Income Taxes:

For income tax purposes, NNN has taxable REIT subsidiaries in which certain real estate activities are conducted.

NNN treats some depreciation expense and certain other items differently for tax than for financial reporting purposes. The principal differences between NNN’s effective tax rates for the years ended December 31, 2014, 2013 and 2012, and the statutory rates relate to state taxes and nondeductible expenses.

In 2010, NNN acquired the 21.1% non-controlling interest in its majority owned and controlled subsidiary, OAMI, pursuant to which OAMI became a wholly owned subsidiary of NNN. As of December 31, 2014, OAMI has no remaining tax liabilities relating to the built-in gain of its assets.

The significant components of the net income tax asset consist of the following at December 31 (dollars in thousands):



	2014			2013
Deferred tax assets:
Cost basis	$	1,233		$	994
Deferred income	113			155
Reserves	2,756			4,728
Credits	434			393
Excess interest expense carryforward	1,689			2,706
Net operating loss carryforward	5,196			5,212
	11,421			14,188
Valuation allowance	(619		)	—
Total deferred tax assets	10,802			14,188

Deferred tax liabilities:
Built-in gain	—			(2,163		)
Depreciation	(204		)	(618		)
Other	(110		)	(779		)
Total deferred tax liabilities	(314		)	(3,560		)

Net deferred tax asset	$	10,488		$	10,628

In assessing the ability to realize a deferred tax asset, management considers whether it is more likely than not that some portion or the entire deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The net operating loss carryforwards were generated by NNN’s taxable REIT subsidiaries. The net operating loss carryforwards begin to expire in 2028. Based upon the level of historical taxable income and projections for future taxable income management believes it is more likely than not that NNN will realize all of the benefits of these deductible differences that existed as of December 31, 2014 and 2013, with the exception of a 2014 capital loss carryover.

As disclosed in Note 1, during the year ended December 31, 2012, NNN identified certain immaterial errors related to deferred tax assets and the related valuation allowance. NNN decreased deferred tax assets and the related valuation allowance by $10,350,000 each to correct a gross-up error and reversed its valuation allowance by $6,493,000 to reflect an overstatement of its valuation allowance recorded in the years ended December 31, 2010 and 2009.

Furthermore, NNN determined in the year ended December 31, 2012 that its available sources of income supported realizability of all of its gross deferred tax assets. In 2012, NNN reversed the remaining valuation allowance and recorded an income tax benefit of $1,178,000.

The increase in the valuation allowance for the year ended December 31, 2014 was $619,000. There was no valuation allowance as of December 31, 2013.

The income tax benefit (expense) consists of the following components for the years ended December 31, (as adjusted) (dollars in thousands):



	2014			2013			2012
Net earnings before income taxes	$	190,844		$	161,230		$	135,124
Provision for income tax benefit (expense):
Current:
Federal	(190		)	(195		)	(136		)
State and local	5			(90		)	(7		)
Deferred:
Federal	(166		)	(790		)	5,871
State and local	108			(10		)	1,163
Total benefit (expense) for income taxes	(243		)	(1,085		)	6,891
Net earnings attributable to NNN’s stockholders	$	190,601		$	160,145		$	142,015

The total income tax benefit (expense) differs from the amount computed by applying the statutory federal tax rate to net earnings before taxes as follows for the years ended December 31 (dollars in thousands):



	2014			2013			2012
Federal expense at statutory tax rate	$	(64,887	)	$	(54,818	)	$	(45,942	)
Nontaxable income of NNN	63,353			53,178			44,746
State taxes, net of federal benefit	(196		)	(200		)	(139		)
Amortization of built-in gain tax	372			761			613
Expiration of built-in gain tax	1,792			—			—
Other	(58		)	(6		)	(58		)
Valuation allowance (increase) decrease	(619		)	—			7,671
Total tax benefit (expense)	$	(243	)	$	(1,085	)	$	6,891

In June 2006, the FASB issued additional guidance, which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements included in Income Taxes. The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

NNN, in accordance with FASB guidance included in Income Taxes, has analyzed its various federal and state filing positions. NNN believes that its income tax filing positions and deductions are well documented and supported. Additionally, NNN believes that its accruals for tax liabilities are adequate. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to the FASB guidance. In addition, NNN did not record a cumulative effect adjustment related to the adoption of the FASB guidance.

NNN has had no increases or decreases in unrecognized tax benefits for current or prior years since the date of adoption. Further, no interest or penalties have been included since no reserves were recorded and no significant increases or decreases are expected to occur within the next 12 months. When applicable, such interest and penalties will be recorded in non-operating expenses. The periods that remain open under federal statute are 2011 through 2014. NNN also files in many states with varying open years under statute.