Taxes

Components of our net deferred tax assets at December 31, 2015 and 2014 are presented in the following table.

Table 20.1 – Deferred Tax Assets (Liabilities)



(In Thousands)	December 31, 2015			December 31, 2014
Deferred Tax Assets
Net operating loss carryforward – state	$	95,972		$	91,579
Net capital loss carryforward – state	22,603			27,308
Net operating loss carryforward – federal	32,929			18,765
Net capital loss carryforward – federal	7,971			7,903
Real estate assets	5,144			—
Interest rate agreements	1,472			—
Allowances and accruals	3,458			2,355
Other	513			210
Total Deferred Tax Assets	170,062			148,120
Deferred Tax Liabilities
Real estate assets	—			(6,821		)
Mortgage Servicing Rights	(50,630		)	(37,581		)
Interest rate agreements	—			(87		)
Tax effect of unrealized gains – OCI	(2,638		)	(2,684		)
Total Deferred Tax Liabilities	(53,268		)	(47,173		)
Valuation allowance	(116,794		)	(111,183		)
Total Deferred Tax Asset (Liability), net of Valuation Allowance	$	—		$	(10,236	)

The deferred tax assets and liabilities reported above, with the exception of the state net operating loss and capital loss carryforwards, relate solely to our TRS. For state purposes, the REIT files a unitary combined return with its TRS. Because the REIT may have state taxable income apportioned to it from the activity of its TRS, we report the entire combined unitary state net operating loss and capital loss carryforwards as deferred tax assets, including the carryforwards allocated to the REIT.

Realization of our deferred tax assets at December 31, 2015, is dependent on many factors, including generating sufficient taxable income prior to the expiration of NOL carryforwards and generating sufficient capital gains in future periods prior to the expiration of capital loss carryforwards. We determine the extent to which realization of the deferred assets is not assured and establish a valuation allowance accordingly.

GAAP losses generated at our TRS in 2015 caused us to report net federal deferred tax assets at December 31, 2015, as compared to net federal deferred tax liabilities at December 31, 2014. Our deferred tax asset valuation allowance increased during 2015, as compared to 2014, due to our recording of a full valuation allowance against our net federal deferred tax assets. We are uncertain about our ability to generate sufficient taxable income or capital gains in future periods needed to utilize net deferred tax assets beyond the reversal of our deferred tax liabilities, and recorded a full valuation allowance accordingly. Consistent with prior periods, we continue to provide a full valuation allowance against our net state deferred tax assets.

Our estimate of net deferred tax assets could change in future periods to the extent that actual or revised estimates of future taxable income during the carryforward periods change from current expectations. We assessed our tax positions for all open tax years (i.e., Federal, 2012 to 2015, and State, 2011 to 2015) and, at December 31, 2015 and 2014, concluded that we had no uncertain tax positions that resulted in material unrecognized tax benefits.

The following table summarizes the provision for income taxes for the years ended December 31, 2015, 2014, and 2013.

Table 20.2 – Provision for Income Taxes



	Years Ended December 31,
(In Thousands)	2015			2014		2013
Current Provision for Income Taxes
Federal	$	144		$	24	$	3,490
State	167			17		142
Total Current Provision for Income Taxes	311			41		3,632
Deferred Provision for Income Taxes
Federal	(10,198		)	703		7,316
State	(459		)	—		—
Total Deferred Provision for (Benefit from) Income Taxes	(10,657		)	703		7,316
Total Provision for Income Taxes	$	(10,346	)	$	744	$	10,948

At December 31, 2015, our federal NOL carryforward at the REIT was $70 million, which will expire in 2029. In order to utilize NOLs at the REIT, taxable income must exceed dividend distributions. At December 31, 2015, our taxable REIT subsidiaries had federal NOLs of $97 million, which will expire between 2030 and 2035. Redwood and its taxable subsidiaries accumulated an estimated state NOL of $1.3 billion at December 31, 2015. These NOLs expire beginning in 2028. If certain substantial changes in the Company’s ownership occur, there could be an annual limitation on the amount of the carryforwards that can be utilized.

For the years ended December 31, 2015 and 2014, we recognized a benefit from income taxes of $10 million and a provision for income taxes of $1 million, respectively. The following is a reconciliation of the statutory federal and state tax rates to our effective tax rate at December 31, 2015 and 2014.

Table 20.3 – Reconciliation of Statutory Tax Rate to Effective Tax Rate



	December 31, 2015		December 31, 2014		December 31, 2013
Federal statutory rate	34.0	%	34.0	%	34.0	%
State statutory rate, net of Federal tax effect	7.2	%	7.2	%	7.2	%
Permanent differences in taxable (loss) income from GAAP income	(20.3	)%	(14.5	)%	(1.9	)%
Change in valuation allowance	6.1	%	(0.1	)%	(16.4	)%
Dividends paid deduction	(38.3	)%	(25.9	)%	(17.0	)%
Effective Tax Rate	(11.3	)%	0.7	%	5.9	%

For the year ended December 31, 2015, our TRS had GAAP losses that resulted in a benefit from income taxes, while our REIT had GAAP income and essentially no tax provision due to the dividends paid deduction. As our consolidated GAAP income was positive and we recorded a consolidated benefit from income taxes, our resulting effective tax rate was negative.

We believe that we have met all requirements for qualification as a REIT for federal income tax purposes. Many requirements for qualification as a REIT are complex and require analysis of particular facts and circumstances. Often there is only limited judicial or administrative interpretive guidance and as such there can be no assurance that the Internal Revenue Service or courts would agree with our various tax positions. If we did not meet the requirements for statutory relief, we could be subject to a 100% prohibited transaction tax for certain transactions, be required to distribute additional dividends, or be subject to federal income tax at regular corporate rates. We could also potentially lose our REIT status. Any of these outcomes could have a material adverse impact on our consolidated financial statements.