Starwood 2008 Annual Report Download - page 146

During 2007, the Company completed an evaluation of its ability to claim U.S. foreign tax credits generated in
prior years on its federal tax return. As a result of this analysis, the Company determined that it can realize the
credits for the 1999 and 2000 tax years. The Company had not previously accrued this benefit since the realization
of the benefit was determined to be unlikely. Therefore, during 2007, a $28 million tax benefit, net of incremental
taxes and interest, was recorded for these foreign tax credits. In addition, during 2006, the Company determined that
it could 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 for these foreign tax credits.
Pursuant to FIN 48, the Company is required to accrue tax and associated interest and penalty on uncertain tax
positions. During 2007, the Company recorded a $13 million charge, primarily associated with interest due on
existing uncertain tax positions.
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 2006. 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 during 2006 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.
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. Additional tax benefits of $1.017 bil-
lion 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 as a result of 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 a
reduction 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 the capital loss valuation allowance.
During 2008, the Company sold the Westin Turnberry subject to a long-term management contract. As a result,
the pretax gain has been deferred and is being recognized over the life of the contract. Accordingly, the Company
has established a deferred tax asset and recognized the related tax benefit of approximately $10 million for the
book-tax difference on the deferred gain.
During 2008 and 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. As discussed
above, the Company had not previously accrued a benefit for the capital loss since the realization was determined to
be unlikely. Therefore, during 2008 and 2007, the Company recorded tax benefits of $31 million and $35 million,
respectively, to reverse the capital loss valuation allowance.
As a result of the implementation of FIN 48 in 2007, the Company recognized a $35 million cumulative effect
adjustment to the beginning balance of retained earnings in the period. As of December 31, 2008, the Company had
approximately $1.0 billion of total unrecognized tax benefits, of which $150 million would affect its effective tax
rate if recognized. As discussed above, the Company expects to resolve the tax litigation related to the ITT World
Directories transaction during 2009 and expects to reduce that amount of unrecognized tax benefits by approx-
imately $499 million. The Company does not expect other significant increases or decreases to the amount of
F-30
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)