Income Taxes

12 Months Ended

Dec. 31, 2011

Income Taxes

Income Taxes

Note H: Income Taxes

Deferred tax assets are recognized for estimated tax effects that are attributable to deductible temporary differences and tax carryforwards related to tax credits and operating losses. They are realized when existing temporary differences are carried back to a profitable year(s) and/or carried forward to a future year(s) having taxable income. Deferred tax assets are reduced by a valuation allowance if an assessment of their components indicates that it is more likely than not that all or some portion of the deferred tax asset will not be realized. This assessment considers, among other things, cumulative losses; forecasts of future profitability; the duration of statutory carryforward periods; the Company's experience with loss carryforwards not expiring unused; and tax planning alternatives. The Company generated deferred tax assets in 2011, 2010 and 2009 primarily due to inventory impairments and net operating loss carryforwards. In light of these additional impairments, the unavailability of net operating loss carrybacks and the uncertainty as to the housing downturn's duration, which limits the Company's ability to predict future taxable income, the Company determined that an allowance against its deferred tax assets was required. Therefore, in accordance with ASC 740, the Company recorded net valuation allowances totaling $16.6 million, $32.7 million and $2.1 million against its deferred tax assets in 2011, 2010 and 2009, respectively, which were reflected as noncash charges to income tax expense. The net valuation allowance taken for net state taxes was comprised of increases that totaled $1.4 million, $2.7 million and $8.6 million in 2011, 2010 and 2009, respectively. The net valuation allowance taken for federal taxes totaled increases of $15.2 million and $30.0 million in 2011 and 2010, respectively, and a decrease of $6.5 million in 2009. The net increase in the valuation allowance was $16.6 million from 2010 to 2011, and the balance of the deferred tax valuation allowance totaled $270.5 million and $253.8 million at December 31, 2011 and 2010, respectively. For federal purposes, net operating losses can be carried forward 20 years; for state purposes, they can generally be carried forward 10 to 20 years, depending on the taxing jurisdiction. The federal net operating loss carryforwards, if not utilized, will begin to expire in 2030. For federal purposes, the Company's carryforwards of $704,000 can be carried forward 20 years and its remaining tax credit carryforwards of $648,000 can be carried forward 5 years, with expiration dates beginning in 2013. To the extent that the Company generates sufficient taxable income in the future to utilize the tax benefits of related deferred tax assets, it expects to experience a reduction in its effective tax rate as the valuation allowance is reversed.

The Company's provision for income tax presented an overall effective income tax benefit rate of 5.3 percent for the year ended December 31, 2011, an overall effective income tax rate of 0.2 percent for 2010 and an overall effective income tax benefit rate of 37.4 percent for 2009. The change in the effective income tax rate for 2011, compared to 2010, was primarily due to the settlement of previously reserved unrecognized tax benefits. The change in the effective income tax rate for 2010, compared to 2009, was primarily due to noncash tax charges of $32.7 million in 2010 for the valuation allowance that related to the Company's deferred tax assets.

The Company made a $1.6 million settlement payment for income tax, interest and penalty to a state taxing authority during the first quarter of 2011. Additionally, it recorded a tax benefit of $2.4 million to reverse the excess reserve previously recorded for the tax position that related to this settlement.

In 2009, the "Worker, Homeownership and Business Assistance Act of 2009" (the "Act") was enacted. The Act amended Section 172 of the Internal Revenue Code to allow net operating losses realized in a tax year ending after December 31, 2007, and beginning before January 1, 2010, to be carried back up to five years (such losses were previously limited to a two-year carryback). This change allowed the Company to carry back its 2009 taxable loss to prior years and receive a refund of previously paid federal income taxes during the first quarter of 2010.

The following table reconciles the federal income tax statutory rate to the Company's effective income tax benefit (expense) rate for the years ended December 31, 2011, 2010 and 2009:

	2011		2010		2009
Federal income tax statutory rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal tax	3.2		3.2		3.2
Deferred tax valuation allowance	(37.8	)	(38.5	)	(0.9	)
Settlement of uncertain tax positions	4.6		–		–
Other	0.3		0.1		0.1
Effective income tax benefit (expense) rate	5.3	%	(0.2	)%	37.4	%

The Company's income tax expense (benefit) for the years ended December 31, 2011, 2010 and 2009, is summarized as follows:

(in thousands)		2011			2010			2009
CURRENT TAX (BENEFIT) EXPENSE
Federal	$	(227	)	$	(244	)	$	(95,902	)
State		(2,638	)		439			(1,295	)
Total current tax (benefit) expense		(2,865	)		195			(97,197	)
DEFERRED TAX EXPENSE
Federal		–			–			–
State		–			–			–
Total deferred tax expense		–			–			–
Total income tax (benefit) expense	$	(2,865	)	$	195		$	(97,197	)

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Significant components of the Company's deferred tax assets and liabilities were as follows:

	DECEMBER 31,
(in thousands)		2011			2010
DEFERRED TAX ASSETS
Warranty, legal and other accruals	$	17,206		$	17,718
Employee benefits		17,131			16,831
Noncash tax charge for impairment of long-lived assets		115,226			138,486
Joint ventures		3,604			3,146
Federal net operating loss carryforwards		107,529			66,677
Other carryforwards		1,352			1,352
State net operating loss carryforwards		36,831			33,038
Other		1,313			3,032
Total		300,192			280,280
Valuation allowance		(270,451	)		(253,822	)
Total deferred tax assets		29,741			26,458
DEFERRED TAX LIABILITIES
Deferred recognition of income and gains		(3,385	)		(2,002	)
Capitalized expenses		(24,842	)		(22,693	)
Other		(1,514	)		(1,763	)
Total deferred tax liabilities		(29,741	)		(26,458	)
NET DEFERRED TAX ASSET	$	–		$	–

The Company accounts for unrecognized tax benefits in accordance with ASC 740. It accounts for interest and penalties on unrecognized tax benefits through its provision for income taxes. At December 31, 2011, the Company's liability for gross unrecognized tax benefits was $129,000, of which $84,000, if recognized, will affect the Company's effective tax rate. The Company had $19,000 and $2.7 million in accrued interest and penalties at December 31, 2011 and 2010, respectively. At December 31, 2010, the Company's liability for gross unrecognized tax benefits was $3.2 million, of which $2.2 million, if recognized, will affect the Company's effective tax rate. The Company estimates that, within 12 months, $29,000 of gross state unrecognized tax benefits will reverse due to the anticipated expiration of time to assess tax.

The following table represents a reconciliation of changes in the Company's tax uncertainties:

(in thousands)		2011			2010
Balance at January 1	$	3,164		$	4,132
Additions related to current year positions		100			1,006
Reductions related to prior year positions		(450	)		–
Reductions due to settlements		(1,878	)		–
Reductions due to expiration of the statute of limitations		(807	)		(1,974	)
Balance at December 31	$	129		$	3,164

As of December 31, 2011, tax years 2004, 2005 and 2007 through 2011 remain subject to examination.