Income Taxes

12 Months Ended

Dec. 31, 2011

Notes to Financial Statements

Income Taxes

 Note 15. Income Taxes

We account for our operations using accounting principles generally accepted in the United States, or GAAP. Below, we reconcile the differences between our GAAP-basis reporting and the equivalent amounts prepared on an income tax basis.

Our consolidated financial results include three separate taxable entities, Capital Trust, Inc. (a real estate investment trust, or REIT), CTIMCO (a wholly-owned taxable REIT subsidiary, or TRS, of Capital Trust, Inc.), and CT Legacy REIT. These entities are presented on a consolidated basis under GAAP, however they are separate taxpayers.

The table below shows GAAP net income (loss), estimated taxable income (loss), and our GAAP income tax provision for the year ended December 31, 2011 disaggregated for each of these separate taxpaying entities:

Disaggregated Income (Loss) Information by Taxpayer, for the Year Ended December 31, 2011
(in thousands)	GAAP Net Income (Loss)			Estimated Taxable Income			Income Tax Provisison
Capital Trust		$258,629			$26,216			$675
CTIMCO		(2,986	)		4,745			1,121
CT Legacy REIT		(3,324	)		(7,426	)		750
Consolidated GAAP net income and tax provision		$252,319						$2,546

During 2011, in our GAAP-basis consolidated financial statements, we recorded an income tax provision of $2.5 million, which was primarily comprised of a $3.2 million current year tax provision, offset by a $610,000 non-cash deferred income tax provision at CTIMCO due primarily to timing differences of compensation expenses as well as the use of NOL carryforwards.

Capital Trust, Inc.

Capital Trust, Inc. has made a tax election to be treated as a REIT. The primary benefit from this election is that we are able to deduct dividends paid to our shareholders from the calculation of taxable income, effectively eliminating corporate taxes on the operations of the REIT. In order to qualify as a REIT, our activities must focus on real estate investments and we must meet certain asset, income, ownership and distribution requirements. These qualifications have become more difficult to meet in light of the transfer of our legacy portfolio to CT Legacy REIT in conjunction with our March 2011 restructuring, and the lack of new, replacement investment activity. If we fail to maintain our qualification as a REIT in any year, we may be subject to material penalties as well as federal, state, and local income taxes on our taxable income at regular corporate rates. As of December 31, 2011 and 2010, we were in compliance with all REIT requirements.

In addition, we are subject to taxation on the income generated by investments in our CT CDOs. Due to the redirection provisions of our CT CDOs, which reallocate principal proceeds and interest otherwise distributable to us to repay senior note holders, assets financed through our CT CDOs may generate current taxable income without a corresponding cash distribution to us.

As of December 31, 2011, we have approximately $163.1 million of NOLs, and $120.8 million of NCLs available to be carried forward and utilized in future periods. If we are unable to utilize our NOLs, they will expire in 2029. If we are unable to utilize our NCLs, $2.0 million will expire in 2013, $87.4 million will expire in 2014, and $31.4 million will expire in 2015. The availability of these NOLs and NCLs is subject to certain change of control provisions promulgated by the Internal Revenue Service with respect to the ownership of Capital Trust, Inc.

The table below reconciles the differences between GAAP net income and estimated taxable income for Capital Trust, Inc.:

Capital Trust GAAP to Tax Reconciliation
(in thousands)	Year Ended December 31, 2011
GAAP net income		$258,629
LESS: GAAP net income of entities not consolidated for tax (1)		(197,289	)
Subtotal		61,340
GAAP to tax differences:
Losses, allowances and provisions on investments(2)		(51,460	)
Gain recognition related to March 31, 2011 restructuring		18,114
Non-cash interest expense not deductible for tax		5,271
Equity investments(3)		(1,582	)
GAAP income tax provision		675
Other		(6,142	)
Subtotal		(35,124	)
Capital Trust estimated taxable income (4)		$26,216

(1)	Represents the GAAP net income of securitization vehicles which are consolidated into Capital Trust under GAAP, but which are separate taxpayers.
(2)	Comprised of 2011 tax losses that were recognized for GAAP in prior periods. This is offset by GAAP losses that may be recognized in future tax periods.
(3)	GAAP to tax differences relating to our co-investments in CTOPI, primarily the elimination of unrealized gains and losses recorded under GAAP.
(4)	We expect to utilize our net operating losses and net capital losses carried forward from prior periods to offset taxable income for 2011.

For tax year 2011, we expect to utilize net operating losses, or NOLs, and net capital losses, or NCLs, carried forward from prior periods to offset taxable income. The utilization of NOLs will also require us to pay alternative minimum taxes of approximately $400,000.

CTIMCO

CTIMCO is a wholly-owned subsidiary that operates our investment management business (including the management of Capital Trust, Inc.) and holds some of our assets. As a TRS, CTIMCO is subject to corporate taxation. The table below reconciles GAAP net loss to estimated taxable income for CTIMCO:

CTIMCO GAAP to Tax Reconciliation
(in thousands)	Year Ended December 31, 2011
GAAP net loss		($2,986	)
GAAP to tax differences:
General and administrative (1)		4,940
GAAP income tax provision		1,121
Other		1,670
Subtotal		7,731
CTIMCO estimated taxable income		$4,745

(1) Primarily differences associated with stock-based and other compensation to our employees.

For tax year 2011, we paid approximately $1.7 million of estimated taxes at CTIMCO.

CT Legacy REIT

The table below reconciles the differences between GAAP net loss and estimated taxable loss for CT Legacy REIT:

Legacy REIT GAAP to Tax Reconciliation
(in thousands)	Year Ended December 31, 2011
GAAP net loss		($3,324	)
LESS: GAAP net income of entities not consolidated for tax (1)		(13,174	)
Subtotal		(16,498	)
GAAP to tax differences:
Losses, allowances and provisions on investments(2)		3,225
Non-cash interest expense not deductible for tax		1,857
GAAP income tax provision		750
Other		3,240
Subtotal		9,072
CT Legacy REIT estimated taxable loss		($7,426	)

(1)	Represents the GAAP net income of securitization vehicles which are consolidated into CT Legacy REIT under GAAP, but which are separate taxpayers.
(2)	Comprised of 2011 GAAP losses that may be recognized in future tax periods.

Certain of CT Legacy REIT’s assets have been transferred to taxable REIT subsidiaries, or TRSs. For tax year 2011, CT Legacy REIT recorded a $750,000 current tax provision related to the operations of one of its TRS entities which had net taxable income for the year, which is not included in the table above. No income taxes were due or paid directly by CT Legacy REIT.

As of December 31, 2011, CT Legacy REIT has approximately $7.4 million of NOLs available to be carried forward and utilized in future periods. If CT Legacy REIT is unable to utilize its NOLs, they will expire in 2031.

Deferred Income Taxes (CTIMCO)

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities used for financial reporting purposes and the amounts used for tax reporting purposes.

The significant components of deferred tax assets and liabilities, which were generated entirely by CTIMCO, were as follows (in thousands):

	December 31, 2011		December 31, 2010
NOL carryforwards		$—		$392
Deferred compensation expense		1,039		24
Other		229		242
Deferred tax asset		1,268		658
Valuation allowance		—		—
Net deferred tax asset		$1,268		$658

As of December 31, 2011, tax years 2007 through 2011 remain subject to examination by taxing authorities.