Income Taxes

The following summarizes the tax status of dividends paid on our common shares during the respective years:



		2012		2011		2010
Dividend per share	$	1.85		1.85		1.85
Ordinary income		71	%	33	%	40	%
Capital gain		1	%	1	%	2	%
Return of capital		28	%	66	%	58	%

RRG is subject to federal and state income taxes and files separate tax returns. Income tax expense consists of the following for the years ended December 31, 2012, 2011, and 2010 (in thousands):



		2012	2011	2010
Income tax expense (benefit):
Current	$	97	283	(639	)
Deferred		13,727	2,422	(860	)
Total income tax expense (benefit)	$	13,824	2,705	(1,499	)

Income tax expense (benefit) is included in either income tax expense (benefit) of taxable REIT subsidiaries, if the related income is from continuing operations, or is included in operating income from discontinued operations, if from discontinued operations, on the Consolidated Statements of Operations as follows for the years ended December 31, 2012, 2011, and 2010 (in thousands):



		2012	2011		2010
Income tax expense (benefit) from:
Continuing operations	$	13,224	2,994		(1,333	)
Discontinued operations		600	(289	)	(166	)
Total income tax expense (benefit)	$	13,824	2,705		(1,499	)

Income tax expense (benefit) differed from the amounts computed by applying the U.S. Federal income tax rate of 34% to pretax income from continuing operations of RRG for the years ended December 31, 2012, 2011, and 2010, respectively as follows (in thousands):



		2012		2011		2010
Computed expected tax (benefit) expense	$	(2,099	)	1,089		(3,368	)
(Decrease) increase in income tax resulting from state taxes		(122	)	126		(392	)
Valuation allowance		15,635		1,438		286
All other items		410		52		1,975
Total income tax expense (benefit)		13,824		2,705		(1,499	)
Amounts attributable to discontinued operations		600		(289	)	(166	)
Amounts attributable to continuing operations	$	13,224		2,994		(1,333	)

For 2012, all other items principally represent permanent differences related to deferred compensation and meals and entertainment. For 2011, all other items principally represent permanent differences related to impairments and the effect of the change in state tax rate. For 2010, all other items principally represent straight line rents. Included in the income tax expense (benefit) disclosed above, the Company has approximately $600,000 of state income tax expense at the Operating Partnership for the Texas Gross Margin Tax recorded in income tax expense (benefit) of taxable REIT subsidiaries in the accompanying Consolidated Statements of Operations for each of the years ended December 31, 2012, 2011, and 2010.

The following table represents the Company's net deferred tax assets as of December 31, 2012 and 2011 recorded in other assets in the accompanying Consolidated Balance Sheets (in thousands):



		2012		2011
Deferred tax assets
Investments in real estate partnerships	$	8,116		8,124
Provision for impairment		5,667		4,047
Deferred interest expense		4,507		4,507
Capitalized costs under Section 263A		2,637		3,828
Net operating loss carryforward		1,033		280
Employee benefits		838		683
Other		435		791
Deferred tax assets		23,233		22,260
Valuation allowance		(22,114	)	(6,479	)
Deferred tax assets, net		1,119		15,781
Deferred tax liabilities
Straight line rent		519		1,916
Depreciation		600		138
Deferred tax liabilities		1,119		2,054
Net deferred tax assets	$	—		13,727

During 2012 and 2011, the net change in the total valuation allowance was $15.6 million and $1.4 million, respectfully. The Company has federal and state net operating loss carryforwards totaling $2.9 million, which expire between 2027 and 2032.

The evaluation of the recoverability of the deferred tax assets and the need for a valuation allowance requires the Company to weigh all positive and negative evidence to reach a conclusion that it is more likely than not that all or some portion of the deferred tax assets will not be realized. The Company's framework for assessing the recoverability of deferred tax assets includes weighing recent taxable income (loss), projected future taxable income (loss) of the character necessary to realize the deferred tax assets, the carryforward periods for the net operating loss, including the effect of reversing taxable temporary differences, and prudent feasible tax planning strategies that would be implemented, if necessary, to protect against the loss of deferred tax assets. At December 31, 2012, the cumulative history of taxable losses and projected future taxable income within the TRS caused the Company to determine that it is more likely than not that the net deferred tax assets will not be realized. As a result, a valuation allowance has been established for the entire amount of the deferred tax asset.

The Company accounts for uncertainties in income tax law in accordance with FASB ASC Topic 740, under which tax positions shall initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions shall initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts. The Company believes that it has appropriate support for the income tax positions taken and to be taken on its tax returns and that its accruals for tax liabilities are adequate for all open tax years based on an assessment of many factors including past experience and interpretations of tax laws applied to the facts of each matter. Federal and state tax returns are open from 2009 and forward for the Company.