INCOME TAXES (as restated)

9 Months Ended

Sep. 30, 2016

NOTE 18 – INCOME TAXES

(as restated)

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 September 30, 2016			As of December 31, 2015
	(in thousands)			(in thousands)
GAAP consolidated net income (loss) attributable to Five Oaks Investment Corp		(22,897	)		450
GAAP net loss (income) from REIT operations		21,068			(1,826	)
GAAP net income (loss) of taxable subsidiary		(1,829	)		(1,376	)
Capitalized transaction fees		(31	)		(41	)
Unrealized gain (loss)		2,372			2,041
Tax income of taxable subsidiary before utilization of net operating losses		512			624
Utilizations of net operating losses		(512	)		(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 September 30, 2016			As of December 31, 2015
Accumulated net operating losses of TRS		864			1,058
Unrealized loss		282			(618	)
Capitalized transaction costs		200			210
AMT Credit		4			9
Deferred tax asset (liability)		1,350			659
Valuation allowance		(1,350	)		(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 September 30, 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 $0.7 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 September 30, 2016, the TRS had net operating loss carryforwards for federal income tax purposes of $2.3 million, which are available to offset future taxable income and begin expiring in 2034.

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 all prior losses to be recognized.

As further described in Note 19, the Company has declared and will pay in the fourth quarter a deficiency dividend relating to a recent determination of an inability to offset certain net gains on hedging transactions in 2013 against net capital losses on the sale of certain mortgage-backed securities. In connection with this declaration, the Company has provisioned an amount of $1.86 million for interest charges expected to be paid to the IRS following the payment of the dividend. This amount is included in the Company’s condensed consolidated balance sheets in the line item “Other accounts payable and accrued expenses”, and is included in “Other interest expense” in the Company’s condensed consolidated statements of operations. The Company’s estimate of expected interest charges is based on the anticipated timing of the deficiency dividend payment, and the Company’s understanding of the rules, procedures and existing precedent relating to such dividend payments. As such, the actual amount of interest payable may differ from the Company’s estimate.