Starwood 2007 Annual Report Download - page 147

Deferred income taxes represent the tax effect of the differences between the book and tax bases of assets and
liabilities. Deferred tax assets (liabilities) include the following (in millions):
2007 2006
December 31,
Plant, property and equipment ...................................... $ 312 $ 236
Intangibles .................................................... 15 6
Allowances for doubtful accounts and other reserves ..................... 160 151
Employee benefits ............................................... 100 80
Net operating loss, capital loss and tax credit carryforwards . ............... 723 1,052
Deferred income ................................................ (102) (103)
Other ........................................................ 108 74
1,316 1,496
Less valuation allowance .......................................... (615) (1,009)
Deferred income taxes ............................................ $ 701 $ 487
As a result of the Host Transaction, discussed in Note 5, certain deferred tax liabilities related to plant, property
and equipment of the assets sold, including those owned by the Trust, were no longer necessary and were adjusted
accordingly at the consummation dates. In addition, the tax basis of certain assets, including plant, property and
equipment and intangibles, retained by the Company was adjusted to the then fair market value resulting in an
overall increase in deferred tax assets on the consolidated balance sheet.
At December 31, 2007, the Company had federal and state net operating losses of approximately $38 million
and $3.2 billion, respectively, and federal tax credit carryforwards of $88 million. The Company also had foreign
net operating loss and tax credit carryforwards of approximately $31 million and $19 million, respectively.
Substantially all federal and state net operating losses from which the Company expects to realize future tax
benefits, expire by 2026. The Company has established a valuation allowance against substantially all of the tax
benefit for the remaining federal and state carryforwards as it is unlikely that the benefit will be realized prior to
their expiration. The Company is currently considering certain tax-planning strategies that may allow it to utilize
these tax attributes within the statutory carryforward period.
The Company generated a federal capital loss in connection with the Host Transaction which was originally
estimated at approximately $2.6 billion at December 31, 2006. During 2007, the Company completed its 2006 tax
return which included the Host Transaction and adopted FIN 48. As a result, the Company reduced its original
estimate of this capital loss and corresponding valuation allowance by approximately $1.2 billion, resulting in a
revised amount of $1.4 billion at December 31, 2006. Through December 31, 2007, approximately $324 million of
this loss has been utilized to offset 2007 and prior years’ capital gains. The remaining $1.1 billion of capital loss is
available to offset federal capital gains through 2011. The Company also had state capital losses related to the Host
Transaction of approximately $1.0 billion, substantially all of which expire in 2011. Due to the uncertainty of
realizing the tax benefit of the federal and state capital loss carryforwards, the entire tax benefit of the losses has
been offset by a valuation allowance.
In February 1998, the Company disposed of ITT World Directories. The Company recorded $551 million of
income taxes relating to this transaction, which were included in deferred income taxes as of December 31, 2004.
While the Company strongly believes this transaction was completed on a tax-deferred basis, in 2002 the IRS
proposed an adjustment to fully tax the gain in 1998, which would increase Starwood’s taxable income by
approximately $1.4 billion in that year. During 2004, the Company filed a petition in United States Tax Court to
contest the IRS’s proposed adjustment. Starwood will continue to vigorously defend its position with the IRS and
anticipates that litigation proceedings will begin in 2008.
F-27
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)