Income Taxes

12 Months Ended

Dec. 31, 2011

Income Taxes [Abstract]

INCOME TAXES

NOTE 9 INCOME TAXES

We are taxed as a C corporation after November 9, 2010. One of our consolidated entities, Victoria Ward, Limited (“Ward”, substantially all of which is owned by us) elected to be taxed as a REIT under sections 856-860 of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with the taxable year beginning January 1, 2002. To qualify as a REIT, Ward must meet a number of organizational and operational requirements, including requirements to distribute at least 90% of its ordinary taxable income and to distribute to stockholders or pay tax on 100% of capital gains and to meet certain asset and income tests. Ward has satisfied such REIT distribution requirements for 2011 and 2010, and presently we intend to continue to operate Ward as a REIT. As a REIT, Ward is ordinarily not subject to income taxes; however, Ward is required to make annual distributions to its shareholders, and the shareholders are taxed on these distributions. As of December 31, 2011, the bases of Ward included in our Consolidated Financial Statements exceeds the tax bases in Ward by $173.3 million.

GGP received a private letter ruling from the Internal Revenue Service (the “IRS”) with respect to the tax effect of the transfer of assets from our predecessors to HHC and to the effect that the distribution of HHC stock to GGP’s shareholders in the separation would qualify as tax-free to GGP and its subsidiaries for U.S. federal income tax purposes. A private letter ruling from the IRS generally is binding on the IRS. The IRS did not rule that the distribution satisfies every requirement for a tax-free spin-off, and the parties have relied, and will rely, solely on the advice of counsel for comfort that such additional requirements are satisfied.

The provision for (benefit from) income taxes for the years ended December 31, 2011, 2010 and 2009 was as follows:

	2011			2010			2009
	(In thousands)
Current	$	936		$	2,658		$	(849	)
Deferred		(19,261	)		(636,117	)		(23,120	)
Total	$	(18,325	)	$	(633,459	)	$	(23,969	)

The 2010 income tax provision includes significant tax amounts recognized immediately prior to the Separation related to assets previously held in REIT entities for which no income tax provision was recorded. Upon transfer of the assets to a taxable entity a net tax benefit was recorded to reflect the excess of tax basis over the book basis of transferred assets. In addition, the 2010 income tax provision also reflects deferred tax benefits recognized after the Separation due to impairment losses.

Income tax expense is computed by applying the Federal corporate tax rate for the years ended December 31, 2011, 2010 and 2009 and is reconciled to the provision for income taxes as follows:

	2011			2010			2009
	(In thousands)
Tax at statutory rate on earnings from continuing operations before income taxes	$	45,099		$	(245,942	)	$	(254,653	)
Increase (decrease) in valuation allowance, net		(13,110	)		61,649			7,267
State income taxes, net of Federal income tax benefit		2,243			(7,969	)		(2,728	)
Tax at statutory rate on REIT entity earnings not subject to Federal income taxes		1,204			2,193			220,836
Tax expense (benefit) from change in rates, provision adjustments and other permanent differences		(20,829	)		(8,811	)		257
Non-deductible warrant liability (gain) loss		(35,859	)		49,315			—
Non-taxable interest income		(2,990	)		—			—
Non-deductible restructuring costs		—			17,352			—
Tax benefit from tax related restructuring		—			(509,970	)		—
Expiration of capital loss carryforwards		—			—			3,726
Uncertain tax position expense, excluding interest		364			1,667			—
Uncertain tax position interest, net of Federal income tax benefit		5,553			7,057			1,326
Income tax benefit	$	(18,325	)	$	(633,459	)	$	(23,969	)

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 2032. Some of the net operating loss carry-forward amounts are subject to annual limitations under Section 382 of the Code. This annual limitation under Section 382 is subject to modification if a taxpayer recognizes what are called ‘‘built-in gain items.’’ It is possible that we could, in the future, experience a change in control pursuant to Section 382 that could put additional limits on the benefit of deferred tax assets.

As of December 31, 2011, 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	$	84,687	2024-2032
Net operating loss carryforwards - State		225,036	2011-2032
Tax credit carryforwards - Federal AMT		1,724	n/a

As of December 31, 2011 and 2010, we had gross deferred tax assets totaling $384.5 million and $367.9 million, and gross deferred tax liabilities of $403.2 million and $376.2 million, respectively. We have established a valuation allowance in the amount of $57.3 million and $70.4 million as of December 31, 2011 and 2010, 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 that we believe have only a remote possibility of realization have not been recorded.

The tax effects of temporary differences and carryforwards included in the net deferred tax liabilities at December 31, 2011 and 2010 are summarized as follows:

	2011			2010
	(In thousands)
Property Associated with Master Planned Communities, primarily differences in the tax basis of land assets and treatment of interest and other costs	$	(189,147	)	$	(171,351	)
Operating property, primarily differences in basis of assets and liabilities		226,097			210,587
Deferred income		(214,065	)		(204,828	)
Interest deduction carryforwards		110,649			122,330
Operating loss and tax credit carryforwards		47,776			34,968
Valuation allowance		(57,276	)		(70,386	)
Net deferred tax liabilities	$	(75,966	)	$	(78,680	)

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.

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 ending December 31, 2007 through 2011 and are open to audit by state taxing authorities for years ending December 31, 2007 through 2011.

Two of our subsidiaries were subject to IRS audit for the years ended December 31, 2008 and 2007. On February 9, 2011, the two subsidiaries received statutory notices of deficiency (“90-day letters”) seeking $144.1 million in additional tax. It is our position that the tax law in question has been properly applied and reflected in the 2007 and 2008 returns for these two taxable REIT subsidiaries. We previously provided for the additional taxes sought by the IRS, through our uncertain tax position liability or deferred tax liabilities. Pursuant to the Investment Agreements, 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, 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 in an amount up to $303.8 million. Under certain circumstances, GGP has also agreed to be responsible for interest or penalties attributable to such MPC Taxes in excess of the $303.8 million. We have recorded interest income receivable on the tax indemnity receivable in the amounts of $28.0 million and $19.7 million for the years ended December 31, 2011 and 2010, respectively. In addition, we are generally responsible for any liabilities, taxes or other charges that are imposed on GGP as a result of the Separation failing to qualify for nonrecognition treatment for U.S. federal (and state and local) income tax purposes, if we are the party responsible for such failure.

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 United States Tax Court to consolidate the cases of the two former taxable REIT subsidiaries of GGP subject to litigation with the Internal Revenue Service due to the common nature of the cases’ facts and circumstances and the issues being litigated. The United States Tax Court granted the motion to consolidate. The litigation is currently in the discovery phase.

We adopted 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 (benefit) related to the unrecognized tax benefits of $8.5 million, $10.9 million and $2.0 million for the years ended December 31, 2011, 2010 and 2009, respectively. At December 31, 2011, we had total unrecognized tax benefits of $101.4 million, excluding interest of $28.5 million, of which none would impact our effective tax rate. At December 31, 2010 and 2009, we had total unrecognized tax benefits of $120.8 million and $56.5 million, respectively, excluding interest, of which $0.4 million would impact our effective tax rate.

	2011			2010			2009
	(In thousands)
Unrecognized tax benefits, opening balance	$	120,816		$	56,508		$	69,665
Gross increases - tax positions in prior period		—			69,168			41
Gross decreases - tax positions in prior periods		(19,408	)		(4,860	)		(13,198	)
Unrecognized tax benefits, ending balance	$	101,408		$	120,816		$	56,508

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, 2011. A material change in unrecognized tax benefits could have a material effect on our statements of income (loss) and comprehensive income (loss). As of December 31, 2011, there is approximately $101.4 million of unrecognized tax benefits, excluding accrued interest, which due to the reasons above, could significantly increase or decrease during the next twelve months.

Earnings and profits, which determine the taxability of dividends to stockholders, differ from net income reported for financial reporting purposes due to differences for Federal income tax reporting purposes in, among other things, estimated useful lives, depreciable basis of properties and permanent and temporary differences on the inclusion or deductibility of elements of income and deductibility of expense for such purposes.