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Income Taxes and Distributions
 12 Months Ended
Dec. 31, 2014
Income Taxes and Distributions [Abstract]  
Income Taxes and Distributions

18. Income Taxes and Distributions

We elected to be taxed as a REIT commencing with our first taxable year. To qualify as a REIT for federal income tax purposes, at least 90% of taxable income (excluding 100% of net capital gains) must be distributed to stockholders. REITs that do not distribute a certain amount of current year taxable income in the current year are also subject to a 4% federal excise tax. The main differences between net income for federal income tax purposes and financial statement purposes are the recognition of straight-line rent for reporting purposes, basis differences in acquisitions, recording of impairments, differing useful lives and depreciation and amortization methods for real property and the provision for loan losses for reporting purposes versus bad debt expense for tax purposes.

Cash distributions paid to common stockholders, for federal income tax purposes, are as follows for the periods presented:

Year Ended December 31,
201420132012
Per Share:
Ordinary income$1.7861$1.4928$1.5000
Return of capital 0.8368 1.4176 1.3376
Long-term capital gains0.16380.04480.1176
Unrecaptured section 1250 gains 0.3933 0.1048 0.0048
Totals$3.1800$3.0600$2.9600

Our consolidated provision for income taxes is as follows for the periods presented (dollars in thousands):

Year Ended December 31,
201420132012
Current$2,672$12,389$4,785
Deferred (3,939) (4,898) 2,827
Totals$(1,267)$7,491$7,612

REITs generally are not subject to U.S. federal income taxes on that portion of REIT taxable income or capital gain that is distributed to stockholders. For the tax year ended December 31, 2014, as a result of acquisitions located in Canada and the United Kingdom, we were subject to foreign income taxes under the respective tax laws of these jurisdictions.

The provision for income taxes for the year ended December 31, 2014 primarily relates to state taxes, foreign taxes, and taxes based on income generated by entities that are structured as taxable REIT subsidiaries. During 2014, we established certain new wholly-owned direct and indirect subsidiaries in Luxembourg and Jersey and transferred interests in certain foreign investments into this new holding company structure. The new structure includes a property holding company that is tax resident in the United Kingdom. No material adverse current tax consequences in Luxembourg, Jersey or the United Kingdom resulted from the creation of this new holding company structure and all of the subsidiary entities in the structure are treated as disregarded entities of the company for U.S. federal income tax purposes. The company will reflect current and deferred tax liabilities for any such withholding taxes incurred as a result of this holding company structure in its consolidated financial statements.

For the tax year ended December 31, 2014 and 2013, the Canadian and United Kingdom tax benefit amount included in the consolidated provision for income taxes was $6,069,000 and $484,000, respectively. The income tax benefit in 2014 is due primarily to the elimination of deferred tax liabilities in certain United Kingdom property holding companies which offsets the current year tax provision. For the tax year ended December 31, 2012, the Canadian and United Kingdom tax expense amount included in the consolidated provision for income taxes was $596,000.

A reconciliation of income tax expense, which is computed by applying the federal corporate tax rate for the years ended December 31, 2014, 2013 and 2012, to the income tax provision/(benefit) is as follows for the periods presented (dollars in thousands):

Year Ended December 31,
201420132012
Tax at statutory rate on earnings from continuing operations before unconsolidated entities, noncontrolling interests and income taxes$178,862$51,020$64,979
Increase / (decrease) in valuation allowance(1)9,13318,4449,234
Tax at statutory rate on earnings not subject to federal income taxes(189,070)(88,762)(72,640)
Foreign permanent depreciation4,38322,313-
Other differences(4,575)4,4766,039
Totals$(1,267)$7,491$7,612
(1) Excluding purchase price accounting.

Each TRS and foreign entity subject to income taxes is a tax paying component for purposes of classifying deferred tax assets and liabilities. The tax effects of taxable and deductible temporary differences, as well as tax attributes, are summarized as follows for the periods presented (dollars in thousands):

Year Ended December 31,
201420132012
Investments and property, primarily differences in investment basis, depreciation and amortization, the basis of land assets and the treatment of interests and certain costs$(1,020)$(34,236)$(2,144)
Operating loss and interest deduction carryforwards 47,528 67,215 8,552
Expense accruals and other26,19119,3094,372
Valuation allowance(85,207)(71,955)(12,199)
Totals$(12,508)$(19,667)$(1,419)

We assess the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. As required under the provisions of ASC 740, we apply the concepts on an entity-by-entity, jurisdiction-by-jurisdiction basis. With respect to the analysis of certain entities in multiple jurisdictions, a significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2014. Such objective evidence limits the ability to consider other subjective evidence such as our projections for future growth.

On the basis of the evaluations performed as required by the codification, valuation allowances totaling $85,207,000 were recorded on U.S. taxable REIT subsidiaries as well as entities in other jurisdictions to limit the deferred tax assets to the amount that we believe is more likely that not realizable. However, the amount of the deferred tax asset considered realizable could be adjusted if (i) estimates of future taxable income during the carryforward period are reduced or increased or (ii) objective negative evidence in the form of cumulative losses is no longer present (and additional weight may be given to subjective evidence such as our projections for growth). The valuation allowance rollforward is summarized as follows for the periods presented (dollars in thousands):

Year Ended December 31,
201420132012
Beginning balance$71,955$12,199$2,965
Additions:
Purchase price accounting 4,119 41,312 -
Expense9,13318,4449,234
Ending balance$85,207$71,955$12,199

As a result of certain acquisitions, we are subject to corporate level taxes for any related asset dispositions that may occur during the ten-year period immediately after such assets were owned by a C corporation (“built-in gains tax”). The amount of income potentially subject to this special corporate level tax is generally equal to the lesser of (a) the excess of the fair value of the asset over its adjusted tax basis as of the date it became a REIT asset, or (b) the actual amount of gain. Some but not all gains recognized during this period of time could be offset by available net operating losses and capital loss carryforwards. During the year ended December 31, 2014, we acquired certain additional assets with built-in gains as of the date of acquisition that could be subject to the built-in gains tax if disposed of prior to the expiration of the applicable ten-year period. We have not recorded a deferred tax liability as a result of the potential built-in gains tax based on our intentions with respect to such properties and available tax planning strategies.

Under the provisions of the REIT Investment Diversification and Empowerment Act of 2007 (“RIDEA”), for taxable years beginning after July 30, 2008, the REIT may lease “qualified health care properties” on an arm’s-length basis to a TRS if the property is operated on behalf of such subsidiary by a person who qualifies as an “eligible independent contractor.” Generally, the rent received from the TRS will meet the related party rent exception and will be treated as “rents from real property.” A “qualified health care property” includes real property and any personal property that is, or is necessary or incidental to the use of, a hospital, nursing facility (our long-term/post-acute care facilities), assisted living facility, congregate care facility, qualified continuing care facility, or other licensed facility which extends medical or nursing or ancillary services to patients. We have entered into various joint ventures that were structured under RIDEA. Resident level rents and related operating expenses for these facilities are reported in the consolidated financial statements and are subject to federal and state income taxes as the operations of such facilities are included in a TRS. Certain net operating loss carryforwards could be utilized to offset taxable income in future years.

Given the applicable statute of limitations, we generally are subject to audit by the Internal Revenue Service (“IRS”) for the year ended December 31, 2011 and subsequent years, by the Canada Revenue Agency (“CRA”) and provincial authorities for acquisitions subsequent to May 2102, and by Her Majesty Revenue & Customs (“HMRC”) for acquisitions subsequent to August 2012. The statute of limitations may vary in the states in which we own properties or conduct business. We do not expect to be subject to audit by state taxing authorities for any year prior to the year ended December 31, 2008.

At December 31, 2014, we had a net operating loss (“NOL”) carryforward related to the REIT of $378,791,000. 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. The NOL carryforwards will expire through 2034.

At December 31, 2014, 2013 and 2012, we had a net operating loss carryforward related to Canadian entities of $32,085,000, $50,958,000 and $4,275,000, respectively. These Canadian losses have a 20-year carryforward period. At December 31, 2014 and 2013, we had a net operating loss carryforward related to United Kingdom entities of $177,079,000 and $238,741,000, respectively. These United Kingdom losses do not have a finite carryforward period. On the basis of evaluations performed as required by the codification, valuation allowances were recorded to limit the deferred tax assets for the related net operating loss carryforwards to the amount that we believe is more likely than not realizable.

We apply the rules under ASC 740-10 “Accounting for Uncertainty in Income Taxes” for uncertain tax positions using a “more likely than not” recognition threshold for tax positions. Pursuant to these rules, we will initially recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits of the tax position, that such a position will be sustained upon examination by the relevant tax authorities. If the tax benefit meets the “more likely than not” threshold, the measurement of the tax benefit will be based on our estimate of the ultimate tax benefit to be sustained if audited by the taxing authority. The following table summarizes the activity related to our unrecognized tax benefits for the periods presented (dollars in thousands):

Year Ended December 31,
20142013
Gross unrecognized tax benefits at beginning of year$6,413$6,098
Increases (decreases) in unrecognized tax benefits related to a prior year - 76
Increases (decreases) in unrecognized tax benefits related to the current year-260
Lapse in statute of limitations for assessment(5,556)(21)
Gross unrecognized tax benefits at end of year$857$6,413

The balance of our unrecognized tax benefits as of December 31, 2014 and 2013 was $857,000 and $6,413,000, respectively. During 2014, $6,976,000 (including penalties and interest) relating to the April 1, 2011 Genesis Healthcare Corporation transaction (“Genesis Acquisition”) expired due to the applicable statute of limitations. As a part of the Genesis Acquisition, we received a full indemnification from FC-GEN Operations Investment, LLC covering income taxes or other taxes as well as interest and penalties relating to tax positions taken by FC-GEN Operations Investment, LLC prior to the acquisition. Accordingly, an offsetting indemnification asset was recorded in receivables and other assets on the consolidated balance sheet and was reversed during 2014.

There is no amount of unrecognized tax benefits, currently accrued for, that would have a material impact on the effective tax rate to the extent that would be recognized. There were insignificant uncertain tax positions as of December 31, 2014 for which it is reasonably possible that the amount of unrecognized tax benefits would decrease during 2015. Interest and penalties totaled $137,000 and $253,000, respectively, for the year ended December 31, 2014 and are included in income tax expense.