Quarterly report pursuant to Section 13 or 15(d)

Income Taxes

v2.3.0.15
Income Taxes
 9 Months Ended
Sep. 30, 2011
Income Taxes [Abstract]  
Income Taxes
Income Taxes
For the three and nine months ended September 30, 2011 and 2010, the Company qualified to be taxed as a REIT under the Code for U.S. federal income tax purposes. So 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 also owns taxable REIT subsidiaries (TRS), Capitol Acquisition Corp., or Capitol, and TH TRS Corp., which are fully taxed as U.S. C-Corporations. The tables below reflect the net taxes accrued at the TRS level and the tax attributes included in the condensed 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 which will not be qualifying income for REIT purposes. These activities include holding swaptions, credit default swaps, TBAs, and other risk-management instruments. We have designated Capitol to engage in such activities.
The following table summarizes the tax provision (benefit) recorded at the taxable subsidiary level for the three and nine months ended September 30, 2011 and 2010:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
2011
 
2010
 
2011
 
2010
Current tax provision (benefit):
 
 
 
 
 
 
 
Federal
$
923

 
$
46

 
$
928

 
$
(96
)
State
—

 
—

 
—

 
—

Total current tax provision (benefit)
923

 
46

 
928

 
(96
)
Deferred tax provision (benefit)
8,465

 
(292
)
 
4,136

 
(1,459
)
Total provision for (benefit from) income taxes
$
9,388

 
$
(246
)
 
$
5,064

 
$
(1,555
)

The Company's taxable income before dividend distributions differed from our GAAP net income primarily due to the accounting for projected credit losses in our GAAP recognition of secondary market discount accretion income not recognized for tax, amortization of original issue discount on our Agency RMBS, and unrealized gains and losses recognized in income not recognized for tax. These before tax differences are not reflected in the financial statements as we believe we will retain REIT status.
The following is a reconciliation of the statutory federal and state rates to the effective rates, for the three and nine months ended September 30, 2011 and 2010:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2011
 
2010
 
2011
 
2010
(dollars in thousands)
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
Computed income tax expense at federal rate
$
21,759

 
34
 %
 
$
3,275

 
34
 %
 
$
27,563

 
34
 %
 
$
6,031

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

 
—
 %
 
—

 
—
 %
 
—

 
—
 %
 
—

 
—
 %
Permanent differences in taxable income from GAAP income (loss)
2

 
—
 %
 
1

 
—
 %
 
6

 
—
 %
 
1

 
—
 %
Dividends paid deduction
(12,373
)
 
(19
)%
 
(3,522
)
 
(37
)%
 
(22,505
)
 
(28
)%
 
(7,587
)
 
(43
)%
Effective Tax Rate
$
9,388

 
15
 %
 
$
(246
)
 
(3
)%
 
$
5,064

 
6
 %
 
$
(1,555
)
 
(9
)%

The Company's condensed consolidated balance sheet, as of September 30, 2011 and December 31, 2010, contains the following current and deferred tax assets and liabilities:
(in thousands)
 
September 30, 2011
 
December 31, 2010
Current tax
 
 
 
 
Federal income tax payable, net
 
$
(929
)
 
$
(1
)
State and local income tax payable
 
—

 
—

Deferred tax (liabilities) assets
 
 
 
 
Deferred tax asset
 
7,894

 
723

Deferred tax liability
 
(11,476
)
 
(169
)
Deferred tax (liability) asset
 
(3,582
)
 
554

 
 
$
(4,511
)
 
$
553


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. Components of the Company's deferred tax assets and liabilities as of September 30, 2011 and December 31, 2010 are as follows:
(in thousands)
 
September 30, 2011
 
December 31, 2010
Unrealized (gain) loss on derivative assets
 
$
(1,707
)
 
$
392

Unrealized (gain) loss on trading securities
 
(1,875
)
 
162

Total net deferred tax (liabilities) assets
 
$
(3,582
)
 
$
554


At September 30, 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 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 condensed consolidated financial statements. Management is currently unaware of any issues under review that could result in significant payments, accruals or material deviations from its position.
As of September 30, 2011, the AFS securities, at fair value, had a U.S. federal tax basis of approximately $6.4 billion.