Income Taxes

The following table provides a reconciliation of the Company’s effective tax rate from the federal statutory tax rate for the fiscal years ended October 31, 2012, 2011 and 2010 ($ amounts in thousands).



	2012				2011				2010
	$		%*		$		%*		$		%*
Federal tax benefit at statutory rate	39,530		35.0		(10,278	)	35.0		(41,015	)	35.0
State taxes, net of federal benefit	4,711		4.2		(954	)	3.2		(3,809	)	3.3
Reversal of accrual for uncertain tax positions	(34,167	)	(30.3	)	(52,306	)	178.1		(39,485	)	33.7
Accrued interest on anticipated tax assessments	5,000		4.4		3,055		(10.4	)	9,263		(7.9	)
Increase in unrecognized tax benefits	5,489		4.9						35,575		(30.4	)
Increase in deferred tax assets, net					(25,948	)	88.4
Valuation allowance — recognized					43,876		(149.4	)	55,492		(47.4	)
Valuation allowance — reversed	(394,718	)	(349.5	)	(25,689	)	87.5		(128,640	)	109.8
Other	(49	)	—		(917	)	3.1		(1,194	)	1.0
Tax benefit	(374,204	)	(331.3	)	(69,161	)	235.5		(113,813	)	97.1



*	Due to rounding, amounts may not add.

The Company currently operates in 19 states and is subject to various state tax jurisdictions. The Company estimates its state tax liability based upon the individual taxing authorities’ regulations, estimates of income by taxing jurisdiction and the Company’s ability to utilize certain tax-saving strategies. Due primarily to a change in the Company’s estimate of the allocation of income or loss, as the case may be, among the various taxing jurisdictions and changes in tax regulations and their impact on the Company’s tax strategies, the Company’s estimated rate for state income taxes was 6.4% in fiscal 2012 and 5.0% for each of fiscal 2011 and 2010.

The following table provides information regarding the (benefit) provision for income taxes for each of the fiscal years ended October 31, 2012, 2011 and 2010 (amounts in thousands).



	2012			2011			2010
Federal	$	(329,277	)	$	(21,517	)	$	(67,318	)
State	(44,927		)	(47,644		)	(46,495		)
	$	(374,204	)	$	(69,161	)	$	(113,813	)

Current	$	(21,296	)	$	(43,212	)	$	(156,985	)
Deferred	(352,908		)	(25,949		)	43,172
	$	(374,204	)	$	(69,161	)	$	(113,813	)

In November 2009, the Worker, Homeownership, and Business Assistance Act of 2009 was enacted into law which allowed the Company to carry back its fiscal 2010 taxable loss against taxable income reported in fiscal 2006 and receive a federal tax refund in its second quarter of fiscal 2011 of $154.3 million. The tax losses generated in fiscal 2010 were primarily from the recognition for tax purposes of previously recognized book impairments and the recognition of stock option expenses recognized for book purposes in prior years.

The following table provides a reconciliation of the change in the unrecognized tax benefits for the years ended October 31, 2012, 2011 and 2010 (amounts in thousands).



	2012			2011			2010
Balance, beginning of year	$	104,669		$	160,446		$	171,366
Increase in benefit as a result of tax positions taken in prior years	5,000			8,168			14,251
Increase in benefit as a result of tax positions taken in current year	5,489						15,675
Decrease in benefit as a result of settlements	—			(17,954		)
Decrease in benefit as a result of completion of audits	(1,782		)	(33,370		)
Decrease in benefit as a result of lapse of statute of limitation	(32,385		)	(12,621		)	(40,846		)
Balance, end of year	$	80,991		$	104,669		$	160,446

The Company has reached final settlement of its federal tax returns for fiscal years through 2009. The federal settlements resulted in a reduction in the Company’s unrecognized tax benefits. The state impact of any amended federal return remains subject to examination by various states for a period of up to one year after formal notification of such amendments is made to the states.

The Company’s unrecognized tax benefits are included in “Income taxes payable” on the Company’s consolidated balance sheets. If these unrecognized tax benefits reverse in the future, they would have a beneficial impact on the Company’s effective tax rate at that time. During the next twelve months, it is reasonably possible that the amount of unrecognized tax benefits will change but we are not able to provide a range of such change. The anticipated changes will be principally due to the expiration of tax statutes, settlements with taxing jurisdictions, increases due to new tax positions taken and the accrual of estimated interest and penalties.

The Company recognizes in its tax benefit, potential interest and penalties. The following table provides information as to the amounts recognized in its tax provision, before reduction for applicable taxes and reversal of previously accrued interest and penalties, of potential interest and penalties in the twelve-month periods ended October 31, 2012, 2011 and 2010, and the amounts accrued for potential interest and penalties at October 31, 2012 and 2011 (amounts in thousands).



Expense recognized in statements of operations
Fiscal year
2012	$	5,000
2011	$	4,700
2010	$	14,300



Accrued at:
October 31, 2012	$	24,906
October 31, 2011	$	29,200

The amounts accrued for interest and penalties are included in “Income taxes payable” on the Company’s consolidated balance sheets.

Since the beginning of fiscal 2007, the Company recorded significant deferred tax assets as a result of the recognition of inventory impairments and impairments of investments in and advances to unconsolidated entities. In accordance with GAAP, the Company assessed whether a valuation allowance should be established based on its determination of whether it is “more likely than not” that some portion or all of the deferred tax assets would not be realized. In fiscal 2009, the Company recorded valuation allowances against its deferred tax assets. The Company believed that the continued downturn in the housing market, the uncertainty as to its length and magnitude, the Company's continued recognition of impairment charges, and its operating losses were significant negative evidence of the need for a valuation allowance against its net deferred tax assets.

At October 31, 2012, the Company considered the need for a valuation allowance against its deferred tax assets considering all available and objectively verifiable positive and negative evidence. That evidence principally consisted of (i) an indication that the events and conditions that gave rise to significant losses in recent years were unlikely to recur in the foreseeable future, (ii) a return to profitability in fiscal 2012 together with expectations of continuing profitability in fiscal 2013, supported by existing backlog, and beyond, and (iii) the term of the statutory operating loss carry-forward periods provide evidence that it is more likely than not that these deferred tax assets will be realized.

At October 31, 2012, the Company re-evaluated the evidence related to the need for its deferred tax asset valuation allowances and determined that the valuation allowance on its federal deferred tax assets and certain state valuation allowances were no longer needed. Accordingly, in fiscal 2012, the Company reversed a valuation allowance in the amount of $394.7 million. This has been reported as a component of income tax benefit in the accompanying Consolidated Statement of Operations. The remaining valuation allowance of $57.0 million relates to deferred tax assets in states that have not met the “more-likely-than-not” realization threshold criteria. The Company will continue to review its deferred tax assets in accordance with ASC 740.

The components of net deferred tax assets and liabilities at October 31, 2012 and 2011 are set forth below (amounts in thousands).



	2012			2011*
Deferred tax assets:
Accrued expenses	$	57,734		$	59,411
Impairment charges	319,818			368,459
Inventory valuation differences	29,288			30,802
Stock-based compensation expense	44,336			38,454
Amounts related to unrecognized tax benefits	36,934			47,387
State tax, net operating loss carryforward	50,006			52,323
Federal tax net operating loss carryforward	25,170			11,232
Other	20,169			11,783
Total assets	583,455			619,851
Deferred tax liabilities:
Capitalized interest	102,713			84,915
Deferred income	6,608			7,771
Expenses taken for tax purposes not for book	36,811			58,502
Depreciation	3,994			2,344
Deferred marketing	18,229			14,557
Total liabilities	168,355			168,089
Net deferred tax assets before valuation allowances	415,100			451,762
Cumulative valuation allowance - state	(57,044		)	(89,142		)
Cumulative valuation allowance - federal				(362,620		)
Net deferred tax assets	$	358,056		$	—


*	To conform to the current period presentation, the October 31, 2011 amounts reflect adjustments to certain deferred amounts by $24.4 million with a corresponding adjustment to the related valuation allowances.

For federal income tax purposes, the Company is allowed to carry forward tax losses for 20 years and apply such tax losses to future taxable income to realize its federal deferred tax assets. At October 31, 2012, the Company estimates that it will have federal tax loss carryfowards of approximately $106.3 million resulting from losses incurred for federal income tax purposes during fiscal years 2011 and 2012.

We file tax returns in the various states in which we do business. Each state has its own statutes regarding the use of tax loss carryforwards. Some of the states in which we do business do not allow for the carryfoward of losses while others allow for carryforwards for 5 years to 20 years.