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Income Taxes | 12 Months Ended
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Dec. 31, 2012
Income Taxes | 16. Income Taxes The Company elected to be treated as a REIT under the Internal Revenue Code of 1986, as amended, commencing with its taxable year ended December 31, 1993. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that the Company distribute at least 90% of its taxable income to its shareholders. It is management’s current intention to adhere to these requirements and maintain the Company’s REIT status. As a REIT, the Company generally will not be subject to corporate level federal income tax on taxable income it distributes to its shareholders. As the Company distributed sufficient taxable income for the three years ended December 31, 2012, no U.S. federal income or excise taxes were incurred. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income taxes at regular corporate rates (including any alternative minimum tax) and may not be able to qualify as a REIT for the four subsequent taxable years. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain foreign, state and local taxes on its income and property and to federal income and excise taxes on its undistributed taxable income. In addition, at December 31, 2012, the Company has taxable REIT subsidiaries that generate taxable income from non-REIT activities and is subject to federal, state and local income taxes. In order to maintain its REIT status, the Company must meet certain income tests to ensure that its gross income consists of passive income and not income from the active conduct of a trade or business. The Company utilizes its TRS to the extent certain fee and other miscellaneous non-real estate-related income cannot be earned by the REIT. In addition, the Company is subject to income tax for its operations in Puerto Rico. At December 31, 2012, 2011 and 2010, the tax cost basis of assets was $8.7 billion, $8.5 billion and $8.6 billion, respectively. For the year ended December 31, 2012, the Company recorded a net payment of $1.1 million. For the years ended December 31, 2011 and 2010, the Company recorded a net refund of $0.5 million and $2.1 million, respectively. These amounts reflect taxes paid to federal and state authorities for franchise and other taxes. The following represents the combined activity of the Company’s TRS and its taxable activity in Puerto Rico (in thousands):
|  | For the Year Ended December 31, |
|  | 2012 |  |  | 2011 |  |  | 2010 |
Book (loss) income before income taxes — TRS |  | $ | (16,934 | ) |  | $ | 4,738 |  |  | $ | (22,843 | )
Components of income tax expense (benefit) are as follows:
Current: |  |  |  |  |  |  |  |  |  |  |  |
Federal |  | $ | — |  |  | $ | 351 |  |  | $ | (1,775 | )
State and local |  |  | — |  |  |  | — |  |  |  | — |
|  |  | — |  |  |  | 351 |  |  |  | (1,775 | )
Deferred: |  |  |  |  |  |  |  |  |  |  |  |
Federal |  |  | — |  |  |  | — |  |  |  | 45,311 |
State and local |  |  | — |  |  |  | — |  |  |  | 6,663 |
|  |  | — |  |  |  | — |  |  |  | 51,974 |
Total expense (benefit) — TRS |  | $ | — |  |  | $ | 351 |  |  | $ | 50,199 |
Book loss before income taxes — Puerto Rico |  | $ | (19,738 | ) |  | $ | (20,835 | ) |  | $ | (17,276 | )
Current |  | $ | — |  |  | $ | — |  |  | $ | — |
Deferred |  |  | — |  |  |  | — |  |  |  | — |
Total expense (benefit) — Puerto Rico |  | $ | — |  |  | $ | — |  |  | $ | — |
At December 31, 2012 and 2011, the Company had net deferred tax assets of $81.5 million and $57.6 million, respectively. The net deferred tax asset at December 31, 2012, included $36.7 million attributed to net operating loss carryforwards that expire in varying amounts between the years 2017 through 2032, $10.9 million attributable to tax restructuring of investments in order to increase capital recycling ability, and $30.0 million of Puerto Rico special partnership loss carryforwards with no expiration date. Realization of the net deferred tax assets is dependent on the existence of significant positive evidence, such as the Company’s ability to generate sufficient income to utilize the deferred tax assets within the relevant carryforward periods. Over the past several years, the Company has initiated various tax actions within the TRS that generated income (“Tax Actions”). These Tax Actions were initiated based upon management’s expectations of the REIT’s future liquidity and cash flow strategies. Management regularly assesses established reserves and adjusts these reserves when facts and circumstances indicate that a change in estimate is necessary. Due to the Company’s continued progress in raising capital over the past several years and expected improvements within its core operating results, it discontinued initiating these actions during the second half of 2010 and expects that it is unlikely that these Tax Actions will be used in future periods. In addition, throughout 2010, the Company continued to experience unexpected adverse charges within its TRS. During the fourth quarter of 2010, the TRS recorded an impairment charge of $19.3 million and a $3.0 million lease liability charge related to a development project that the Company no longer planned to pursue, which resulted in a loss within the TRS for the year ended December 31, 2010. As of December 31, 2010, the Company had a three-year cumulative pre-tax book loss, adjusted for permanent differences. This, in conjunction with the historical and continued volatility of the activities within the TRS, is sufficient negative evidence that a future benefit of the deferred tax asset may not exist. As such, management believed that it was more likely than not that the deferred tax assets would not be used in future years, and, accordingly, a full valuation allowance against those deferred tax assets was recorded at December 31, 2010. The Company also had a three-year cumulative pretax book loss as of December 31, 2012, with respect to its Puerto Rican activity. The differences between total income tax expense or benefit and the amount computed by applying the statutory federal income tax rate to income before taxes were as follows (in thousands):
|  | For the Year Ended December 31, |
|  | 2012 |  |  | 2011 |  |  | 2010 |
Statutory rate of 34% applied to pre-tax (loss) income |  | $ | (5,757 | ) |  | $ | 1,611 |  |  | $ | (7,767 | )
Effect of state and local income taxes, net of federal tax benefit |  |  | (847 | ) |  |  | 237 |  |  |  | (1,142 | )
Valuation allowance increase (decrease) |  |  | 16,808 |  |  |  | (715 | ) |  |  | 58,322 |
Other |  |  | (10,204 | ) |  |  | (782 | ) |  |  | 786 |
Total expense — TRS |  | $ | — |  |  | $ | 351 |  |  | $ | 50,199 |
Effective tax rate |  |  | 0.00 | % |  |  | 7.40 | % |  |  | (219.76 | )%(A)
(A) | The 2010 effective tax rate includes the impact from the recording of the valuation allowance in the fourth quarter 2010. Without this impact, the effective tax rate was approximately 37.59%.
The differences between total income tax expense or benefit and the amount computed by applying the statutory income tax rate to income before taxes with respect to its Puerto Rican activity were as follows (in thousands):
|  | For the Year Ended December 31, |
|  | 2012 |
Statutory rate of 30% applied to pre-tax loss |  | $ | (5,921 | )
Valuation allowance increase |  |  | 7,049 |
Other |  |  | (1,128 | )
Total expense — Puerto Rico |  | $ | — |
Effective tax rate |  |  | 0.00 | %
Deferred tax assets and liabilities of the Company’s TRS and Puerto Rico were as follows (in thousands):
|  | For the Year Ended December 31, |
|  | 2012 |  |  | 2011 |  |  | 2010 |
Deferred tax assets — TRS |  | $ | 75,450 |  |  | $ | 58,297 |  |  | $ | 58,923 |
Deferred tax assets — Puerto Rico |  |  | 34,041 |  |  |  | — |  |  |  | — |
Deferred tax liabilities — TRS |  |  | (1,035 | ) |  |  | (690 | ) |  |  | (601 | )
Deferred tax liabilities — Puerto Rico |  |  | (26,992 | ) |  |  | — |  |  |  | — |
Valuation allowance — TRS |  |  | (74,415 | ) |  |  | (57,607 | ) |  |  | (58,322 | )
Valuation allowance — Puerto Rico |  |  | (7,049 | ) |  |  | — |  |  |  | — |
Net deferred tax asset(A) |  | $ | — |  |  | $ | — |  |  | $ | — |
(A) | The components of the net deferred tax assets are primarily attributable to net operating losses, Puerto Rico special partnership losses and interest expense, subject to limitations and basis differentials in assets due to purchase price accounting.
Reconciliation of GAAP net loss attributable to DDR to taxable income is as follows (in thousands):
|  | For the Year Ended December 31, |
|  | 2012 |  |  | 2011 |  |  | 2010 |
GAAP net loss attributable to DDR |  | $ | (25,822 | ) |  | $ | (15,854 | ) |  | $ | (209,358 | )
Plus: Book depreciation and amortization(A) |  |  | 247,084 |  |  |  | 222,751 |  |  |  | 217,035 |
Less: Tax depreciation and amortization(A) |  |  | (185,230 | ) |  |  | (181,935 | ) |  |  | (179,377 | )
Book/tax differences on gains/losses from capital transactions |  |  | (122,101 | ) |  |  | (116,395 | ) |  |  | (103,331 | )
Joint venture equity in (loss) earnings, net(A) |  |  | (23,885 | ) |  |  | 19,190 |  |  |  | (28,659 | )
Dividends from subsidiary REIT investments |  |  | 480 |  |  |  | 954 |  |  |  | 1,609 |
Deferred income |  |  | 8,471 |  |  |  | (4,327 | ) |  |  | 1,937 |
Compensation expense |  |  | (11,325 | ) |  |  | (17,614 | ) |  |  | 1,199 |
Impairment charges |  |  | 153,142 |  |  |  | 128,765 |  |  |  | 172,127 |
Equity derivative instrument valuation |  |  | — |  |  |  | (21,926 | ) |  |  | 40,157 |
Senior Convertible Notes interest expense |  |  | 10,884 |  |  |  | 14,914 |  |  |  | 8,204 |
Miscellaneous book/tax differences, net |  |  | (2,755 | ) |  |  | (12,131 | ) |  |  | (12,007 | )
Taxable income (loss) before adjustments |  |  | 48,943 |  |  |  | 16,392 |  |  |  | (90,464 | )
Less: Capital Gains |  |  | (48,943 | ) |  |  | — |  |  |  | — |
Less: Taxable loss carried forward(B) |  |  | — |  |  |  | — |  |  |  | 90,464 |
Taxable income subject to the 90% dividend requirement |  | $ | — |  |  | $ | 16,392 |  |  | $ | — |
(A) | Depreciation expense from majority-owned subsidiaries and affiliates, which is consolidated for financial reporting purposes but not for tax reporting purposes, is included in the reconciliation item “Joint venture equity in (loss) earnings, net.”
(B) | The Company has net operating loss carryforwards expiring in 2030 of $90.5 million that can offset future undistributed taxable income.
Reconciliation between cash dividends paid and the dividends paid deduction is as follows (in thousands):
|  | For the Year Ended December 31, |
|  | 2012 |  |  | 2011 |  |  | 2010 |
Dividends paid |  | $ | 153,617 |  |  | $ | 75,253 |  |  | $ | 61,204 |
Plus: Deemed dividends on convertible debt |  |  | 7,875 |  |  |  | — |  |  |  | — |
Less: Dividends designated to prior year |  |  | (6,967 | ) |  |  | (6,967 | ) |  |  | (6,967 | )
Plus: Dividends designated from the following year |  |  | 7,030 |  |  |  | 6,967 |  |  |  | 6,967 |
Less: Return of capital |  |  | (112,612 | ) |  |  | (58,861 | ) |  |  | (61,204 | )
Dividends paid deduction |  | $ | 48,943 |  |  | $ | 16,392 |  |  | $ | — |
The dividends declared in the fourth quarter with respect to the Company’s common share dividends for the years ended December 31, 2012, 2011 and 2010, have been allocated and reported to shareholders in the subsequent year. The tax characterization of common share dividends per share as reported to shareholders for the years ended December 31, 2012, 2011, and 2010, are summarized as follows:
2012 Dividends |  | Date Paid |  |  | Gross Ordinary Income |  |  | Capital Gain Distributions |  |  | Return of Capital |  |  | Total Dividends |
4th quarter 2011 |  |  | 01/06/12 |  |  | $ | — |  |  | $ | 0.0122 |  |  | $ | 0.0678 |  |  | $ | 0.0800 |
1st quarter |  |  | 04/03/12 |  |  |  | — |  |  |  | 0.0183 |  |  |  | 0.1017 |  |  |  | 0.1200 |
2nd quarter |  |  | 07/06/12 |  |  |  | — |  |  |  | 0.0183 |  |  |  | 0.1017 |  |  |  | 0.1200 |
3rd quarter |  |  | 10/02/12 |  |  |  | — |  |  |  | 0.0183 |  |  |  | 0.1017 |  |  |  | 0.1200 |
4th quarter |  |  | 01/04/13 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
|  |  |  |  |  | $ | — |  |  | $ | 0.0671 |  |  | $ | 0.3729 |  |  | $ | 0.4400 |
2011 Dividends |  | Date Paid |  |  | Gross Ordinary Income |  |  | Capital Gain Distributions |  |  | Return of Capital |  |  | Total Dividends |
4th quarter 2010 |  |  | 01/05/11 |  |  | $ | — |  |  | $ | — |  |  | $ | 0.0200 |  |  | $ | 0.0200 |
1st quarter |  |  | 04/05/11 |  |  |  | — |  |  |  | — |  |  |  | 0.0400 |  |  |  | 0.0400 |
2nd quarter |  |  | 07/06/11 |  |  |  | — |  |  |  | — |  |  |  | 0.0400 |  |  |  | 0.0400 |
3rd quarter |  |  | 10/11/11 |  |  |  | — |  |  |  | — |  |  |  | 0.0600 |  |  |  | 0.0600 |
4th quarter |  |  | 01/06/12 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
|  |  |  |  |  | $ | — |  |  | $ | — |  |  | $ | 0.1600 |  |  | $ | 0.1600 |
2010 Dividends |  | Date Paid |  |  | Gross Ordinary Income |  |  | Capital Gain Distributions |  |  | Return of Capital |  |  | Total Dividends |
4th quarter 2009 |  |  | 01/06/10 |  |  | $ | — |  |  | $ | — |  |  | $ | 0.0200 |  |  | $ | 0.0200 |
1st quarter |  |  | 04/06/10 |  |  |  | — |  |  |  | — |  |  |  | 0.0200 |  |  |  | 0.0200 |
2nd quarter |  |  | 07/07/10 |  |  |  | — |  |  |  | — |  |  |  | 0.0200 |  |  |  | 0.0200 |
3rd quarter |  |  | 10/05/10 |  |  |  | — |  |  |  | — |  |  |  | 0.0200 |  |  |  | 0.0200 |
4th quarter |  |  | 01/05/11 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
|  |  |  |  |  | $ | — |  |  | $ | — |  |  | $ | 0.0800 |  |  | $ | 0.0800 |

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 109 -Paragraph 136, 172 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(h)) -URI http://asc.fasb.org/extlink&oid=6881521&loc=d3e23780-122690 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 08 -Paragraph h -Article 4 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 15 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32718-109319 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 109 -Paragraph 43, 44, 45, 46, 47, 48, 49 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32537-109319 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 9 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32639-109319 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32559-109319 + Details
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