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.

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



	Year Ended December 31,
	2013			2012			2011
GAAP consolidated net loss attributable to FelCor LP	$	(62,001	)	$	(128,849	)	$	(130,543	)
Loss allocated to FelCor LP unitholders	497			842			689
GAAP consolidated net loss attributable to FelCor	(61,504		)	(128,007		)	(129,854		)
GAAP net loss from REIT operations	62,513			125,088			127,709
GAAP net income (loss) of taxable subsidiaries	1,009			(2,919		)	(2,145		)
Impairment loss not deductible for tax	—			—			946
Gain/loss differences from dispositions	—			(407		)	(7,841		)
Depreciation and amortization^(a)	1,646			404			1,389
Employee benefits not deductible for tax	3,914			363			(1,578		)
Management fee recognition	(1,245		)	(1,715		)	(1,717		)
Foreign exchange	—			12,907			—
Capitalized TRS start-up costs	4,981			—			—
Other book/tax differences	2,754			4,884			(552		)
Tax income (loss) of taxable subsidiaries before utilization of net operating losses	13,059			13,517			(11,498		)
Utilization of net operating loss	(13,059		)	(13,517		)	—
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.

12. 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,
	2013			2012
Accumulated net operating losses of TRS	$	119,355		$	124,318
Tax property basis in excess of book	1,017			869
Accrued employee benefits not deductible for tax	3,477			2,291
Management fee recognition	464			932
Foreign exchange	4,905			4,905
Capitalized TRS start-up costs	1,893			—
Other	701			914
Gross deferred tax asset	131,812			134,229
Valuation allowance	(131,812		)	(134,229		)
Deferred tax asset after valuation allowance	$	—		$	—

We have provided a valuation allowance against our deferred tax asset at December 31, 2013 and 2012, that results in no net deferred tax asset at December 31, 2013 and 2012 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, 2013, our TRS had net operating loss carryforwards for federal income tax purposes of $314.2 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 loss to taxable loss (in thousands):



	Year Ended December 31,
	2013			2012			2011
GAAP net loss from REIT operations	$	(62,513	)	$	(125,088	)	$	(127,709	)
Book/tax differences, net:
Depreciation and amortization^(a)	2,173			2,084			6,183
Noncontrolling interests	(4,017		)	4,112			4,149
Gain/loss differences from dispositions	(2,032		)	(30,747		)	(30,502		)
Impairment loss not deductible for tax	28,795			1,335			12,303
Conversion costs	(2,099		)	31,197			—
Other	8,453			(9,226		)	(1,974		)
Tax loss^(b)	$	(31,240	)	$	(126,333	)	$	(137,550	)


(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.

12. Income Taxes — (continued)

At December 31, 2013, FelCor had net operating loss carryforwards for federal income tax purposes of $499.4 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:




	2013				2012				2011
	Amount			%	Amount			%	Amount			%
Preferred Stock – Series A
Dividend income	$	—		—	$	—		—	$	—		—
Return of capital	1.95		^(c)	100.00	5.3625		^(b)	100.00	1.95		^(a)	100.00
	$	1.95		100.00	$	5.3625		100.00	$	1.95		100.00
Preferred Stock – Series C
Dividend income	$	—		—	$	—		—	$	—		—
Return of capital	2.00		^(c)	100.00	5.50		^(b)	100.00	2.00		^(a)	100.00
	$	2.00		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.


(c)	Fourth quarter 2012 preferred distributions were paid January 31, 2013, and were treated as 2013 distributions for tax purposes.