Starwood 2006 Annual Report Download - page 88

obligation to the IRS. In October 2005, the Company made a cash payment to the IRS of this $360 million
obligation in order to eliminate any future interest accrual associated with the pending dispute. As discussed above,
the Company had previously reserved a substantial amount of the potential liability in connection with the
disposition of ITT World Directories, but recorded a charge in 2005 of approximately $52 million, primarily
relating to interest that would be owed to the IRS if the Company does not prevail. This charge is comprised of a
federal tax expense of $103 million partially offset by a state tax benefit of $51 million. The Company strongly
believes that this transaction was completed on a tax-deferred basis and will continue to vigorously defend its
position with the IRS.
A reconciliation of the tax provision of the Company at the U.S. statutory rate to the provision for income tax as
reported is as follows (in millions):
2006 2005 2004
Year Ended December 31,
Tax provision at U.S. statutory rate ............................. $ 239 $225 $144
U.S. state and local income taxes ............................... (10) (14) (37)
Exempt Trust income ....................................... (32) (64) (62)
Tax on repatriation of foreign earnings ........................... (16) 11 13
Tax on repatriation of foreign earnings under the American Jobs Creation
Act of 2004 ............................................. — 47 —
Foreign tax rate differential ................................... (15) (28) (6)
Change in tax law and regulations .............................. — — (15)
Deferred gain on ITT World Directories disposition ................. — 52 —
Tax settlements ............................................ (59) (8) (15)
Tax benefit on the deferred gain from the Host Transaction . . ......... (356) — —
Tax benefits recognized on Host Transaction ...................... (1,017) — —
Basis difference on asset sales ................................. (41) — —
Change in of valuation allowance .............................. 884 7 24
Other ................................................... (11) (9) (3)
Provision for income tax (benefit) .............................. $ (434) $219 $ 43
During 2006, the IRS completed its audits of the Company’s 2001, 2002 and 2003 tax returns and issued its
final audit adjustments to the Company. In addition, state income tax audits for various jurisdictions and tax years
were completed during the year. As a result of the completion of these audits, the Company recorded a $50 million
tax benefit. The Company also recognized a $9 million tax benefit related to the reversal of previously accrued
income taxes after an evaluation of the applicable exposures and the expiration of the related statutes of limitations.
During 2006, the Company completed an evaluation of its ability to claim U.S. foreign tax credits on its federal
income tax return. As a result of this analysis, the Company determined that it can claim the credits for the 2005 and
2006 tax years. The Company had not previously accrued this benefit since the realization of the benefit was
determined to be unlikely. Therefore, during 2006, a $15 million and $19 million tax benefit was recorded for 2006
and 2005, respectively.
As discussed in Note 5, the Company completed the Host Transaction during the second quarter of 2006 which
included the sale of 33 hotel properties. As the Company sold these hotels subject to long-term management
contracts, the gain of approximately $955 million has been deferred over the life of those contracts. As a result of the
recognition of this deferred gain, the Company has established a deferred tax asset and recognized the related tax
benefit of approximately $356 million for the book-tax difference on the deferred gain liability. Additional tax
benefits of $1,017 million resulted from the Host Transaction consisting primarily of the tax benefit of $832 million
F-27
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)