NOTE 12 — INCOME TAXES

During the years ended December 31, 2013, 2012 and 2011, the current and deferred tax provision for federal and state taxes was zero. A reconciliation of the expected income tax expense (benefit) at the statutory federal income tax rate of 35% to the Company’s actual provision for income taxes and the effective tax rate for the years ended December 31, 2013, 2012 and 2011, respectively, is as follows (amounts in thousands):



	2013					2012					2011
	Amount			%		Amount			%		Amount			%
Computed Tax Benefit at Federal Statutory Rate of 35%	$	(9,172	)	35.0	%	$	(11,268	)	35.0	%	$	(12,318	)	35.0	%

Permanent Differences:
State Taxes, Net of Federal Benefit	(859		)	3.3	%	(1,282		)	4.0	%	(1,790		)	5.1	%
Change in Valuation Allowance	8,374			(32.0	)%	12,509			(38.9	)%	17,454			(49.6	)%
Shareholder Settlement Payable	1,537			(5.9	)%	—			—		—			—
Non-Deductible Offering Costs	—			—		—			—		(2,170		)	6.2	%
Other Permanent Differences	120			(0.4	)%	41			(0.1	)%	(1,176		)	3.3	%
Provision (Benefit) for Income Taxes	$	—		—	%	$	—		—	%	$	—		—	%

Deferred income tax assets and liabilities result from differences between the timing of the recognition of assets and liabilities for financial reporting purposes and for income tax return purposes. These assets and liabilities are measured using the enacted tax rates and laws that are currently in effect. The significant components of deferred tax assets and liabilities in the consolidated balance sheets as of December 31, 2013 and 2012, respectively, were as follows (in thousands):



Deferred Tax Assets	2013			2012
Loss Carryforward	$	132,769		$	109,242
Allowance for Credit Loss	5,200			15,607
Impairment of Real Estate Owned	16,161			16,328
Reserve against Judgment	6,004			5,772
Accrued Interest Receivable	—			5,333
Capitalized Real Estate Costs	5,453			5,603
Accrued Expenses	2,598			2,445
Accrued Interest Payable	883			540
Stock Based Compensation	969			802
Fixed Assets and Other	856			847
Total Deferred Tax Assets Before Valuation Allowance	170,893			162,519
Valuation Allowance	(170,893		)	(162,519		)
Total Deferred Tax Assets Net of Valuation Allowance	$	—		$	—

Upon the execution of the Conversion Transactions (which included a recapitalization of the Fund), we are a corporation and subject to Federal and state income tax. Under GAAP, a change in tax status from a non-taxable entity to a taxable entity requires recording deferred taxes as of the date of change in tax status. For tax purposes, the Conversion Transactions were a contribution of assets at historical tax basis for holders of the Fund that are subject to federal income tax and at fair market value for holders that are not subject to federal income tax.

The temporary differences that give rise to deferred tax assets and liabilities upon recapitalization of the Company were primarily related to the valuation allowance for loans held for sale and certain impairments of REO assets which are recorded on our books but deferred for tax reporting purposes. Because of the significant declines in the real estate markets in recent years, we had approximately $98 million of built-in unrealized tax losses in our portfolio of loans and REO assets, as well as other deferred tax assets, and approximately $340 million of net operating loss carryforwards as of December 31, 2013. As of December 31, 2012, we had approximately $137 million of built-in unrealized tax losses and approximately $280 million of net operating loss carryforwards. The increase in our valuation allowance during the periods ended December 31, 2013, 2012 and 2011 was primarily a result of a continuation of net operating losses and the realization of tax losses resulting from foreclosure of legacy loan assets.

We evaluated the deferred tax asset to determine if it was more likely than not that it would be realized and concluded that a valuation allowance was required for the net deferred tax assets. In making the determination of the amount of valuation allowance, we evaluated both positive and negative evidence including recent historical financial performance, forecasts of future income, tax planning strategies and assessments of the current and future economic and business conditions.

As of December 31, 2013 and 2012, we had federal and state net operating loss carry forwards of approximately $340 million and $280 million, respectively, which will begin to expire in 2031 and 2016, respectively. In the event of a change in control, under Internal Revenue Code Section 382, the utilization of our existing net operating loss carryforwards and built in losses may be subject to limitation.

The Company has not identified any uncertain tax positions and does not believe it will have any material changes over the next 12 months. Any interest and penalties accrued relating to uncertain tax positions will be recognized as a component of the income tax provision. However, since there are no uncertain tax positions, we have not recorded any accrued interest or penalties.

The Company files corporate income tax returns in the U.S. federal and various state jurisdictions. The Company is not subject to income tax examinations by tax authorities for periods prior to June 18, 2010. The predecessor entities are subject to income tax examinations by federal tax authorities for the periods ended December 31, 2008 through June 18, 2010, and by state tax authorities from December 31, 2007 through June 18, 2010.