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 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.

12. Income Taxes — (continued)

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



	Year Ended December 31,
	2012			2011			2010
GAAP consolidated net loss attributable to FelCor LP	$	(128,849	)	$	(130,543	)	$	(223,922	)
Loss allocated to FelCor LP unitholders	842			689			881
GAAP consolidated net loss attributable to FelCor	(128,007		)	(129,854		)	(223,041		)
GAAP net loss from REIT operations	125,088			127,709			172,495
GAAP net loss of taxable subsidiaries	(2,919		)	(2,145		)	(50,546		)
Impairment loss not deductible for tax	—			946			8,852
Tax gain (loss) in excess of book gains on sale of hotels	(407		)	(7,841		)	—
Depreciation and amortization^(a)	404			1,389			(106		)
Employee benefits not deductible for tax	363			(1,578		)	3,534
Management fee recognition	(1,715		)	(1,717		)	916
Tax adjustment to lease expense^(b)	—			—			40,572
Foreign exchange	12,907			—			—
Other book/tax differences	4,884			(552		)	5,251
Tax income (loss) of taxable subsidiaries before utilization of net operating losses	13,517			(11,498		)	8,473
Utilization of net operating loss	(13,517		)	—			(8,473		)
Net tax loss of taxable subsidiaries	—			$	(11,498	)	$	—


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

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



	December 31,
	2012			2011
Accumulated net operating losses of our TRS	$	124,318		$	129,455
Tax property basis in excess of book	869			929
Accrued employee benefits not deductible for tax	2,291			760
Management fee recognition	932			1,415
Foreign exchange	4,905			—
Other	914			970
Gross deferred tax asset	134,229			133,529
Valuation allowance	(134,229		)	(133,529		)
Deferred tax asset after valuation allowance	$	—		$	—

12. Income Taxes — (continued)

We have provided a valuation allowance against our deferred tax asset at December 31, 2012 and 2011, that results in no net deferred tax asset at December 31, 2012 and 2011 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, 2012, our TRS had net operating loss carryforwards for federal income tax purposes of $327.2 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,
	2012			2011			2010
GAAP net loss from REIT operations	$	(125,088	)	$	(127,709	)	$	(172,495	)
Book/tax differences, net:
Depreciation and amortization^(a)	2,084			6,183			(17,645		)
Noncontrolling interests	4,112			4,149			(882		)
Equity in loss from unconsolidated entities	—			—			(35,386		)
Tax gain (loss) on dispositions in excess of book	(30,747		)	(30,502		)	34,729
Impairment loss not deductible for tax	1,335			12,303			156,773
Conversion costs	31,197			—			—
Tax adjustment to lease revenue^(b)	—			—			(35,634		)
Other	(9,226		)	(1,974		)	(6,452		)
Tax loss^(c)	$	(126,333	)	$	(137,550	)	$	(76,992	)


(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 any taxable income.

12. Income Taxes — (continued)

At December 31, 2012, FelCor had net operating loss carryforwards for federal income tax purposes of $463.1 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):




	2012				2011				2010
	Amount			%	Amount			%	Amount		%
Preferred Stock – Series A
Dividend income	$	—		—	$	—		—	$	—	—
Return of capital	5.3625		^(b)	100.00	1.95		^(a)	100.00	—		—
	5.3625			100.00	$	1.95		100.00	$	—	—
Preferred Stock – Series C
Dividend income	$	—		—	$	—		—	$	—	—
Return of capital	5.50		^(b)	100.00	2.00		^(a)	100.00	—		—
	$	5.50		100.00	$	2.00		100.00	$	—	—


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

(b) Fourth quarter 2011 preferred distributions were paid January 31, 2012, and were treated as 2012 distributions for tax purposes.