Income Taxes

9 Months Ended

Sep. 30, 2011

Income Taxes [Abstract]

Income Taxes

14. Income Taxes

We had an income tax benefit of $14 million and an effective tax rate of 11.2% in the third quarter of 2011.

     Accounting rules require a reduction of the carrying amounts of deferred tax assets by a valuation allowance if, based on the available evidence, it is more likely than not that such assets will not be realized. The need to establish valuation allowances for deferred tax assets is assessed periodically. In assessing the requirement for, and amount of, a valuation allowance in accordance with the more-likely-than-not standard, we give appropriate consideration to all positive and negative evidence related to the realization of the deferred tax assets. Under the accounting rules, this assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, our experience with operating loss and tax credit carryforwards not expiring unused and tax planning alternatives. A history of cumulative losses for a certain threshold period is a significant form of negative evidence used in the assessment, and the accounting rules require that we have a policy regarding the duration of the threshold period. If a cumulative loss threshold is met, forecasts of future profitability may not be used as positive evidence related to the realization of the deferred tax assets in the assessment. Consistent with practices in the home building and related industries, we have a policy of four years as our threshold period for cumulative losses.

     As of September 30, 2011, we had federal net operating loss, or NOL, carryforwards of approximately $1.8 billion that are available to offset future federal taxable income and will expire in the years 2026 through 2031. In addition, as of that date, we had federal alternative minimum tax credit carryforwards of approximately $52 million that are available to reduce future regular federal income taxes over an indefinite period. In order to fully realize these U.S. federal net deferred tax assets, taxable income of approximately $1.9 billion would need to be generated during the period before their expiration. In addition, we have federal foreign tax credit carryforwards of $6 million that will expire in 2015.

     As of September 30, 2011, we had a gross deferred tax asset related to our state NOLs and tax credit carryforwards of $285 million, of which $11 million will expire in 2011. The remainder will expire if unused in years 2012 through 2031. To the extent that we do not generate sufficient state taxable income within the statutory carryforward periods to utilize the NOL and tax credit carryforwards in these states, they will expire unused.

     We also had NOL and tax credit carryforwards in various foreign jurisdictions in the amount of $4 million as of September 30, 2011 against a portion of which we have historically maintained a valuation allowance.

     During periods prior to 2011, we established a valuation allowance against our deferred tax assets totaling $884 million. Based upon an evaluation of all available evidence and our losses for the first nine months of 2011, we recorded increases in the valuation allowance against our deferred tax assets of $54 million in the first quarter, $26 million in the second quarter and $28 million in the third quarter. Our cumulative loss position over the last four years was significant evidence supporting the recording of the additional valuation allowance. In addition to being impacted by the $108 million increase due to the first, second and third quarter losses, the valuation allowance was also impacted by other discrete adjustments that decreased the valuation allowance by $3 million. As a result, the net increase in the valuation allowance was $105 million, increasing our deferred tax assets valuation allowance to $989 million as of September 30, 2011. In future periods, the valuation allowance can be reversed based on sufficient evidence indicating that it is more likely than not that a portion of our deferred tax assets will be realized.

     The Internal Revenue Code imposes limitations on a corporation’s ability to utilize NOLs if it experiences an “ownership change.” In general terms, an ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50 percentage points over a three-year period. If we were to experience an ownership change, utilization of our NOLs would be subject to an annual limitation determined by multiplying the market value of our outstanding shares of stock at the time of the ownership change by the applicable long-term tax-exempt rate, which was 3.77% for September 2011. Any unused annual limitation may be carried over to later years within the allowed NOL carryforward period. The amount of the limitation may, under certain circumstances, be increased or decreased by built-in gains or losses held by us at the time of the change that are recognized in the five-year period after the change. Many states have similar limitations. If an ownership change had occurred as of September 30, 2011, our annual U.S. federal NOL utilization would have been limited to approximately $26 million per year.

     We classify interest expense and penalties related to unrecognized tax benefits and interest income on tax overpayments as components of income taxes (benefit). As of September 30, 2011, the total amount of interest expense and penalties recognized on our condensed consolidated balance sheet was $4 million. We recognized a $6 million tax benefit in the first quarter of 2011 due to the reversal of reserves for uncertain tax positions that were resolved during the period.

     Our federal income tax returns for 2008 and prior years have been examined by the Internal Revenue Service, or IRS. The U.S. federal statute of limitations remains open for the year 2004 and later years. We are under examination in various U.S. state and foreign jurisdictions. It is possible that these examinations may be resolved within the next 12 months. Due to the potential for resolution of the examinations and the expiration of various statutes of limitation, it is reasonably possible that our gross unrecognized tax benefit may change within the next 12 months by a range of $5 million to $7.5 million. Foreign and U.S. state jurisdictions have statutes of limitations generally ranging from three to five years.

     Under current accounting rules, we are required to consider all items (including items recorded in other comprehensive income) in determining the amount of tax benefit that results from a loss from continuing operations and that should be allocated to continuing operations. As a result, during the second quarter of 2011, we recorded a $3 million noncash income tax benefit on the loss from continuing operations. This benefit was offset by income tax expense on comprehensive income. However, while the income tax benefit from continuing operations is reported on the condensed consolidated statement of operations, the income tax expense on comprehensive income is recorded directly to AOCI, which is a component of stockholders’ equity. Because the income tax expense on comprehensive income is equal to the income tax benefit from continuing operations, our deferred tax position was not impacted by this tax allocation. A similar noncash income tax benefit of $19 million was recorded during the first quarter of 2010 relating to the fourth quarter of 2009.