INCOME TAXES

In general, only the taxable REIT subsidiaries, whose businesses include the Company’s non-REIT qualified activities and foreign activities, are subject to corporate income taxes. However, the Company was subject to U.S. federal corporate income tax on built-in gains (the excess of fair market value over tax basis for property held upon REIT election at January 1, 2004) on taxable sales of such property during calendar years 2004 through 2010. In 2011, the law provided a built-in gains tax holiday. In 2013, the law provided a built-in gains tax holiday for 2012 (retroactive) and 2013 which impacted the Company’s 2013 tax provision. Accordingly, the provision for corporate income taxes relates principally to current and deferred taxes on TRS income and foreign operations.

Like-Kind Exchanges

Under current tax law, the built-in gain tax from the sale of REIT property can be deferred and eliminated if sale proceeds from “relinquished” properties are reinvested in similar property consistent with the LKE requirements of the U.S. Internal Revenue Code, as long as the “replacement” property is owned through the end of the built-in gain period (10-year period which began on January 1, 2004). The LKE requirements do not restrict the Company’s ability to harvest timber on a pay-as-cut basis from such replacement property during the built-in gain period.

Alternative Fuel Mixture Credit (“AFMC”) and Cellulosic Biofuel Producer Credit (“CBPC”)

The U.S. Internal Revenue Code allowed two credits for taxpayers that produced and used an alternative fuel in the operation of their business during calendar year 2009. The AFMC is a $0.50 per gallon refundable excise tax credit (which is not taxable), while the CBPC is a $1.01 per gallon credit that is nonrefundable, taxable and has limitations based on an entity’s tax liability. Rayonier produces and uses an alternative fuel (“black liquor”) at its Jesup, Georgia and Fernandina Beach, Florida Performance Fibers mills, which qualified for both credits. Rayonier claimed the AFMC on its original 2009 income tax return. In 2013, 2012 and 2011, management approved exchanges of black liquor gallons previously claimed under the AFMC for the CBPC. The net tax benefit from these exchanges was $18.8 million, $12.2 million and $5.8 million, respectively.

Provision for Income Taxes from Continuing Operations

The (provision for)/benefit from income taxes consisted of the following:



	2013				2012			2011
Current
U.S. federal	$	(83,119	)		$	(76,381	)	$	(27,224	)
State	(4,315		)		(4,569		)	(624		)
Foreign	(400		)		(288		)	(342		)
	(87,834		)		(81,238		)	(28,190		)
Deferred
U.S. federal	39,567				(2,598		)	(2,079		)
State	18,320				(595		)	(1,066		)
Foreign	(5,119		)		(55		)	(32		)
	52,768				(3,248		)	(3,177		)
Changes in valuation allowance	(14,595		)	(a)	(257		)	679
Total	$	(49,661	)		$	(84,743	)	$	(30,688	)


(a)	The increase in the valuation allowance during 2013 was primarily related to Georgia investment tax credits earned on the CSE project, the majority of which are fully reserved.

A reconciliation of the U.S. federal statutory income tax rate to the actual income tax rate was as follows:



	2013		2012		2011
U.S. federal statutory income tax rate	35.0	%	35.0	%	35.0	%
REIT income not subject to federal tax	(11.0	)	(7.3	)	(10.6	)
Manufacturing deduction	(2.5	)	(2.4	)	—
Other	2.0		1.0		(1.0	)
Effective tax rate before non-routine items	23.5	%	26.3	%	23.4	%
Installment note prepayment	(2.4	)	—		(3.6	)
Built-in gains tax holiday	—		—		(1.9	)
AFMC for CBPC exchange	(4.9	)	(3.3	)	(1.9	)
Taxing authority settlements and unrecognized tax benefit adjustments	—		—		(5.3	)
Gain related to consolidation of New Zealand joint venture	(1.5	)	—		—
Other	(1.7	)	0.8		(0.7	)
Income tax rate as reported	13.0	%	23.8	%	10.0	%

The effective tax rate decreased in 2013 from 2012 due to proportionately higher earnings from REIT operations and a benefit associated with the internal transfer of timberland properties. The effective tax rate increased in 2012 from 2011 due to proportionally higher TRS income. The Company’s effective tax rate is below the 35 percent U.S. statutory rate primarily due to tax benefits associated with being a REIT and the AFMC for CBPC exchange.

Provision for Income Taxes from Discontinued Operations

During 2013, Rayonier completed the sale of its Wood Products business for $80 million plus a working capital adjustment. Income tax expense related to the Wood Products business that was classified in discontinued operations was $22.0 million ($21.1 million from the gain on sale) and $3.6 million for the years ended December 31, 2013 and 2012, respectively. For the year ended December 31, 2011, the income tax benefit related to Wood Products discontinued operations was $0.3 million. See Note 3 — Sale of Wood Products Business for additional information. Additionally, a tax benefit of $0.9 million related to environmental remediation activities of Southern Wood Piedmont Company was classified as discontinued operations for the year ended December 31, 2013.

Deferred Taxes

Deferred income taxes result from recording revenues and expenses in different periods for financial reporting versus tax reporting. The nature of the temporary differences and the resulting net deferred tax asset for the two years ended December 31, were as follows:



	2013			2012
Gross deferred tax assets:
Liabilities for dispositions and discontinued operations	$	28,050		$	29,944
Pension, postretirement and other employee benefits	43,058			66,354
Foreign and state NOL carryforwards	85,801			18,023
Tax credit carryforwards	52,682			4,429
Other	29,871			8,736
Total gross deferred tax assets	239,462			127,486
Less: Valuation allowance	(33,889		)	(19,294		)
Total deferred tax assets after valuation allowance	205,573			108,192
Gross deferred tax liabilities:
Accelerated depreciation	(57,695		)	(61,414		)
Repatriation of foreign earnings	(9,065		)	(5,428		)
New Zealand forests, roads and carbon credits	(85,681		)	—
Other	(12,607		)	(4,461		)
Total gross deferred tax liabilities	(165,048		)	(71,303		)
Net deferred tax asset	$	40,525		$	36,889
Current portion of deferred tax asset	$	39,100		$	15,845
Noncurrent portion of deferred tax asset	10,720			26,792
Noncurrent portion of deferred tax liability	(9,295		)	(5,748		)
Net deferred tax asset	$	40,525		$	36,889

Included above are the following foreign and state net operating loss (“NOL”) and tax credit carryforwards as of December 31, 2013:



Item	Gross Amount		Valuation Allowance			Expiration
RNZ NOL Carryforwards (a)	$	6,342	$	(1,776	)	None
State NOL Carryforwards (a)	243,087		(7,525		)	2014 - 2019
New Zealand JV NOL Carryforwards	273,212		—			None
State Tax Credits	26,000		(24,588		)	2014 - 2023
Cellulosic Biofuel Producer Credit	26,682		—			2016
Total Valuation Allowance			$	(33,889	)


(a)	Fully reserved at December 31, 2013.

In 2013 and 2012, the Company recorded excess tax benefits of $8.4 million and $7.6 million, respectively, related to stock-based compensation. These amounts were credited directly to shareholders’ equity and were not included in the consolidated tax provision.

Unrecognized Tax Benefits

In accordance with generally accepted accounting principles, we recognize the impact of a tax position if a position is “more likely than not” to prevail.

A reconciliation of the beginning and ending unrecognized tax benefits for the three years ended December 31 is as follows:



	2013			2012		2011
Balance at January 1,	$	6,580		$	6,580	$	22,580
Decreases related to prior year tax positions	(800		)	—		(16,000		)	(a)
Increases related to prior year tax positions	4,767			—		—
Balance at December 31,	$	10,547		$	6,580	$	6,580


(a)	During 2011, the Company received a final examination report from the IRS regarding its TRS 2009 tax return. As a result, Rayonier reversed the uncertain tax liability recorded in 2009 relating to the taxability of the AFMC and recognized a $16 million tax benefit in the third quarter of 2011.

The unrecognized tax benefits as of December 31, 2013 included $4.8 million related to an increased domestic production deduction on the Company’s amended 2009 tax return due to the inclusion of the CBPC income. The IRS is currently examining the position and a resolution is expected in 2014. The remaining $5.8 million of unrecognized tax benefits is related to positions on the Company’s 2010 tax return, which is expected to be settled in 2014. As such, it is expected that $10.5 million of unrecognized tax benefits will be reversed in the next 12 months.

The total amount of unrecognized tax benefits that, if recognized, would have affected the effective tax rate at December 31, 2013, 2012 and 2011 is $6.6 million, $2.6 million and $2.6 million, respectively. At December 31, 2013, the amount of unrecognized tax benefits that, if recognized, would decrease prepaid tax assets are $4.0 million. Prepaid tax assets are reported in “Other assets” on the Company’s Consolidated Balance Sheets.

The Company records interest (and penalties, if applicable) related to unrecognized tax benefits in non-operating expenses. For the years ended December 31, 2013 and 2012, the Company recorded interest expense of $0.1 million and $0.2 million, respectively. For the year ended December 31, 2011, the Company recorded an interest benefit of $0.3 million. The Company has liabilities of approximately $0.5 million and $0.4 million for the payment of interest at December 31, 2013 and 2012, respectively.

Tax Statutes

The following table provides detail of the tax years that remain open to examination by the IRS and other significant taxing jurisdictions:



Taxing Jurisdiction	Open Tax Years
U.S. Internal Revenue Service	2008 – 2013
State of Alabama	2009 – 2013
State of Florida	2005 – 2006, 2008 – 2013
State of Georgia	2009 – 2013
New Zealand Inland Revenue	2009 – 2013