Note 14 - Income Taxes

Income before income tax expense includes the following (dollars in thousands):



		Year Ended December 31,
		2014		2013		2012
United States	$	2,778	$	8,745	$	836
Foreign		12,066		3,973		1,446
Income before income tax expense and equity earnings of unconsolidated joint ventures and entities	$	14,844	$	12,718	$	2,282

Net (income) expense attributable to noncontrolling interests:
United States		200		24		578
Foreign		(143)		(128)		(86)
Equity earnings and gain on sale of unconsolidated subsidiary:
United States		--		(1)		27
Foreign		1,015		1,370		1,594
Gain on sale of discontinued operation:
United States		--		--		--
Foreign		--		--		(405)
Income before income tax expense	$	15,916	$	13,983	$	3,990

Significant components of the provision for income taxes are as follows (dollars in thousands):



		Year Ended December 31,
		2014		2013		2012
Current income tax expense
Federal	$	827	$	1,121	$	964
State		511		432		584
Foreign		1,251		1,283		1,370
Total		2,589		2,836		2,918
Deferred income tax expense (benefit)
Federal		(14,341)		--		--
State		(1,234)		--		--
Foreign		3,201		2,106		1,986
Total		(12,374)		2,106		1,986
Total income tax expense (benefit)	$	(9,785)	$	4,942	$	4,904

Deferred income taxes reflect the “temporary differences” between the financial statement carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, adjusted by the relevant tax rate. The components of the deferred tax assets and liabilities are as follows (dollars in thousands):



		December 31,
Components of Deferred Tax Assets		2014		2013
Deferred Tax Assets:
Net operating loss carry-forwards	$	9,902	$	21,228
Impairment reserves		2,967		2,915
Alternative minimum tax credit carry-forwards		3,546		3,291
Compensation and employee benefits		2,560		3,867
Deferred revenue and expense		3,970		2,398
Land, tangible assets, and option real properties		11,461		5,477
Other		4,696		3,685
Total Deferred Tax Assets		39,102		42,861
Valuation allowance		(16,835)		(34,022)
Net deferred tax asset	$	22,267	$	8,839

In accordance with FASB ASC 740-10 – Income Taxes (“ASC 740-10”), we record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial performance. ASC 740-10 presumes that a valuation allowance is required when there is substantial negative evidence about realization of deferred tax assets, such as a pattern of losses in recent years, coupled with facts that suggest such losses may continue. Because of such negative evidence available for Puerto Rico and New Zealand, as of December 31, 2014, we recorded a valuation allowance of $16.8 million.

After consideration of a number of factors for the Reading U.S. group, including its recent history of financial income its expected future earnings, increase in the market value of its underlying real estate assets and its ability to continue to refinance operations as needed, the Company determined as of December 31, 2014 that it was more likely than not that deferred tax assets of the Reading U.S. group will be realized. Accordingly we reversed the full valuation allowance in the U.S. resulting in an overall net deferred tax asset of $22.3 million as of December 31, 2014, with approximately $6.3 million classified as current and $16.0 million classified as non-current.

As of December 31, 2014, we had U.S. net operating loss carry-forwards of $700,000, expiring in 2031. In addition to the above net operating loss carry-forwards having expiration dates, we have the following carry-forwards that have no expiration date at December 31, 2014:

approximately $3.5 million in U.S. alternative minimum tax credit carry-forwards;

approximately $3.8 million in Australia loss carry-forwards

approximately $11.3 million in New Zealand loss carry-forwards.

We disposed of our Puerto Rico operations during 2005 and plan no further investment in Puerto Rico for the foreseeable future. We have approximately $14.1 million in Puerto Rico loss carry-forwards expiring no later than 2018. No material future tax benefits from Puerto Rico loss carry-forwards can be recognized by the Company unless it re-enters the Puerto Rico market for which the Company has no current plans.

We expect no other substantial limitations on the future use of U.S. or foreign loss carry-forwards except as may occur for certain losses occurring in New Zealand related to the Landplan operations, which may only be used to offset income and gains from those particular activities, and cannot be shared with their respective consolidated group.

The provision for income taxes is different from amounts computed by applying U.S. statutory rates to consolidated losses before taxes. The significant reason for these differences follows (dollars in thousands):



		Year Ended December 31,
		2014		2013		2012
Expected tax provision (benefit)	$	5,571	$	4,894	$	1,397
Increase (decrease) in tax expense resulting from:
Change in valuation allowance		(17,187)		(3,882)		(558)
Foreign tax provision		1,252		3,389		3,356
Tax effect of foreign tax rates on current income		--		(294)		(126)
State and local tax provision		375		296		408
Tax/Audit Litigation Settlement		700		1,140		1,140
Other items		(496)		(601)		(713)
Actual tax provision (benefit)	$	(9,785)	$	4,942	$	4,904

U.S. income taxes have not been recognized on the temporary differences between book value and tax basis of investment which is permanently invested in foreign subsidiaries. These differences become taxable upon a sale of the subsidiary or upon distribution of assets from the subsidiary to U.S. shareholders. We expect neither of these events will occur in the foreseeable future for any of our foreign subsidiaries.

Pursuant to ASC 740-10, a provision should be made for the tax effect of earnings of foreign subsidiaries that are not permanently invested outside the United States. Our intent is that earnings of our foreign subsidiaries are not permanently invested outside the United States. Cumulative earnings were available for distribution in the Reading Australia consolidated group of subsidiaries as of December 31, 2014. We have provided approximately $3.1 million in tax in connection with these earnings as of December 31, 2014. There is no withholding tax on dividends paid by an Australian company to its 80% or more U.S. public company shareholder, thus we have not provided foreign withholding taxes for these retained earnings.

We have accrued $16.0 million in income tax liabilities as of December 31, 2014, of which $6.0 million has been classified as current taxes payable and $10.0 million have been classified as non-current tax liabilities. As part of current taxes payable, we have accrued $3.5 million in connection with federal and state liabilities arising from the “Tax/Audit Litigation” matter which has now been settled (see Note 19 – Commitments and Contingencies). As part of noncurrent tax liabilities, we have accrued an additional $8.8 million related to the “Tax Audit/Litigation” matter. Amounts assessed by the IRS in connection with the “Tax Audit/Litigation” matter are no longer recorded under the cumulative probability approach prescribed by FASB ASC 740-10-25 – Income Taxes - Uncertain Tax Positions (“ASC 740-10-25”) but are recorded as a fixed and determinable liability. As of December 31, 2014, amounts which may be assessed by state income tax agencies in connection with the “Tax Audit/Litigation” matter are recorded under the cumulative probability approach prescribed by FASB ASC 740-10-25. We believe the $16.0 million in tax liabilities represents an adequate provision for our income tax exposures.

The following table is a summary of the activity related to unrecognized tax benefits, excluding interest and penalties, for the years ending December 31, 2014, December 31, 2013, and December 31, 2012 (dollars in thousands):



		Year Ended		Year Ended		Year Ended
		December 31,		December 31,		December 31,
		2014		2013		2012
Unrecognized tax benefits – gross beginning balance	$	2,160	$	2,171	$	1,974
Gross increases – prior period tax provisions		1,600		(11)		197
Gross increases – current period tax positions		--		--		--
Settlements		--		--		--
Statute of limitations lapse		--		--		--
Unrecognized tax benefits – gross ending balance	$	3,760	$	2,160	$	2,171

In accordance with FASB ASC 740-10-25 we elected to record interest and penalties related to income tax matters as part of income tax expense.

We had approximately $10.8 million and $11.4 million of gross tax benefits as of the adoption date and December 31, 2007, respectively, plus $1.7 million and $2.3 million of tax interest unrecognized on the financial statements as of each date, respectively. The gross tax benefits mostly reflect operating loss carry-forwards and the IRS Tax Audit/Litigation case described below.

During the period January 1, 2012 to December 31, 2012 we recorded an increase of $200,000 to our gross unrecognized tax benefits and an increase to tax interest of $1.1 million, resulting in a total balance of $5.3 million consisting of $2.1 million in tax and $3.2 million in interest. Of the $5.3 million gross unrecognized tax benefit at December 31, 2012, approximately $4.3 million would impact the effective rate if recognized. During the period January 1, 2013 to December 31, 2013 we recorded no material change to our gross unrecognized tax benefits and a decrease to tax interest of approximately $1.4 million, resulting in a total balance of $3.9 million consisting of $2.1 million in tax and $1.8 million in interest. Of the $3.9 million gross unrecognized tax benefit at December 31, 2013, $2.9 million would impact the effective rate if recognized. During the period January 1, 2014 to December 31, 2014 we recorded an increase of $1.6 million to our gross unrecognized tax benefits and an increase to tax interest of $3.6 million, resulting in a total balance of $9.2 million consisting of $3.7 million in tax and $5.4 million in interest. Of the $9.2 million gross unrecognized tax benefit at December 31, 2014, approximately $8.1 million would impact the effective rate if recognized.

It is difficult to predict the timing and resolution of uncertain tax positions. Based upon the Company’s assessment of many factors, including past experience and judgments about future events, it is probable that within the next 12 months the reserve for uncertain tax positions will increase within a range of $500,000 to $1.5 million. The reasons for such change include but are not limited to tax positions expected to be taken during 2014, revaluation of current uncertain tax positions, and expiring statutes of limitations.

Our company and subsidiaries are subject to U.S. federal income tax, income tax in various U.S. states, and income tax in Australia, New Zealand, and Puerto Rico.

Generally, changes to our federal and most state income tax returns for the calendar year 2010 and earlier are barred by statutes of limitations. Certain U.S. subsidiaries filed federal and state tax returns for periods before these entities became consolidated with us. These subsidiaries were examined by IRS for the years 1996 to 1999 and significant tax deficiencies were assessed for those years. Those deficiencies have been settled, as discussed in “Tax Audit/Litigation,” Note 19 – Commitments and Contingencies. Our income tax returns for Australia filed since inception in 1995 are generally open for examination. The income tax returns filed in New Zealand and Puerto Rico for calendar year 2009 and afterward remain open for examination as of December 31, 2014.