Income Taxes

FelCor LP is a partnership for federal income tax purposes, and is not subject to federal income tax. However, under its partnership agreement, it is required to reimburse FelCor for any tax payments they are required to make. Accordingly, the tax information herein represents disclosures regarding FelCor and its taxable subsidiaries.

FelCor elected to be treated as a REIT under the federal income tax laws. As a REIT, FelCor generally is not subject to federal income taxation at the corporate level on taxable income that is distributed to its stockholders. FelCor may, however, be subject to certain state and local taxes on its income and property and to federal income and excise taxes on its undistributed taxable income. FelCor's taxable REIT subsidiaries, or TRSs, formed to lease its hotels are subject to federal, state and local income taxes. A REIT is subject to a number of organizational and operational requirements, including a requirement that it currently distribute at least 90% of its annual taxable income to its stockholders. If FelCor fails to qualify as a REIT in any taxable year for which the statute of limitations remains open, it will be subject to federal income taxes at regular corporate rates (including any applicable alternative minimum tax) for such taxable year and may not qualify as

11.Income Taxes — (continued)

a REIT for four subsequent years. In connection with FelCor's election to be treated as a REIT, its charter imposes restrictions on the ownership and transfer of shares of its common stock. FelCor LP expects to make distributions on its units sufficient to enable FelCor to meet its distribution obligations as a REIT.

We account for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

The following table reconciles our TRS’s GAAP net income (loss) to taxable income (loss) (in thousands):



	Year Ended December 31,
	2011			2010			2009
GAAP consolidated net loss attributable to FelCor LP	$	(130,543	)	$	(223,922	)	$	(108,794	)
Loss allocated to FelCor LP unitholders	689			881			672
GAAP consolidated net loss attributable to FelCor	(129,854		)	(223,041		)	(108,122		)
GAAP net loss from REIT operations	127,709			172,495			66,977
GAAP net loss of taxable subsidiaries	(2,145		)	(50,546		)	(41,145		)
Impairment loss not deductible for tax	946			8,852			—
Tax gain (loss) in excess of book gains on sale of hotels	(7,841		)	—			(1,821		)
Depreciation and amortization^(a)	1,389			(106		)	(269		)
Employee benefits not deductible for tax	(1,578		)	3,534			(4,205		)
Management fee recognition	(1,717		)	916			4,828
Tax adjustment to lease expense^(b)	—			40,572			11,769
Other book/tax differences	(552		)	5,251			7,799
Tax income (loss) of taxable subsidiaries before utilization of net operating losses	(11,498		)	8,473			(23,044		)
Utilization of net operating loss	—			(8,473		)	—
Net tax income (loss) of taxable subsidiaries	$	(11,498	)	$	—		$	(23,044	)


(a)	The changes in book/tax differences in depreciation and amortization principally result from book and tax basis differences, differences in depreciable lives and accelerated depreciation methods.


(b)	In 2009 and 2010, we recorded a reduction in intercompany rent between our REIT entities and TRS entities for tax purposes.


11.	Income Taxes — (continued)

Our TRS had a deferred tax asset, on which we had a 100% valuation allowance, primarily comprised of the following (in thousands):



	December 31,
	2011			2010
Accumulated net operating losses of our TRS	$	129,455		$	125,085
Tax property basis in excess of book	929			2,822
Accrued employee benefits not deductible for tax	760			984
Management fee recognition	1,415			2,093
Other	970			997
Gross deferred tax asset	133,529			131,981
Valuation allowance	(133,529		)	(131,981		)
Deferred tax asset after valuation allowance	$	—		$	—

We have provided a valuation allowance against our deferred tax asset at December 31, 2011 and 2010, that results in no net deferred tax asset at December 31, 2011 and 2010 due to the uncertainty of realization (because of historical operating losses). Accordingly, no provision or benefit for income taxes is reflected in the accompanying Consolidated Statements of Operations. At December 31, 2011, our TRS had net operating loss carryforwards for federal income tax purposes of $340.7 million, which are available to offset future taxable income, if any, and do not begin to expire until 2022.

The following table reconciles REIT GAAP net income (loss) to taxable income (in thousands):



	Year Ended December 31,
	2011			2010			2009
GAAP net loss from REIT operations	$	(127,709	)	$	(172,495	)	$	(66,977	)
Book/tax differences, net:
Depreciation and amortization^(a)	6,183			(17,645		)	(11,608		)
Noncontrolling interests	4,149			(882		)	(222		)
Equity in loss from unconsolidated entities	—			(35,386		)	2,068
Tax gain (loss) on dispositions in excess of book	(30,502		)	34,729			(26,922		)
Impairment loss not deductible for tax	12,303			156,773			3,448
Liquidated damages	—			—			(1,000		)
Tax adjustment to lease revenue^(b)	—			(35,634		)	(11,769		)
Other	(1,974		)	(6,452		)	6,431
Taxable income (loss) subject to distribution requirement^(c)	$	(137,550	)	$	(76,992	)	$	(106,551	)


(a)	Book/tax differences in depreciation and amortization principally result from differences in depreciable lives and accelerated depreciation methods.


(b)	For tax purposes, we recorded a reduction in intercompany rent between our REIT entities and TRS entities.


(c)	The dividend distribution requirement is 90% of taxable income.

11.Income Taxes — (continued)

At December 31, 2011, FelCor had net operating loss carryforwards for federal income tax purposes of

$336.7 million, which it expects to use to offset future distribution requirements.

For income tax purposes, dividends paid consist of ordinary income, capital gains, return of capital or a combination thereof. Dividends paid per share were characterized as follows (there were no distributions in 2010):




	2011				2010			2009
	Amount		%		Amount		%	Amount			%
Preferred Stock – Series A
Dividend income	$	—	—		$	—	—	$	—		—
Return of capital	1.9500		100.00	^(b)	—		—	0.4875		^(a)	100.00
	$	1.9500	100.00		$	—	—	$	0.4875		100.00
Preferred Stock – Series C
Dividend income	$	—	—		$	—	—	$	—		—
Return of capital	2.00		100.00	^(b)	—		—	0.50		^(a)	100.00
	$	2.00	100.00		$	—	—	$	0.50		100.00


(a)	Fourth quarter 2008 preferred distributions were paid January 31, 2009, and were treated as 2009 distributions for tax purposes.


(b)	Fourth quarter 2010 preferred distributions were paid January 31, 2011, and were treated as 2011 distributions for tax purposes.