15.	Income Taxes

The total income tax expense of

$1.1

million and

$1.7

million recognized for the

three

and

nine

months ended

July 31, 2018,

respectively, was primarily related to state tax expense from income generated that was

not

offset by tax benefits in states where we fully reserve the tax benefit from net operating losses.

The total income tax expense of

$287.0

million and

$286.5

million for the

three

and

nine

months ended

July 31, 2017,

respectively, was primarily due to increasing our valuation allowance to fully reserve against our deferred tax assets (“DTAs”). In addition, income tax for the same periods were impacted by state tax expense from income generated in certain states, which was

not

offset by tax benefits in other states that had losses (for which we fully reserve the tax benefit from net operating losses).

Our federal net operating losses of

$1.6

billion expire between

2028

and

2037.

Our state NOLs of

$2.6

billion expire between

2018

and

2037.

Of the total state amount,

$247.1

million will expire between

2018

through

2022;

$463.1

million will expire between

2023

through

2027;

$1.5

billion will expire between

2028

through

2032;

and

$348.6

million will expire between

2033

through

2037.

December 22, 2017,

the President of the United States signed into law the Tax Cuts and Jobs Act of

2017

(the “Act”). Effective

January 1, 2018,

the comprehensive U.S. tax reform package, among other things, lowered the corporate tax rate from

35%

21%.

Under the accounting rules, companies are required to recognize the effects of changes in tax laws and tax rates on deferred tax assets and liabilities in the period in which the new legislation is enacted. The effects of the Act on the Company include

one

major category which is the remeasurement of deferred taxes. Our accounting for the U.S. federal corporate tax rate is complete. Consequently, we have recorded a decrease related to deferred tax assets and liabilities of

$298.5

million and

$12.2

million, respectively, with a corresponding net adjustment to the valuation allowance in fiscal

2018,

therefore there was

income tax expense or benefit as a result of the tax law changes. We will continue to evaluate the impact of the tax reform as additional regulatory guidance is obtained. The ultimate impact of tax reform

may

differ from our interpretations and assumptions due to additional regulatory guidance that

may

be issued.

Deferred federal and state income tax assets (“DTAs”) primarily represent the deferred tax benefits arising from NOL carryforwards and temporary differences between book and tax income which will be recognized in future years as an offset against future taxable income. If the combination of future years’ income (or loss) and the reversal of the timing differences results in a loss, such losses can be carried forward to future years. In accordance with ASC

740,

we evaluate our DTAs 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.

As of

July 31, 2018,

we considered all available positive and negative evidence to determine whether, based on the weight of that evidence, our valuation allowance for our DTAs was appropriate in accordance with ASC

740.

Listed below, in order of the weighting of each factor, is the available positive and negative evidence that we considered in determining that it is more likely than

not

that all of our DTAs will

not

be realized. In analyzing these factors, overall the negative evidence, both objective and subjective, outweighed the positive evidence. Based on this analysis, we determined that the current valuation allowance for deferred taxes of

$659.9

million as of

July 31, 2018,

which fully reserves for our DTAs, is appropriate.

Fiscal

2017

financial results, especially the

$50.2

million pre-tax loss in the

third

quarter of

2017

primarily from the

$42.3

million loss on extinguishment of debt during the quarter, that put us in a cumulative

three

-year loss position as of

July 31, 2017.

We are still in a cumulative

three

-year loss position as of

July 31, 2018.

Per ASC

740,

cumulative losses are

one

of the most objectively verifiable forms of negative evidence. (Negative Objective Evidence)

In the

third

quarter of fiscal

2017

and

second

and

third

quarters of fiscal

2018,

we completed debt refinancing/restructuring transactions which, by extending our debt maturities, will enable us to allocate cash to invest in new communities and grow our community count to get back to sustained profitability. (Positive Objective Evidence)

The refinancing in the

third

quarter of fiscal

2017

discussed in item

above will increase our interest incurred in fiscal

2018

and future years (based on our longer term modeling) by

$23.4

million per year. (Negative Objective Evidence)

Recent financial results of

$40.0

million pre-tax loss for the

first

nine

months of

2018.

(Negative Objective Evidence)

We incurred pre-tax losses during the housing market decline and the slower than expected housing market recovery. (Negative Objective Evidence)

We exited

two

geographic markets in fiscal

2016,

one

in fiscal

2017,

and completed the wind down of operations in

one

other market in the

second

quarter of fiscal

2018,

that have historically had losses. By exiting these underperforming markets, the Company will be able to redeploy capital to better performing markets, which over time should improve our profitability. (Positive Subjective Evidence)

Evidence of a sustained recovery in the housing markets in which we operate, supported by economic data showing housing starts, homebuilding volume and prices all increasing and forecasted to continue to increase. (Positive Subjective Evidence)

The historical cyclicality of the U.S. housing market, a more restrictive mortgage lending environment compared to before the housing downturn, the uncertainty of the overall US economy and government policies and consumer confidence, all or any of which could continue to hamper a faster, stronger recovery of the housing market. (Negative Subjective Evidence)