INCOME TAXES

12 Months Ended

Dec. 31, 2012

INCOME TAXES

INCOME TAXES

NOTE 12.        INCOME TAXES

For tax periods ending before August 31, 2012, ARL was part of the American Realty Investors, Inc. consolidated federal return.  After that date, ARL and the rest of the American Realty Investors, Inc. group joined the Realty Advisors Management, Inc. (RAMI) consolidated group for tax purposes.  The income tax expense (benefit) for 2010 and 2011 tax periods in the accompanying financial statement was calculated under a tax sharing and compensating agreement between ARL, TCI and IOT.  That agreement continued until August 31, 2012 at which time a new tax sharing and compensating agreement was entered into by ARL, TCI, IOT and RAMI for the remainder of 2012.  For 2012, ARL, TCI and IOT had a combined net taxable loss and ARL recorded no current tax (benefit) or expense. There was no deferred tax expense (benefit) recorded for 2012, 2011 or 2010 as a result of the uncertainty of the future use of the deferred tax asset.

The Federal income tax expense differs from the amount computed by applying the corporate tax rate of 35% to the income before income taxes as follows:

	2012			2011			2010
Computed “expected” income tax (benefit) expense		(1,955	)		(2,556	)		(34,368	)
Book to tax differences in gains on sale of property.		(8,503	)		2,184			419
Book to tax differences from entities not consolidated for tax purposes		(3,831	)		(3,228	)		(3,638	)
Book to tax differences of depreciation and amortization		1,460			1,556			1,871
Valuation allowance against current Net Operating Loss benefit		5,387			9,283			51,685
Other book to tax differences		7,442			(7,239	)		(15,969	)
		-			-			-
Alternative Minimum Tax		-			-			-

The tax effects of temporary differences that give rise to the deferred tax asset are as follows:

	2012			2011			2010
Net operating losses and tax credits		70,235			68,968			82,398
Basis difference of
Real estate holdings and equipment		1,159			(2,500	)		(54,602	)
Notes receivable		8,248			5,314			10,329
Investments		(13,824	)		(14,660	)		(14,462	)
Notes payable		17,691			25,299			56,208
Deferred gains		18,170			28,181			41,312
Total		101,679			110,602			121,183
Deferred tax valuation allowance		(101,679	)		(110,602	)		(121,183	)
Net deferred tax asset		-			-			-

At December 31, 2012, 2011 and 2010 ARL had a net deferred tax asset due to tax deductions available to it in future years. However, as management could not determine that it was more likely than not that ARL would realize the benefit of the deferred tax asset, a 100% valuation allowance was established.

ARL has prior tax net operating losses and capital loss carryforwards of approximately $68.0 million expiring through the year 2031.

Federal and state tax authorities generally have the right to examine and audit the previous three years of tax returns filed which would mean that the Company’s Forms 1120, U.S, Corporation Income Tax Returns, for the years ending December 31, 2011, 2010 and 2009 are still subject to examination by the IRS.