13.

Income Taxes

At the end of each interim period, we are required to estimate our annual effective tax rate for the fiscal year and use that rate to provide for income taxes for the current year-to-date reporting period. We recorded an income tax benefit of $186.9 million and $186.8 million for the three and six months ended June 30, 2013, respectively, compared to a benefit of $1.0 million and $1.1 million for the same respective periods in 2012. The income tax benefit in the current year periods is due primarily to a $187.6 million, or $3.80 per diluted share, reversal of a portion of our deferred tax asset valuation allowance in the second quarter, while the benefit from income taxes in the prior year periods was due primarily to the release of reserves related to settlements with various taxing authorities. Due to the effects of the deferred tax asset valuation allowance release and changes in unrecognized tax benefits, our effective tax rates in 2013 and 2012 are not meaningful as the income tax benefit is not directly correlated to the amount of pretax income or loss.

Deferred income taxes reflect the net tax effects of temporary differences between (1) the carrying amounts of the assets and liabilities for financial reporting purposes and (2) the amounts used for income tax purposes. A valuation allowance is recorded against a deferred tax asset if, based on the weight of available evidence, it is more-likely-than-not (a likelihood of more than 50%) that some portion, or all, of the deferred tax asset will not be realized. At March 31, 2013, we had a full valuation allowance totaling $238.8 million recorded against our net deferred tax asset. During the quarter ended June 30, 2013, we concluded that it was more likely than not that we would be able to realize substantially all of our deferred tax assets within the applicable carryforward periods and as such, we reversed substantially all of our deferred tax asset valuation allowance.

We have a remaining valuation allowance of $39.7 million related to (1) a portion of which will be reversed in the remaining interim periods of 2013 as pretax income is realized as required by ASC 740-270, Income Taxes - Interim Reporting, when a change in a valuation allowance is recognized in an interim period and (2) various state net operating loss carryforwards where realization is more uncertain at this time due to the more limited carryforward periods that exist in certain states.

In our evaluation of the need for, and level of, a valuation allowance recorded against our deferred tax assets, the most significant piece of evidence considered was the objective and direct positive evidence related to our recent financial results. We have generated pretax income in each of the last six consecutive quarters totaling $121.7 million, and our second quarter 2013 pretax income was higher than any of the five previous quarters. In prior periods, a significant part of the negative evidence we considered was our three-year cumulative loss position. However, at June 30, 2013, when including expected earnings from homes currently in our backlog, we no longer anticipate being in a cumulative loss position at December 31, 2013. Lastly, if our quarterly income in future years remains consistent with earnings levels experienced in recent quarters, we estimate that we will utilize all of our current federal net operating losses by 2016. Other negative evidence considered was the recent rise in mortgage interest rates, caused largely by an expectation that the Federal Reserve may taper its use of quantitative easing as early as the second half of 2013. However, the Federal Reserve has also indicated that such tapering would likely only occur if economic conditions continue to improve, which would help to offset the impact of rising interest rates on the homebuilding industry. Based on our evaluation of both positive and negative evidence, we concluded that the objective and direct positive evidence related to operating results achieved during the recent challenging economic and housing market conditions and the sustainability of current pretax income levels outweighed the negative evidence and that it is more likely than not that the substantial majority of the Company’s deferred tax assets will be realized.

The components of our net deferred tax asset were as follows:


	June 30, 2013			December 31, 2012
	(Dollars in thousands)
Deferred tax assets:
Federal net operating loss carryforwards	$	110,779		$	129,695
State net operating loss carryforwards		47,646			49,551
Alternative minimum tax and other tax credit carryforwards		12,069			10,988
Stock-based compensation expense		29,267			29,196
Warranty, litigation and other reserves		15,525			14,556
Deferred compensation retirement plans		12,111			11,252
Asset impairment charges		8,984			14,080
Inventory, additional costs capitalized for tax purposes		4,450			3,930
Other, net		1,703			2,063

Total deferred tax assets		242,534			265,311
Valuation allowance		(39,697	)		(248,306	)

Total deferred tax assets, net of valuation allowance		202,837			17,005


Deferred tax liabilities:
Property, equipment and other assets		6,164			5,753
Discount on notes receivable		4,204			4,204
Deferred revenue		3,426			3,796
Unrealized gain on marketable securities		3,422			1,863
Other, net		1,400			1,389

Total deferred tax liabilities		18,616			17,005

Net deferred tax asset	$	184,221		$	—