Income Taxes

9 Months Ended

Sep. 30, 2011

Income Taxes

Income Taxes

Note 13.  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 for the third quarters of 2011 and 2010 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 No. 740 (“ASC 740”), “Income Taxes,” the Company recorded a net valuation allowance totaling $7.5 million against its deferred tax assets during the quarter ended September 30, 2011, which was reflected as a noncash charge to income tax expense. The balance of the deferred tax valuation allowance was $272.8 million and $253.8 million at September 30, 2011 and December 31, 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. 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.

For the quarter ended September 30, 2011, the Company’s effective income tax benefit rate was 0.5 percent, compared to an effective income tax rate of 1.5 percent for the same period in 2010, primarily due to noncash charges that totaled $7.5 million and $11.0 million, respectively, for the Company’s deferred tax valuation allowance, which offsets the tax benefit generated. For the nine months ended September 30, 2011, the Company’s effective income tax benefit rate was 7.2 percent, compared to an effective income tax rate of 0.7 percent for the same period in 2010, primarily due to noncash charges that totaled $19.0 million and $24.2 million, respectively.

For the third quarter ended September 30, 2011, the Company reversed $1.1 million of state unrecognized tax benefits and accrued interest due to the expiration of time to assess tax. As of September 30, 2011, tax years 2004, 2005 and 2007 through 2010 remain subject to examination.

At September 30, 2011, the Company’s liability for gross unrecognized tax benefits was $479,000, which reflected a $2.7 million decrease from the balance of $3.2 million at December 31, 2010. The Company had $251,000 and $2.7 million in accrued interest and penalties at September 30, 2011 and December 31, 2010, respectively.