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Income Taxes
12 Months Ended
Dec. 31, 2011
Income Taxes [Abstract]  
Income Taxes
12. Income Taxes

Earnings (loss) before income taxes consisted of the following:

 

                         

(millions)

  2011     2010     2009  

U.S.

  $ (367   $ (453   $ (359

Foreign

    (33     14       22  
   

 

 

   

 

 

   

 

 

 

Total

  $ (400   $ (439   $ (337
   

 

 

   

 

 

   

 

 

 

Income tax (benefit) expense consisted of the following:

 

                         

(millions)

  2011     2010     2009  

Current:

                       

Federal

  $ (5   $ —       $ 3  

Foreign

    5       6       10  

State

    —         1       1  
   

 

 

   

 

 

   

 

 

 
      —         7       14  
   

 

 

   

 

 

   

 

 

 

Deferred:

                       

Federal

    —         (37     357  

Foreign

    (11     —         4  

State

    1       (4     75  
   

 

 

   

 

 

   

 

 

 
      (10     (41     436  
   

 

 

   

 

 

   

 

 

 

Total (a)

  $ (10   $ (34   $ 450  
   

 

 

   

 

 

   

 

 

 

 

(a) Income tax (benefit) expense includes noncash deferred tax asset valuation allowances of $149 million in 2011, $179 million in 2010 and $575 million in 2009.

Differences between actual provisions for income taxes and provisions for income taxes at the U.S. federal statutory rate (35%) were as follows:

 

                         

(millions)

  2011     2010     2009  

Taxes on income at U.S. federal statutory rate

  $ (140   $ (153   $ (118

Foreign earnings subject to different tax rates

    6       —         (1

State income tax, net of federal benefit

    (18     (24     (1

Change in valuation allowance

    149       179       575  

Change in unrecognized tax benefits

    (7     (2     (7

Tax benefit resulting from other comprehensive income allocation

    —         (37     —    

Other, net

    —         1       2  
   

 

 

   

 

 

   

 

 

 

Provision for income tax (benefit) expense

  $ (10   $ (34   $ 450  

Effective income tax rate

    2.6     7.7     (133.2 )% 
   

 

 

   

 

 

   

 

 

 

In the above schedule, we have reclassified State income tax to be presented gross of the change in the valuation allowance resulting in a decrease of $23 million with an offsetting increase in the Change in valuation allowance for the year ended December 31, 2010 to conform to the current year presentation.

 

Significant components of deferred tax assets and liabilities as of December 31 were as follows:

 

                 

(millions)

  2011     2010  

Deferred Tax Assets:

               

Net operating loss and tax credit carryforwards

  $ 991     $ 859  

Pension and postretirement benefits

    206       172  

Goodwill and other intangible assets

    41       44  

Reserves not deductible until paid

    41       42  

Self insurance

    11       11  

Capitalized interest

    15       12  

Derivative instruments

    3       25  

Inventories

    8       —    

Share-based compensation

    29       29  
   

 

 

   

 

 

 

Deferred tax assets before valuation allowance

    1,345       1,194  

Valuation allowance

    (1,042     (884
   

 

 

   

 

 

 

Total deferred tax assets

  $ 303     $ 310  
   

 

 

   

 

 

 

Deferred Tax Liabilities:

               

Property, plant and equipment

    287       297  

Inventories

    —         2  

Other

    5       12  
   

 

 

   

 

 

 

Total deferred tax liabilities

    292       311  
   

 

 

   

 

 

 

Net deferred tax (liabilities) assets

  $ 11     $ (1
   

 

 

   

 

 

 

We have established a valuation allowance in the amount of $1.042 billion consisting of $766 million for federal deferred tax assets, $270 million for state deferred tax assets and $6 million for foreign deferred tax assets.

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 December 31, 2011, we had federal NOL carryforwards of approximately $1.865 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 $49 million that are available to reduce future regular federal income taxes over an indefinite period. In order to fully realize the U.S. federal net deferred tax assets, taxable income of approximately $2.004 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 December 31, 2011, we had a gross deferred tax asset related to our state NOLs and tax credit carryforwards of $264 million, of which $1 million will expire in 2012. 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 and $6 million as of December 31, 2011 and 2010, respectively, 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 during 2011, we recorded an increase in the valuation allowance against our deferred tax assets of $149 million. 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 $149 million increase, the valuation allowance was also impacted by other discrete adjustments that increased the valuation allowance by $9 million. As a result, the net increase in the valuation allowance was $158 million in 2011, increasing our deferred tax assets valuation allowance to $1.042 billion as of December 31, 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. Our net deferred tax assets were $11 million as of December 31, 2011. Our net deferred tax liabilities were $1 million as of December 31, 2010.

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 3.55% for December 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 December 31, 2011, our annual U.S. federal NOL utilization would have been limited to approximately $38 million per year.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

 

                         

(millions)

  2011     2010     2009  

Balance as of January 1

  $ 34     $ 35     $ 47  

Tax positions related to the current period:

                       

Gross increase

    —         —         —    

Gross decrease

    —         —         —    

Tax positions related to prior periods:

                       

Gross increase

    2       1       2  

Gross decrease

    (20     (1     (10

Settlements

    (3     —         (3

Lapse of statutes of limitations

    (1     (1     (1
   

 

 

   

 

 

   

 

 

 

Balance as of December 31

  $ 12     $ 34     $ 35  
   

 

 

   

 

 

   

 

 

 

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 December 31, 2011, the total amounts of interest expense and penalties recognized on our consolidated balance sheet were $3 million and $1 million, respectively. The total amounts of interest and penalties recognized in our consolidated statements of operations were $(1) million for 2011, zero for 2010 and $(1) million for 2009. The total amounts of unrecognized tax benefit that, if recognized, would affect our effective tax rate were $8 million for 2011, $16 million for 2010 and $33 million for 2009.

 

Our federal income tax returns for 2008 and prior years have been examined by the Internal Revenue Service. 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 limitations, it is reasonably possible that our gross unrecognized tax benefit may change within the next 12 months by a range of $3 million to $5.5 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 fourth quarter of 2010, we recorded an $18 million noncash income tax benefit on the loss from continuing operations for 2010. This benefit was offset by income tax expense on other comprehensive income. However, while the income tax benefit from continuing operations is reported on the income statement, the income tax expense on other comprehensive income is recorded directly to AOCI, which is a component of stockholders’ equity. Because the income tax expense on other comprehensive income is equal to the income tax benefit from continuing operations, our year-end net deferred tax position is 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.

We do not provide for U.S. income taxes on the portion of undistributed earnings of foreign subsidiaries that is intended to be permanently reinvested. The cumulative amount of such undistributed earnings totaled approximately $633 million as of December 31, 2011. These earnings would become taxable in the United States upon the sale or liquidation of these foreign subsidiaries or upon the remittance of dividends. The estimate of the amount of the deferred tax liability on such earnings is $27 million, consisting of foreign withholding taxes.