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INCOME TAXES
 9 Months Ended
Sep. 30, 2020
Income Tax Disclosure [Abstract]  
INCOME TAXES INCOME TAXES
The Company elected to be taxed as a REIT under sections 856-860 of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with the filing of its 2015 tax return for its tax year ended December 31, 2015. To the extent the Company meets certain requirements under the Code, the Company will not be taxed on its federal taxable income. If we fail to qualify as a REIT for any taxable year, we will be subject to federal income taxes at regular corporate rates, including any alternative minimum tax, which, for corporations, was repealed under the Tax Cuts and Jobs Act (“TCJA”) and may not be able to qualify as a REIT for the four subsequent taxable years. The Company is subject to certain foreign and state and local income taxes, including on its two Puerto Rico malls, which are included in income tax benefit (expense) in the consolidated statements of income. The Company is also subject to certain other taxes, including state and local franchise taxes which are included in general and administrative expenses in the consolidated statements of income.

For U.S. federal income tax purposes, the REIT and other minority members are partners in the Operating Partnership. As such, the partners are required to report their share of taxable income on their respective tax returns. However, during the nine months ended September 30, 2020, certain non-real estate operating activities that could not be performed by the REIT, occurred through the Company’s taxable REIT subsidiary (“TRS”), and the Company’s TRS is subject to federal, state and local income taxes. These income taxes are included in the income tax expense in the consolidated statements of income.
On June 1, 2020, the Company completed a mortgage refinancing of its mall in Puerto Rico, The Outlets at Montehiedra. The debt forgiven as a part of this refinancing resulted in a write-down to our Puerto Rico tax basis in the mall equal to such amount of debt forgiven and the recognition of a deferred tax liability on the Company’s consolidated balance sheet, which amounted to $10.3 million as of September 30, 2020. Refer to Note 6 to the unaudited consolidated financial statements in Part I, Item I of this Quarterly Report on Form 10-Q for further information on the refinancing.
On June 5, 2020, the Company completed a legal entity restructuring of Montehiedra. Prior to the legal entity restructuring, our two Puerto Rico malls were held in a special partnership for Puerto Rico tax purposes (the general partner being a qualified REIT subsidiary or “QRS”) and subject to a 29% non-resident withholding tax which is included in income tax benefit
(expense) in the consolidated statements of income. The legal entity restructuring resulted in a step up in our Puerto Rico tax basis in Montehiedra and the recognition of a deferred tax asset on the Company’s consolidated balance sheet, which amounted to $23.7 million as of September 30, 2020. As a result of the legal entity restructuring of Montehiedra, the Operating Partnership, and therefore, the REIT and the other minority partners, are now deemed to be engaged in a trade or business in Puerto Rico with respect to their allocable share of Montehiedra’s net income and, as such, required to file Puerto Rico income tax returns. The REIT will be subject to regular Puerto Rico corporate income taxes on its allocable share of Montehiedra’s operating activities as opposed to the former 29% non-resident withholding tax on the net income from such operating activities allocated to the Operating Partnership. The Puerto Rico corporate income tax consists of a flat 18.5% tax rate plus a graduated income surcharge tax for a maximum corporate income tax rate of 37.5%. In addition, the REIT is subject to a 10% branch profit tax on the earnings and profits generated from Montehiedra and such tax is included in income tax expense in the consolidated statements of income. Our other Puerto Rico property, Las Catalinas Mall, continues to be taxed as a special partnership and is subject to the 29% non-resident withholding tax.
Together, the refinancing and legal entity restructuring transactions resulted in a deferred tax asset, net of $13.4 million and the Company recognized an accompanying Puerto Rico income tax benefit on the Company’s consolidated statements of income during the nine months ended September 30, 2020.
As a result of the Montehiedra refinancing, the Company recognized a gain on extinguishment of debt for U.S. federal income tax purposes and implemented various tax planning strategies to limit its impact on the Company’s overall U.S. federal taxable income. The strategies implemented resulted in the recognition of a state and local income tax liability and corresponding deferred tax asset for the REIT of $1.7 million during the three and nine months ended September 30, 2020.

A reduction of the carrying amounts of deferred tax assets by a valuation allowance is required, if based on the evidence available, it is more likely than not (a likelihood of more than 50 percent) that some portion or all of the deferred tax assets will not be realized. A valuation allowance for deferred tax assets is provided if the Company believes that it is more likely than not that it will not realize the tax benefit of deferred tax assets based on available evidence at the time the determination is made. A change in circumstances may cause the Company to change its judgment about whether a deferred tax asset will more likely than not be realized by the Company. During the three months ended September 30, 2020, the Company recorded a $1.7 million valuation allowance against the deferred tax asset attributable to the REIT’s state and local income tax liability incurred from strategies implemented to limit the impact of the Montehiedra refinancing on the Company’s U.S. federal taxable income. As of September 30, 2020, the Company’s total valuation allowance was $1.7 million.

For the three and nine months ended September 30, 2020, the REIT’s state and local income tax expense was $1.7 million and the Puerto Rico income tax benefit was $1.3 million and $14.8 million, respectively. For the three and nine months ended September 30, 2019, the Puerto Rico income tax expense was $0.1 million and $1.2 million, respectively. All amounts for the three and nine months ended September 30, 2020 and 2019 are included in income tax benefit (expense) on the consolidated statements of income.