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 federal taxable income (in thousands):



	Year Ended December 31,
	2015			2014			2013
GAAP consolidated net income (loss) attributable to FelCor LP	$	(9,059	)	$	92,236		$	(62,001	)
Loss (income) allocated to FelCor LP unitholders	194			(137		)	497
GAAP consolidated net income (loss) attributable to FelCor	(8,865		)	92,099			(61,504		)
GAAP net loss (income) from REIT operations	21,838			(68,796		)	62,513
GAAP net income (loss) of taxable subsidiaries	12,973			23,303			1,009
Taxes related to joint venture transaction	—			5,761			—
Gain/loss differences from dispositions	(872		)	—			—
Depreciation and amortization^(a)	(1,877		)	(461		)	1,646
Employee benefits not deductible for tax	(588		)	(101		)	3,914
Management fee recognition	(107		)	(1,151		)	(1,245		)
Cancellation of debt	—			(3,188		)	—
Capitalized TRS start-up costs	—			11,859			4,981
Other book/tax differences	3,827			181			2,754
Federal tax income of taxable subsidiaries before utilization of net operating losses	13,356			36,203			13,059
Utilization of net operating loss	(13,356		)	(36,203		)	(13,059		)
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 $1.2 million, $660,000 and $652,000 related to current state income taxes for the years ended December 31, 2015, 2014 and 2013, respectively. State income taxes in 2014 and 2013 have been reclassified from taxes, insurance and lease expense to conform to the 2015 presentation of a separate line for income tax expense on our consolidated statement 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,
	2015			2014
Accumulated net operating losses of TRSs	$	98,367		$	107,027
Tax property basis compared to book	(4,518		)	952
Accrued employee benefits not deductible for tax	4,889			3,883
Management fee recognition	—			81
Historic tax credits^(a)	25,375			—
Capitalized TRS start-up costs	—			6,399
Other	109			1,261
Gross deferred tax asset	124,222			119,603
Valuation allowance	(124,222		)	(119,603		)
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.

We provided a valuation allowance against our deferred tax asset, that results in no net deferred tax asset at December 31, 2015 and 2014. 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 is dependent on projections of future taxable income, for which there is uncertainty when considering our historic results and cyclical nature of the lodging industry. Accordingly, no provision or benefit for income taxes is reflected in the accompanying consolidated statements of operations. At December 31, 2015, our TRSs had net operating loss carryforwards for federal income tax purposes of $264.6 million, which are available to offset future taxable income, if any, and do not begin to expire until 2023.

12. Income Taxes — (continued)

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



	Year Ended December 31,
	2015			2014			2013
GAAP net income (loss) from REIT operations	$	(21,838	)	$	68,796		$	(62,513	)
Book/tax differences, net:
Dividend income from TRS	24,809			—			—
Depreciation and amortization^(a)	3,937			1,831			2,173
Noncontrolling interests	(400		)	329			(4,017		)
Gain/loss differences from dispositions	18,335			(99,946		)	(2,032		)
Impairment loss not deductible for tax	20,861			—			28,795
Conversion costs	(2,881		)	(3,233		)	(2,099		)
Other	1,153			(1,674		)	8,453
Tax income (loss)^(b)	$	43,976		$	(33,897	)	$	(31,240	)


(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 2015, our distributions were in excess of 100% of taxable income.

At December 31, 2015, 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 Code, as follows:



	2015				2014				2013
	Amount			%	Amount			%	Amount			%
Preferred Stock – Series A
Capital gains	$	1.23		63.08	$	—		—	$	—		—
Dividend income	$	0.72		36.92	$	—		—	$	—		—
Return of capital	—		^(c)	—	1.95		^(b)	100.00	1.95		^(a)	100.00
	$	1.95		100.00	$	1.95		100.00	$	1.95		100.00
Preferred Stock – Series C
Capital gains	$	0.63		63.00	$	—		—	$	—		—
Dividend income	$	0.37		37.00	$	—		—	$	—		—
Return of capital	—		^(c)	—	2.00		^(b)	100.00	2.00		^(a)	100.00
	$	1.00		100.00	$	2.00		100.00	$	2.00		100.00
Common Stock
Capital gains	$	—		—	$	—		—	$	—		—
Dividend income	$	—		—	$	—		—	$	—		—
Return of capital	0.16		^(c)	100.00	0.08			100.00	—			—
	$	0.16		100.00	$	0.08		100.00	$	—		—


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


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


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