Annual report pursuant to Section 13 and 15(d)

Income Taxes (Notes)

v2.4.0.6
Income Taxes (Notes)
 12 Months Ended
Dec. 31, 2012
Income Tax Disclosure [Abstract]  
Income Taxes
Income Taxes
For the years ended December 31, 2012, 2011 and 2010, the Company qualified to be taxed as a REIT under the Code for U.S. federal income tax purposes. As long as the Company qualifies as a REIT, the Company generally will not be subject to U.S. federal income taxes on its taxable income to the extent it annually distributes its net taxable income to stockholders, does not engage in prohibited transactions, and maintains its intended qualification as a REIT. The majority of states also recognize the Company's REIT status. The Company's TRSs file separate tax returns and are fully taxed as standalone U.S. C-Corporations. The tables below reflect the net taxes accrued at the TRS level and the tax attributes included in the consolidated financial statements. It is assumed that the Company will retain its REIT status and will incur no REIT level taxation as it intends to comply with the REIT regulations and annual distribution requirements.
Certain activities the Company performs may produce income that will not be qualifying income for REIT purposes. These activities include holding swaptions, credit default swaps, TBAs and other risk-management instruments and has designated Capitol to engage in these activities. The Company purchases and intends to sell mortgage loans through the secondary whole loan market and/or securitization market and has designated TH TRS Corp. to engage in these activities.
The following table summarizes the tax (benefit) provision recorded at the taxable subsidiary level for the years ended December 31, 2012, 2011 and 2010:
 
Year Ended December 31,
(in thousands)
2012
 
2011
 
2010
Current tax (benefit) provision:
 
 
 
 
 
Federal
$
(4,586
)
 
$
4,731

 
$
(6
)
State
3

 
—

 
—

Total current tax (benefit) provision
(4,583
)
 
4,731

 
(6
)
Deferred tax benefit
(37,636
)
 
(5,837
)
 
(677
)
Total benefit from income taxes
$
(42,219
)
 
$
(1,106
)
 
$
(683
)


The Company's taxable income before dividend distributions differs from its GAAP pre-tax net income primarily due to unrealized gains and losses, the recognition of credit losses for GAAP but not tax, differences in timing of income recognition due to market discount, and original issue discount and the calculations surrounding each. These book to tax differences in the REIT are not reflected in the financial statements as the Company believes it will retain its REIT status.
The following is a reconciliation of the statutory federal and state rates to the effective rates, for the years ended December 31, 2012, 2011 and 2010:
 
Year Ended December 31,
 
2012
 
2011
 
2010
(dollars in thousands)
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
Computed income tax expense at federal rate
$
84,894

 
34
 %
 
$
42,951

 
34
 %
 
$
11,924

 
34
 %
State taxes, net of federal benefit, if applicable
2

 
—
 %
 
—

 
—
 %
 
—

 
—
 %
Permanent differences in taxable income from GAAP income
118

 
—
 %
 
2,731

 
2
 %
 
(5
)
 
—
 %
Dividends paid deduction
(127,233
)
 
(51
)%
 
(46,788
)
 
(37
)%
 
(12,602
)
 
(36
)%
Benefit from income taxes/Effective Tax Rate(1)
$
(42,219
)
 
(17
)%
 
$
(1,106
)
 
(1
)%
 
$
(683
)
 
(2
)%

____________________
(1)
The benefit from income taxes is recorded at the taxable subsidiary level.

The Company's consolidated balance sheet, as of December 31, 2012 and December 31, 2011, contains the following current and deferred tax assets and liabilities, which are included in other assets and are recorded at the taxable subsidiary level:
(in thousands)
December 31,
2012
 
December 31,
2011
Current tax
 
 
 
Federal income tax payable
$
—

 
$
(3,898
)
Current income taxes receivable
4,323

 
157

State and local income tax payable
—

 
—

Current tax receivable (payable), net
4,323

 
(3,741
)
Deferred tax assets (liabilities)
 
 
 
Deferred tax asset
46,727

 
9,710

Deferred tax liability
(2,543
)
 
(3,319
)
Deferred tax asset, net
44,184

 
6,391

Total tax assets and liabilities, net
$
48,507

 
$
2,650



Deferred Tax Assets and Liabilities
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting and tax purposes at the TRS level. Components of the Company's deferred tax assets and liabilities as of December 31, 2012 and December 31, 2011 are as follows:
(in thousands)
December 31,
2012
 
December 31,
2011
Unrealized loss on derivative assets
$
13,505

 
$
7,429

Unrealized gain on trading securities and mortgage loans held-for-sale
(1,972
)
 
(1,038
)
Capitalized start-up and organizational costs
148

 
—

Net operating loss carryforward
17,931

 
—

Capital loss carryforward
14,572

 
—

Total net deferred tax assets
$
44,184

 
$
6,391



At December 31, 2012 and December 31, 2011, the Company has not recorded a valuation allowance for any portion of its deferred tax assets as it does not believe, at a more likely than not level, that any portion of its deferred tax assets will not be realized. The net operating loss carryforward of $17.9 million is scheduled to expire December 31, 2032. The capital loss carryforward of $14.6 million is scheduled to expire December 31, 2017. The Company estimates, based on existence of sufficient evidence, the ability to realize the remainder of its deferred tax assets. Any adjustments to such estimates will be made in the period such determination is made.
Based on the Company's evaluation, it has been concluded that there are no significant uncertain tax positions requiring recognition in the Company's financial statements of a contingent tax liability for uncertain tax positions. Additionally, there were no amounts accrued for penalties or interest as of or during the periods presented in these consolidated financial statements.