NOTE 13: INCOME TAXES

RAIT and Taberna have elected to be taxed as REITs under Sections 856 through 860 of the Internal Revenue Code. To maintain qualification as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our ordinary taxable income to shareholders. We generally will not be subject to U.S. federal income tax on taxable income that is distributed to our shareholders. If RAIT or Taberna fails to qualify as a REIT in any taxable year, we will then be subject to U.S. federal income taxes on our taxable income at regular corporate rates, and we will not be permitted to qualify for treatment as a REIT for U.S. federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service grants relief under certain statutory provisions. Such an event could materially adversely affect our net income and cash available for dividends to shareholders. However, we believe that both RAIT and Taberna will be organized and operated in such a manner as to qualify for treatment as a REIT, and both intend to operate in the foreseeable future in a manner so that both will qualify as a REIT. We may be subject to certain state and local taxes.

Our TRS entities generate taxable revenue from fees for services provided to securitizations. Some of these fees paid to the TRS entities are capitalized as deferred costs by the securitizations. In consolidation, these fees are eliminated when the securitization is included in the consolidated group. Nonetheless, all income taxes are expensed and are paid by the TRSs in the year in which the revenue is received. These income taxes are not eliminated when the related revenue is eliminated in consolidation.

The components of the provision for income taxes as it relates to our taxable income from domestic TRSs during the years ended December 31, 2011, 2010 and 2009 includes the effects of our performance of a portion of its TRS services in a foreign jurisdiction that does not incur income taxes.

Certain TRS entities are domiciled in the Cayman Islands and, accordingly, taxable income generated by these entities may not be subject to local income taxation, but generally will be included in our income on a current basis as SubPart F income, whether or not distributed. Upon distribution of any previously included SubPart F income by these entities, no incremental U.S. federal, state, or local income taxes would be payable by us. Accordingly, no provision for income taxes has been recorded for these foreign TRS entities for the years ended December 31, 2011, 2010 and 2009.

The components of the income tax benefit (provision) as it relates to our taxable income (loss) from domestic and foreign TRSs during the years ended December 31, 2011, 2010 and 2009 were as follows:


	For the Year Ended December 31, 2011
	Federal			State and Local			Foreign			Total
Current benefit (provision)	$	0		$	0		$	(57	)	$	(57	)
Deferred benefit (provision)		595			0			0			595

Income tax benefit (provision)	$	595		$	0		$	(57	)	$	538


	For the Year Ended December 31, 2010
	Federal			State and Local			Foreign			Total
Current benefit (provision)	$	(2,844	)	$	(10	)	$	(510	)	$	(3,364	)
Deferred benefit (provision)		2,143			162			(543	)		1,762

Income tax benefit (provision)	$	(701	)	$	152		$	(1,053	)	$	(1,602	)


	For the Year Ended December 31, 2009
	Federal			State and Local			Foreign			Total
Current benefit (provision)	$	1,085		$	0		$	(1,210	)	$	(125	)
Deferred benefit (provision)		450			58			575			1,083

Income tax benefit (provision)	$	1,535		$	58		$	(635	)	$	958

A reconciliation of the income tax benefit (provision) based upon the statutory tax rates to the effective rates is as follows for the years ended December 31, 2011, 2010 and 2009:


	For the Years Ended December 31
	2011			2010			2009
Federal statutory rate	$	3,762		$	22		$	436
State statutory, net of federal benefit		0			162			59
Change in valuation allowance		(2,899	)		(50	)		(1,879	)
Permanent items		(42	)		(53	)		(724	)
Foreign tax effects		(283	)		803			3,066
Transfer pricing adjustment (1)		0			(2,503	)		0
Other		0			17			0

Income tax benefit (provision)	$	538		$	(1,602	)	$	958

(1)

In February 2011, management and the IRS settled tax examinations for 2006, 2007 and 2008 for a total cash payment of $296. These tax examinations related to certain transfer pricing adjustments for transactions between TCM and TCB during those years. While the total transfer pricing adjustment increased our tax expense by $2,503 during 2010, the net cash payment made to the IRS in February 2011 was $296, after utilization of net operating losses in these prior years.

Significant components of our deferred tax assets (liabilities), at our TRSs, are as follows as of December 31, 2011 and 2010:


Deferred tax assets (liabilities):	As of December 31, 2011			As of December 31, 2010
Net operating losses, at TRSs	$	20,744		$	12,156
Capital losses		662			662
Unrealized losses		12,023			12,023
Other		644			2,251

Total deferred tax assets		34,073			27,092
Valuation allowance		(29,970	)		(25,359	)

Net deferred tax assets	$	4,103		$	1,733

Accrued interest		(653	)		0
Other		(48	)		0
Deferred tax (liabilities)		(701	)		0

Net deferred tax assets (liabilities)	$	3,402		$	1,733

As of December 31, 2011, we had $43,460 of federal net operating losses, $61,937 of state net operating losses, $4,849 of foreign net operating losses and $1,892 of capital losses. The federal net operating losses will begin to expire in 2028, the state net operating losses will begin to expire in 2017 and the foreign operating losses have an indefinite carryforward period. The capital losses will expire in 2012. We have concluded that it is more likely than not that $32,564 of federal net operating losses, $56,851 of state net operating losses, all of the foreign net operation losses and all of the capital losses will not be utilized during their respective carry forward periods; and as such, we have established a valuation allowance against these deferred tax assets.

The accounting guidance for income taxes clarifies the accounting for uncertainty in income taxes, and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The guidance also provides rules on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We have no uncertain tax positions for the years ending December 31, 2011, 2010 and 2009.