than the TRS entities are collectively referred to as "the REIT" within this Note 13.
Although we intend to continue to operate in such a manner as to enable us to qualify as a REIT, our actual qualification and taxation as a REIT depends upon our ability to meet, on a continuing basis, distribution levels, stock ownership and various qualification tests. During the years ended December 31, 2011, 2010 and 2009, our tax treatment of distributions per common share was as follows:
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2011 |
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2010 |
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2009 |
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Tax treatment of distributions: |
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Ordinary income |
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$ |
2.28131 |
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$ |
1.99928 |
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$ |
1.8356 |
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Long-term capital gain |
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0.01869 |
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0.07644 |
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0.1510 |
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Unrecaptured Section 1250 gain |
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— |
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0.06428 |
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0.0634 |
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Distribution reported for 1099-DIV purposes |
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2.30000 |
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2.14000 |
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2.0500 |
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Less: Dividend declared in prior year and taxable in current year |
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— |
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— |
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— |
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Distributions declared per common share outstanding |
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$ |
2.30000 |
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$ |
2.14000 |
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$ |
2.0500 |
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We believe we have met the annual REIT distribution requirement by payment of at least 90% of our estimated taxable income for 2011, 2010 and 2009. Our consolidated provision (benefit) for income taxes for the years ended December 31, 2011, 2010 and 2009 was as follows:
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2011 |
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2010 |
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2009 |
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(In thousands)
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Current |
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$ |
(4,080 |
) |
$ |
2,459 |
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$ |
2,166 |
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Deferred |
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(27,057 |
) |
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2,742 |
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(3,885 |
) |
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Total |
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$ |
(31,137 |
) |
$ |
5,201 |
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$ |
(1,719 |
) |
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The benefit for the year ended December 31, 2011 primarily relates to the reversal of certain income tax contingency reserves, including interest, and the deferred tax liabilities established for the ASLG acquisition. The statute of limitations with respect to our 2007 U.S. federal income tax returns expired in September 2011. We did not recognize any income tax expense as a result of the litigation proceeds that we received in the third and fourth quarters of 2011, as no income taxes are payable on these proceeds.
The deferred tax expense/benefit for the years ended December 31, 2011, 2010 and 2009 was adjusted by income tax expense of $0 million, $2.3 million and $1.7 million, respectively, related to the noncontrolling interest share of net income. For the tax year ended December 31, 2011, the Canadian income tax expense included in the consolidated benefit for income taxes was $0.5 million. For the tax years ended December 31, 2010 and 2009, the Canadian income tax benefit included in the consolidated benefit for income taxes was $0.3 million and $2.0 million, respectively.
Although the TRS entities were not liable for any cash federal income taxes for the year ended December 31, 2011, their federal income tax liabilities may increase in future years as we exhaust net operating loss carryforwards and as our senior living operations and MOB operations reportable segments grow. Such increases could be significant.
A reconciliation of income tax expense, which is computed by applying the federal corporate tax rate for the years ended December 31, 2011, 2010 and 2009, to the income tax benefit is as follows:
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2011 |
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2010 |
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2009 |
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(In thousands)
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Tax at statutory rate on earnings from continuing operations before unconsolidated entities, noncontrolling interest and income taxes |
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$ |
115,673 |
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$ |
78,663 |
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$ |
67,049 |
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State income taxes, net of federal benefit |
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(2,396 |
) |
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700 |
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(126 |
) |
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Increase in valuation allowance |
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9,408 |
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5,705 |
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7,713 |
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(Decrease) increase in ASC 740 income tax liability |
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(4,084 |
) |
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2,420 |
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2,166 |
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Tax at statutory rate on earnings not subject to federal income taxes |
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(151,429 |
) |
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(82,490 |
) |
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(78,176 |
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Other differences |
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1,691 |
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203 |
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(345 |
) |
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Income tax (benefit) expense |
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$ |
(31,137 |
) |
$ |
5,201 |
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$ |
(1,719 |
) |
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The REIT made no income tax payments for the years ended December 31, 2011, 2010 and 2009.
In connection with the Sunrise REIT and ASLG acquisitions, we established a beginning net deferred tax liability of $306.3 million and $44.6 million, respectively, related to temporary differences between the financial reporting and tax bases of assets and liabilities acquired (primarily property, intangible and related assets, net of net operating loss carryforwards). No net deferred tax asset or liability was recorded for the Lillibridge acquisition.
Each TRS is a tax paying component for purposes of classifying deferred tax assets and liabilities. The tax effects of temporary differences and carryforwards included in the net deferred tax liabilities at December 31, 2011, 2010 and 2009 are summarized as follows:
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2011 |
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2010 |
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2009 |
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(In thousands)
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Property, primarily differences in depreciation and amortization, the tax basis of land assets and the treatment of interests and certain costs |
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$ |
(332,111 |
) |
$ |
(287,165 |
) |
$ |
(293,800 |
) |
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Operating loss and interest deduction carryforwards |
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343,843 |
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103,733 |
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86,014 |
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Expense accruals and other |
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11,511 |
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3,093 |
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(58 |
) |
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Valuation allowance |
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(281,954 |
) |
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(60,994 |
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(45,821 |
) |
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Net deferred tax liabilities(1) |
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$ |
(258,711 |
) |
$ |
(241,333 |
) |
$ |
(253,665 |
) |
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- (1)
- 2011 includes approximately $2 million of deferred tax assets included in other assets on our Consolidated Balance Sheets.
Our net deferred tax liability increased $17.4 million during 2011 due primarily to the initial deferred tax liability related to the ASLG acquisition. Our net deferred tax liability decreased $12.3 million during 2010 due primarily to the purchase of Sunrise's noncontrolling interests in 58 of our seniors housing communities. See "Note 4—Acquisitions of Real Estate Property."
Due to our uncertainty regarding the realization of certain deferred tax assets, we have established valuation allowances, the majority of which relate to the net operating loss ("NOL") carryforward related to the REIT.
We are subject to corporate level taxes for any asset dispositions during the ten-year period immediately after the assets were owned by a C corporation (either prior to our REIT election, through stock acquisition or merger) ("built-in gains tax"). The amount of income potentially subject to built-in gains tax is generally equal to the lesser of the excess of the fair value of the asset over its adjusted tax basis as of the date it became a REIT asset or the actual amount of gain. Some, but not all, future gains could be offset by available NOLs.
Generally, we are subject to audit under the statute of limitations by the Internal Revenue Service ("IRS") for the year ended December 31, 2008 and subsequent years and are subject to audit by state taxing authorities for the year ended December 31, 2007 and subsequent years. We are also subject to audit by the Canada Revenue Agency ("CRA") and provincial authorities generally for periods subsequent to 2006 related to entities acquired or formed in connection with our Sunrise REIT acquisition.
At December 31, 2011, we had a combined NOL carryforward of $240 million related to the TRS entities and an NOL carryforward related to the REIT of $690 million (including carryforwards related to Lillibridge entities of $10.4 million and $16.2 million, respectively). The REIT NOL carryforward increased from 2010 by $38.7 million and $543.8 million due to the NHP and ASLG acquisitions, respectively. These amounts can be used to offset future taxable income (and/or taxable income for prior years if an audit determines that tax is owed), if any. The REIT will be entitled to utilize NOLs and tax credit carryforwards only to the extent that REIT taxable income exceeds our deduction for dividends paid. Lillibridge and ASLG NOL carryforwards are limited as to their utilization by Section 382 of the Code. The NOL carryforwards begin to expire in 2024 with respect to the TRS entities and in 2016 for the REIT.
As a result of our uncertainty regarding the use of existing REIT NOLs, we have not ascribed any net deferred tax benefit to REIT NOL carryforwards as of December 31, 2011 and 2010. The IRS may challenge our entitlement to these tax attributes during its review of the tax returns for the previous tax years. We believe we are entitled to these tax attributes, but we cannot provide any assurance as to the outcome of these matters.
The following table summarizes the activity related to our unrecognized tax benefits:
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2011 |
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2010 |
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(In thousands)
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Balance as of January 1 |
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$ |
17,868 |
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$ |
15,444 |
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Additions to tax positions related to the current year |
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2,961 |
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2,424 |
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Additions to tax positions related to prior years |
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490 |
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— |
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Subtractions to tax positions related to prior years |
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(6,425 |
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— |
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Balance as of December 31 |
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$ |
14,894 |
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$ |
17,868 |
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Included in the unrecognized tax benefits of $14.9 million and $17.9 million at December 31, 2011 and 2010, respectively, was $14.6 million and $17.3 million of tax benefits that, if recognized, would reduce our annual effective tax rate. We accrued no penalties. Interest of $0.5 million related to the unrecognized tax benefits was accrued during 2011. We expect our unrecognized tax benefits to increase by $3 million during 2012. |