10. Income Taxes

The Company has elected to be taxed as a REIT under the Code. As a REIT the Company generally will not be subject to corporate level federal income taxes on net income it distributes to its stockholders. The Company may 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. The Company may also be subject to federal and/or state income taxes when using net operating loss carryforwards to offset current taxable income. During 2012, the Company’s use of net operating loss carryforwards resulted in federal and state income tax expense of $1.1 million.

The Company leases its hotels to the TRS Lessee and its subsidiaries, which are subject to federal and state income taxes. The Company accounts for income taxes in accordance with the provisions of the Income Taxes Topic of the FASB ASC, which requires the Company to 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 GAAP carrying amounts and their respective tax bases.

The income tax provision for the Company is included in the consolidated financial statements as follows (in thousands):

	Year Ended December 31, 2012			Year Ended December 31, 2011			Year Ended December 31, 2010
Current:
Federal	$	850		$	—		$	—
State	298			—			—
Total current income tax provision	$	1,148		$	—		$	—
Deferred:
Federal	$	1,031		$	345		$	4,187
State	278			96			1,069
	1,309			441			5,256
Valuation allowance	(1,309		)	(441		)	(5,256		)
Total deferred income tax provision	$	—		$	—		$	—

The tax effects of temporary differences giving rise to the deferred tax assets (liabilities) are as follows (in thousands):

	December 31,
	2012			2011
NOL carryover	$	40,330		$	39,097
Other reserves	2,919			3,035
State taxes and other	(1,534		)	(1,725		)
Deferred tax asset before valuation allowance	41,715			40,407

Depreciation	(49		)	(50		)
Deferred tax liability before valuation allowance	(49		)	(50		)

Deferred tax assets (liabilities), net	41,666			40,357
Valuation allowance	(41,666		)	(40,357		)
	$	—		$	—

The Company has provided a valuation allowance against its net deferred tax asset at December 31, 2012 and 2011. The valuation allowance is due to the uncertainty of realizing the Company’s historical operating losses. Accordingly, no provision or benefit for income taxes related to the Company is reflected in the accompanying consolidated statements of operations and comprehensive income.

At December 31, 2012 and 2011, the net operating loss carryforwards for federal income tax purposes totaled approximately $102.6 million and $99.5 million, respectively. These losses, which begin to expire in 2024, are available to offset future income through 2032.

In January 2013, the Internal Revenue Service issued a notice of proposed adjustment to the Company that challenged certain aspects of the Company’s leases with its TRS Lessee and its subsidiaries under Code sections 482 and 857 and related regulations. The Company disagrees with the IRS’s position, and management believes that its positions are more-likely-than-not to prevail upon appeal. No amounts have been accrued under the Income Taxes Topic of the FASB ASC as of December 31, 2012, as the Company has no uncertain tax positions that warrant accrual.

Characterization of Distributions

For income tax purposes, distributions paid consist of ordinary income, capital gains, return of capital or a combination thereof. For the years ended December 31, 2012, 2011 and 2010, distributions paid per share were characterized as follows (unaudited):

	2012				2011				2010
	Amount		%		Amount		%		Amount		%
Common Stock:
Ordinary income	$	—	—	%	$	—	—	%	$	—	—	%
Capital gain	—		—		—		—		—		—
Return of capital	—		—		—		—		—		—
Total	$	—	—	%	$	—	—	%	$	—	—	%

Preferred Stock — Series A
Ordinary income	$	2.000	100.000	%	$	2.500	100.000	%	$	1.010	67.321	%
Capital gain	—		—		—		—		—		—
Return of capital	—		—		—		—		0.490		32.679
Total	$	2.000	100.000	%	$	2.500	100.000	%	$	1.500	100.000	%

Preferred Stock — Series C
Ordinary income	$	1.572	100.000	%	$	1.965	100.000	%	$	0.794	67.321	%
Capital gain	—		—		—		—		—		—
Return of capital	—		—		—		—		0.385		32.679
Total	$	1.572	100.000	%	$	1.965	100.000	%	$	1.179	100.000	%

Preferred Stock — Series D
Ordinary income	$	2.000	100.000	%	$	1.472	100.000	%	$	—	—	%
Capital gain	—		—		—		—		—		—
Return of capital	—				—		—		—		—
Total	$	2.000	100.000	%	$	1.472	100.000	%	$	—	—	%