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INCOME TAXES
12 Months Ended
Dec. 31, 2020
Income Tax Disclosure [Abstract]  
INCOME TAXES INCOME TAXES
The Company elected to be taxed as a REIT under sections 856-860 of the Code, commencing with the filing of its 2015 tax return for its tax year ended December 31, 2015. With the exception of the Company’s TRS, to the extent the Company meets certain requirements under the Code, the Company will not be taxed on its federal taxable income. If we fail to qualify as a REIT for any taxable year, we will be subject to federal income taxes at regular corporate rates (including any alternative minimum tax, which, for corporations, was repealed under the TCJA for tax years beginning after December 31, 2017) and may not be able to qualify as a REIT for the four subsequent taxable years. In addition to its TRS, the Company is subject to certain foreign and state and local income taxes, in particular income taxes arising from its operating activities in Puerto Rico, which are included in income tax expense in the consolidated statements of income.

The Company satisfied its REIT distribution requirement by distributing $0.68 per common share in 2020, which comprised a regular quarterly cash dividend of $0.22 per common share declared for the first quarter of 2020 and a special cash dividend of $0.46 per common share declared in December 2020. During the years ended December 31, 2019 and 2018, the Company declared cash distributions on our common shares of $0.88 per share. The taxability of such dividends for the years ended December 31, 2020, 2019 and 2018 are as follows:
Year Ended December 31,
202020192018
Dividend paid per share(1)
$0.68 $0.88 $0.88 
Ordinary income100 %83 %100 %
Return of capital— %— %— %
Capital gains— %17 %— %
(1) The special cash dividend of $0.46 per common share declared in December 2020, and paid in January 2021, was fully allocable to the 2020 tax year.

For U.S. federal income tax purposes, the REIT and other minority members are partners in the Operating Partnership. As such, the partners are required to report their share of taxable income on their respective tax returns. However, during the years ended December 31, 2020 and 2019, certain non-real estate operating activities that could not be performed by the REIT, occurred through the Company’s TRS, and the Company’s TRS is subject to federal, state and local income taxes. These income taxes are included in the income tax expense in the consolidated statements of income.

On June 1, 2020, the Company completed a mortgage refinancing of its mall in Puerto Rico, The Outlets at Montehiedra (“Montehiedra”). The debt forgiven as a part of this refinancing resulted in a write-down to our Puerto Rico tax basis in the mall equal to such amount of debt forgiven and the recognition of a deferred tax liability on the Company’s consolidated balance sheet, which amounted to $10.3 million.
On June 5, 2020 and December 11, 2020, the Company completed a legal entity restructuring of Montehiedra and Las Catalinas Mall, respectively. Prior to the legal entity restructuring, both malls were held in a special partnership for Puerto Rico tax purposes (the general partner being a qualified REIT subsidiary or “QRS”) and subject to a 29% non-resident withholding tax which is included in income tax benefit (expense) in the consolidated statements of income. The legal entity restructurings resulted in a step up in our Puerto Rico tax basis in each mall and the recognition of a deferred tax asset on the Company’s consolidated balance sheet, which amounted to $23.7 million for Montehiedra and $29.5 million for Las Catalinas Mall. As a result of the legal entity restructurings, the Operating Partnership, and therefore, the REIT and the other minority partners, are now deemed to be engaged in a trade or business for each mall with respect to their allocable share of Puerto Rico taxable income and, as such, required to file Puerto Rico income tax returns. The REIT is subject to regular Puerto Rico corporate income taxes on its allocable share of the Company’s Puerto Rico operating activities as opposed to the former 29% non-resident withholding tax on the net income from such Puerto Rico operating activities allocated to the Operating Partnership. The Puerto Rico corporate income tax consists of a flat 18.5% tax rate plus a graduated income surcharge tax for a maximum corporate income tax rate of 37.5%. In addition, the REIT is subject to a 10% branch profit tax on the earnings and profits generated from its allocable share of the Company’s Puerto Rico operating activities and such tax is included in income tax expense in the consolidated statements of income.

Together, the refinancing and legal entity restructuring transactions resulted in a net deferred tax asset of $42.9 million, which is included in prepaid expenses and other assets on the consolidated balance sheets as of December 31, 2020, and the Company recognized an accompanying Puerto Rico income tax benefit on the consolidated statements of income during the year ended December 31, 2020.
As a result of the Montehiedra refinancing and the Las Catalinas Mall troubled debt restructuring, the Company recognized a gain on extinguishment of debt for U.S. federal income tax purposes and implemented various tax planning strategies to limit its impact on the Company’s overall U.S. federal taxable income. The strategies implemented resulted in the recognition of a state and local income tax liability and corresponding deferred tax asset for the REIT of $4.5 million during the year ended December 31, 2020.

Refer to Note 6 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for further information on the Montehiedra refinancing and the Las Catalinas Mall troubled debt restructuring.

A reduction of the carrying amounts of deferred tax assets by a valuation allowance is required if, based on the evidence available, it is more likely than not (a likelihood of more than 50 percent) that some portion or all of the deferred tax assets will not be realized. Management’s determination of the ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the underlying temporary differences become deductible. As of December 31, 2020, no valuation allowance has been recorded against the deferred tax assets that resulted from the legal entity restructurings of the Puerto Rico malls. In assessing the realizability of deferred tax assets, management determined it is more likely than not that these deferred tax assets will be realized. During the year ended December 31, 2020, the Company recorded a $4.5 million valuation allowance against the deferred tax asset attributable to the REIT’s state and local income tax liability incurred from strategies implemented to limit the impact of the Montehiedra refinancing and the Las Catalinas troubled debt restructuring on the Company’s U.S. federal taxable income because management determined that it is not more likely than not that these deferred tax assets will be realized. For the year ended December 31, 2019, the Company recorded a valuation allowance against the deferred tax asset related to a federal net operating loss generated at the Company’s operating TRS. This determination was based on the operating TRS’ lack of anticipated future taxable income. As a result of a change in circumstances in 2020 related to anticipated future profitability of the Company’s operating TRS, such valuation allowance was released. As of December 31, 2020, the Company’s total valuation allowance was $4.5 million.

We record uncertain tax positions in accordance with ASC 740 Income Taxes on the basis of a two-step process whereby (i) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (ii) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.

Income before income taxes from the Company’s operating activities in Puerto Rico during the years ended December 31, 2020 and 2019 was $26.4 million and $9.4 million, respectively. For the year ended December 31, 2020, the REIT’s state and local income tax expense was $4.5 million and the Puerto Rico income tax benefit was $43.5 million. The Puerto Rico tax expense recorded was $1.2 million and $3.3 million for the years ended December 31, 2019 and December 31, 2018, respectively. Income taxes are accounted for under the asset and liability method. Deferred income taxes are recognized for the tax effect of temporary differences between the financial reporting basis and the tax basis of taxable assets and liabilities.

Income tax expense (benefit) for the years ended December 31, 2020, 2019 and 2018 consists of the following:
Year Ended December 31,
(Amounts in thousands)202020192018
Income tax expense (benefit):
Current:
U.S. federal income tax$— $— $154 
U.S. state and local income tax4,525 66 101 
Puerto Rico income tax1,293 851 560 
Total current5,818 917 815 
Deferred:
U.S. federal income tax(6)— — 
U.S. state and local income tax— — — 
Puerto Rico income tax(1)
(44,808)370 2,704 
Total deferred(44,814)370 2,704 
Total income tax expense (benefit)$(38,996)$1,287 $3,519 
(1) Due to the effects of applying ASC 842 on January 1, 2019, a deferred tax benefit of $0.8 million was recognized within a cumulative-effect adjustment to accumulated deficit to adjust reserves on receivables from straight-line rents during the year ended December 31, 2019. Refer to Note 3 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for more information.
Provision for income taxes differs from the amounts computed by applying the statutory federal income tax rate to consolidated net income before income taxes as follows:
Year Ended December 31,
(Amounts in thousands)202020192018
Federal provision at statutory tax rate(1)
$12,338 $24,672 $25,301 
REIT income before income taxes not subject to federal tax provision(12,339)(24,677)(14,390)
TRS permanent book to tax adjustments— — (10,740)
State and local income tax provision, net of federal benefit11 66 84 
Puerto Rico income tax provision (43,515)1,221 3,264 
Change in valuation allowance4,509 — 
Total income tax expense (benefit)$(38,996)$1,287 $3,519 
(1) Federal statutory tax rate of 21% for the years ended December 31, 2020, 2019 and 2018.

Below is a table summarizing the Company’s deferred tax assets and liabilities as of December 31, 2020 and 2019:
Balance at
(Amounts in thousands)December 31, 2020December 31, 2019
Deferred tax assets:
Depreciation$41,942 $— 
Amortization of deferred financing costs1,105 69 
Rental revenue deemed uncollectible2,109 461 
Charitable contribution
Net operating loss107 
Valuation allowance(4,514)(5)
Total deferred tax assets40,756 535 
Deferred tax liabilities:
Depreciation— (4,416)
Straight line rent(738)(1,051)
Amortization of acquired leases(228)(205)
Accrued interest expense(113)— 
Total deferred tax liabilities(1,079)(5,672)
Net deferred tax assets (liabilities)$39,677 $(5,137)