Income Taxes

12 Months Ended

Dec. 31, 2011

Income Taxes [Abstract]

Income Taxes

(9)  Income Taxes

The provision for income taxes was based upon management's estimate of taxable income or loss for each respective accounting period.  We recognized an asset or liability for the deferred tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements.  These temporary differences would result in taxable or deductible amounts in future years when the reported amounts of the assets are recovered or liabilities are settled.  We also recognized as deferred tax assets the future tax benefits from net operating loss and tax credit carryforwards.  A valuation allowance was provided for certain deferred tax assets, since it is more likely than not that a portion of the net deferred tax assets will not be realized.

Income tax expense (benefit) on income attributable to continuing operations consisted of the following for the years ended December 31 (in thousands):

	2011		2010		2009
Current:
Federal	$	-	$	-	$	-
State		2,064		1,772		2,300
		2,064		1,772		2,300
Deferred:
Federal		8,572		963		24,829
State		1,821		229		2,487
		10,393		1,192		27,316
Total	$	12,457	$	2,964	$	29,616

 Actual tax expense (benefit) differed from the expected tax expense, which was computed by applying the U.S. Federal corporate income tax rate of 35% to our profit before income taxes for the years ended December 31 as follows (in thousands):

	2011			2010			2009
Computed expected tax (benefit) expense	$	(96,987	)	$	87		$	25,234
Adjustments in income taxes resulting from:
Loss on asset impairment		109,365			-			-
Change in valuation allowance		104			(111	)		-
State income tax expense, net of Federal
income tax effect		1,846			694			3,814
Reduction in unrecognized tax benefits		(594	)		(264	)		(56	)
Nondeductible transaction costs		212			3,771			-
Tax credits		(3,398	)		(1,612	)		(1,339	)
Nondeductible compensation		-			31			53
Other nondeductible expenses		791			439			728
Other		1,118			(71	)		1,182
Total	$	12,457		$	2,964		$	29,616

Deferred tax assets (liabilities) at December 31 consisted of the following (in thousands):

	2011			2010
Deferred tax assets:
Accounts and notes receivable	$	17,790		$	26,945
Accrued liabilities		102,156			89,865
Intangible assets		9,663			9,936
Property and equipment		-			5,400
Write-down of assets held for sale		877			888
Partnership investments		396			2,165
Minimum tax and other credit carryforwards		10,764			6,457
State net operating loss carryforwards		16,198			16,120
Federal net operating loss carryforwards		50,898			56,690
		208,742			214,466
Less valuation allowance		(17,888	)		(18,126	)
Total deferred tax assets		190,854			196,340
Deferred tax liabilities:
Property and equipment		(3,710	)		-
Deferred tax assets, net	$	187,144		$	196,340

In connection with the Separation, certain deferred tax assets (e.g., net operating loss ("NOL") carryforwards and tax credit carryforwards) and certain deferred tax liabilities (primarily related to property and equipment) were transferred to or assumed by Sabra.  In the case of NOL carryforwards, regulations under the Internal Revenue Code and similar state rules require the NOLs to be allocated to the two companies based on their relative contributions (including the contributions of their subsidiaries) to the NOLs for each tax period.  Similar rules are applied for the allocation of tax credits.  In the case of other deferred balances (e.g., property and equipment), the deferred tax asset (liability) transferred was based upon the difference between the net book basis and net tax basis transferred to Sabra.  The net amount of deferred tax liabilities assumed by Sabra was approximately $20.7 million.

The $0.2 million net decrease in the valuation allowance resulted from the amount of valuation allowance related to deferred tax assets transferred to Sabra of $0.3 million offset by an adjustment to our tax provision of $(0.1) million.

In evaluating the need to establish a valuation allowance on our net deferred tax assets, all items of positive evidence (e.g., future sources of taxable income, including the ability to reliably forecast and implemented mitigation initiatives ) and negative evidence (e.g., impact of CMS Final Rule and subsequent impairment of goodwill) were considered.  We are in a cumulative pre-tax book loss of approximately $217 million for the three-year period ended December 31, 2011.  However, because approximately $324 million of the book expenses were not deductible for tax purposes, we generated taxable income and utilized existing net operating loss carryforwards in each of the last three years.  As discussed in Note 1, as a result of the negative impact of the CMS Final Rule on our business, we commenced a broad based mitigation initiative, which included infrastructure cost reductions. Our ability to generate sufficient future taxable income to realize our deferred tax assets is dependent on our ability to realize the savings from our mitigation initiative. Based upon our current estimates of future taxable income, we believe that we will more likely than not realize our net deferred tax assets.  However, if we are unable to realize enough savings through our mitigation initiative to offset the negative impact of the CMS Final Rule, we may be required to increase our valuation allowance in future periods.

Internal Revenue Code Section 382 imposes a limitation on the use of a company's NOL carryforwards and other losses when the company has an ownership change.  In general, an ownership change occurs when shareholders owning 5% or more of a "loss corporation" (a corporation entitled to use NOL or other loss carryovers) have increased their ownership of stock in such corporation by more than 50 percentage points during any 3-year testing period beginning on the first day following the change date for an earlier ownership change.  The annual base Section 382 limitation is calculated by multiplying the loss corporation's value at the time of the ownership change times the greater of the long-term tax-exempt rate determined by the IRS in the month of the ownership change or the two preceding months. Some states impose ownership change rules similar to Section 382 that limit the utilization of the state NOLs as well.

The issuance of our common stock in connection with an acquisition in 2005 resulted in an ownership change under Section 382.  Considering the Tax Allocation Agreement ("TAA") between us and Sabra, the annual base Section 382 limitation to be applied to our tax attribute carryforwards as a result of this ownership change is approximately $9.1 million.  Accordingly, our NOL and tax credit carryforwards have been reduced to take into account this limitation and the respective carryforward periods for these tax attributes.  In addition, a separate annual base Section 382 limitation of approximately $8.0 million per the TAA is to be applied to the tax attribute carryforwards of Harborside as a result of the Harborside acquisition.

After considering the reduction in tax attributes resulting from the allocation to Sabra and the Section 382 limitations discussed above, we have Federal NOL carryforwards of approximately $145.4 million with expiration dates from 2019 through 2030.  Various subsidiaries have state NOL carryforwards totaling approximately $324.3 million with expiration dates beginning in 2012 through the year 2030.Our application of the rules under Section 382 or similar state statute is subject to challenge upon review by the IRS or state taxing authorities.  A successful challenge could significantly impact our ability to utilize tax attribute carryforwards from periods prior to the ownership change dates.

We are subject to income taxes in the U.S. and numerous state and local jurisdictions.  Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes.  Under GAAP, we utilize a two-step approach to recognizing and measuring uncertain tax positions.  The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any.  The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement.

Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different.  We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the expiration of the statute of limitations.  To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made.  The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

	2011			2010			2009
Balance at the beginning of the period	$	26,246		$	26,316		$	25,654
Additions for tax positions of prior years		10			248			730
Lapsing of statutes of limitations		(716	)		(318	)		(68	)
Balance at the end of the period	$	25,540		$	26,246		$	26,316

All of the gross unrecognized tax benefits would affect the effective tax rate if recognized.  Unrecognized tax benefits are adjusted in the period in which new information about a tax position becomes available or the final outcome differs from the amount recorded.  Unrecognized tax benefits are not expected to change significantly over the next twelve months.

We recognize potential accrued interest related to unrecognized tax benefits in income tax expense.  Penalties, if incurred, would also be recognized as a component of income tax expense.  The amount of accrued interest related to unrecognized tax benefits as of December 31, 2011, 2010, and 2009 was $0.2 million, $0.3 million, and $0.2 million, respectively. The amount of interest expense included in the 2011 tax provision is $0.1 million.

We file numerous consolidated and separate state and local income tax returns in addition to our consolidated U.S. federal income tax return.  With few exceptions, we are no longer subject to U.S. federal, state or local income tax examinations for years before 2008.  These jurisdictions can, however, adjust NOL carryforwards from earlier years.