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 FelCor LP is 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 distributes 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 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 TRSs’ GAAP net income (loss) to federal taxable income (in thousands):



	Year Ended December 31,
	2016			2015			2014
GAAP consolidated net income (loss) attributable to FelCor LP	$	3,405		$	(9,059	)	$	92,236
Loss (income) allocated to FelCor LP unitholders	93			194			(137		)
GAAP consolidated net income (loss) attributable to FelCor	3,498			(8,865		)	92,099
GAAP net loss (income) from REIT operations	21,332			21,838			(68,796		)
GAAP net income of taxable subsidiaries	24,830			12,973			23,303
Taxes related to joint venture transaction	—			—			5,761
Gain/loss differences from dispositions	—			(872		)	—
Depreciation and amortization^(a)	(12,437		)	(1,877		)	(461		)
Employee benefits not deductible for tax	(2,965		)	(588		)	(101		)
Management fee recognition	—			(107		)	(1,151		)
Cancellation of debt	—			—			(3,188		)
Capitalized TRS start-up costs	—			—			11,859
Other book/tax differences	386			3,827			181
Federal tax income of taxable subsidiaries before utilization of net operating losses	9,814			13,356			36,203
Utilization of net operating loss	(9,814		)	(13,356		)	(36,203		)
Net federal tax income of taxable subsidiaries	$	—		$	—		$	—


(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.

12. Income Taxes — (continued)

Included in our consolidated statement of operations are $873,000, $1.2 million and $660,000 related to current state income taxes for the years ended December 31, 2016, 2015 and 2014, respectively. State income taxes in 2014 have been reclassified from taxes, insurance and lease expense to conform to the 2016 and 2015 presentation of a separate line for income tax expense on our consolidated statements of operations.

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



	December 31,
	2016			2015
Accumulated net operating losses of TRSs	$	94,219		$	98,367
Tax property basis compared to book	4,844			(4,518		)
Accrued employee benefits not deductible for tax	4,966			4,889
Historic tax credits^(a)	19,357			25,375
Other	26			109
Gross deferred tax asset	123,412			124,222
Valuation allowance	(123,412		)	(124,222		)
Deferred tax asset after valuation allowance	$	—		$	—

(a)

Because of the completion of construction at The Knickerbocker in 2015, one of our TRSs became entitled to the future benefits of historic tax credits that vest over a five year period and do not expire. Historic tax credits for 2015 reflect both federal and state credits. Upon the filing of the state return for 2015 in 2016, the state credit became refundable. Historic tax credits for 2016 reflect federal credits only.

We provided a valuation allowance against our deferred tax asset that results in no net deferred tax asset at December 31, 2016 and 2015. We recorded a 100% valuation allowance related to our TRSs’ net deferred tax asset because we believe it is more likely than not that the deferred tax asset will not be fully realized. The realization of the deferred tax assets associated with our net operating losses and historic tax credits is dependent on projections of future taxable income, for which there is uncertainty when considering our historic results and the cyclical nature of the lodging industry. Accordingly, no provision or benefit for deferred income taxes is reflected in the accompanying consolidated statements of operations. At December 31, 2016, our TRSs had net operating loss carryforwards for federal income tax purposes of $254.8 million, which are available to offset future taxable income, if any, and do not begin to expire until 2024.

12. Income Taxes — (continued)

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



	Year Ended December 31,
	2016			2015			2014
GAAP net income (loss) from REIT operations	$	(21,332	)	$	(21,838	)	$	68,796
Book/tax differences, net:
Dividend income from TRS	25,650			24,809			—
Depreciation and amortization^(a)	19,582			3,937			1,831
Noncontrolling interests	(93		)	(400		)	329
Gain/loss differences from dispositions	(16,572		)	18,335			(99,946		)
Impairment loss not deductible for tax	26,459			20,861			—
Conversion costs	(3,233		)	(3,233		)	(3,233		)
Other	(446		)	1,505			(1,674		)
Tax income (loss)^(b)	$	30,015		$	43,976		$	(33,897	)


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


(b)	The dividend distribution requirement is 90% of any taxable income (net of capital gains). For 2016 and 2015, our distributions were in excess of 100% of taxable income.

At December 31, 2016, FelCor had net operating loss carryforwards for federal income tax purposes of $534.2 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, in accordance with the requirements under the Internal Revenue Code, as follows:



	2016				2015				2014
	Amount			%	Amount			%	Amount			%
Preferred Stock – Series A
Capital gains	$	—		—	$	1.23		63.08	$	—		—
Dividend income	1.03			52.82	0.72			36.92	—			—
Non-dividend distribution	0.92			47.18	—			—	1.95			100.00
	$	1.95	^(a)	100.00	$	1.95	^(b)	100.00	$	1.95	^(c)	100.00
Preferred Stock – Series C
Capital gains	$	—		—	$	0.63		63.00	$	—		—
Dividend income	—			—	0.37			37.00	—			—
Non-dividend distribution	—			—	—			—	2.00			100.00
	$	—		—	$	1.00	^(b)	100.00	$	2.00	^(c)	100.00
Common Stock
Capital gains	$	—		—	$	—		—	$	—		—
Dividend income	—			—	—			—	—			—
Non-dividend distribution	0.24			100.00	0.16			100.00	0.08			100.00
	$	0.24	^(a)	100.00	$	0.16	^(b)	100.00	$	0.08	^(c)	100.00


(a)	Fourth quarter 2015 preferred and common distributions were paid January 29, 2016, and were treated as 2016 distributions for tax purposes.


(b)	Fourth quarter 2014 preferred and common distributions were paid January 29, 2015, and were treated as 2015 distributions for tax purposes.


(c)	Fourth quarter 2013 preferred and common distributions were paid January 30, 2014, and were treated as 2014 distributions for tax purposes.