Income Taxes

The Company elected to be taxed as a REIT under the Internal Revenue Code, commencing with its taxable year ended December 31, 1997. In January 1998, the Company completed its reorganization into an UPREIT structure under which substantially all of the Company's real estate assets are owned by the Operating Partnership. Presently substantially all interests in the Operating Partnership are owned by the Company and a wholly owned subsidiary. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that it currently distribute at least 90% of its adjusted taxable income to its stockholders. It is management's current intention to adhere to these requirements and maintain the Company's REIT status, and the Company was in compliance with all REIT requirements at December 31, 2014. As a REIT, the Company generally will not be subject to corporate level federal income tax on taxable income it distributes currently to its stockholders. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and property, and to federal income and excise taxes on its undistributed taxable income. The Operating Partnership and its subsidiary, which is a pass-through entity generally not subject to federal and state income taxes, as all of the taxable income, gains and deductions are passed through its partners. However, the Operating Partnership is subject to income taxes in Texas. In addition, taxable income from non-REIT activities managed through taxable REIT subsidiaries is subject to federal, state and local income taxes.

As of December 31, 2014, the Company had NOL carryforwards for federal income tax purposes of $254.8 million (including $88.4 million of NOLs from the Mergers). On December 10, 2012, the Company believes a change in ownership pursuant to Section 382 of the Code has occurred. Accordingly, $160.8 million of NOLs in existence as of December 10, 2012 are subject to an annual Section 382 limitation of $15.4 million. The historic NOLs of TPGI are also subject to Section 382 limitation. The Company's NOL carryforwards (including NOLs of TPGI) are subject to varying expiration dates beginning in 2018 through 2033. As of December 31, 2014, the Company recorded a full valuation allowance against its deferred tax asset associated with the net operating losses due to the uncertainty of future utilization. The utilization of these NOLs can cause the Company to incur a small alternative minimum tax.

The Company's income differs for income tax and financial reporting purposes principally because real estate owned has a different basis for tax and financial reporting purposes, producing different gains upon disposition and different amounts of annual depreciation.

The following reconciles GAAP net income (loss) to taxable income (loss) for the years ended December 31, 2014, 2013 and 2012 (in thousands) (Unaudited):



	2014			2013			2012
GAAP net income (loss)	$	42,943		$	(19,650	)	$	(39,395	)
Less: Taxable REIT subsidiary GAAP net income (loss)	10,235			6,154			46,896
GAAP net income (loss) from REIT operations (1)	53,178			(13,496		)	7,501
GAAP to tax adjustments:
Depreciation and amortization	69,597			42,086			10,619
Gains and losses from capital transactions	(62,222		)	776			(115,065		)
Share-based compensation expense	7,821			2,569			205
Amortization of mortgage loan premium	(6,495		)	(567		)	32
Allowance for doubtful accounts	(295		)	855			(480		)
Vesting of restricted shares and dividends	(31		)	(225		)	(674		)
Deferred revenue	(550		)	1,458			(329		)
Capitalizable acquisition costs	3,292			12,980			2,119
Straight line rent	(7,498		)	(2,148		)	(2,883		)
Interest expense	(122		)	—			(214		)
Nontaxable dividend income	(3,189		)	(1,732		)	(3,707		)
Prepaid revenue	(3,105		)	4,557			—
Prepaid insurance	877			(955		)	—
Other differences	245			(1,288		)	829
Taxable income (loss) before adjustments (2)	51,503			44,870			(102,047		)
Less: NOL carry forward	—			—			—
Adjusted taxable income subject to 90% dividend requirement	$	51,503		$	44,870		$	—


(1)	GAAP net income (loss) from REIT operations is net of amounts attributable to noncontrolling interests.


(2)	An estimated taxable income (loss) before adjustments is presented. The Company plans to file its 2014 tax return with the IRS on or before the extended due date of September 15, 2015.

The Company has elected to treat certain consolidated subsidiaries as taxable REIT subsidiaries, which are tax paying entities for income tax purposes and are taxed separately from the Company. Taxable REIT subsidiaries may participate in non-real estate related activities and/or perform non-customary services for customers and are subject to federal and state income tax at regular corporate tax rates. On May 18, 2011, in connection with the combination of the Eola management company, the Company contributed the management company to a TRS wholly owned by the Operating Partnership.

Certain income and expense items of taxable REIT subsidiaries are accounted for differently for financial reporting and income tax purposes. Deferred income tax assets and liabilities are determined based on the difference between the financial statement and the tax bases of assets and liabilities, applying enacted statutory income tax rates in effect for the year in which the differences are expected to reverse. As of December 31, 2014, the Company recorded a net deferred tax asset of $4.6 million. Deferred tax assets generally represent items that can be used as a tax deduction in the Company's tax returns in future years for which the Company has already recorded a tax benefit in its consolidated statement of operations.

The significant components of the net deferred tax liabilities (assets) as of December 31, 2014 and 2013 are as follows (in thousands):



	December 31,
	2014			2013
	(In thousands)
Capitalizable transaction costs	$	(784	)	$	(831	)
Contingent consideration	(1,411		)	(1,499		)
Management contracts	(2,377		)	2,017
Murano	(331		)	—
Peachtree investment	469			—
Other	(135		)	(155		)
Valuation allowance	—			479
Total deferred tax liabilities (assets)	$	(4,569	)	$	11

FASB ASC 740-10-30 ("ASC 740-10-30") "Accounting for Income Taxes" subsection "Initial Measurement," requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax asset will not be realized. In determining whether the deferred tax asset is realizable, the Company considers all available positive and negative evidence, including future reversal of existing taxable temporary differences, carryback potential, tax-planning strategies and its ability to generate sufficient taxable income in future years. During 2014, sufficient positive evidence became available to reach a conclusion that the valuation allowance is no longer needed and, as a result, the Company released the entire valuation allowance. This release resulted in the recognition of certain deferred tax assets and a decrease in income tax expense for the period.

The components of income tax benefit (expense) for the years ended December 31, 2014, 2013, and 2012 are as follows (in thousands):



	Year Ended
	December 31,
Current:	2014			2013			2012
Federal	$	(2,876	)	$	(488	)	$	(914	)
State	(2,026		)	(67		)	(202		)
Total Current	(4,902		)	(555		)	(1,116		)
Deferred:
Federal	3,868			1,582			722
State	895			378			133
Total Deferred	4,763			1,960			855
Total income tax benefit (expense)	$	(139	)	$	1,405		$	(261	)

Consolidated income (loss) subject to tax consists of pretax income or loss of taxable REIT subsidiaries. For the years ended December 31, 2014 and 2013 the Company had consolidated losses subject to tax of $2.6 million and $5.8 million, respectively. The reconciliation of income tax benefit (expense) computed at the U.S. statutory rate is shown below (in thousands):



	2014					2013
	Amount			Percentage		Amount			Percentage
Tax at U.S. statutory rates on consolidated income (loss) subject to tax	$	897		34.0	%	$	1,990		34.0	%
State income tax, net of federal tax benefit	(1,090		)	(41.3	)%	185			3.2	%
Effect of permanent differences	(41		)	(1.6	)%	(291		)	(5.0	)%
Valuation allowance	479			18.1	%	(479		)	(8.2	)%
Other - Peachtree	(422		)	(16.0	)%	—			—	%
Other	38			1.5	%	—			—	%
Total income tax benefit (expense)	$	(139	)	(5.3	)%	$	1,405		24.0	%

The Company's federal income tax returns for tax years 2011 through 2014 remain open and subject to examination by the taxing authorities.

On December 19, 2013, the Company completed the Mergers. The Company assumed TPGI’s ownership interest in two wholly owned office properties in Houston, Texas and five office properties in Austin, Texas in the PKY/CalSTRS Austin, LLC discussed in "Note 4 - Investments in Unconsolidated Joint Ventures", and mortgage notes payable discussed in "Note 8—Capital and Financing Transactions". As set forth in the Merger Agreement, the parties to the Parent Merger intended that the Parent Merger be treated as a reorganization within the meaning of Section 368(a) of the Code. Assuming that, as intended, the Parent Merger qualified as a reorganization, because TPGI was a C corporation, the Company is subject to the rules applicable to REITs acquiring assets with "built-in gain" from C corporations in reorganizations. Pursuant to these rules, the Company is subject to corporate income tax to the extent that unrealized gain on historic TPGI assets (determined at the time of the Parent Merger) is recognized in taxable dispositions of such assets in the ten-year period following the Parent Merger. In addition, in connection with the Parent Merger, the Company succeeded to $88.4 million (or $30.9 million of deferred tax asset) of historic TPGI net operating loss carryovers (determined for U.S. federal income tax purposes), the utilization of which is subject to limitations under Section 382 of Code. In addition, the Company has deferred tax assets associated with California and Pennsylvania net operating losses of $1.4 million, and $2.8 million, respectively. ASC 740-10-30 requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax asset will not be realized. Future realization of the deferred tax asset is dependent on the reversal of existing taxable temporary differences, carryback potential, tax-planning strategies and on us generating sufficient taxable income in future years. As of December 31, 2014, a valuation allowance has been established against the net deferred tax assets that will more likely than not be realized of $25.3 million, $1.0 million and $2.1 million for federal, California and Pennsylvania, respectively. At December 31, 2013, a deferred tax liability of approximately $11,000 has been recorded to reflect Texas Margin Tax for the sale of Four Points.

FASB ASC 740-10-25, "Accounting for Income Taxes" subsection "Recognition," clarifies the accounting for uncertainty in income taxes recognized in a company's financial statements. The interpretation prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company's policy is to recognize interest and penalties related to unrecognized tax benefits as components of income tax expense. As of December 31, 2014, there is no interest or penalty associated with unrecognized tax benefits.

At December 31, 2014, the Company has recorded unrecognized tax benefits of approximately $6.9 million, acquired as part of the TPGI merger and, if recognized, would not affect its effective tax rate. The Company has sufficient NOLs to utilize for current or future tax liabilities.

A reconciliation of the Company’s unrecognized tax benefits as of December 31, 2014 and 2013 (in thousands):



	December 31,
	2014			2013
	(In thousands)
Unrecognized Tax Benefits - Opening Balance	$	7,999		$	—
Gross increases - current period tax positions	—			7,999
Gross decreases - lapse of statute of limitations	(1,142		)	—
Unrecognized Tax Benefits - Ending Balance	$	6,857		$	7,999

The following reconciles cash dividends paid with the dividends paid deduction for the years ended December 31, 2014, 2013 and 2012 (in thousands):



	2014			2013			2012
	Estimated			Actual			Actual
Cash dividends paid	$	76,735		$	45,189		$	26,306
Less: Dividends on deferred compensation plan shares	—			—			(3		)
Less: Dividends absorbed by current earnings and profits	(76,735		)	(36,291		)	—
Less: Return of capital	—			(8,898		)	(26,303		)
Dividends paid deduction	$	—		$	—		$	—

The following characterizes distributions paid per common share for the years ended December 31, 2014, 2013 and 2012 (Unaudited):



	2014				2013				2012
	Amount		Percentage		Amount		Percentage		Amount		Percentage
Ordinary income	$	0.7141	95.2	%	$	0.4425	69.4	%	$	—	—	%
Capital gain	0.0359		4.8	%	—		—	%	—		—	%
Unrecaptured Section 1250 gain	—		—	%	0.0831		13.0	%	—		—	%
Return of capital	—		—	%	0.1119		17.6	%	0.3750		100.0	%
	$	0.7500	100.0	%	$	0.6375	100.0	%	$	0.3750	100.0	%