13.

Income Taxes

Our provision for (benefit from) income taxes for the years ended December 31, 2012, 2011 and 2010 consisted of the following:


	Year Ended December 31,
	2012			2011			2010
Current tax benefit:	(Dollars in thousands)
Federal	$	(374	)	$	(3,652	)	$	(481	)
State		(1,210	)		(5,430	)		(5,350	)

Total current		(1,584	)		(9,082	)		(5,831	)

Deferred tax expense:
Federal		-			-			-
State		-			-			-

Total deferred		-			-			-

Benefit from income taxes	$	(1,584	)	$	(9,082	)	$	(5,831	)

The provision for (benefit from) income taxes differs from the amount that would be computed by applying the statutory federal income tax rate of 35% to income before income taxes as a result of the following:


	Year Ended December 31,
	2012			2011			2010
	(Dollars in thousands)
Tax expense(benefit) computed at federal statutory rate	$	21,390		$	(37,615	)	$	(24,711	)
State income tax expense(benefit), net of federal benefit		2,139			(3,762	)		(2,471	)
Permanent differences		1,771			93			319
Expiration of statute, Arizona net operating loss		2,634			-			-
Liability for unrecognized tax benefits		(1,857	)		(9,173	)		(4,082	)
Change in valuation allowance		(27,661	)		41,375			25,114

Benefit from income taxes	$	(1,584	)	$	(9,082	)	$	(5,831	)

Effective tax rate		2.6%			8.5%			8.3%

During 2012, the Company recorded a $1.6 million benefit from income taxes, primarily from the release of reserves attributable to the expiration of the statute of limitation periods and refunds from various states relating to and our settlement with the IRS on its audit of the 2004 and 2005.

During 2011, the Company recorded a $9.1 million benefit from income taxes, primarily related to the settlements of various state income tax matters and our settlement with the IRS on its audit of the 2004 and 2005 federal income tax returns.

During 2010, the Company recorded a $5.8 million benefit from income taxes, primarily from our finalization of various state income tax examinations.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of significant temporary differences that give rise to the net deferred tax asset are as follows:


	December 31,
	2012			2011
Deferred tax assets:	(Dollars in thousands)
Federal net operating loss carryforward	$	129,695		$	133,454
State net operating loss carryforward		49,551			53,350
Asset impairment charges		14,080			31,137
Stock-based compensation expense		29,196			26,771
Warranty, litigation and other reserves		14,556			18,933
Accrued liabilities		12,166			10,667
Alternative minimum tax and other tax credit carry forwards		10,988			10,296
Inventory, additional costs capitalized for tax purposes		3,930			3,466
Unrealized loss on marketable securities		-			2,787
Charitable contribution on carryforward		520			942
Deferred revenue		629			580

Total deferred tax assets		265,311			292,383
Valuation allowance		(248,306	)		(281,178	)

Total deferred tax assets, net of valuation allowance		17,005			11,205

Deferred tax liabilities:
Deferred revenue		3,796			5,589
Property, equipment and other assets		5,753			706
Inventory, additional costs capitalized for financial statement purposes		450			542
Accrued liabilities		758			32
Unrealized gain on marketable securities		1,863			-
Other, net		4,385			4,336

Total deferred tax liabilities		17,005			11,205

Net deferred tax asset	$	-		$	-

At December 31, 2012, we had $129.7 million in tax effected federal net operating loss carryforwards. These operating loss carryforwards, if unused, will begin to expire in 2028. Additionally, we had $49.6 million in tax effected state net operating loss carryforwards. These operating loss carryforwards, if unused, will begin to expire in 2013.

The decrease in our valuation allowance between December 31, 2012 and 2011 was primarily due to income generated the Company during 2012. Our future realization of its deferred tax assets ultimately depends on the existence of sufficient taxable income in the carryforward periods under the tax laws. We will continue analyzing, in subsequent reporting periods, the positive and negative evidence in determining the expected realization of its deferred tax assets.

The following table summarizes our liability associated with unrecognized tax benefits for the years ended December 31, 2012, 2011 and 2010:


	Year Ended December 31,
	2012			2011			2010
	(Dollars in thousands)
Gross unrecognized tax benefits at beginning of year	$	2,712		$	48,963		$	52,837
Increases related to prior year tax positions		63			-			13
Decreases related to prior year tax positions		(84	)		(286	)		(2,323	)
Increases related to current year tax positions		-			85			385
Decreases related to current year tax positions		-			-			-
Settlements with taxing authorities		-			(38,543	)		(1,414	)
Lapse of applicable statute of limitations		(2,116	)		(7,507	)		(535	)

Gross unrecognized tax benefits at end of year	$	575		$	2,712		$	48,963

Our liability for gross unrecognized tax benefits was $0.6 million and $2.7 million at December 31, 2012 and 2011, respectively. This decrease resulted primarily from the expiration of statutes of limitations.

In addition to unrecognized tax benefit activity noted above, additional paid-in-capital increased by $1.6 million and $18.4 million during the years ended December 31, 2012 and 2011, respectively. The 2012 increase was due to the expiration of various statutes of limitations while the 2011 increase was due to a settlement with the IRS and the expiration of various statutes of limitations. Finally, since we settled with the IRS for an amount less than the $35.6 million deposit we made with the IRS during 2008, the settlement resulted in an increase of $11.1 million to income taxes receivable in our consolidated balance sheets. We received payment from the IRS during the 2011 second quarter.

The total liabilities associated with unrecognized tax benefits that, if recognized, would impact the effective tax rates in our consolidated statements of operations is $0.5 million and $1.0 million at December 31, 2012 and 2011, respectively.

We accrue interest and penalties associated with unrecognized tax benefits in income tax expense in the consolidated statements of operations, and the corresponding liability in accrued liabilities in the Homebuilding section of our consolidated balance sheets. The expense (benefit) for interest and penalties reflected in the consolidated statements of operations for the years ended December 31, 2012, 2011 and 2010 was approximately $(0.4) million, ($4.8) million and ($1.8) million (interest net of related tax benefits), respectively. The corresponding liabilities in the consolidated balance sheets were $0.4 million and $0.8 million at December 31, 2012 and 2011, respectively.

We have taken positions in certain taxing jurisdictions for which it is reasonably possible that the total amounts of unrecognized tax benefits may decrease within the next twelve months. The possible decrease could result from the expiration of various statutes of limitation and the finalization of various state income tax matters. The estimated range of the reasonably possible decrease is $0 to $1.0 million.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. We are subject to U.S. federal income tax examination for calendar tax years ending 2009 through 2012. Additionally, we are subject to various state income tax examinations for the 2001 through 2012 calendar tax years. The Company currently is under state income tax examination in the states of California and Utah for various tax years.