Note 6 - Income Taxes

9 Months Ended

Sep. 30, 2013

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

6.     Income Taxes:

The Company files a consolidated U.S. Federal Tax Return that includes all 100% owned subsidiaries. State tax returns are filed on a consolidated or separate basis depending on the applicable laws.

Deferred income tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

The Condemnation litigation with the State of New York concluded in June 2012 and the State remitted payment in July 2012.

The following table provides the breakdown of the tax (benefit)/provision in 2012 and 2013:

	Condemnation Gross Proceeds		Income Tax Provision 2012		Income Tax (Benefit)/Provision 2013
Gross gain from condemnation	$	98,685,000	$	61,649,000	$	(61,649,000	)
Interest income on condemnation		67,341,716		-
Reimbursement of condemnation expenses		1,474,941		-
Income Tax						70,558
Excise Tax and related interest associated with 2012 dividend declared in 2013						3,396,320
Total	$	167,501,657	$	61,649,000	$	(58,182,122	)

Deferred income tax liabilities consist of the following:

	September 30, 2013			December 31, 2012
Deferred Tax Liabilities:
Gain on condemnation	$	-		$	(61,649,000	)
Unrealized gain on investment in Citrus Grove		(1,315,000	)		(1,315,000	)
Net Deferred Income Taxes	$	(1,315,000	)	$	(62,964,000	)

At September 30, 2013 and December 31, 2012, the Company’s deferred income tax liability was $1,315,000 and $61,649,000, respectively. The December 31, 2012 deferred income tax liability included a federal net built-in-gains tax of $34,057,000 assessed on the real estate portion of the condemnation proceeds related to the converted Flowerfield property pursuant to Internal Revenue Code Section 1374 and a corporate level income tax on the undistributed profits of the Company. As described below, tax law changes and a favorable private letter ruling from the IRS allowed the Company to avoid these taxes.

In accordance with Section 1033 of the Internal Revenue Code, the Company had deferred recognition of the gain on the proceeds received from litigation following condemnation of its real property for income tax purposes. During the quarter ended September 30, 2012, the Company applied for and received an additional approved IRS extension of time to replace the condemned property with like-kind property by April 30, 2014. The previous deadline was April 30, 2013. If the Company replaced the condemned property with like-kind property by April 30, 2014 (or such extended period approved by the Internal Revenue Service at its discretion), recognition of the gain would be deferred until the newly acquired property is disposed of. Under the tax laws at the time, pending a replacement property acquisition, the Company had recorded a provision for income taxes of $61,649,000 resulting from the condemnation award. The provision for income taxes is a direct result of the gain on condemnation of the Company's real property.  

Following a change in tax law in January 2013, retroactive to January 2012, reducing the recognition period for REIT owned property applicable for the 2012 taxable year to five years, the Company applied for a private letter ruling from the IRS in March 2013 and ultimately received a favorable ruling on August 28, 2013 (the "PLR"). The PLR concludes that the Company’s receipt of the additional damages in July 2012 in connection with the judgment in the Company’s favor in its condemnation litigation with the State of New York (the "2012 Proceeds") occurred outside of the applicable recognition period for 2012, and therefore permits the Company to distribute, by means of a dividend such as the Special Dividend described below, the gains realized from its receipt of the 2012 Proceeds, subject to a 4% excise tax, in order to avoid incurring the corporate level tax. 

On September 13, 2013, the Board declared the Special Dividend, in the amount of $98,685,000, or $66.56 per Gyrodyne share, of which approximately $68,000,000, or $45.86 per share, will be paid in cash. The balance of the Special Dividend will be payable in the form of cash proceeds from any further asset dispositions effected prior to payment of the Special Dividend, Dividend Notes, interests in a limited liability company to which Gyrodyne may transfer its remaining assets (or into which it may merge), or a combination of such forms at the discretion of the Board. The form of the balance of the Special Dividend, if other than cash, is referred to as the non-cash portion of the Special Dividend.

The Company is taxed as a REIT for federal and state income tax purposes under section 856(c)(1) of the Internal Revenue Code (the "Code"). As long as the Company qualifies for taxation as a REIT, it generally will not be subject to federal and state income tax. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal and state income tax on its taxable income at regular corporate rates. Unless entitled to relief under specific statutory provisions, the Company will also be disqualified for taxation as a REIT for the four taxable years following the year in which it loses its qualification. Even if the Company qualifies as a REIT, it may be subject to certain state and local taxes on its income and property and to federal income and excise taxes on its undistributed income.