Income Taxes

We have elected to be taxed as a REIT under the applicable provisions of the Code for every year beginning with the year ended December 31, 1999. We have also elected for certain of our subsidiaries to be treated as taxable REIT subsidiaries (“TRS” or “TRS entities”), which are subject to federal and state income taxes. All entities other than the TRS entities are collectively referred to as the “REIT” within this Note 13.

Although we intend to continue to operate in a manner that will enable us to qualify as a REIT, such qualification depends upon our ability to meet, on a continuing basis, various distribution, stock ownership and other tests. During the years ended December 31, 2013, 2012 and 2011, our tax treatment of distributions per common share was as follows:



	2013		2012		2011
Tax treatment of distributions:
Ordinary income	$	2.65787	$	2.23124	$	2.28131
Qualified ordinary income	0.03718		—		—
Long-term capital gain	0.03995		0.18884		0.01869
Unrecaptured Section 1250 gain	—		0.05992		—
Distribution reported for 1099-DIV purposes	$	2.73500	$	2.48000	$	2.30000

We believe we have met the annual REIT distribution requirement by payment of at least 90% of our estimated taxable income for 2013, 2012 and 2011. Our consolidated benefit for income taxes for the years ended December 31, 2013, 2012 and 2011 was as follows:



	2013			2012			2011
	(In thousands)
Current	$	2,684		$	1,208		$	(4,080	)
Deferred	(14,512		)	(7,490		)	(26,580		)
Total	$	(11,828	)	$	(6,282	)	$	(30,660	)

The income tax benefit for the year ended December 31, 2013 primarily relates to the release of valuation allowances against certain deferred tax assets of our TRS entities. The income tax benefit for the year ended December 31, 2012 primarily relates to the income tax benefit of ordinary losses related to our TRS entities, partially offset by a valuation allowance recorded against certain deferred tax assets of one of our other TRS entities. We did not recognize any income tax expense as a result of the litigation proceeds that we received in the third and fourth quarters of 2011, as no income taxes are payable on these proceeds.

For the tax years ended December 31, 2013, 2012 and 2011, the Canadian income tax provision included in the consolidated benefit for income taxes was a benefit of $0.3 million, a benefit of $0.7 million and an expense of $0.5 million, respectively.

Although the TRS entities have paid minimal cash federal income taxes, their federal income tax liabilities may increase in future years as we exhaust net operating loss (“NOL”) carryforwards and as our senior living operations reportable business segment grows. Such increases could be significant.

A reconciliation of income tax expense, which is computed by applying the federal corporate tax rate for the years ended December 31, 2013, 2012 and 2011, to the income tax benefit is as follows:



	2013			2012			2011
	(In thousands)
Tax at statutory rate on earnings from continuing operations before unconsolidated entities, noncontrolling interest and income taxes	$	167,469		$	105,185		$	115,645
State income taxes, net of federal benefit	(1,857		)	(842		)	(2,364		)
Increase in valuation allowance	7,145			33,577			8,783
Increase (decrease) in ASC 740 income tax liability	2,805			656			(4,084		)
Tax at statutory rate on earnings not subject to federal income taxes	(186,938		)	(144,698		)	(150,331		)
Other differences	(452		)	(160		)	1,691
Income tax benefit	$	(11,828	)	$	(6,282	)	$	(30,660	)

The REIT made no income tax payments for the years ended December 31, 2013, 2012 and 2011.

In connection with our acquisitions of Sunrise Senior Living Real Estate Investment Trust (“Sunrise REIT”) in 2007 and ASLG in 2011, we established a beginning net deferred tax liability of $306.3 million and $44.6 million, respectively, related to temporary differences between the financial reporting and tax bases of assets acquired and liabilities assumed (primarily property, intangible and related assets, net of NOL carryforwards). No net deferred tax asset or liability was recorded for the Lillibridge acquisition in 2010.

Each TRS is a tax paying component for purposes of classifying deferred tax assets and liabilities. The tax effects of temporary differences and carryforwards included in the net deferred tax liabilities at December 31, 2013, 2012 and 2011 are summarized as follows:



	2013			2012			2011
	(In thousands)
Property, primarily differences in depreciation and amortization, the tax basis of land assets and the treatment of interests and certain costs	$	(309,775	)	$	(310,756	)	$	(332,111	)
Operating loss and interest deduction carryforwards	377,645			366,590			343,843
Expense accruals and other	13,421			13,984			11,511
Valuation allowance	(331,458		)	(326,837		)	(281,954		)
Net deferred tax liabilities (1)	$	(250,167	)	$	(257,019	)	$	(258,711	)


(1)	Includes approximately $0.0 million, $2.7 million and $2.0 million, respectively, of deferred tax assets included in other assets on our Consolidated Balance Sheets.

Our net deferred tax liability decreased $6.9 million during 2013 primarily due to the reversal of valuation allowances against deferred tax assets. Our net deferred tax liability decreased $1.7 million during 2012 primarily due to the reversal of deferred liabilities.

Due to uncertainty regarding the realization of certain deferred tax assets, we have established valuation allowances, primarily in connection with the NOL carryforward related to the REIT.

For the years ended December 31, 2013 and 2012, the net difference between tax bases and the reported amount of REIT assets and liabilities for federal income tax purposes was approximately $4.7 billion and $5.1 billion, respectively, less than the book bases of those assets and liabilities for financial reporting purposes.

We are subject to corporate level taxes for any asset dispositions during the ten-year period immediately after the assets were owned by a C corporation (either prior to our REIT election, through stock acquisition or merger) (“built-in gains tax”). The amount of income potentially subject to built-in gains tax is generally equal to the lesser of the excess of the fair value of the asset over its adjusted tax basis as of the date it became a REIT asset or the actual amount of gain. Some, but not all, future gains could be offset by available NOL carryforwards.

Generally, we are subject to audit under the statute of limitations by the Internal Revenue Service (“IRS”) for the year ended December 31, 2010 and subsequent years and are subject to audit by state taxing authorities for the year ended December 31, 2009 and subsequent years. The statute of limitations with respect to our 2009 U.S. federal income tax returns expired in September 2013. We are also subject to audit by the Canada Revenue Agency (“CRA”) and provincial authorities generally for periods subsequent to 2008 related to entities acquired or formed in connection with our Sunrise REIT acquisition.

At December 31, 2013, we had a combined NOL carryforward of $311 million related to the TRS entities and an NOL carryforward of $714 million related to the REIT. These amounts can be used to offset future taxable income (and/or taxable income for prior years if an audit determines that tax is owed), if any. The REIT will be entitled to utilize NOLs and tax credit carryforwards only to the extent that REIT taxable income exceeds our deduction for dividends paid. Lillibridge and ASLG NOL carryforwards are limited as to their utilization by Section 382 of the Code. The NOL carryforwards begin to expire in 2024 with respect to the TRS entities and in 2016 for the REIT.

As a result of our uncertainty regarding the use of existing REIT NOLs, we have not ascribed any net deferred tax benefit to REIT NOL carryforwards as of December 31, 2013 and 2012. The IRS may challenge our entitlement to these tax attributes during its review of the tax returns for the previous tax years. We believe we are entitled to these tax attributes but cannot assure you as to the outcome of these matters.

The following table summarizes the activity related to our unrecognized tax benefits:



	2013			2012
	(In thousands)
Balance as of January 1	$	19,466		$	19,583
Additions to tax positions related to the current year	3,901			3,489
Additions to tax positions related to prior years	—			59
Subtractions to tax positions related to prior years	(513		)	(968		)
Subtractions to tax positions related to settlements	—			(47		)
Subtractions to tax positions as a result of the lapse of the statute of limitations	(948		)	(2,650		)
Balance as of December 31	$	21,906		$	19,466

Included in these unrecognized tax benefits of $21.9 million and $19.5 million at December 31, 2013 and 2012, respectively, were $20.4 million and $17.9 million of tax benefits at December 31, 2013 and 2012, respectively, that, if recognized, would reduce our annual effective tax rate. We accrued interest of $0.4 million related to the unrecognized tax benefits during 2013, but no penalties. We expect our unrecognized tax benefits to increase by $1.0 million during 2014.