Note 12 - Income Taxes

12 Months Ended

Oct. 31, 2012

Income Tax Disclosure [Text Block]

12. Income Taxes

Income taxes payable consists of the following:

	Year Ended October 31,
(In thousands)	2012		2011
State income taxes:
Current	$	940	$	36,164
Deferred		-		-
Federal income taxes:
Current		5,942		5,665
Deferred		-		-
Total	$	6,882	$	41,829

The provision for income taxes is composed of the following charges (benefits):

	Year Ended October 31,
(In thousands)	2012			2011			2010
Current income tax (benefit) expense:
Federal	$	277		$	(1,577	)	$	(291,334	)
State(1)		(35,328	)		(3,924	)		(6,536	)
Total current income tax (benefit):		(35,051	)		(5,501	)		(297,870	)
Total	$	(35,051	)	$	(5,501	)	$	(297,870	)

(1) The current state income tax expense is net of the use of state net operating losses totaling $3.4 million, $0.5 million, and $0.4 million for the years ended October 31, 2012, 2011, and 2010, respectively.

The 2012 total income tax benefit was $35.1 million primarily due to various state tax expenses and the elimination of uncertain state tax positions consistent with past practices and precedents of the relevant taxing authorities in their dealings with the Company. In 2011, we recorded a tax benefit of $5.5 million primarily due to a decrease in tax reserves for uncertain tax positions. In 2010, we recorded a tax benefit of $297.9 million.  This benefit was primarily due to the Worker, Homeownership, and Business Assistance Act of 2009, under which the Company was able to carryback its 2009 net operating loss to previously profitable years that were not available for carryback prior to the new tax legislation.  We recorded the impact of the carryback of $291.3 million in the three months ended January 31, 2010.  We received $274.1 million in the second quarter of fiscal 2010 and the remaining $17.2 million in the three months ended January 31, 2011.

In accordance with ASC 740, we evaluate our deferred tax assets quarterly to determine if valuation allowances are required.  ASC 740 requires that companies assess whether valuation allowances should be established based on the consideration of all available evidence using a “more likely than not” standard.  Because of the downturn in the homebuilding industry during 2010 and 2011, resulting in significant inventory and intangible impairments, we are in a three-year cumulative loss position as of October 31, 2012.  According to ASC 740, a three-year cumulative loss is significant negative evidence in considering whether deferred tax assets are realizable, and in this circumstance, the Company does not rely on projections of future taxable income to support the recovery of deferred tax assets.

During 2012, we increased the valuation allowance by $38.5 million against our deferred tax assets. Our valuation allowance increased to $937.9 million at October 31, 2012 from $899.4 million at October 31, 2011 primarily due to additional valuation allowance recorded for the federal and state tax benefits related to losses incurred during the period.  Our state net operating losses of approximately $2.3 billion expire between 2013 and 2032. Our federal net operating losses of $1.5 billion expire between 2028 and 2032.

The deferred tax assets and liabilities have been recognized in the Consolidated Balance Sheets as follows:

	Year Ended October 31,
(In thousands)	2012			2011
Deferred tax assets:
Association subsidy reserves	$	-		$	233
Depreciation		1,870			1,035
Inventory impairment loss		255,996			295,271
Uniform capitalization of overhead		6,046			6,446
Warranty and legal reserves		16,320			19,915
Deferred income		1,173			1,235
Acquisition intangibles		27,598			32,688
Restricted stock bonus		5,830			8,053
Rent on abandoned space		5,318			6,868
Stock options		5,831			1,956
Provision for losses		32,647			28,183
Joint venture loss		12,496			16,172
Federal net operating losses		528,117			444,573
State net operating losses		180,184			180,399
Other		11,362			9,547
Total deferred tax assets		1,090,788			1,052,574
Deferred tax liabilities:
Acquisition intangibles		296			303
Debt repurchase income		152,414			152,564
Other		197			293
Total deferred tax liabilities		152,907			153,160
Valuation allowance		(937,881	)		(899,414	)
Net deferred income taxes	$	-		$	-

The effective tax rates varied from the statutory federal income tax rate. The effective tax rate is affected by a number of factors, the most significant of which is the valuation allowance recorded against our deferred tax assets.  The sources of these factors were as follows:

	Year Ended October 31,
	2012			2011			2010
Computed “expected” tax rate		35.0	%		35.0	%		35.0	%
State income taxes, net of Federal income tax benefit		(2.6	)		(0.1	)		(0.3	)
Permanent differences, net		(0.3	)		(1.2	)		1.2
Deferred tax asset valuation allowance impact		(32.3	)		(25.8	)		65.2
Tax contingencies		34.8			(3.2	)		-
Adjustments to prior years’ tax accruals		-			(2.8	)		-
Other		-			-			(0.2	)
Effective tax rate		34.6	%		1.9	%		100.9	%

ASC 740-10 provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits.

Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of ASC 740-10 and in subsequent periods. This interpretation also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

We recognize tax liabilities in accordance with ASC 740-10 and we adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a liability that is materially different from our current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which they are determined.

We recognize interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying consolidated statement of operations.  Accrued interest and penalties are included within the related tax liability line in the consolidated balance sheet.

The following is a tabular reconciliation of the total amount of unrecognized tax benefits for the year (in millions) excluding interest and penalties

	2012			2011
Unrecognized tax benefit—November 1,	$	26.8		$	23.0
Gross increases—tax positions in current period		0.6			9.3
Decrease related to tax positions taken during a prior period		(16.2	)		-
Settlements		-			(0.4	)
Lapse of statute of limitations		(1.3	)		(5.1	)
Unrecognized tax benefit—October 31,	$	9.9		$	26.8

Related to the unrecognized tax benefits noted above, as of October 31, 2012, and 2011, we have recognized a liability for interest and penalties of $0.4 million and $18.8 million, respectively.  For the years ended October 31, 2012, 2011 and 2010, we recognized $(18.3) million, $(2.0) million and $(3.2) million, respectively, of interest and penalties in income tax benefit.

It is likely that, within the next twelve months, the amount of the Company's unrecognized tax benefits will decrease by approximately $9.3 million, excluding penalties and interest. This reduction is expected primarily due to the expiration of the statutes of limitation or the expectation of settlement. The total amount of unrecognized tax benefits that, if recognized, would affect the Company’s effective tax rate (excluding any related impact to the valuation allowance) is $9.9 million and $26.8 million as of October 31, 2012 and 2011, respectively.  The recognition of unrecognized tax benefits could have an impact on the Company’s deferred tax assets and the valuation allowance.

There is an open federal audit for the year ended October 31, 2010.  We are also subject to various income tax examinations in the states in which we do business. The outcome for a particular audit cannot be determined with certainty prior to the conclusion of the audit, appeal, and in some cases, litigation process. As each audit is concluded, adjustments, if any, are appropriately recorded in the period determined.  To provide for potential exposures, tax reserves are recorded, if applicable, based on reasonable estimates of potential audit results.  However, if the reserves are insufficient upon completion of an audit, there could be an adverse impact on our financial position and results of operations.  The statute of limitations for our major tax jurisdictions remains open for examination for tax years 2008 – 2011.