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 September 30, 2017		As of December 31, 2016

GAAP consolidated net income (loss) attributable to Five Oaks Investment Corp	(4,184	)	$	(10,426	)
GAAP net loss (income) from REIT operations	3,981		9,090
GAAP net income (loss) of taxable subsidiary	(203	)	(1,336		)
Capitalized transaction fees	(31	)	(41		)
Unrealized gain (loss)	597		1,964
Deferred income	(1	)	204
Tax income of taxable subsidiary before utilization of net operating losses	362		791
Utilizations of net operating losses	(362	)	(791		)
Net tax income of taxable subsidiary	—		$	—

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, 2017		As of December 31, 2016

Accumulated net operating losses of TRS	620		758
Unrealized gain	354		127
Capitalized transaction costs	184		196
Deferred income	77		77
AMT Credit	12		12
Deferred tax asset (liability)	1,247		1,170
Valuation allowance	(1,247	)	(1,170	)
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, 2017, and December 31, 2016. 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 $77,000 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, 2017, the TRS had net operating loss carryforwards for federal income tax purposes of $1.6 million, which are available to offset future taxable income and begin expiring in 2034.

As of September 30, 2017, the Company is not aware of any material uncertain tax positions, but the Company could be subject to federal and state taxes for its open tax years of 2014, 2015 and 2016.

The Company declared and paid in the fourth quarter of 2016 a deficiency dividend relating to a determination of an inability to offset certain net gains on hedging transactions in 2013 against capital losses on the sale of certain mortgage-backed securities. In connection with this declaration, the Company provisioned an amount of $1.86 million in 2016 for interest charges expected to be paid to the IRS following the payment of the dividend. On March 8, 2017, the Company paid an amount of $2.01 million to the IRS for interest charges related to the fourth quarter deficiency dividend payment. The amount paid exceeded the provision of $1.86 million taken in 2016 due to the timing of the payment and accordingly the Company recorded additional interest expense of $0.15 million, which is included in "Other interest expense" in the Company's condensed consolidated statements of operations. The first quarter 2017 payment of $2.01 million is included in "cash paid for interest" in the Company's condensed consolidated statements of cash flows.