Income Taxes

We have elected to be taxed as a REIT under the applicable provisions of the Code for every year beginning with the year ended December 31, 1999. We have also elected for certain of our subsidiaries to be treated as taxable REIT subsidiaries (“TRS” or “TRS entities”), which are subject to federal, state and foreign income taxes. All entities other than the TRS entities are collectively referred to as the “REIT” within this Note 13. Certain REIT entities are subject to foreign income tax.

Although we intend to continue to operate in a manner that will enable us to qualify as a REIT, such qualification depends upon our ability to meet, on a continuing basis, various distribution, stock ownership and other tests. During the years ended December 31, 2015, 2014 and 2013, our tax treatment of distributions per common share was as follows:



	2015		2014		2013
Tax treatment of distributions:
Ordinary income	$	3.02368	$	2.61271	$	2.65787
Qualified ordinary income	0.01632		0.10474		0.03718
Long-term capital gain	—		0.16224		0.03995
Unrecaptured Section 1250 gain	—		0.08531		—
Distribution reported for 1099-DIV purposes	$	3.04000	$	2.96500	$	2.73500

We believe we have met the annual REIT distribution requirement by payment of at least 90% of our estimated taxable income for 2015, 2014 and 2013. Our consolidated benefit for income taxes for the years ended December 31, 2015, 2014 and 2013 was as follows:



	2015			2014			2013
	(In thousands)
Current - Federal	$	138		$	878		$	3,145
Current - State	1,453			—			(461		)
Deferred - Federal	(25,962		)	(3,338		)	(11,860		)
Deferred - State	(3,054		)	(1,772		)	(2,396		)
Current - Foreign	953			327			—
Deferred - Foreign	(12,812		)	(4,827		)	(256		)
Total	$	(39,284	)	$	(8,732	)	$	(11,828	)

The income tax benefit for the year ended December 31, 2015 is due primarily to the income tax benefit of ordinary losses related to certain TRS entities. The income tax benefit for the year ended December 31, 2014 primarily relates to the income tax benefit of ordinary losses and restructuring related to certain TRS entities.

Although the TRS entities have paid minimal cash federal income taxes for the year ended December 31, 2015, their federal income tax liabilities may increase in future years as we exhaust net operating loss (“NOL”) carryforwards and as our senior living operations reportable business segment grows. Such increases could be significant.

A reconciliation of income tax expense and benefit, which is computed by applying the federal corporate tax rate for the years ended December 31, 2015, 2014 and 2013, to the income tax benefit is as follows:



	2015			2014			2013
	(In thousands)
Tax at statutory rate on earnings from continuing operations before unconsolidated entities, noncontrolling interest and income taxes	$	123,086		$	122,746		$	127,463
State income taxes, net of federal benefit	(657		)	(1,152		)	(1,857		)
Increase in valuation allowance	20,978			23,122			7,145
Increase (decrease) in ASC 740 income tax liability	(462		)	878			2,805
Tax at statutory rate on earnings not subject to federal income taxes	(185,648		)	(151,055		)	(146,932		)
Foreign rate differential and foreign taxes	3,095			3,230			—
Change in tax status of TRS	—			(7,380		)	—
Other differences	324			879			(452		)
Income tax expense (benefit)	$	(39,284	)	$	(8,732	)	$	(11,828	)

In connection with our acquisitions of Sunrise Senior Living Real Estate Investment Trust (“Sunrise REIT”) in 2007, and ASLG in 2011, and the Holiday Canada Acquisition in 2014, we established a beginning net deferred tax liability of $306.3 million, $44.6 million and $107.7 million, respectively, related to temporary differences between the financial reporting and tax bases of assets acquired and liabilities assumed (primarily property, intangible and related assets, net of NOL carryforwards). No net deferred tax asset or liability was recorded for the Lillibridge acquisition in 2010 or the acquisition of three triple-net leased private hospitals (located in the United Kingdom) in 2014.

In connection with our acquisitions of HCT and Crimson in 2015, we established a beginning net deferred tax liability of $32.3 million and $18.5 million, respectively, related to temporary differences between the financial reporting and tax bases of assets acquired and liabilities assumed (primarily property, intangible and related assets, net of NOL carryforwards).

Each TRS is a tax paying component for purposes of classifying deferred tax assets and liabilities. The tax effects of temporary differences and carryforwards (in addition to the REIT carryforwards) included in the net deferred tax liabilities at December 31, 2015, 2014 and 2013 are summarized as follows:



	2015			2014			2013
	(In thousands)
Property, primarily differences in depreciation and amortization, the tax basis of land assets and the treatment of interests and certain costs	$	(413,566	)	$	(406,023	)	$	(309,775	)
Operating loss and interest deduction carryforwards	564,091			398,859			377,645
Expense accruals and other	14,624			15,355			13,421
Valuation allowance	(503,531		)	(352,528		)	(331,458		)
Net deferred tax liabilities	$	(338,382	)	$	(344,337	)	$	(250,167	)

Our net deferred tax liability decreased $6.0 million during 2015 primarily due to $51.8 million of recorded deferred tax liability as a result of the HCT, Canford, Eglise and Ardent acquisitions, offset by the impact of TRS operating losses and currency translation adjustments. Our net deferred tax liability increased $94.2 million during 2014 primarily due to $107.7 million of recorded deferred tax liability as a result of the Holiday Canada acquisition.

Due to uncertainty regarding the realization of certain deferred tax assets, we have established valuation allowances, primarily in connection with the NOL carryforwards related to the REIT and certain TRSs. The amounts related to NOLs at the REIT and TRS entities for 2015, 2014, and 2013 are $369.4 million and $85.5 million, $251.1 million and $66.1 million, and $250.0 million and $47.0 million, respectively.

For the years ended December 31, 2015 and 2014, the net difference between tax bases and the reported amount of REIT assets and liabilities for federal income tax purposes was approximately $4.7 billion and $4.1 billion, respectively, less than the book bases of those assets and liabilities for financial reporting purposes.

A rollforward of valuation allowances, for the years ended December 31, 2015, 2014 and 2013, is as follows:



	2015			2014			2013
	(In thousands)
Beginning Balance	$	352,528		$	331,458		$	326,837
Additions:
Purchase accounting	172,932			—			613
Expenses	24,332			28,364			31,540
Subtractions:
Deductions	(42,437		)	(2,344		)	(23,622		)
Other activity (not resulting in expense or deduction)	(3,824		)	(4,950		)	(3,910		)
Ending balance	$	503,531		$	352,528		$	331,458

We are subject to corporate level taxes for any asset dispositions during the five-year period immediately after the assets were owned by a C corporation (either prior to our REIT election, through stock acquisition or merger) (“built-in gains tax”). The amount of income potentially subject to built-in gains tax is generally equal to the lesser of the excess of the fair value of the asset over its adjusted tax basis as of the date it became a REIT asset or the actual amount of gain. Some, but not all, future gains could be offset by available NOL carryforwards.

Generally, we are subject to audit under the statute of limitations by the Internal Revenue Service (“IRS”) for the year ended December 31, 2012 and subsequent years and are subject to audit by state taxing authorities for the year ended December 31, 2011 and subsequent years. We are subject to audit by the Canada Revenue Agency (“CRA”) and provincial authorities with respect to entities acquired or formed in connection with our 2007 acquisition of Sunrise Senior Living Real Estate Investment Trust generally for periods subsequent to the acquisition. We are also subject to audit in Canada for periods subsequent to the acquisition, and certain prior periods, with respect to the entities acquired in connection with the Holiday Canada Acquisition.

At December 31, 2015, we had a combined NOL carryforward of $460.2 million related to the TRS entities and an NOL carryforward of $1.1 billion related to the REIT, including $18.6 million and $442.6 million of the REIT NOL carried over from the HCT and Ardent acquisitions, respectively. Additionally, $10.5 million of Federal income tax credits were carried over from the Ardent entities. These amounts can be used to offset future taxable income (and/or taxable income for prior years if an audit determines that tax is owed), if any. The REIT will be entitled to utilize NOLs and tax credit carryforwards only to the extent that REIT taxable income exceeds our deduction for dividends paid. Lillibridge, ASLG and Ardent NOL and credit carryforwards are limited as to their utilization by Section 382 of the Code. The NOL carryforwards begin to expire in 2024 with respect to the TRS entities and in 2019 for the REIT.

As a result of our uncertainty regarding the use of existing REIT NOLs, we have not ascribed any net deferred tax benefit to REIT NOL carryforwards as of December 31, 2015 and 2014. The IRS may challenge our entitlement to these tax attributes during its review of the tax returns for the previous tax years. We believe we are entitled to these tax attributes but cannot assure you as to the outcome of these matters.

The following table summarizes the activity related to our unrecognized tax benefits:



	2015			2014
	(In thousands)
Balance as of January 1	$	25,446		$	21,906
Additions to tax positions related to the current year	—			4,507
Additions to tax positions related to prior years	248			126
Subtractions to tax positions related to prior years	(677		)	(129		)
Subtractions to tax positions related to settlements	—			—
Subtractions to tax positions as a result of the lapse of the statute of limitations	(882		)	(964		)
Balance as of December 31	$	24,135		$	25,446

Included in these unrecognized tax benefits of $24.1 million and $25.4 million at December 31, 2015 and 2014, respectively, were $22.5 million and $23.9 million of tax benefits at December 31, 2015 and 2014, respectively, that, if recognized, would reduce our annual effective tax rate. We accrued interest of $0.4 million related to the unrecognized tax benefits during 2015, but no penalties. We expect our unrecognized tax benefits to decrease by $3.4 million during 2016.

As a part of the transfer pricing structure in the normal course of business, the REIT enters into transactions with certain TRSs, such as leasing transactions, other capital financing and allocation of general and administrative costs, which transactions are intended to comply with Internal Revenue Service and foreign tax authority transfer pricing rules.