Starwood 2006 Annual Report Download - page 87

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):
2006 2005
December 31,
Plant, property and equipment ....................................... $ 236 $(448)
Intangibles ..................................................... 6 (158)
Allowances for doubtful accounts and other reserves ...................... 151 139
Employee benefits ............................................... 80 51
Net operating loss, capital loss and tax credit carryforwards ................. 1,052 173
Deferred income ................................................. (103) (154)
Other ......................................................... 74 (40)
1,496 (437)
Less valuation allowance. . . ........................................ (1,009) (125)
Deferred income taxes ............................................ $ 487 $(562)
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, 2006, the Company had federal and state net operating losses of approximately $16 million
and $2.8 billion, respectively. The Company also had foreign net operating loss and tax credit carryforwards of
approximately $111 million and $24 million, respectively. Substantially all federal and state net operating losses,
which are expected to provide future tax benefits, expire by 2026. As the Company does not expect to utilize all of
the federal, state and foreign carryforwards and credits prior to their expiration, substantially all of the tax benefit
has been offset by a valuation allowance.
The Company generated a federal capital loss of approximately $2.6 billion in connection with the Host
Transaction. At December 31, 2006, approximately $200 million of this loss has been utilized to offset 2006 and
prior year capital gains. The remaining $2.4 billion of capital loss is available to offset U.S. capital gains through
2011. Due to the uncertainty of realizing the tax benefit of this capital loss carryforward, the entire tax benefit of the
loss has been offset by a valuation allowance. The Company is currently considering certain tax-planning strategies
that may allow it to utilize these tax attributes within the statutory carryforward period.
In February 1998, the Company disposed of ITT World Directories. Through December 31, 2004, the
Company had recorded $551 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, this position is currently being challenged by the IRS. In 2002, the IRS proposed an adjustment to
increase Starwood’s 1998 taxable income by approximately $1.4 billion. If the transaction is deemed to be fully
taxable in 1998, then the Company’s federal tax obligation would be approximately $499 million, plus interest, and
would be partially offset by the Company’s net operating loss carryforwards. During 2004, the matter was
transferred from IRS Appeals to the jurisdiction of the United States Tax Court and the Company filed a petition in
United States Tax Court on October 28, 2004 to contest the IRS’s proposed adjustment.
As a result of the United States Tax Court decision against another taxpayer in August 2005, the Company has
decided to treat this transaction as if it were taxable in 1998 for accounting purposes and reclassified the taxes
associated with this transaction to a current liability. As such, the Company has applied substantially all of its
federal net operating loss carryforwards against this gain and accrued interest, which resulted in a $360 million
F-26
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)