Note 11: Income Taxes

We believe that we are organized in conformity with, and operate in a manner that will allow us to elect to be taxed as a REIT, for U.S. federal income tax purposes for our tax year ending December 31, 2017, and we expect to continue to be organized and operate so as to qualify as a REIT. To qualify as a REIT, we must continually satisfy tests concerning, among other things, the real estate qualification of sources of our income, the real estate composition and values of our assets, the amounts we distribute to our stockholders and the diversity of ownership of our stock. To the extent we qualify as a REIT, we generally will not be subject to U.S. federal income tax on taxable income generated by our REIT activities that we distribute to our stockholders. Accordingly, no provision for U.S. federal income taxes has been included in our accompanying consolidated financial statements for the year ended December 31, 2017 related to our REIT activities, other than the derecognition of deferred tax assets and liabilities discussed below.

The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. The Act, which amended the Internal Revenue Code of 1986 (“Code”), was the most significant tax legislative development in decades. Major elements of the Act from our perspective include reducing the corporate tax rate; restricting the eligibility for tax deferred like-kind exchange treatment solely to real property; limiting the deductibility of interest expense; and the one-time transition tax on foreign cash and unremitted earnings. At December 31, 2017, we have not completed the internal assessment for the tax effects of enactment of the Act; specifically, the analysis to determine the potential tax liability and deferred tax related to a potential sale of ancillary hotel furniture, fixtures, and equipment that may be sold in a like-kind exchange transaction was not able to be completed. Accordingly, Staff Accounting Bulletin 118, issued by the Securities and Exchange Commission, states that companies that are unable to calculate a reasonable estimate are able to record the adjustment to the tax provision as the information becomes available, but no later than one year from the enactment date. We intend to continue our analysis and record the effects of the provision through deferred taxes when the information is available and an assessment is made.

We will be subject to U.S. federal income tax on taxable sales of built-in gain property (representing property with an excess of fair value over tax basis held by us on January 4, 2017) during the five-year period following our election to be taxed as a REIT. In addition, we are subject to non-U.S. income tax on foreign held REIT activities. Further, our taxable REIT subsidiaries (“TRSs”) are generally subject to U.S. federal, state and local, and foreign income taxes (as applicable).

Our tax provision includes federal, state and foreign income taxes payable. The domestic and foreign components of income before income taxes were:

	Year Ended December 31,
	2017		2016		2015
	(in millions)
U.S. income before tax	$	279	$	188	$	379
Foreign income before tax		6		33		38
Income before income taxes	$	285	$	221	$	417

The components of our (benefit) provision for income taxes were:

	Year Ended December 31,
	2017			2016			2015
	(in millions)
Current:
Federal	$	21		$	130		$	102
State		2			16			15
Foreign		9			2			8
Total current		32			148			125
Deferred:
Federal		(2,373	)		(60	)		69
State		—			(7	)		(74	)
Foreign		(5	)		1			(2	)
Total deferred		(2,378	)		(66	)		(7	)
Total (benefit) provision for income taxes	$	(2,346	)	$	82		$	118

Reconciliations of our tax provision at the U.S. statutory rate to the (benefit) provision for income taxes were:

	Year Ended December 31,
	2017			2016			2015
	(in millions)
Statutory U.S. federal income tax provision	$	100		$	77		$	146
State income taxes, net of U.S. federal tax benefit		2			9			26
Foreign income tax expense		4			5			9
U.S. benefit of foreign taxes		—			(3	)		(6	)
Nontaxable liquidation of subsidiaries		—			—			(34	)
Change in deferred tax asset valuation allowance		3			(2	)		(3	)
Change in basis difference in foreign subsidiaries		—			(5	)		(2	)
Tax rate change		(25	)		—			(81	)
Non-deductible goodwill		—			—			65
Non-deductible transaction costs		—			3			—
REIT income not subject to tax		(83	)		—			—
Derecognition and remeasurement of deferred taxes		(2,347	)		—			—
Other, net		—			(2	)		(2	)
(Benefit) provision for income taxes	$	(2,346	)	$	82		$	118

Through January 3, 2017, we had been included in the consolidated U.S. federal income tax return of Hilton, as well as certain state tax returns where Hilton filed on a consolidated or combined basis, and foreign tax returns, as applicable. During the years ended December 31, 2016 and 2015, Hilton paid $146 million and $119 million, respectively of income tax liabilities related to us.

During the year ended December 31, 2015, certain of our controlled foreign corporation subsidiaries elected to be disregarded for U.S. federal income tax purposes. These transactions were treated as tax-free liquidations for federal tax purposes. As a result of these liquidation transactions, we recognized $34 million of previously unrecognized deferred tax assets associated with assets and liabilities distributed from the liquidated controlled foreign corporations. These previously unrecognized deferred tax assets were a component of our investment in foreign subsidiaries deferred tax balances that were connected to the liquidated controlled foreign corporations. Prior to these liquidations, we did not believe that the benefit of these deferred tax assets would be realized within the foreseeable future; therefore, we did not recognize these deferred tax assets.

As a result of the sale of the Waldorf Astoria New York during the year ended December 31, 2015, we reduced our U.S. deferred tax liabilities and provision for income taxes by $81 million due to a decrease in the state effective tax rate being applied to our gross temporary differences.

Deferred income taxes represent the tax effect of the differences between the book and tax bases of assets and liabilities plus carryforward items. The composition of net deferred tax balances were as follows:

	December 31,
	2017			2016
	(in millions)
Deferred income tax assets⁽¹⁾	$	6		$	4
Deferred income tax liabilities		(65	)		(2,437	)
Net deferred tax liability	$	(59	)	$	(2,433	)

⁽¹⁾	Included within Other assets in our consolidated balance sheets.

The tax effects of the temporary differences and carryforwards that give rise to our net deferred tax liability were:

	December 31,
	2017			2016
	(in millions)
Deferred tax assets:
Net operating loss carryforwards	$	10		$	6
Unrealized foreign currency losses		—			4
Other reserves		1			4
Capital lease obligations		2			8
Deferred income		3			7
Property and equipment		7			—
Accrued compensation		2			—
Other		2			4
Total gross deferred tax assets		27			33
Less: valuation allowance		(4	)		—
Deferred tax assets	$	23		$	33
Deferred tax liabilities:
Property and equipment	$	(77	)	$	(2,382	)
Investments		(4	)		(75	)
Amortizable intangible assets		—			(9	)
Other		(1	)		—
Deferred tax liabilities		(82	)		(2,466	)
Net deferred tax liability	$	(59	)	$	(2,433	)

As of December 31, 2017, we had federal, state and foreign net operating loss carryforwards of $71 million, which resulted in deferred tax assets of $10 million. Our federal and state net operating loss carryforwards of approximately $5 million and $14 million begin to expire in 2023 and 2025, respectively and our foreign net operating loss carryforwards of approximately $52 million are not subject to expiration. Our valuation allowance increased $4 million during the year ended December 31, 2017.

For periods ended prior to January 4, 2017, Hilton filed income tax returns, including returns for us, with federal, state and foreign jurisdictions. Hilton is under regular and recurring audit by the Internal Revenue Service on open tax positions. The timing of the resolution of tax audits is highly uncertain, as are the amounts, if any, that may ultimately be paid upon such resolution. Changes may result from the conclusion of ongoing audits, appeals or litigation in state, local, federal and foreign tax jurisdictions or from the resolution of various proceedings between the U.S. and foreign tax authorities. Hilton is no longer subject to U.S. federal income tax examination for years through 2004. As of December 31, 2017, Hilton remains subject to federal examinations from 2005 through 2016, state examinations from 2005 through 2016 and foreign examinations of their income tax returns for the years 1996 through 2016. We will be subject to federal, state and foreign examinations for 2017.

For federal income tax purposes, the cash distributions to stockholders are characterized as follows:

	For the Year Ended
	December 31, 2017
Common distributions:
Ordinary dividends	$	4.41
Qualified dividends		2.62