INCOME TAXES

9 Months Ended

Sep. 30, 2011

INCOME TAXES

INCOME TAXES

As a REIT, we generally are not subject to corporate level tax on income of the REIT that is distributed to shareholders. We will, however, be subject to corporate taxes on built-in-gains (the excess of fair market value over tax basis at January 1, 2010) on sales of real property (other than standing timber) held by the REIT during the first 10 years following the REIT conversion. We also will continue to be required to pay federal corporate income taxes on earnings of our Taxable REIT Subsidiary (TRS), which principally includes our manufacturing businesses, our real estate development business and the portion of our timberlands segment income included in the TRS.

The provision for income taxes is based on the current estimate of the annual effective tax rate. Our 2011 and 2010 income tax rates excluding discrete items are lower than the statutory rate, primarily due to the tax benefits of being a REIT.

Our effective income tax rates from continuing operations excluding discrete items were:

• (17.9) percent for 2011 and

• 16.8 percent for 2010.

Discrete items excluded from the calculation of our effective income tax rates include:

DOLLAR AMOUNTS IN MILLIONS
First Quarter 2011:
Income taxes on a non-strategic timberlands gain discussed in Note 8	$	(56	)
Second Quarter 2011:
Tax benefit on early extinguishment of debt discussed in Note 11	$	10
Third Quarter 2011:
Tax benefit related to foreign tax credits	$	83
First Quarter 2010:
Medicare Part D subsidy charge	$	(28	)
State tax law and rate changes charge	$	(3	)
Third Quarter 2010:
REIT conversion benefit	$	1,043
Medicare Part D subsidy plan change due to plan amendment	$	(4	)
Unrecognized tax benefits and other adjustments	$	(4	)

Due to the Patient Protection and Affordable Care Act, as modified by the Health Care and Education Reconciliation Act, we no longer will be able to claim an income tax deduction for prescription drug benefits provided to retirees and reimbursed under the Medicare Part D subsidy beginning in 2013. During first quarter 2010, we recorded the effect of the change, as accounting rules require the effect of the change to be recorded in the period that the law was enacted.

During third quarter 2010, we reversed certain deferred income tax liabilities, relating to temporary differences of timber assets, as a result of our conversion to a REIT.