NOTE 9 INCOME TAXES

The provision for (benefit from) income taxes for the years ended December 31, 2014, 2013 and 2012 were as follows:


	2014		2013		2012
	(In thousands)
Current	$	(2,050)	$	1,218	$	2,439
Deferred		65,010		8,352		4,448
Total	$	62,960	$	9,570	$	6,887

Income tax expense is computed by applying the Federal corporate tax rate for the years ended December 31, 2014, 2013 and 2012 and is reconciled to the provision for income taxes as follows:


	2014		2013		2012
	(In thousands)
Tax at statutory rate on earnings from continuing operations before income taxes	$	13,800	$	(22,477)	$	(42,490)
Increase (decrease) in valuation allowance, net		5,602		(88,826)		(32,172)
State income taxes, net of Federal income tax benefit		1,320		1,562		1,328
Tax at statutory rate on REIT entity earnings not subject to Federal income taxes		(512)		(2,648)		(3,087)
Tax expense (benefit) from change in rates and other permanent differences		(12,193)		4,339		13,908
Set up deferred tax liability related to captive REIT		(1,068)		53,973		-
Non-deductible warrant liability loss		21,182		63,695		65,311
Non-taxable interest income		18,373		(363)		(2,863)
Uncertain tax position expense, excluding interest		2,395		(1,034)		1,765
Uncertain tax position interest, net of Federal income tax benefit		14,061		1,349		5,187
Income tax expense	$	62,960	$	9,570	$	6,887

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 2034. 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, with a three year term, to protect us from such an event and protect our deferred tax assets. On February 26, 2015, the Board of Directors extended the term of the Section 382 Rights Agreement to March 14, 2018. The extension is subject to approval by our stockholders.

As of December 31, 2014, the amounts and expiration dates of operating loss and tax credit carryforwards for tax purposes are as follows:


			Expiration
	Amount		Date
		(In thousands)
Net operating loss carryforwards - Federal	$	109,096		2024-2034
Net operating loss carryforwards - State		138,221		2015-2034
Capital loss carryfoward		26,345		2018-2019
Tax credit carryforwards - Federal AMT		1,955		n/a

As of December 31, 2014 and 2013, we had gross deferred tax assets totaling $335.7 million and $336.6 million, and gross deferred tax liabilities of $379.7 million and $413.4 million, respectively. We have established a valuation allowance in the amount of $18.2 million and $12.6 million as of December 31, 2014 and 2013, 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 future years; therefore, we determined that is 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, 2014 and 2013 are summarized as follows:


	2014		2013
	(In thousands)
Deferred tax assets:
Operating and Strategic Development properties, primarily differences in basis of assets and liabilities	$	201,303	$	201,993
Interest deduction carryforwards		80,520		85,671
Operating loss and tax credit carryforwards		53,851		48,971
Total deferred tax assets		335,674		336,635
Valuation allowance		(18,218)		(12,624)
Total net deferred tax assets	$	317,456	$	324,011
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	$	(212,093)	$	(137,930)
Operating and Strategic Development properties, primarily differences in basis of assets and liabilities		(47,355)		(48,007)
Deferred income		(120,213)		(227,439)
Total deferred tax liabilities		(379,661)		(413,376)
Net deferred tax liabilities	$	(62,205)	$	(89,365)

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 with no taxes due. In connection with the planned condominium development of Victoria Ward, the Company determined that it was likely to revoke its REIT election and consequently, the Company believed that the book and tax basis differences in the land and buildings of Victoria Ward, Limited would be realized after such time REIT status is revoked and would then be taxed at the applicable corporate tax rates. As a result of these events, deferred tax liabilities of $48.0 million were recorded in 2013 due to the excess book over tax basis relating to land and buildings and reduced to $46.9 million as of December 31, 2014. As planned, the Company revoked its REIT election effective January 1, 2015.

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 as well as state taxing authorities for the years ended December 31, 2010 through 2014.

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 provided us with an indemnity against certain potential tax liabilities. Pursuant to the Tax Matters Agreement with GGP, GGP had 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 controlled the action in the United States Tax Court (the “Tax Court”) related to the dispute with the IRS.

On May 6, 2011, GGP filed Tax Court petitions on behalf of the two former 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. The case was heard by the Tax Court in November 2012 and filed their ruling in favor of the IRS on June 2, 2014.

In December 2014, we entered into a tax indemnity and mutual release agreement with GGP (the “Settlement Agreement”) pursuant to which, in consideration of the full satisfaction of GGP’s obligation for reimbursement of taxes related to certain assets in our Master Planned Communities segment prior to March 31, 2010, and interest, GGP (i) made a cash payment to us in the amount of $138.0 million and (ii) conveyed to us fee simple interest in six office properties and related parking garages located in Columbia, Maryland, known as 10-60 Columbia Corporate Center, for an agreed upon total value of $130.0 million. Under the Settlement Agreement, the Company now controls the Tax Matter, including the right to decide whether to appeal the decision. On December 15, 2014, the Company paid the MPC Taxes and filed an appeal of the decision to the Fifth Circuit Court of Appeals. The appeal seeks to overturn the decision and allow the Company to continue to use its current method of tax accounting for the sale of assets in the Company’s Master Planned Communities Segment. If the decision stands, we may be required to change our method of tax accounting for certain transactions, which could affect the timing of our future tax payments. We expect the appeal to be heard by the appellate court in 2015.

As a result of the settlement, we recorded a net $74.0 million non-cash charge representing the difference between the $268.0 million value of the consideration received from GGP and the receivable recorded on our books. When we were spun-off from GGP in 2010, we recognized a receivable from GGP equal to the amount of the indemnity cap. However, the Tax Matters Agreement stipulated that a certain tax asset on our books related to deferred interest deductions be used to reduce GGP’s indemnity obligation to us, when utilized in our tax returns. As a result, we had reduced the indemnity receivable as we utilized the tax asset. Going forward, we now will get 100% of the benefit of the tax asset, which totaled $85.1 million before netting against an unrecognized tax benefit per ASU 2013-11 (described below), at December 31, 2014. We also could recover approximately $60 million of cash interest paid to the U.S. Government if we prevail on appeal.

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.

In 2014, we adopted the guidance in ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” The impact of adoption on the financial statements in 2014 is a reclassification of $39.0 million between Deferred tax assets and Uncertain tax position liability and $2.5 million between Income tax receivable and Uncertain tax position liability.

We recognize and report interest and penalties, if applicable, within our provision for income tax expense. We recognized potential interest expense related to the unrecognized tax benefits of $21.6 million, $2.1 million and $8.2 million for the years ended December 31, 2014, 2013 and 2012, respectively. At December 31, 2014, we had total unrecognized tax benefits of $184.2 million, excluding interest of $60.3 million, of which none would impact our effective tax rate. At December 31, 2013 and 2012, we had total unrecognized tax benefits of $90.5 million and $95.9 million, respectively, excluding interest, of which none would impact our effective tax rate. A reconciliation of the change in our unrecognized tax benefits for the years ended December 31, 2014, 2013 and 2012 is as follows:

	2014		2013		2012
	(In thousands)
Unrecognized tax benefits, opening balance	$	90,532	$	95,917	$	101,408
Gross increases - tax positions in prior period		93,668		9,162		841
Gross decreases - tax positions in prior periods		-		(14,547)		(6,332)
Unrecognized tax benefits, ending balance	$	184,200	$	90,532	$	95,917

Periodically we make payments to taxing jurisdictions which reduce our uncertain tax benefits, but are not included in the reconciliation above, as the position is not yet settled. The amount of payments that reduced our uncertain tax benefits was $144.1 million at December 31, 2014 and zero at December 31, 2013 and 2012, respectively.

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, 2014. As of December 31, 2014, there is approximately $184.2 million of unrecognized tax benefits, excluding accrued interest, which due to the reasons above, could significantly increase or decrease during the next twelve months.