INCOME TAXES

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code by, among other things, reducing the federal corporate income tax rate and business deductions. In general, the Tax Act reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018.

Under FASB ASC 740, the effects of changes in tax rates and laws are recognized in the period in which the new legislation is enacted. As a result of the reduction in the U.S. corporate income tax rate, the Company re-measured its ending net deferred tax assets at December 31, 2017 at the rate at which they are expected to reverse in the future and recognized a reduction in deferred tax assets of $66.4 million, which was offset by a similar reduction in valuation allowance.

Due to the complexities of implementing the provisions of the Tax Act, the staff of the U.S. Securities and Exchange Commission issued Staff Accounting Bulletin 118 (“SAB 118”), which provides guidance on accounting for tax effects of the Tax Act and permits a measurement period not to exceed one year from the enactment date for companies to complete the required analyses and accounting. As permitted under SAB 118, the adjustments we recorded due to the Tax Act, including the remeasurement of deferred tax assets and liabilities, were based on reasonable estimates and were considered provisional during the year ended December 31, 2017. In the fourth quarter of 2018, we completed our analysis to determine the effect of the Tax Act and recorded immaterial adjustments as of December 31, 2018. The Company has considered and completed all applicable elements of tax reform under the remeasurement period.

The Company recorded no tax benefit or expense during the years ended December 31, 2018 and 2017. A reconciliation of the expected income tax expense (benefit) at the statutory federal income tax rate of 21% to the Company’s actual provision for income taxes and the effective tax rate for the years ended December 31, 2018 and 2017, respectively, is as follows (amounts in thousands):



	2018					2017
	Total			%		Continuing Operations			Discontinued Operations		Total			%
Computed Tax Benefit at Federal Statutory Rate of 21%	$	(2,561	)	21.0	%	$	(2,306	)	$	1,762	$	(544	)	35.0	%

Permanent Differences:
State Taxes, Net of Federal Benefit	(454		)	3.7	%	(171		)	200		29			(1.9	)%
Change in Valuation Allowance	3,245			(26.6	)%	(69,278		)	—		(69,278		)	4,457.2	%
Rate change	—			—	%	66,381			—		66,381			(4270.8	)%
State NOL expiration and rate change	—			—	%	2,576			—		2,576			(165.7	)%
Other true-up	(267		)	2.2	%	686			—		686			(44.1	)%
Other Permanent Differences	37			(0.3	)%	149			1		150			(9.7	)%
Provision (Benefit) for Income Taxes	$	—		—	%	$	(1,963	)	$	1,963	$	—		—	%

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 for continuing operations as of December 31, 2018 and 2017, respectively, were as follows (in thousands):



Deferred Tax Assets	2018			2017
Loss carryforward	$	106,676		$	104,897
Allowance for credit loss	2,619			2,500
Impairment of real estate owned	2,665			2,983
Reserve against judgment	9,826			8,045
Capitalized real estate costs	339			347
Accrued expenses	521			638
Stock based compensation	477			412
Fixed assets and other	(1,828		)	(1,773		)
Total deferred tax assets before valuation allowance	121,295			118,049
Valuation allowance	(121,295		)	(118,049		)
Total deferred tax assets net of valuation allowance	$	—		$	—

Upon the execution of the Conversion Transactions (which included a recapitalization of the Fund), we became 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 gave 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 were recorded on our books but deferred for tax reporting purposes. As of December 31, 2018, we had approximately $61.8 million of built-in unrealized tax losses in our portfolio of loans and REO assets, as well as other deferred tax assets, and approximately $445.4 million of federal and $256.4 million of state net operating loss (“NOL”) carryforwards, which will begin to expire in 2031. As of December 31, 2017, we had approximately $55.6 million of built-in unrealized tax losses and approximately $439.1 million of federal and $246.7 million of state NOL carryforwards. The decrease in our valuation allowance during the year ended December 31, 2017 was primarily a result of the reduction in the deferred tax asset balances due to the reduction in the federal corporate income tax rate from a maximum of 35% to 21%.

We evaluated the deferred tax assets 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 our recent historical financial performance, forecasts of our future income, tax planning strategies and assessments of current and future economic and business conditions.

Utilization of the NOL carryforwards may be subject to a substantial annual limitation due to an “ownership change” that may have occurred or that could occur in the future, pursuant to Section 382 of the Internal Revenue Code of 1986, as amended (“Code”), as well as similar state provisions. These ownership changes may limit the amount of NOL carryforwards that can be utilized annually to offset future taxable income. In general, an “ownership change” under Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50% of the outstanding stock of a company by certain stockholders or public groups.

In 2017, the Company conducted an analysis to assess whether an ownership change has occurred since the Company’s formation. Based on the results of this analysis and updates to the original analysis in 2018, the Company believes it has not experienced a Section 382 ownership change since the Company’s formation. If such an ownership change were to occur, utilization of the NOL carryforwards would be subject to an annual limitation under Section 382. The annual limitation, which is determined by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term, tax-exempt rate, could be subject to additional adjustments. Any limitation may result in the expiration of a portion of the NOL carryforwards before utilization. Due to the existence of the valuation allowance provided against our deferred tax assets, future changes in the Company’s unrecognized tax benefits would not impact its effective tax rate. Any carryforwards that might expire prior to utilization as a result of a limitation under Section 382 would be removed from deferred tax assets with a corresponding reduction of the valuation allowance.

The Company has not identified any uncertain tax positions and does not believe it will have any material changes in the next 12 months. Interest and penalties accrued, if any, 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 is subject to U.S. federal and state taxes in the normal course of business, and its income tax returns are subject to examination by the relevant tax authorities. Tax years 2015-2017 are still open for examination by Federal tax authorities and tax years 2014-2017 are generally open for examination by state tax authorities. The Company has not utilized net operating loss carryforwards which were generated in the tax years 2010-2013, so the statute of limitations for these years remains open for purposes of adjusting the amounts of the losses carried forward from those years.