Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.20.4
Income Taxes
 12 Months Ended
Dec. 31, 2020
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
For the years ended December 31, 2020, 2019 and 2018, 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, and does not engage in prohibited transactions. The Company intends to distribute 100% of its REIT taxable income and comply with all requirements to continue to qualify 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. 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, residential mortgage loans, certain derivative financial instruments and other risk-management instruments. The Company has designated its TRSs 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, 2020, 2019 and 2018:
Year Ended
December 31,
(in thousands) 2020 2019 2018
Current tax provision:
Federal $ 3,275  $ 8,684  $ 52 
State 1,304  2,668  1 
Total current tax provision 4,579  11,352  53 
Deferred tax (benefit) provision (40,267) (24,912) 41,770 
Total (benefit from) provision for income taxes
 $ (35,688) $ (13,560) $ 41,823 

During the year ended December 31, 2020, the Company’s TRSs recognized a benefit from income taxes of $35.7 million, which was primarily due to losses recognized on MSR, offset by net gains recognized on derivative instruments held in the Company’s TRSs. During the year ended December 31, 2019, the Company’s TRSs recognized a benefit from income taxes of $13.6 million, which was primarily due to losses recognized on MSR, offset by net gains recognized on derivative instruments held in the Company’s TRSs. During the year ended December 31, 2018, the Company’s TRSs recognized a provision for income taxes of $41.8 million, which was primarily due to realized gains on sales of AFS securities and gains recognized on MSR held in the TRSs as well as the write-down of net deferred tax assets resulting from the deemed liquidation of one of the Company’s TRSs due to its TRS election revocation, offset by net losses incurred on derivative instruments held in the TRSs.
The Company’s taxable income before dividend distributions differs from its pre-tax net income for U.S. GAAP purposes primarily due to unrealized gains and losses, the deferral of capital losses and operating losses for tax, the recognition of credit losses for U.S. GAAP purposes but not tax purposes, 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 consolidated financial statements as the Company intends to retain its REIT status.
As of December 31, 2020, the Company had $640.5 million of net operating loss carryforwards for federal income tax purposes at the REIT, which may be utilized to offset future taxable income after consideration for the dividends paid deduction. These federal net operating loss carryforwards do not have an expiration date and can be carried forward indefinitely. As of December 31, 2020, the Company had $1.2 billion of capital net operating loss carryforwards for federal income tax purposes at the REIT, which may be utilized to offset future net gains from the sale of capital assets. These federal capital net operating loss carryforwards have an expiration date of five years of which the majority of these losses will expire in 2025. The utilization of the capital net operating loss carryforwards will depend on the REIT’s ability to generate sufficient net capital gains prior to the expiration of the carryforward period.
The following is a reconciliation of the statutory federal and state rates to the effective rates, for the years ended December 31, 2020, 2019 and 2018:
Year Ended
December 31,
2020 2019 2018
(dollars in thousands) Amount Percent Amount Percent Amount Percent
(Benefit from) provision for income taxes at statutory federal tax rate
 $ (349,823) 21  % $ 65,184  21  % $ (518) 21  %
State taxes, net of federal benefit, if applicable
 1,030  —  % 2,108  1  % 1  —  %
Permanent differences in taxable income from GAAP net income
 (3,525) —  % 702  —  % 28,414  (1,152) %
REIT income not subject to corporate income tax
 316,630  (19) % (81,554) (26) % 13,926  (565) %
(Benefit from) provision for income taxes/ Effective Tax Rate(1)
$ (35,688) 2  % $ (13,560) (4) % $ 41,823  (1,696) %
____________________
(1)The (benefit from) provision for income taxes is recorded at the taxable subsidiary level.

The Company’s permanent differences in taxable income from GAAP net income (loss) in the year ended December 31, 2020 were primarily due to the intercompany sale of securities between the Company’s TRSs and the REIT. The Company’s permanent differences in taxable income from GAAP net income (loss) in the year ended December 31, 2019 were primarily due to dividends paid from the Company’s TRSs to the REIT, offset by permanent differences related to the intercompany sale of securities between the Company’s TRSs and the REIT. The Company’s permanent differences in taxable income from GAAP net income (loss) in the year ended December 31, 2018 were primarily due to the intercompany sales of securities between the Company’s TRSs and the REIT, as well as the write-down of net deferred tax assets resulting from the deemed liquidation of three of the Company’s TRSs due to their TRS election revocation, offset by the reversal of the valuation allowance upon TRS revocation. Additionally, the Company’s recurring permanent differences in taxable income from GAAP net income (loss) in the years ended December 31, 2020, 2019 and 2018 were due to a difference in the dividends paid deduction for tax and compensation expense related to restricted stock dividends and vesting.
The Company’s consolidated balance sheets, as of December 31, 2020 and December 31, 2019 contain the following current and deferred tax liabilities and assets, which are included in other assets, and are recorded at the taxable subsidiary level:
(in thousands) December 31,
2020		 December 31,
2019
Income taxes receivable:
Federal income taxes receivable $ 22,504  $ 17,539 
State and local income taxes receivable —  — 
Income taxes receivable, net 22,504  17,539 
Deferred tax assets (liabilities):
Deferred tax asset 64,024  23,756 
Deferred tax liability —  (19)
Total net deferred tax assets (liabilities) 64,024  23,737 
Total tax assets (liabilities), net $ 86,528  $ 41,276 
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 liabilities and assets as of December 31, 2020 and December 31, 2019 were as follows:
(in thousands) December 31,
2020		 December 31,
2019
Available-for-sale securities $ —  $ (19)
Mortgage servicing rights 62,881  23,110 
Derivative assets and liabilities —  67 
Other assets —  12 
Other liabilities 1,066  463 
Intangibles 77  90 
Net operating loss carryforward —  7 
Capital loss carryforward —  7 
Total deferred tax assets (liabilities) 64,024  23,737 
Valuation allowance —  — 
Total net deferred tax assets (liabilities) $ 64,024  $ 23,737 

As of December 31, 2020 and December 31, 2019, the Company had not recorded a valuation allowance for any portion of its deferred tax assets as it did not believe, at a more likely than not level, that any portion of its deferred tax assets would not be realized.
Based on the Company’s evaluation, it has been concluded that there are no significant uncertain tax positions requiring recognition in the Company’s consolidated 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.