Income Taxes and Distributions

12 Months Ended

Dec. 31, 2013

Income Taxes and Distributions [Abstract]

18. Income Taxes and Distributions

We elected to be taxed as a REIT commencing with our first taxable year. To qualify as a REIT for federal income tax purposes, at least 90% of taxable income (excluding 100% of net capital gains) must be distributed to stockholders. REITs that do not distribute a certain amount of current year taxable income in the current year are also subject to a 4% federal excise tax. The main differences between net income for federal income tax purposes and financial statement purposes are the recognition of straight-line rent for reporting purposes, basis differences in acquisitions, recording of impairments, differing useful lives and depreciation and amortization methods for real property and the provision for loan losses for reporting purposes versus bad debt expense for tax purposes.

Cash distributions paid to common stockholders, for federal income tax purposes, are as follows for the periods presented:


			Year Ended December 31,
			2013		2012		2011
Per Share:
	Ordinary income	$	1.4928	$	1.5000	$	1.1472
	Return of capital		1.4176		1.3376		1.4227
	Long-term capital gains		0.0448		0.1176		0.1059
	Unrecaptured section 1250 gains		0.1048		0.0048		0.1592
	Totals	$	3.0600	$	2.9600	$	2.8350

Our consolidated provision for income taxes is as follows for the periods presented (dollars in thousands):


		Year Ended December 31,
		2013		2012		2011
Current	$	12,389	$	4,785	$	389
Deferred		(4,898)		2,827		999
Totals	$	7,491	$	7,612	$	1,388

REITs generally are not subject to U.S. federal income taxes on that portion of REIT taxable income or capital gain that is distributed to stockholders. For the tax year ended December 31, 2013, as a result of acquisitions located in Canada and the United Kingdom in 2012 and 2013, we were subject to foreign income taxes under the respective tax laws of these jurisdictions. The provision for income taxes for the year ended December 31, 2013 primarily relates to state taxes, foreign taxes, and taxes based on income generated by entities that are structured as taxable REIT subsidiaries.

For the tax year ended December 31, 2013, the Canadian and United Kingdom tax benefit amount included in the consolidated provision for income taxes was $484,000. For the tax year ended December 31, 2012, the Canadian and United Kingdom tax expense amount included in the consolidated provision for income taxes was $596,000. We did not hold an interest in any entity located in a foreign jurisdiction for the year ended December 31, 2011.

A reconciliation of income tax expense, which is computed by applying the federal corporate tax rate for the years ended December 31, 2013, 2012 and 2011, to the income tax provision/(benefit) is as follows for the periods presented (dollars in thousands):


		Year Ended December 31,
		2013		2012		2011
Tax at statutory rate on earnings from continuing operations before unconsolidated entities, noncontrolling interests and income taxes	$	51,020	$	64,979	$	54,750
Increase / (decrease) in valuation allowance⁽¹⁾		18,444		9,234		(4,732)
Tax at statutory rate on earnings not subject to federal income taxes		(88,762)		(72,640)		(48,630)
Foreign permanent depreciation		22,313		-		-
Other differences		4,476		6,039		-
Totals	$	7,491	$	7,612	$	1,388


(1) Excluding purchase price accounting.

Each TRS and foreign entity subject to income taxes is a tax paying component for purposes of classifying deferred tax assets and liabilities. The tax effects of taxable and deductible temporary differences, as well as tax attributes, are summarized as follows for the periods presented (dollars in thousands):


		Year Ended December 31,
		2013		2012		2011
Investments and property, primarily differences in investment basis, depreciation and amortization, the basis of land assets and the treatment of interests and certain costs	$	(34,236)	$	(2,144)	$	(1,577)
Operating loss and interest deduction carryforwards		67,215		8,552		1,488
Expense accruals and other		19,309		4,372		5,749
Valuation allowance		(71,955)		(12,199)		(2,965)
Totals	$	(19,667)	$	(1,419)	$	2,695

Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. As required under the provisions of ASC 740, Management applied the concepts on an entity-by-entity, jurisdiction-by-jurisdiction basis. With respect to the analysis of certain entities in multiple jurisdictions, a significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2013. Such objective evidence limits the ability to consider other subjective evidence such as our projections for future growth.

On the basis of the evaluations performed as required by the codification, valuation allowances totaling $71,955,000 were recorded on U.S. taxable REIT subsidiaries as well as entities in other jurisdictions to limit the deferred tax assets to the amount that Management believes is more likely that not realizable. However, the amount of the deferred tax asset considered realizable could be adjusted if (i) estimates of future taxable income during the carryforward period are reduced or increased or (ii) objective negative evidence in the form of cumulative losses is no longer present (and additional weight may be given to subjective evidence such as our projections for growth).

The valuation allowance rollforward is summarized as follows for the periods presented (dollars in thousands):


		Year Ended December 31,
		2013		2012		2011
Beginning balance	$	12,199	$	2,965	$	7,697
Additions:
Purchase price accounting		41,312		-		-
Expense		18,444		9,234		-
Deductions		-		-		(4,732)
Ending balance	$	71,955	$	12,199	$	2,965

As a result of certain acquisitions, we are subject to corporate level taxes for any related asset dispositions that may occur during the ten-year period immediately after such assets were owned by a C corporation (“built-in gains tax”). The amount of income potentially subject to this special corporate level tax is generally equal to the lesser of (a) the excess of the fair value of the asset over its adjusted tax basis as of the date it became a REIT asset, or (b) the actual amount of gain. Some but not all gains recognized during this period of time could be offset by available net operating losses and capital loss carryforwards. During the year ended December 31, 2013, we acquired certain additional assets with built-in gains as of the date of acquisition that could be subject to the built-in gains tax if disposed of prior to the expiration of the applicable ten-year period. We have not recorded a deferred tax liability as a result of the potential built-in gains tax based on our intentions with respect to such properties and available tax planning strategies.

Under the provisions of the REIT Investment Diversification and Empowerment Act of 2007 (“RIDEA”), for taxable years beginning after July 30, 2008, the REIT may lease “qualified health care properties” on an arm’s-length basis to a TRS if the property is operated on behalf of such subsidiary by a person who qualifies as an “eligible independent contractor.” Generally, the rent received from the TRS will meet the related party rent exception and will be treated as “rents from real property.” A “qualified health care property” includes real property and any personal property that is, or is necessary or incidental to the use of, a hospital, nursing facility, assisted living facility, congregate care facility, qualified continuing care facility, or other licensed facility which extends medical or nursing or ancillary services to patients. We have entered into various joint ventures that were structured under RIDEA. Resident level rents and related operating expenses for these facilities are reported in the consolidated financial statements and are subject to federal and state income taxes as the operations of such facilities are included in a TRS. Certain net operating loss carryforwards could be utilized to offset taxable income in future years.

Given the applicable statute of limitations, we generally are subject to audit by the Internal Revenue Service (“IRS”) for the year ended December 31, 2010 and subsequent years. The statute of limitations may vary in the states in which we own properties or conduct business. We do not expect to be subject to audit by state taxing authorities for any year prior to the year ended December 31, 2007. We are also subject to audit by the Canada Revenue Agency and provincial authorities generally for periods subsequent to our REIT acquisition in May 2012 related to entities acquired or formed in connection with the acquisition, and by HM Revenue & Customs for periods subsequent to our REIT acquisitions in August 2012 and January 2013 related to entities acquired or formed in connection with the acquisitions.

At December 31, 2013, we had a net operating loss (“NOL”) carryforward related to the REIT of $133,568,000. Due to our uncertainty regarding the realization of certain deferred tax assets, we have not recorded a deferred tax asset related to NOLs generated by the REIT. 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. The NOL carryforwards will expire through 2033.

At December 31, 2013 and 2012, respectively, we had a net operating loss carryforward related to Canadian entities of $50,958,000 and $4,275,000. These Canadian losses have a 20-year carryforward period. At December 31, 2013, we had a net operating loss carryforward related to United Kingdom entities of $238,741,000, consisting of $232,305,000 of net operating losses from acquisitions and $6,436,000 of net operating losses from current year activities. These United Kingdom losses do not have a finite carryforward period.

We apply the rules under ASC 740-10 “Accounting for Uncertainty in Income Taxes” for uncertain tax positions using a “more likely than not” recognition threshold for tax positions. Pursuant to these rules, we will initially recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits of the tax position, that such a position will be sustained upon examination by the relevant tax authorities. If the tax benefit meets the “more likely than not” threshold, the measurement of the tax benefit will be based on our estimate of the ultimate tax benefit to be sustained if audited by the taxing authority. The following table summarizes the activity related to our unrecognized tax benefits for the periods presented (dollars in thousands):


		Year Ended December 31,
		2013		2012
Gross unrecognized tax benefits at beginning of year	$	6,098	$	6,098
Increases (decreases) in unrecognized tax benefits related to a prior year		76		(248)
Increases (decreases) in unrecognized tax benefits related to the current year		260		394
Lapse in statute of limitations for assessment		(21)		(146)
Gross unrecognized tax benefits at end of year	$	6,413	$	6,098

Of the total $6,413,000 of total liability for gross unrecognized tax benefits at December 31, 2013, $5,896,000 (exclusive of accrued interest and penalties) relates to the April 1, 2011 Genesis HealthCare Corporation transaction (“Genesis Acquisition”) and is included in accrued expenses and other liabilities on the consolidated balance sheet. As a part of the Genesis Acquisition, we received a full indemnification from FC-GEN Operations Investment, LLC covering income taxes or other taxes as well as interest and penalties relating to tax positions taken by FC-GEN Operations Investment, LLC prior to the acquisition. Accordingly, an offsetting indemnification asset is recorded in receivables and other assets on the consolidated balance sheet. Such indemnification asset is reviewed for collectability periodically.

There is no amount of unrecognized tax benefits, currently accrued for, that would have a material impact on the effective tax rate to the extent that would be recognized. There were insignificant uncertain tax positions as of December 31, 2013 for which it is reasonably possible that the amount of unrecognized tax benefits would decrease during 2014. Interest and penalties totaled $465,000 and $1,215,000, respectively, for the year ended December 31, 2013 and are included in income tax expense. Of these amounts, $337,000 and $996,000 of interest and penalties, respectively, relate to the Genesis Acquisition and are offset by the indemnification asset.