Starwood 2007 Annual Report Download - page 149

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 $962 million has been deferred and is being recognized over the life of those
contracts. Accordingly, the Company has established a deferred tax asset and recognized the related tax benefit of
approximately $359 million for the book-tax difference on the deferred gain liability. Additional tax benefits of
$1.017 billion resulted from the Host Transaction consisting primarily of the tax benefit of $832 million on the
$2.4 billion federal capital loss, net of carrybacks and 2006 utilization. The remaining benefit consisted of an
adjustment to deferred income taxes for the increased tax basis of certain retained assets, partially offset by current
tax liabilities generated in the transaction. During 2007, the Company completed its 2006 tax return which included
the Host Transaction. As a result, the Company recognized a net $97 million tax charge during 2007 as an
adjustment to the original tax benefit accrued in 2006. The net charge was comprised of a $114 million charge
related to an adjustment to the amount of capital loss generated in the transaction offset by a $17 million tax benefit
related to other aspects of the transaction. As a valuation allowance fully offsets the capital loss carryforward, the
Company also recorded a $114 million tax benefit for the reversal of capital loss valuation allowance.
During 2007, the Company completed certain transactions that generated capital gains for U.S. tax purposes.
These gains were completely offset by the capital loss generated in the Host Transaction. The Company had not
previously accrued a benefit for the capital loss since the realization was determined to be unlikely. Therefore,
during 2007, a $35 million tax benefit was recorded to reverse the capital loss valuation allowance.
During 2005, the Company was notified by ITT Industries that a refund of tax and interest had been approved
by the IRS for payment to ITT Industries related to its 1993-1995 tax returns. In connection with its acquisition of
Sheraton Holding, the Company is party to a tax sharing agreement between ITT Industries, Hartford Insurance and
Sheraton Holding as a result of their 1995 split of ITT Industries into these companies and is entitled to one-third of
this refund. As a result of this notification, the Company recorded an $8 million tax benefit during 2005.
As a result of the implementation of FIN 48, the Company recognized a $35 million cumulative effect
adjustment to the beginning balance of retained earnings in the period. As of December 31, 2007, the Company had
approximately $469 million of total unrecognized tax benefits, of which $158 million would affect its effective tax
rate if recognized. The Company does not expect any significant increases or decreases to the amount of
unrecognized tax benefits within 12 months of December 31, 2007. A reconciliation of the beginning and ending
balance of unrecognized tax benefits is as follows (in millions):
Balance at January 1, 2007 .................................................. $465
Additions based on tax positions related to the current year ........................ 6
Additions for tax positions of prior years ...................................... 1
Settlements with tax authorities ............................................. (2)
Reductions for tax positions of prior years ..................................... —
Reductions due to the lapse of applicable statutes of limitation ...................... (1)
Balance at December 31, 2007 ............................................... $469
The Company recognizes interest and penalties related to unrecognized tax benefits through income tax
expense. The Company had $29 million and $16 million accrued for the payment of interest and no accrued
penalties as of December 31, 2007 and December 31, 2006, respectively.
The Company is subject to taxation in the U.S. federal jurisdiction, as well as various state and foreign
jurisdictions. As of December 31, 2007, the Company is no longer subject to examination by U.S. federal taxing
authorities for years prior to 2004 and to examination by any U.S. state taxing authority prior to 1998. All
subsequent periods remain eligible for examination. In the significant foreign jurisdictions in which we operate, we
are no longer subject to examination by the relevant taxing authorities for any years prior to 2001.
F-29
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)