Annual report pursuant to Section 13 and 15(d)

Income Taxes (Notes)

v2.4.0.8
Income Taxes (Notes)
 12 Months Ended
Dec. 31, 2013
Income Tax Disclosure [Abstract]  
Income Taxes
Income Taxes
For the years ended December 31, 2013, 2012 and 2011, 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 the designated portion of MSR treated as normal mortgage servicing, swaptions, credit default swaps, TBAs and other risk-management instruments. The Company has designated its TRSs to engage in these activities. The Company also purchases and sells mortgage loans through the secondary whole loan market and/or securitization market and has designated its TRSs to engage in these activities.
The following table summarizes the tax provision (benefit) recorded at the taxable subsidiary level for the years ended December 31, 2013, 2012 and 2011:
 
Year Ended December 31,
(in thousands)
2013
 
2012
 
2011
Current tax provision (benefit):
 
 
 
 
 
Federal
$
808

 
$
(4,586
)
 
$
4,731

State
5

 
3

 
—

Total current tax provision (benefit)
813

 
(4,583
)
 
4,731

Deferred tax provision (benefit)
83,598

 
(37,636
)
 
(5,837
)
Total provision for (benefit from) income taxes
$
84,411

 
$
(42,219
)
 
$
(1,106
)


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 intends to 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, 2013, 2012 and 2011:
 
Year Ended December 31,
 
2013
 
2012
 
2011
(dollars in thousands)
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
Computed income tax expense at federal rate
$
225,573

 
34
 %
 
$
84,894

 
34
 %
 
$
42,951

 
34
 %
State taxes, net of federal benefit, if applicable
4

 
—
 %
 
2

 
—
 %
 
—

 
—
 %
Permanent differences in taxable income from GAAP income
17,681

 
3
 %
 
118

 
—
 %
 
2,731

 
2
 %
Dividends paid deduction
(158,847
)
 
(24
)%
 
(127,233
)
 
(51
)%
 
(46,788
)
 
(37
)%
Provision for (benefit from) income taxes/Effective Tax Rate(1)
$
84,411

 
13
 %
 
$
(42,219
)
 
(17
)%
 
$
(1,106
)
 
(1
)%

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

The Company’s permanent differences in taxable income from GAAP income were due primarily to dividends received by the REIT from the TRSs.
The Company’s consolidated balance sheet, as of December 31, 2013 and December 31, 2012, contains the following current and deferred tax liabilities and assets, which are included in other liabilities and other assets, respectively, and are recorded at the taxable subsidiary level:
(in thousands)
December 31,
2013
 
December 31,
2012
Income taxes (payable) receivable
 
 
 
Federal income taxes (payable) receivable
$
(757
)
 
$
4,323

State and local income taxes (payable) receivable
—

 
—

Income taxes (payable) receivable, net
(757
)
 
4,323

Deferred tax (liabilities) assets
 
 
 
Deferred tax asset
14,927

 
46,727

Deferred tax liability
(54,341
)
 
(2,543
)
Total net deferred tax (liabilities) assets
(39,414
)
 
44,184

Total tax liabilities and assets, net
$
(40,171
)
 
$
48,507



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, 2013 and December 31, 2012 are as follows:
(in thousands)
December 31,
2013
 
December 31,
2012
Derivative assets
$
(45,740
)
 
$
13,505

Trading securities
(1,380
)
 
(1,972
)
Mortgage servicing rights
(846
)
 
—

Capitalized start-up and organizational costs
515

 
148

Net operating loss carryforward
7,986

 
17,931

Capital loss carryforward
51

 
14,572

Total net deferred tax (liabilities) assets
$
(39,414
)
 
$
44,184



At December 31, 2013 and December 31, 2012, the Company had 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 TRS net operating loss carryforward of $8.0 million is scheduled to expire December 31, 2033. The TRS net capital loss carryforward of $0.1 million is scheduled to expire December 31, 2018. In addition, the REIT has a gross capital loss carryforward of $50.1 million, resulting from the loss on sale of Agency RMBS during the year ended December 31, 2013, which is scheduled to expire December 31, 2018. The REIT’s gross capital loss carryforward is not reflected in the consolidated balance sheet or the deferred tax asset and liabilities table above. 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.