INCOME TAXES

The Company has elected to be treated as a REIT under federal income tax laws. As a REIT, the Company is generally not subject to federal income taxation at the corporate level to the extent that it distributes 100% of its taxable earnings to shareholders annually and does not engage in prohibited transactions. Certain activities of the Company that produce prohibited income are conducted through a taxable REIT subsidiary ("TRS"), FOAC, to protect REIT election and FOAC is therefore subject to tax as a U.S. C-Corporation. To maintain our REIT election, the Company must continue to meet certain ownership, asset and income requirements set forth in the Code. As further discussed below, the Company may be subject to non-income taxes on excess amounts of assets or income that cause a failure of any of the REIT testing requirements.

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



	As of March 31, 2019		As of March 31, 2018
GAAP consolidated net income (loss) attributable to Five Oaks Investment Corp	1,411		12,829
GAAP net loss (income) from REIT operations	(1,311	)	(12,559	)
GAAP net income (loss) of taxable subsidiary	100		270
Capitalized transaction fees	(10	)	(10	)
Unrealized gain (loss)	380		(50	)
Deferred income	—		52
Tax income (loss) of taxable subsidiary before utilization of net operating losses	470		262
Current state tax expense	(102	)	—
Utilizations of net operating losses	(68	)	(262	)
Net tax income of taxable subsidiaries	300		—

The TRS has a deferred tax asset, comprised of the following (in thousands):



	As of March 31, 2019	As of December 31, 2018
Accumulated net operating losses of TRS	297	263
Unrealized (gain) loss	417	245
Capitalized transaction costs	133	112
Deferred tax asset (liability)	847	620

The Company had provided a valuation allowance against its deferred tax assets for the three months ended March 31, 2018. The Company recorded a 100% valuation allowance related to the TRS net deferred tax asset because it believed it was more likely than not that the deferred tax asset would not be fully realized. During 2018, the TRS reported GAAP earnings of $1.3 million which, when combined with the prior two years of profit and loss, resulted in cumulative GAAP earnings for the prior three years. The history of earnings, combined with the introduction of a new investment at the TRS in the fourth quarter of 2018, results in the Company's determination that, as of March 31, 2019, it is more likely than not that the Company will realize benefit from its deferred tax assets in subsequent periods. At March 31, 2019, the TRS had net operating loss carryforwards for federal income tax purposes of $0.95 million, which are available to offset future taxable income and begin expiring in 2034.

As of March 31, 2019, the Company is not aware of any material uncertain tax positions, but the Company could be subject to federal and state income taxes for its open tax years of 2016, 2017 and 2018.

REIT Testing and Tax on 75% Income Test Failure

During tax years 2017 and 2018 the Company passed all the requisite ownership, asset and income tests, with the exception of the 2018 test under Section 856(c)(3) of the Code, also known as the 75% Income Test. The 75% Income Test required that at least 75% of the gross income earned by the Company be generated by qualifying real estate income, including interest income on mortgages and realized gain on the sale of real estate assets. In our case, the gains generated by the asset protection hedging strategy resulting from the complete dissolution of the MBS asset portfolio during 2018 were determined to be non-qualified income for the purpose of the 75% Income Test and resulted in a failure of the 75% Income Test for the year-ended December 31, 2018. As a result, the Company also owed an income tax on the amount of the gross income that exceeded the 75% Income Test threshold. The calculation of the tax under Section 857(b)(5) of the Code resulted in an accrued tax liability of $1.96 million for 2018, which is reflected as part of the "(Provision for) benefit from income taxes" in the Company's condensed consolidated statements of operations and "Other accounts payable and accrued expenses" in the Company's condensed consolidated balance sheets. The Company believes it more likely than not that our REIT election will not be impacted in the current or future periods. On April 12, 2019, in connection with filing its 2018 tax extensions, the Company paid the $1.96 million tax liability associated with the failure of the 75% gross income test.