INCOME TAXES

Income tax (benefit) expense consists of the following:



	Year Ended December 31,
	2018			2017			2016
Current:
Federal	$	6,146		$	(1,250	)	$	3,813
State and Local	477			360			252
Total Current Income Tax Expense (Benefit)	6,623			(890		)	4,065
Deferred:
Federal	(68,907		)	148,997			33,999
State and Local	(11,147		)	19,521			847
Total Deferred Income Tax Expense (Benefit)	(80,054		)	168,518			34,846
Total Income Tax (Benefit) Expense	$	(73,431	)	$	167,628		$	38,911

New Residential intends to qualify as a REIT for each of its tax years through December 31, 2018. A REIT is generally not subject to U.S. federal corporate income tax on that portion of its income that is distributed to stockholders if it distributes at least 90% of its REIT taxable income to its stockholders by prescribed dates and complies with various other requirements.

New Residential operates various securitization vehicles and has made certain investments, particularly its investments in MSRs (Note 5), Servicer Advance Investments (Note 6) and REO (Note 8), through TRSs that are subject to regular corporate income taxes which have been provided for in the provision for income taxes, as applicable.

The increase in the benefit for income taxes for the year ended December 31, 2018 is primarily due to the release of valuation allowances on deferred tax assets and increase in other deferred tax benefits attributable to New Residential’s TRSs.

The increase in the provision for income taxes for the year ended December 31, 2017 is primarily due to the use of deferred tax assets and an increase in net income attributable to New Residential’s TRSs.

The difference between New Residential’s reported provision for income taxes and the U.S. federal statutory rate of 21% is as follows:



	December 31,
	2018		2017		2016
Provision at the statutory rate	21.00	%	35.00	%	35.00	%
Non-taxable REIT income	(25.44	)%	(21.72	)%	(28.22	)%
State and local taxes	(1.19	)%	1.76	%	0.18	%
Change in valuation allowance	(2.31	)%	0.85	%	0.67	%
Change in federal tax rate	—	%	(0.92	)%	—	%
Other	(0.30	)%	(0.17	)%	(0.48	)%
Total provision	(8.24	)%	14.80	%	7.15	%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liability are presented below:



	December 31,
	2018			2017
Deferred tax assets:
Net operating losses and tax credit carryforwards^(B)	$	41,713		$	20,682
Interest accruals not currently deductible for tax purposes	—			2,628
Basis differences for REO and other assets	8,453			8,034
Unrealized mark to market	36,758			—
Other	3,087			2,279
Total deferred tax assets	90,011			33,623
Less valuation allowance	—			(12,404		)
Net deferred tax assets	$	90,011		$	21,219

Deferred tax liabilities:
Basis difference for partnership and other investments	$	(24,179	)	$	(3,873	)
Interest accruals not currently includible in income for tax purposes	—			(6,979		)
Unrealized mark to market	—			(29,585		)
Total deferred tax (liability)	$	(24,179	)	$	(40,437	)

Net deferred tax assets (liability)	$	65,832		$	(19,218	)

(A)

As of December 31, 2018, New Residential’s TRSs had approximately $131.3 million of net operating loss carryforwards for federal and state income tax purposes which may be available to offset future taxable income, if and when it arises. Approximately, $131.3 million of these federal and state net operating loss carryforwards will begin to expire in 2034. The utilization of the net operating loss carryforwards to reduce future income taxes will depend on the TRSs ability to generate sufficient taxable income prior to the expiration of the carryforward period.

In assessing the realizability of deferred tax assets, New Residential considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. Due to the Shellpoint Acquisition and other asset acquisitions in 2018, and an internal restructuring of New Residential’s TRSs during the year ended December 31, 2018, New Residential released a valuation allowance related to certain net operating losses and loan loss reserves related to its TRSs as New Residential believes that it is more likely than not that these deferred tax assets will be realized.

The following table summarizes the change in the deferred tax asset valuation allowance:



Valuation allowance at December 31, 2016	$	10,054
Increase related to net operating losses and loan loss reserves	4,720
Decrease related to changes in tax rates	(3,845		)
Other increase (decrease)	1,475
Valuation allowance at December 31, 2017	12,404
Increase related to net operating losses and loan loss reserves	18,769
Decrease related to changes in tax rates	—
Other increase (decrease)	(31,173		)
Valuation allowance at December 31, 2018	$	—

New Residential and its TRSs file income tax returns with the U.S. federal government and various state and local jurisdictions. Generally, New Residential is no longer subject to tax examinations by tax authorities for tax years ended prior to December 31, 2015. New Residential recognizes tax benefits for uncertain tax positions only if it is more likely than not that the position is sustainable based on its technical merits. Interest and penalties on uncertain tax positions are included as a component of the provision for income taxes on the consolidated statements of operations. As of December 31, 2018, New Residential has no material uncertainties to be recognized. New Residential does not believe that it is reasonably possible that the total amount of unrecognized tax benefits will significantly change within 12 months of the reporting date.

Common stock distributions were taxable as follows:



Year	Dividends per Share		Ordinary Income		Long-term Capital Gain		Return of Capital
2018^(A)	$	1.60	78.03	%	1.03	%	20.94	%
2017^(B)	1.94		66.64	%	7.83	%	25.53	%
2016	1.38		96.13	%	3.87	%	—	%


(A)	The entire $0.50 per share dividend declared in December 2018 and paid in January 2019 is treated as received by stockholders in 2019.


(B)	The entire $0.50 per share dividend declared in December 2017 and paid in January 2018 is treated as received by stockholders in 2018.