Income Taxes

12 Months Ended

Dec. 31, 2019

NOTE 13—INCOME TAXES

We have elected to be taxed as a REIT under the applicable provisions of the Code, as amended, for every year beginning with the year ended December 31, 1999. We have also elected for certain of our subsidiaries to be treated as 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. 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. Our tax treatment of distributions per common share was as follows:



	For the Years Ended December 31,
	2019			2018			2017
Tax treatment of distributions:
Ordinary income	$	—		$	—		$	1.02814
Qualified ordinary income	0.12230			0.00375			0.00337
199A qualified business income	2.22898			2.97465			—
Long-term capital gain	—			0.05916			1.07836
Unrecaptured Section 1250 gain	0.03434			0.12244			0.21513
Non-dividend distribution	0.78438			—			—
Distribution reported for 1099-DIV purposes	3.17000			3.16000			2.32500
Add: Dividend declared in current year and taxable in following year	0.79250			0.79250			0.79000
Less: Dividend declared in prior year and taxable in current year	(0.79250		)	(0.79000		)	—
Distribution declared per common share outstanding	$	3.17000		$	3.16250		$	3.11500

We believe we have met the annual REIT distribution requirement by payment of at least 90% of our estimated taxable income for 2019, 2018 and 2017. Our consolidated benefit for income taxes was as follows:



	For the Years Ended December 31,
	2019			2018			2017
	(In thousands)
Current - Federal	$	(1,840	)	$	(2,953	)	$	(5,672	)
Current - State	2,118			1,332			1,119
Deferred - Federal	(49,532		)	(32,492		)	(54,396		)
Deferred - State	(3,353		)	(825		)	3,237
Current - Foreign	2,335			1,892			2,307
Deferred - Foreign	(6,038		)	(6,907		)	(6,394		)
Total	$	(56,310	)	$	(39,953	)	$	(59,799	)

The 2019 income tax benefit is primarily due to the $57.7 million reversal of valuation allowances recorded against the net deferred tax assets of certain of our TRS entities. During the second quarter of 2019, we concluded it was “more-likely than-not” that these deferred tax assets (primarily US federal NOL carryforwards which begin to expire in 2031) would be realized. This conclusion was based on recently sustained profitability and recent upward revisions to estimates of future taxable income for these TRS entities. The 2018 income tax benefit is primarily due to the reversal of a $23.2 million valuation allowance on deferred interest carryforwards and tax losses of certain TRS entities. The $23.2 million valuation allowance reversal was an adjustment to the provisional amount recorded in the prior year related to enactment of the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) and was made based upon additional guidance issued by the IRS subsequent to enactment of the 2017 Tax Act. The 2017 income tax benefit is primarily due to accounting for the 2017 Tax Act, specifically a $64.5 million benefit from the reduced U.S. federal corporate tax rate on net deferred tax liabilities and an offsetting expense of $23.3 million to establish the valuation allowance on deferred interest carryforwards (subsequently reversed in 2018), losses of certain TRS entities and the release of a tax reserve.

Although the TRS entities and certain other foreign entities have paid minimal cash federal, state and foreign income taxes for the year ended December 31, 2019, their income tax liabilities may increase in future years as we exhaust net operating loss (“NOL”) carryforwards and as our senior living and other operations grow. 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, 2019, 2018 and 2017, to the income tax benefit is as follows:



	For the Years Ended December 31,
	2019			2018			2017
	(In thousands)
Tax at statutory rate on earnings from continuing operations before unconsolidated entities, noncontrolling interest and income taxes	$	77,803		$	80,811		$	204,742
State income taxes, net of federal benefit	2,341			(253		)	(1,115		)
Change in valuation allowance from ordinary operations	(47,227		)	(5,451		)	8,237
Decrease in ASC 740 income tax liability	—			(4,347		)	(4,750		)
Tax at statutory rate on earnings not subject to federal income taxes	(90,862		)	(89,947		)	(231,379		)
Foreign rate differential and foreign taxes	1,407			1,924			6,407
Change in tax status of TRS	(52		)	359			(690		)
Effect of the 2017 Tax Act	—			(23,160		)	(41,212		)
Other differences	280			111			(39		)
Income tax benefit	$	(56,310	)	$	(39,953	)	$	(59,799	)

Each TRS is a tax paying component for purposes of classifying deferred tax assets and liabilities. The tax effects of temporary differences and carryforwards included in the net deferred tax liabilities are summarized as follows:



	As of December 31,
	2019			2018			2017
	(In thousands)
Property, primarily differences in depreciation and amortization, the tax basis of land assets and the treatment of interests and certain costs	$	(257,373	)	$	(269,758	)	$	(300,395	)
Operating loss and interest deduction carryforwards	136,771			133,243			146,732
Expense accruals and other	7,380			11,910			12,890
Valuation allowance	(40,114		)	(80,614		)	(109,319		)
Net deferred tax liabilities	$	(153,336	)	$	(205,219	)	$	(250,092	)

We established beginning net deferred tax assets and liabilities related to temporary differences between the financial reporting and the tax bases of assets acquired and liabilities assumed (primarily property, intangible and related assets, net of NOL carryforwards) in connection with the following acquisitions:



	For the Years Ended December 31,
	2019		2018			2017
	(In thousands)
Research and innovation acquisition	$	—	$	—		$	19,262
Miscellaneous acquisitions	—		(922		)	(4,510		)
Established beginning deferred tax assets or liabilities	$	—	$	(922	)	$	14,752

Our net deferred tax liability decreased $51.9 million during 2019 primarily due to the $57.7 million reversal of valuation allowances recorded against the net deferred tax assets of certain of our TRS entities. Our net deferred tax liability decreased $44.8 million during 2018 primarily due to accounting for IRS guidance issued subsequent to the enactment of the 2017 Tax Act, specifically a $23.2 million benefit for the reversal of a valuation allowance on deferred interest carryforwards, and tax losses of certain TRS entities. Our net deferred tax liability decreased $66.5 million during 2017 primarily due to accounting for the 2017 Tax Act, specifically a $64.5 million benefit from the reduced U.S. federal corporate tax rate on net deferred tax liabilities and an offsetting expense of $23.3 million to establish a provisional adjustment on deferred interest carryforwards, the impact of TRS operating losses, currency translation adjustments, and purchase accounting adjustments.

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 certain TRSs. The amounts related to NOLs at the TRS entities for 2019, 2018 and 2017 are $21.2 million, $55.1 million and $67.1 million, respectively.

We are subject to corporate level taxes (“built-in gains tax”) 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). 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.

At December 31, 2019, 2018 and 2017, the REIT had NOL carryforwards of $858.6 million, $910.7 million and $973.4 million, respectively. Additionally, the REIT has $12.6 million of federal income tax credits that were carried over from acquisitions. 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. Certain NOL and credit carryforwards are limited as to their utilization by Section 382 of the Code. The remaining REIT carryforwards begin to expire in 2020.

For the years ended December 31, 2019 and 2018, the net difference between tax bases and the reported amount of REIT assets and liabilities for federal income tax purposes was approximately $3.5 billion and $3.8 billion, respectively, less than the book bases of those assets and liabilities for financial reporting purposes.

Generally, we are subject to audit under the statute of limitations by the Internal Revenue Service (“IRS”) for the year ended December 31, 2016 and subsequent years and are subject to audit by state taxing authorities for the year ended December 31, 2015 and subsequent years. We are subject to audit generally under the statutes of limitation by the Canada

Revenue Agency and provincial authorities with respect to the Canadian entities for the year ended December 31, 2015 and subsequent years. We are also subject to audit in Canada for periods subsequent to the acquisition, and certain prior periods, with respect to entities acquired in 2014 from Holiday Retirement. We are subject to audit in the United Kingdom generally for the periods ended in and subsequent to 2018.

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



	2019			2018
	(In thousands)
Balance as of January 1	$	12,344		$	16,765
Additions to tax positions related to prior years	178			207
Subtractions to tax positions related to prior years	(395		)	(1,720		)
Subtractions to tax positions as a result of the lapse of the statute of limitations	—			(2,908		)
Balance as of December 31	$	12,127		$	12,344

Included in these unrecognized tax benefits of $12.1 million and $12.3 million at December 31, 2019 and 2018, respectively, were $10.7 million and $10.6 million of tax benefits at December 31, 2019 and 2018, respectively, that, if recognized, would reduce our annual effective tax rate. We accrued no interest or penalties related to the unrecognized tax benefits during 2019. We do not expect our unrecognized tax benefits to increase or decrease materially in 2020.

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.

Subsequent Event

In the first quarter of 2020, we completed an internal restructuring of certain US taxable REIT subsidiaries. As a result, we expect to record a $152 million tax benefit from the transfer of assets subject to certain deferred tax liabilities from taxable REIT subsidiaries to the REIT in this tax-free transaction.