It is possible that, from time to time, we may not have sufficient cash to meet the
distribution requirements due to timing differences between our actual receipt of cash, including receipt of distributions from our subsidiaries and our inclusion of items in income for U.S. federal income tax purposes. This may be an issue, in
particular, with respect to our investments in distressed or modified debt instruments. See Timing Differences Between Receipt of Cash and Recognition of Income. Potential sources of non-cash
taxable income include:
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residual interests in REMICs or TMPs;
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loans or CMBS held as assets that are issued or acquired at a discount and require the accrual of taxable
economic interest in advance of receipt in cash; and
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loans on which the borrower is permitted to defer cash payments of interest, and distressed loans on which we may
be required to accrue taxable interest income even though the borrower is unable to make current servicing payments in cash.
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In addition, under the TCJA, we generally will be required to include certain amounts in our taxable income no later than the time such
amounts are reflected on certain financial statements. The application of this rule may require the accrual of income with respect to our debt instruments (including mortgage loans and mezzanine loans) or our CMBS, including original issue discount
or market discount, earlier than would be the case under the general tax rules, although the precise application of this rule is unclear at this time. This rule generally will be effective for tax years beginning after December 31, 2017 or, for
debt instruments or mortgage-backed securities issued with original issue discount, for tax years beginning after December 31, 2018.
In the event that such timing differences occur, in order to meet the distribution requirements, it might be necessary for us to arrange for
short-term, or possibly long-term, borrowings, or to pay dividends in the form of taxable stock dividends or in-kind distributions of property. Alternatively, we may declare a taxable dividend payable in cash
or stock at the election of each stockholder, where the aggregate amount of cash to be distributed in such dividend may be subject to limitation. In such case, for U.S. federal income tax purposes, the amount of the dividend paid in stock will be
equal to the amount of cash that could have been received instead of stock.
We may satisfy the 90% distribution test with taxable
distributions of our stock or debt securities. On August 11, 2017, the IRS issued Revenue Procedure 2017-45 authorizing elective cash/stock dividends to be made by publicly offered REITs.
Pursuant to Revenue Procedure 2017-45, effective for distributions declared on or after August 11, 2017, the IRS will treat the distribution of stock pursuant to an elective cash/stock dividend as a
distribution of property under Section 301 of the Internal Revenue Code (i.e., a dividend), as long as at least 20% of the total dividend is available in cash and certain other parameters detailed in the Revenue Procedure are satisfied.
Although we have no current intention of paying dividends in our own stock, if in the future we choose to pay dividends in our own stock, our stockholders may be required to pay tax in excess of the cash that they receive.
The TCJA limits a taxpayers net interest expense deduction to 30% of the sum of adjusted taxable income, business interest, and certain
other amounts. Adjusted taxable income does not include items of income or expense not allocable to a trade or business, business interest or expense, the new deduction for qualified business income, net operating losses (NOLs), and for
years prior to 2022, deductions for depreciation, amortization, or depletion. For partnerships, the interest deduction limit is applied at the partnership level, subject to certain adjustments to the partners for unused deduction limitations at the
partnership level. The TCJA allows a real property trade or business to elect out of this interest limit so long as it uses a 40-year recovery period for nonresidential real property, a 30-year recovery period for residential rental property, and a 20-year recovery period for related improvements. For this purpose, a real property trade or business is any
real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operating, management, leasing, or brokerage trade or business. As a mortgage REIT, we do not believe that our business constitutes a real
property trade or business within the meaning of the TCJA. However, as a mortgage REIT, we do not believe we will be negatively impacted by the 30% limitation on the deductibility of interest imposed
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