NOTE 18 – INCOME TAXES

Certain activities of the Company are conducted through a TRS, FOAC, and FOAC is therefore subject to tax as a corporation. Pursuant to ASC 740, deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not (a likelihood of more than 50%) that some portion or all of the deferred tax assets will not be realized.

The following table reconciles the Company’s TRS GAAP net income (loss) to taxable income (in thousands):

	As of March 31, 2016		As of December 31, 2015
	(in thousands)		(in thousands)
GAAP consolidated net income (loss) attributable to Five Oaks Investment Corp		(16,948)		450
GAAP net loss (income) from REIT operations		15,880		(1,826)
GAAP net income (loss) of taxable subsidiary		(1,068)		(1,376)
Capitalized transaction fees		(41)		(41)
Unrealized gain (loss)		1,059		2,041
Tax income of taxable subsidiary before utilization of net operating losses		(50)		624
Utilizations of net operating losses		50		(624)
Net tax income of taxable subsidiaries		-		-

The TRS has a deferred tax asset on which the Company has a 100% valuation allowance, comprised of the following (in thousands):

	As of March 31, 2016		As of December 31, 2015
Accumulated net operating losses of TRS		1,077		1,058
Unrealized gain (loss)		(216)		(618)
Capitalized transaction costs		195		210
AMT Credit		4		9
Deferred tax asset		1,060		659
Valuation allowance		(1,060)		(659)
Net non-current deferred tax asset (liability)		-		-

The Company has provided a valuation allowance against its deferred tax asset that results in no deferred tax asset at March 31, 2016, and December 31, 2015. The Company recorded a 100% valuation allowance related to the TRS net deferred tax asset because it believes it is more likely than not that the deferred tax asset will not be fully realized. The valuation allowance increased by $0.4 million as a result of the corresponding increase in the deferred tax asset. The realization of the deferred tax asset associated with net operating losses is dependent on projections of future taxable income, for which there is uncertainty when considering historic results and the nature of the business. Accordingly, no provision or benefit (current or deferred tax expense) for income taxes has been reflected in the accompanying financial statements. At March 31, 2016, the TRS had net operating loss carryforwards for federal income tax purposes of $2.8 million, which are available to offset future taxable income and begin expiring in 2034.

As of March 31, 2016, the Company is not aware of any uncertain tax positions, but the Company could be subject to federal and state taxes for its open tax years of 2013, 2014 and 2015. The Company has potential nexus in several states in which it did not file a 2015 tax return. The exposure would be immaterial due to the Company being in a Net Operating Loss (NOL) position. The losses incurred in 2015 would be sufficient to offset any taxable income in 2016. For state tax purposes the Company is in the process of determining filing requirements, but anticipates materially all prior losses to be recognized.