
Note 12.	Income Taxes

We provide for income taxes as a “C” corporation on income earned from operations. For the tax year ended December 31, 2010, our subsidiaries were not able to participate in the filing of a consolidated federal tax return. We intend to reconsolidate our subsidiaries in 2011 for federal tax purposes. We are subject to federal, foreign, state and local taxation in various jurisdictions.

In 2009, we established a valuation allowance against a substantial portion of our net deferred tax assets for subsidiaries where we determined that there was significant negative evidence with respect to our ability to realize such assets. Negative evidence we considered in making this determination included the incurrence of operating losses at several of our subsidiaries, and uncertainty regarding the realization of a portion of the deferred tax assets at future points in time. As of June 30, 2011 and December 31, 2010, the total valuation allowance was $437.1 million and $413.8 million, respectively. Although realization is not assured, we believe it is more likely than not that the net deferred tax assets of $47.2 million as of June 30, 2011 will be realized. We intend to maintain a valuation allowance with respect to our deferred tax assets until sufficient positive evidence exists to support its reduction or reversal.

During the three and six months ended June 30, 2011, we recorded income tax expense of $17.2 million and $28.4 million, respectively. The expense for the three months ended June 30, 2011 was primarily the result of the change in the net deferred tax assets of CapitalSource Bank. The expense for the six months ended June 30, 2011 was primarily due to the re-establishment of a valuation allowance at the consolidated group level with respect to CapitalSource Bank’s net deferred tax assets. The valuation allowance was recorded in connection with our plan to reconsolidate our corporate entities for federal tax purposes in 2011. For the three and six months ended June 30, 2010, we recorded income tax (benefit) expense of $(4.2) million and $16.8 million, respectively. The effective income tax rate on our consolidated net income (loss) from continuing operations was 51.0% and 59.0% for the three and six months ended June 30, 2011, respectively, and 43.0% and (8.1)% for the three and six months ended June 30, 2010, respectively.

We file income tax returns with the United States and various state, local and foreign jurisdictions and generally remain subject to examinations by these tax jurisdictions for tax years 2006 through 2010. We are currently under examination by the Internal Revenue Service for the tax years 2006 to 2008 and by certain states for the tax years 2006 to 2009.