INCOME TAXES

Rayonier is a real estate investment trust (“REIT”). In general, only its taxable REIT subsidiaries, whose businesses include the Company’s non-REIT qualified activities and foreign operations, are subject to corporate income taxes. However, the Company was subject to U.S. federal corporate income tax on built-in gains (the excess of fair market value over tax basis for property held upon REIT election at January 1, 2004) on taxable sales of such property during calendar years 2004 through 2010. Accordingly, the provision for corporate income taxes relates principally to current and deferred taxes on taxable REIT subsidiaries’ income and foreign operations.

Alternative Fuel Mixture Credit (“AFMC”) and Cellulosic Biofuel Producer Credit (“CBPC”)

The U.S. Internal Revenue Code allowed two credits for taxpayers that produced and used an alternative fuel in the operation of their business through December 31, 2009. The AFMC is a $.50 per gallon refundable tax credit (which is not taxable), while the CBPC is a $1.01 per gallon credit that is nonrefundable, taxable and has limitations based on an entity’s tax liability. Rayonier produces and uses an alternative fuel (“black liquor”) at its Jesup, Georgia and Fernandina Beach, Florida performance fibers mills, which qualified for both credits. The Company claimed the AFMC on its original 2009 tax return.

In the first quarter of 2013 management approved the exchange of approximately 120 million gallons of black liquor for the CBPC previously claimed for the AFMC, resulting in a $18.8 million tax benefit. In the third quarter 2012, management approved the exchange of approximately 22 million gallons, bringing the total number of exchange gallons approved year-to date to 82 million for 2012. The impact of the exchanges in 2012 was $2.6 million and $11.7 million for the quarter and year-to-date periods, respectively. Third quarter 2012 results also reflect the reversal of a $3.4 million interest expense accrual based on IRS guidance stating interest payments are not required for AFMC exchanged for the CBPC, based upon the manner of the Company's original claim. For additional information on the AFMC and CBPC, see Note 8 — Income Taxes in the Company’s 2012 Annual Report.

Provision for Income Taxes from Continuing Operations

The Company’s effective tax rate is below the 35 percent U.S. statutory tax rate primarily due to tax benefits associated with being a REIT. The Company’s effective tax rate in 2013 was lower than 2012 primarily due to recording the additional AFMC exchange, the federal research and experimentation tax credit and a $4.9 million benefit associated with the completion of an internal transfer of properties.

The table below reconciles the U.S. statutory rate to the Company’s effective tax rate for each period presented (in millions of dollars):



	Three Months Ended September 30,
	2013					2012
Income tax expense at federal statutory rate	$	24		35.0	%	$	36		35.0	%
REIT income not subject to tax	(11		)	(15.7	)	(6		)	(5.9	)
Other	1			0.5		(2		)	(2.3	)
Income tax expense before discrete items	14			19.8	%	28			26.8	%
Exchange of AFMC for CBPC	—			—		(3		)	(3.1	)
Other	(2		)	(3.3	)	(1		)	(0.5	)
Income tax expense as reported	$	12		16.5	%	$	24		23.2	%



	Nine Months Ended September 30,
	2013					2012
Income tax expense at federal statutory rate	$	98		35.0	%	$	88		35.0	%
REIT income not subject to tax	(37		)	(13.2	)	(18		)	(7.2	)
Other	(1		)	(0.5	)	(3		)	(1.3	)
Income tax expense before discrete items	60			21.3	%	67			26.5	%
Exchange of AFMC for CBPC	(19		)	(6.7	)	(12		)	(4.6	)
Gain related to consolidation of New Zealand joint venture	(5		)	(2.0	)	—			—
Other	(5		)	(1.5	)	(1		)	(0.4	)
Income tax expense as reported	$	31		11.1	%	$	54		21.5	%

Provision for Income Taxes from Discontinued Operations

In the first quarter, Rayonier completed the sale of its Wood Products business for $80 million plus a working capital adjustment. For the nine months ended September 30, 2013 and 2012, income tax expense related to discontinued operations was $22.3 million ($21.4 million from the gain on sale) and $2.6 million, respectively. For the three months ended September 30, 2012, income tax related to discontinued operations was $0.6 million. See Note 2 — Sale of Wood Products Business for additional information.

Unrecognized Tax Benefits

In accordance with generally accepted accounting principles, the Company recognizes the impact of a tax position if a position is “more likely than not” to prevail. During third quarter 2013, the Company filed an amended 2009 federal income tax return reflecting an increased domestic production deduction due to the inclusion of the CBPC income. As required, the Company recorded a $4.8 million liability related to this uncertain tax position.