Note 11 - Income Taxes

12 Months Ended

Dec. 31, 2012

Income Tax Disclosure [Text Block]

11. Income Taxes

The (provision) benefit for income taxes includes the following components:

	Year Ended December 31,
	2012			2011			2010
	(Dollars in thousands)
Current (provision) benefit for income taxes:
Federal	$	(766	)	$	(130	)	$	(899	)
State		―			186			1,456
		(766	)		56			557
Deferred (provision) benefit for income taxes:
Federal		338,500			―			―
State		115,500			―			―
		454,000			―			―
(Provision) benefit for income taxes	$	453,234		$	56		$	557

We account for income taxes in accordance with ASC Topic 740, Income Taxes (“ASC 740”).  ASC 740 requires an asset and liability approach for measuring deferred taxes based on temporary differences between the financial statement and tax bases of assets and liabilities existing at each balance sheet date using enacted tax rates for years in which taxes are expected to be paid or recovered.  The components of our net deferred income tax asset are as follows:

	December 31,
	2012			2011
	(Dollars in thousands)
Inventory impairment charges	$	136,239		$	184,393
Financial accruals		39,482			52,493
Federal net operating loss carryforwards		230,220			210,013
State net operating loss carryforwards		60,742			51,003
Goodwill impairment charges		11,019			17,482
Other, net		366			563
Total deferred tax asset		478,068			515,947
Less: Valuation allowance		(22,696	)		(510,621	)
Net deferred tax asset	$	455,372		$	5,326

At December 31, 2012, we had gross federal and state net operating loss carryforwards of approximately $662 million and $1,134 million, respectively, which if unused, will begin to expire in 2028 and 2013, respectively.

The effective tax rate differs from the federal statutory rate of 35% due to the following items:

	Year Ended December 31,
	2012			2011			2010
	(Dollars in thousands)
Income (loss) before taxes	$	78,187		$	(16,473	)	$	(12,281	)
(Provision) benefit for income taxes at federal statutory rate	$	(27,365	)	$	5,765		$	4,298
(Increases) decreases in tax resulting from:
State income taxes, net of federal benefit		(2,947	)		615			372
Net deferred tax asset valuation (allowance) benefit		487,925			(6,415	)		(4,687	)
State net operating loss expirations		(4,201	)		―			―
Other, net		(178	)		91			574
Benefit for income taxes	$	453,234		$	56		$	557
Effective tax rate		―			0.3	%		4.5	%

Each quarter we assess our deferred tax asset to determine whether all or any portion of the asset is more likely than not unrealizable under ASC 740.  We are required to establish a valuation allowance for any portion of the asset we conclude is more likely than not to be unrealizable. Our assessment considers, among other things, the nature, frequency and severity of our current and cumulative losses, forecasts of our future taxable income, the duration of statutory carryforward periods, our utilization experience with operating loss and tax credit carryforwards, and tax planning alternatives.

As of December 31, 2012, we had a $478.1 million deferred tax asset which was partially offset by a deferred tax asset valuation allowance of $22.7 million.  During the year ended December 31, 2012, we utilized $30.8 million of our deferred tax asset valuation allowance to fully offset the income tax provision related to the pretax income for the year.  During the years ended December 31, 2011 and 2010, we generated deferred tax assets of $6.4 million and $4.7 million, respectively, related to the pretax losses for those years.

During the year ended December 31, 2012, we recognized a $453.2 million income tax benefit that resulted from the reversal of all but $22.7 million of our deferred tax asset valuation allowance.  We concluded that this reversal was appropriate after determining that it was more likely than not that we would be able to realize the full amount of  this income tax benefit within allowable net loss carryforward periods.   In reaching this conclusion we considered, among other things, our recent financial and operating results (three years of cumulative income, five consecutive quarters of profitability, and strong growth in net new orders and backlog) and improved conditions in the new home market (home sales pace and prices trending up steadily in most of our markets throughout 2012, coupled with falling unemployment, historically low interest rates, and high affordability). The remaining valuation allowance of $22.7 million relates primarily to potential Section 382 limitations that expire during the 2013 second quarter and to net operating loss carryforwards in certain states that have short carryforward periods.

As of December 31, 2012, approximately $100 million of our deferred tax asset related to unrealized built-in losses generated primarily from inventory impairment charges.  Our ability to recognize a tax benefit from these unrealized built-in losses may be limited under Internal Revenue Code Section 382 depending on, among other things, when, and at what price, we dispose of the underlying assets.  Assets with built-in losses sold prior to June 27, 2013 are subject to a $15.6 million gross annual deduction limitation for federal and state purposes.  Assets with built-in losses sold after June 27, 2013 are not subject to these limitations.  In general, if realized tax losses from these built-in loss assets exceed $15.6 million in any tax year prior to June 27, 2013, the built-in losses in excess of this amount will be permanently lost.  During the years ended December 31, 2012, 2011 and 2010, we permanently lost $10.5 million, $12.2 million and $22.9 million, respectively, as a result  of the Section 382 annual limitation.

As of December 31, 2012, $148 million (or approximately $359 million and $438 million, respectively, of federal and state net operating loss carryforwards on a gross basis) of our deferred tax asset related to net operating loss carryforwards is subject to the $15.6 million gross annual deduction limitation for both federal and state purposes.  The remaining $143 million (or approximately $303 million and $696 million, respectively, of federal and state net operating loss carryforwards on a gross basis) is not currently limited by Section 382.

As of December 31, 2012, our liability for gross unrecognized tax benefits was $13.5 million, all of which, if recognized, would reduce our effective tax rate.  We believe that it is reasonably possible that the full amount of our unrecognized tax benefits may be recognized by the end of fiscal 2013 as a result of a lapse of the statute of limitations.  As of December 31, 2012, we remained subject to examination by various tax jurisdictions for the tax years ended December 31, 2008 through 2012.  A reconciliation of the beginning and ending amount of gross unrecognized tax benefits, excluding $2.2 million and $1.5 million of accrued interest as of December 31, 2012 and 2011, respectively, is as follows:

	Year Ended December 31,
	2012		2011
	(Dollars in thousands)
Balance, beginning of the year	$	13,484	$	13,670
Changes based on tax positions related to the current year		―		―
Changes for tax position in prior years		―		―
Reductions due to lapse of statute of limitations		―		(186	)
Settlements		―		―
Balance, end of the year	$	13,484	$	13,484