Company: RWT-PA
Filing Date: 2025-03-03
Form Type: S-3ASR
Source: 0001104659-25-019828
Chunk: 58

Company: REDWOOD TRUST INC
Filing Date: 2025-03-03
Form: S-3ASR
Chunk 58
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purchase price plus the market discount we had previously reported as income, we may not be able to benefit from any offsetting loss
deductions in a subsequent taxable year.

If we were to acquire securities
issued with original issue discount, we would generally be required to accrue original issue discount based on the constant yield to
maturity of the securities, and to treat it as taxable income in accordance with applicable U.S. federal income tax rules even though
smaller or no cash payments were received on such debt instrument. As in the case of the market discount discussed in the preceding paragraph,
the constant yield in question would be determined and we would be taxed based on the assumption that all future payments due on securities
in question will be made, with consequences similar to those described in the previous paragraph if all payments on the securities are
not made.

In addition, in the event
that any debt instruments or other securities we acquire are delinquent as to mandatory principal and interest payments, or in the event
payments with respect to a particular debt instrument are not made when due, we may nonetheless be required to continue to recognize
the unpaid interest as taxable income. Similarly, we may be required to accrue interest income with respect to subordinate mortgage-backed
securities at the stated rate regardless of whether corresponding cash payments are received.

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We may also be required under
the terms of indebtedness that we borrow from private lenders to use cash received from interest payments to make principal payments
on that indebtedness, with the effect of recognizing income but not having a corresponding amount of cash available for distribution
to our stockholders.

Finally, we are required
to recognize certain items of income for U.S. federal income tax purposes no later than when we would report such items on our financial
statements. However, under applicable Treasury Regulations, this requirement generally does not apply to an item of income if the timing
of income inclusion for that item is determined using a special method of accounting (e.g., income subject to the timing rules for original
issue discount under the Code).

Due to each of these potential
timing differences between income recognition or expense deduction and the related cash receipts or disbursements, there is a risk that
we may have taxable income in excess of cash available for distribution. In that event, we may need to borrow funds or take other action
to satisfy the REIT distribution requirements for the taxable year in which this “phantom income” is recognized. See “Material
U