NOTE 9 INCOME TAXES

The provision for (benefit from) income taxes for the years ended December 31, 2013, 2012 and 2011 was as follows:

	2013		2012		2011

	(In thousands)
Current	$	1,218	$	2,439	$	936
Deferred		8,352		4,448		(19,261	)(*)


Total	$	9,570	$	6,887	$	(18,325	)

(*): A component of the tax benefit recorded for the year ended December 31, 2011 relates to an adjustment to true-up the deferred tax assets and liabilities that were received by us upon the spin-off from GGP.

Income tax expense is computed by applying the Federal corporate tax rate for the years ended December 31, 2013, 2012 and 2011 and is reconciled to the provision for income taxes as follows:

	2013			2012			2011

	(In thousands)
Tax at statutory rate on earnings from continuing operations before income taxes	$	(22,477	)	$	(42,490	)	$	45,099
Increase (decrease) in valuation allowance, net		(88,826	)		(32,172	)		(13,110	)
State income taxes, net of Federal income tax benefit		1,562			1,328			2,243
Tax at statutory rate on REIT entity earnings not subject to Federal income taxes		(2,648	)		(3,087	)		1,204
Tax expense (benefit) from change in rates, prior period adjustments and other permanent differences		4,339			13,908			(20,829	)
Record deferred tax liability on captive REIT and REIT land distribution		53,973			—			—
Non-deductible warrant liability (gain) loss		63,695			65,311			(35,859	)
Non-taxable interest income		(363	)		(2,863	)		(2,990	)
Uncertain tax position expense, excluding interest		(1,034	)		1,765			364
Uncertain tax position interest, net of Federal income tax benefit		1,349			5,187			5,553


Income tax expense (benefit)	$	9,570		$	6,887		$	(18,325	)

Realization of a deferred tax benefit is dependent upon generating sufficient taxable income in future periods. Our net operating loss carry-forwards are currently scheduled to expire in subsequent years through 2033. Some of the net operating loss carry-forward amounts are subject to the separate return limitation year rules (SRLY). It is possible that we could, in the future, experience a change in control pursuant to Section 382 that could put limits on the benefit of deferred tax assets. On February 27, 2012, we entered into a Section 382 Rights Agreement to protect us from such an event and protect our deferred tax assets. The section 382 Rights Agreement has a three-year term.

As of December 31, 2013, the amounts and expiration dates of operating loss and tax credit carryforwards for tax purposes are as follows:

	Amount		Expiration Date

	(In thousands)
Net operating loss carryforwards – Federal	$	94,715	2024-2033
Net operating loss carryforwards – State		254,533	2014-2033
Capital loss carryforward		16,397	2018
Tax credit carryforwards – Federal AMT		2,045	n/a

As of December 31, 2013 and 2012, we had gross deferred tax assets totaling $336.6 million and $410.5 million, and gross deferred tax liabilities of $413.4 million and $386.1 million, respectively. We have established a valuation allowance in the amount of $12.6 million and $101.5 million as of December 31, 2013 and 2012, respectively, against certain deferred tax assets for which it is more likely than not that such deferred tax assets will not be realized.

Deferred tax assets related to our investment in Head Acquisition, LP in the amount of $76.4 million that we previously believed had only a remote possibility of realization were recorded in 2012 due to tax planning that made realization possible. Due to the uncertainty that the tax planning would result in the realization of the deferred tax asset we established a 100% valuation allowance. During the fourth quarter 2013, the tax planning was successfully implemented and over 90% of the deferred tax asset was realized and the remaining amount will likely be realized in 2014; therefore, we determined that it was appropriate to release the entire valuation allowance in 2013.

The tax effects of temporary differences and carry-forwards included in the net deferred tax liabilities at December 31, 2013 and 2012 are summarized as follows:

	2013			2012

	(In thousands)
Deferred tax assets:
Operating and Strategic Development properties, primarily differences in basis of assets and liabilities	$	201,993		$	291,845
Interest deduction carryforwards		85,671			86,963
Operating loss and tax credit carryforwards		48,971			31,643


Total deferred tax assets		336,635			410,451
Valuation allowance		(12,624	)		(101,518	)


Total net deferred tax assets		324,011			308,933


Deferred tax liabilities:
Property associated with Master Planned Communities, primarily differences in the tax basis of land assets and treatment of interest and other costs	$	(137,930	)		(172,914	)
Operating and Strategic Development properties, primarily differences in basis of assets and liabilities		(48,007	)		—
Deferred income		(227,439	)		(213,166	)


Total deferred tax liabilities		(413,376	)		(386,080	)


Net deferred tax liabilities	$	(89,365	)	$	(77,147	)

The deferred tax liability associated with the Master Planned Communities is largely attributable to the difference between the basis and value determined as of the date of the acquisition by our predecessors of The Rouse Company ("TRC") in 2004 adjusted for sales that have occurred since that time. The cash cost related to this deferred tax liability is dependent upon the sales price of future land sales and the method of accounting used for income tax purposes. The deferred tax liability related to deferred income is the difference between the income tax method of accounting and the financial statement method of accounting for prior sales of land in our Master Planned Communities.

One of our consolidated entities, Victoria Ward, Limited, elected to be taxed as a REIT and intended to continue to operate so as to qualify as a REIT going forward. Consequently, deferred taxes were not recorded on book and tax basis differences of Victoria Ward, Limited as it was believed these differences would ultimately be realized at a zero percent tax rate. In connection with the planned condominium development of Victoria Ward that was approved by the Hawaii Real Estate Commission during the fourth quarter of 2013, the Company now intends to revoke its REIT election within the next few years, before future phases of condominium development commences. The Company now believes that the book and tax basis differences in the land and buildings of Victoria Ward, Limited will be realized after such time REIT status is revoked and will be taxed at the applicable corporate tax rates. As a result of these fourth quarter events, deferred tax liabilities of $48.0 million have been recorded due to the excess book over tax basis relating to land and buildings as of December 31, 2013.

Although we believe our tax returns are correct, the final determination of tax examinations and any related litigation could be different than what was reported on the returns. In our opinion, we have made adequate tax provisions for years subject to examination. Generally, we are currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended December 31, 2009 through 2013 and are open to audit by state taxing authorities for years ending December 31, 2009 through 2013.

Two of our subsidiaries are involved in a dispute with the IRS relating to years in which those subsidiaries were owned by General Growth Properties ("GGP"), and in connection therewith, GGP has provided us with an indemnity against certain potential tax liabilities. Pursuant to the Tax Matters Agreement with GGP, GGP has indemnified us from and against 93.75% of any and all losses, claims, damages, liabilities and reasonable expenses to which we become subject (the "Tax Indemnity"), in each case solely to the extent directly attributable to certain taxes related to sales of certain assets in our Master Planned Communities segment prior to March 31, 2010 ("MPC Taxes"), in an amount up to $303.8 million, plus interest and penalties related to these amounts (the "Indemnity Cap") so long as GGP controls the action in the United States Tax Court (the "Tax Court") related to the dispute with the IRS as described below. We recorded the Tax Indemnity receivable at the Indemnity Cap amount as of the spinoff date. The unrecognized tax benefits and related accrued interest recorded through December 31, 2013 are primarily related to the taxes that are the subject of the Tax Indemnity. We have recorded interest income receivable on the Tax Indemnity receivable in the amounts of $38.6 million and $36.4 million as of December 31, 2013 and 2012, respectively.

The timing of the utilization of the tax assets attributable to indemnified and non-indemnified gains results in changes to the Tax Indemnity receivable and is dependent on numerous future events, such as the timing of recognition of indemnified and non-indemnified gains, the amount of each type of gain recognized in each year, the use of specific deductions and the ultimate amount of indemnified gains recognized. These non-cash changes could be material to our financial statements. Resolution of the Tax Court case noted below could also result in material changes to the Master Planned Community deferred gains and the timing of utilization of the tax assets, both of which could result in material changes to the Tax Indemnity receivable. We record the Tax Indemnity receivable based on the amounts indemnified which are determined in accordance with the provisions set forth in ASC 740 ("ASC 740") Income Taxes. The amounts indemnified are included in the deferred income component of deferred tax liability and in Uncertain tax position liability in our Consolidated Balance Sheets.

During the year ended December 31, 2013, the reduction in the Tax Indemnity receivable of $1.2 million related to interest income that was offset by our utilization of tax assets that contractually limit the amount we can receive pursuant to the Tax Matters Agreement and changes to our deferred tax liability for the MPC Taxes.

During the year ended December 31, 2012, the reduction in the Tax Indemnity receivable of $20.3 million, $8.8 million of which related to 2011 and to a lesser extent 2010, related to our utilization of tax assets that contractually limit the amount we can receive pursuant to the Tax Matters Agreement and changes to our deferred tax liability for the MPC Taxes.

On May 6, 2011, GGP filed Tax Court petitions on behalf of the two former taxable REIT subsidiaries of GGP seeking a redetermination of federal income tax for the years 2007 and 2008. The petitions seek to overturn determinations by the IRS that the taxpayers were liable for combined deficiencies totaling $144.1 million. On October 20, 2011, GGP filed a motion in the Tax Court to consolidate the cases of the two former taxable REIT subsidiaries of GGP subject to litigation with the IRS due to the common nature of the cases' facts and circumstances and the issues being litigated. The Tax Court granted the motion to consolidate. The case was heard by the Tax Court in November 2012. We expect the Tax Court to rule on the case within the next 12 months.

We apply the generally accepted accounting principle related to accounting for uncertainty in income taxes, which prescribes a recognition threshold that a tax position is required to meet before recognition in the financial statements and provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues.

We recognize and report interest and penalties, if applicable, within our provision for income tax expense from January 1, 2007 forward. We recognized potential interest expense related to the unrecognized tax benefits of $2.1 million, $8.2 million and $8.5 million for the years ended December 31, 2013, 2012 and 2011, respectively. At December 31, 2013, we had total unrecognized tax benefits of $90.5 million, excluding interest of $38.7 million, of which none would impact our effective tax rate. At December 31, 2012 and 2011, we had total unrecognized tax benefits of $95.9 million and $101.4 million, respectively, excluding interest, of which none would impact our effective tax rate.

	2013			2012			2011

	(In thousands)
Unrecognized tax benefits, opening balance	$	95,917		$	101,408		$	120,816
Gross increases – tax positions in prior period		9,162			841			—
Gross decreases – tax positions in prior periods		(14,547	)		(6,332	)		(19,408	)


Unrecognized tax benefits, ending balance	$	90,532		$	95,917		$	101,408

Based on our assessment of the expected outcome of existing examinations or examinations that may commence, or as a result of the expiration of the statute of limitations for specific jurisdictions, it is reasonably possible that the related unrecognized tax benefits, excluding accrued interest, for tax positions taken regarding previously filed tax returns will materially change from those recorded at December 31, 2013. A material change in unrecognized tax benefits could have a material effect on our statements of operations. As of December 31, 2013, there is approximately $90.5 million of unrecognized tax benefits, excluding accrued interest, which due to the reasons above, could significantly increase or decrease during the next twelve months.