Annual report pursuant to Section 13 and 15(d)

Income Taxes

v2.4.0.6
Income Taxes
 12 Months Ended
Dec. 31, 2012
Income Tax Disclosure [Abstract]  
Income Taxes
Income Taxes
 
We elected to be treated as a REIT under Sections 856 through 860 of the Internal Revenue Code. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute at least 90% of our adjusted taxable income to our shareholders. As a REIT, we generally will not be subject to Federal income tax on taxable income that we distribute to our shareholders. If we fail to qualify as a REIT in any tax year, we will be subject to Federal income tax on our taxable income at regular corporate rates and may not be able to qualify as a REIT for four subsequent tax years.

The differences between taxable income reported on our income tax return (estimated 2012 and actual 2011 and 2010) and net income as reported on our consolidated statements of operations are set forth below (in thousands):
 
 
For the Years Ended December 31,
 
 
2012
 
2011
 
2010
 
 
 (Estimated)
 
 
 
 
Net income (loss)
 
$
20,341

 
$
(127,576
)
 
$
45,504

Adjustments:
 
 
 
 
 
 
Rental revenue recognition
 
(12,575
)
 
(10,708
)
 
(9,192
)
Compensation expense recognition
 
(2,098
)
 
(1,298
)
 
(4,820
)
Operating expense recognition
 
1,148

 
751

 
280

Gain on sales of properties
 
(45,323
)
 
1,154

 
6,548

Impairment losses
 
66,910

 
151,021

 
—

Loss on interest rate derivatives
 
(29,805
)
 
29,805

 
—

Gains from non-real estate investments
 
2,843

 
4,447

 
(6,994
)
Income from service operations
 
1,500

 
(12,078
)
 
(1,628
)
Income tax expense
 
381

 
6,710

 
119

Depreciation and amortization
 
25,410

 
44,070

 
42,365

Discounts/premiums included in interest expense
 
3,194

 
5,548

 
5,841

Income from unconsolidated entities
 
(725
)
 
(374
)
 
(244
)
Noncontrolling interests, gross
 
(463
)
 
(7,502
)
 
(3,288
)
Other
 
836

 
80

 
2,173

Taxable income
 
$
31,574

 
$
84,050

 
$
76,664



For Federal income tax purposes, dividends to shareholders may be characterized as ordinary income, capital gains or return of capital. The characterization of dividends declared on our common and preferred shares during each of the last three years was as follows:
 
 
Common Shares
 
Preferred Shares
 
 
For the Years Ended December 31,
 
For the Years Ended December 31,
 
 
2012
 
2011
 
2010
 
2012
 
2011
 
2010
Ordinary income
 
33.2
%
 
56.9
%
 
59.7
%
 
100.0
%
 
85.9
%
 
88.3
%
Long term capital gain
 
0.0
%
 
9.4
%
 
8.0
%
 
0.0
%
 
14.1
%
 
11.7
%
Return of capital
 
66.8
%
 
33.7
%
 
32.3
%
 
0.0
%
 
0.0
%
 
0.0
%


We distributed all of our REIT taxable income in 2012, 2011 and 2010 and, as a result, did not incur Federal income tax in those years on such income.

The net basis of our consolidated assets and liabilities for tax reporting purposes is approximately $387 million lower than the amount reported on our consolidated balance sheet at December 31, 2012, which is primarily related to differences in basis for net properties, intangible assets on property acquisitions and deferred rent receivable.

We own a taxable REIT subsidiary (“TRS”) that is subject to Federal and state income taxes. Our TRS had income (loss) before income taxes under GAAP of $11.3 million in 2012, $(27.7) million in 2011 and $345,000 in 2010. Our TRS’ provision for income tax consisted of the following (in thousands):
 
 
For the Years Ended December 31,
 
 
2012
 
2011
 
2010
Deferred
 
 
 
 
 
 
Federal
 
$
(312
)
 
$
5,510

 
$
64

State
 
(69
)
 
1,219

 
14

 
 
(381
)
 
6,729

 
78

Current
 
 
 
 
 
 
Federal
 
—

 
(16
)
 
(161
)
State
 
—

 
(3
)
 
(36
)
 
 
—

 
(19
)
 
(197
)
Total income tax (expense) benefit
 
$
(381
)
 
$
6,710

 
$
(119
)
Reported on line entitled income tax (expense) benefit
 
$
(381
)
 
$
6,710

 
$
(108
)
Reported on line entitled gain on sales of real estate, net
 
—

 
—

 
(11
)
Total income tax (expense) benefit
 
$
(381
)
 
$
6,710

 
$
(119
)


A reconciliation of our TRS’ Federal statutory rate to the effective tax rate for income tax reported on our statements of operations is set forth below:
 
 
 
For the Years Ended December 31,
 
 
2012
 
2011
 
2010
Income taxes at U.S. statutory rate
 
34.0
%
 
34.0
%
 
34.0
 %
State and local, net of U.S. Federal tax benefit
 
4.6
%
 
4.6
%
 
4.2
 %
Other
 
0.0
%
 
0.0
%
 
(3.5
)%
Effective tax rate
 
38.6
%
 
38.6
%
 
34.7
 %


Items in our TRS contributing to temporary differences that lead to deferred taxes include depreciation and amortization, share-based compensation, certain accrued compensation, compensation paid in the form of contributions to a deferred nonqualified compensation plan, impairment losses and net operating losses that are not deductible until future periods. As of December 31, 2012, our TRS had a net operating loss carryforward for federal income tax purposes of approximately $16 million expiring in 2033.

The table below sets forth the tax effects of temporary differences and carry forwards included in the net deferred tax asset of our TRS (in thousands):
 
 
December 31,
 
 
2012
 
2011
Operating loss and interest deduction carry forwards
 
$
6,014

 
$
1,758

Share-based compensation
 
598

 
497

Property (1)
 
—

 
4,668

Net deferred tax asset
 
$
6,612

 
$
6,923



(1)
Difference primarily pertains to depreciation and amortization, basis of contributed assets and the capitalization of interest and certain other costs.

 We are subject to certain state and local income and franchise taxes. The expense associated with these state and local taxes is included in general and administrative expense and property operating expenses on our consolidated statements of operations. We did not separately state these amounts on our consolidated statements of operations because they are insignificant.