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 these assets 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. In light of the unavailability of net operating loss carrybacks and the Company's assessment of the factors listed above, it was determined that an allowance against its deferred tax assets was required. Therefore, in accordance with ASC 740, the Company maintained a full valuation allowance against its net deferred tax assets. In light of the Company's return to profitability, its net valuation allowance was reduced by $11.6 million in 2012, of which $10.5 million was for federal taxes and $1.1 million was for state taxes. The Company recorded net valuation allowances totaling $16.6 million and $32.7 million against its deferred tax assets in 2011 and 2010, 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 and $2.7 million in 2011 and 2010, respectively. The net valuation allowance taken for federal taxes totaled increases of $15.2 million and $30.0 million in 2011 and 2010, respectively. The net decrease in the valuation allowance was $11.6 million from 2011 to 2012, and the balance of the deferred tax valuation allowance totaled $258.9 million and $270.5 million at December 31, 2012 and 2011, respectively. To the extent that the Company generates sufficient taxable income in the future to utilize the tax benefits of related deferred tax assets, it will experience a reduction in its effective tax rate during those periods in which the valuation allowance is reversed. 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. Federal net operating loss carryforwards, if not utilized, will begin to expire in 2031. For federal purposes, the Company's carryforwards of $768,000 can be carried forward 20 years and its remaining carryforwards of $289,000 can be carried forward 5 years, with expiration dates beginning in 2014.

The Company's provision for income tax presented an overall effective income tax expense rate of 3.8 percent for the year ended December 31, 2012, an overall effective income tax benefit rate of 5.3 percent for 2011 and an overall effective income tax expense rate of 0.2 percent for 2010. Changes in the effective income tax rate for the years ended 2012, 2011 and 2010 were primarily due the settlement of previously reserved unrecognized tax benefits.

The Company made a $1.6 million settlement payment for income tax, interest and penalty to a state taxing authority during 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.

The following table reconciles the federal income tax statutory rate to the Company's effective income tax rate for the years ended December 31, 2012, 2011 and 2010:


	2012		2011		2010

Federal income tax statutory rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal tax	3.5		3.2		3.2
Deferred tax valuation allowance	(39.3	)	(37.8	)	(38.5	)
Compensation expense	2.7		(1.6	)	(0.9	)
Settlement of uncertain tax positions	–		4.6		–
Other	1.9		1.9		1.0

Effective income tax rate	3.8	%	5.3	%	(0.2	)%

The Company's income tax expense (benefit) for the years ended December 31, 2012, 2011 and 2010, is summarized as follows:


(in thousands)		2012		2011			2010

CURRENT TAX EXPENSE (BENEFIT)
Federal	$	568	$	(227	)	$	(244	)
State		1,017		(2,638	)		439

Total current tax expense (benefit)		1,585		(2,865	)		195
DEFERRED TAX EXPENSE
Federal		–		–			–
State		–		–			–

Total deferred tax expense		–		–			–

Total income tax expense (benefit)	$	1,585	$	(2,865	)	$	195

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.

The following table presents significant components of the Company's deferred tax assets and liabilities:


	DECEMBER 31,
(in thousands)		2012			2011

DEFERRED TAX ASSETS
Warranty, legal and other accruals	$	17,482		$	17,206
Employee benefits		19,285			17,131
Noncash tax charge for impairment of long-lived assets		88,042			115,226
Joint ventures		4,188			3,604
Federal net operating loss carryforwards		120,068			107,529
Other carryforwards		1,057			1,352
State net operating loss carryforwards		37,893			36,831
Other		912			1,313

Total		288,927			300,192
Valuation allowance		(258,867	)		(270,451	)

Total deferred tax assets		30,060			29,741

DEFERRED TAX LIABILITIES
Deferred recognition of income and gains		(2,277	)		(3,385	)
Capitalized expenses		(25,748	)		(24,842	)
Other		(2,035	)		(1,514	)

Total deferred tax liabilities		(30,060	)		(29,741	)

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, 2012, the Company's liability for gross unrecognized tax benefits was $318,000, of which $207,000, if recognized, will affect the Company's effective tax rate. 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 $18,000 and $19,000 in accrued interest and penalties at December 31, 2012 and 2011, respectively. The Company estimates that, within 12 months, none of its gross state unrecognized tax benefits will reverse due to the anticipated expiration of time to assess tax.

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


(in thousands)		2012			2011

Balance at January 1	$	129		$	3,164
Additions related to prior year positions		218			100
Reductions related to prior year positions		–			(450	)
Reductions due to settlements		–			(1,878	)
Reductions due to expiration of the statute of limitations		(29	)		(807	)

Balance at December 31	$	318		$	129

As of December 31, 2012, tax years 2004, 2005 and 2009 through 2012 remain subject to examination. On March 15, 2013, the assessment statute of limitations closes on tax years 2004, 2005 and 2009.