Starwood 2008 Annual Report Download - page 145

Company expects to realize future tax benefits from substantially all its federal and state net operating losses tax,
which expire by 2027. 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, 2008, approximately $558 million of
this loss has been utilized to offset 2008 and prior years’ capital gains. The remaining $818 million 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 $981 million, 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. 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. As a result of an August 2005 United States Tax
Court decision against another taxpayer, the Company decided to treat this transaction as if it were taxable in 1998
for accounting purposes. As such, the Company applied substantially all of its federal net operating loss
carryforwards against the gain and accrued interest, resulting in a $360 million net current liability. The Company
paid the entire current liability to the IRS in October 2005 in order to eliminate any future interest accruals
associated with the pending dispute. In January 2009, the Company and the IRS reached an agreement in principle
to settle the litigation pertaining to the tax treatment of this transaction. The Company expects to finalize the details
of the agreement and obtain the refund during 2009.
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):
2008 2007 2006
Year Ended December 31,
Tax provision at U.S. statutory rate ............................. $115 $ 257 $ 239
U.S. state and local income taxes .............................. 9 13 (10)
Exempt Trust income ....................................... — — (32)
Tax on repatriation of foreign earnings .......................... (14) (29) (16)
Foreign tax rate differential .................................. (20) 12 (15)
Change in uncertain tax positions .............................. — 13 —
Tax settlements ........................................... — 2 (59)
Tax benefit on the deferred gain from asset sales................... (10) (3) (356)
Tax benefits recognized on Host Transaction. . . ................... — 97 (1,017)
Basis difference on asset sales ................................ 16 (2) (41)
Change in of valuation allowance .............................. (31) (158) 884
Tax expense amortization from intercompany transactions ............ 7 — —
Other ................................................... 4 (13) (11)
Provision for income tax (benefit).............................. $ 76 $189 $ (434)
F-29
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)