INCOME TAXES

3 Months Ended

Mar. 31, 2012

INCOME TAXES

INCOME TAXES

NOTE 12—INCOME TAXES

        We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"), commencing 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. Although the TRS entities were not liable for any cash federal income taxes for the three months ended March 31, 2012, their federal income tax liabilities may increase in future periods as we exhaust net operating loss carryforwards and as our senior living operations and MOB operations reportable segments grow. Such increases could be significant.

        Our consolidated provision for income taxes for the three months ended March 31, 2012 and 2011 was an expense of $11.3 million and a benefit of $3.2 million, respectively. The income tax expense for the three months ended March 31, 2012 is primarily due to a valuation allowance recorded against certain deferred tax assets. We have determined that these future tax benefits are not more likely than not to be realized. The income tax benefit for the three months ended March 31, 2011 was primarily due to the benefit realized from the loss on extinguishment of debt in the quarter.

        Realization of a deferred tax benefit related to net operating losses is dependent in part upon generating sufficient taxable income in future periods. Our net operating loss carryforwards begin to expire in 2024 with respect to our TRS entities and in 2020 with respect to our other entities.

        Each TRS is a tax paying component for purposes of classifying deferred tax assets and liabilities. Net deferred tax liabilities with respect to our TRS entities totaled $269.4 million and $258.7 million as of March 31, 2012 and December 31, 2011, respectively, and related primarily to differences between the financial reporting and tax bases of fixed and intangible assets and to net operating losses. These amounts include the initial net deferred tax liability related to the ASLG acquisition of $44.6 million and adjustments for activity during the periods from May 12, 2011 through March 31, 2012 and December 31, 2011, respectively.

        Generally, we are subject to audit under the statute of limitations by the Internal Revenue Service for the year ended December 31, 2008 and subsequent years and are subject to audit by state taxing authorities for the year ended December 31, 2007 and subsequent years. We are also subject to audit by the Canada Revenue Agency and provincial authorities generally for periods subsequent to 2006 related to entities acquired or formed in connection with our acquisition of Sunrise Senior Living REIT in 2007.