Income Taxes

12 Months Ended

Dec. 31, 2011

Income Taxes [Abstract]

Income Taxes

9. Income Taxes

The provision for income taxes consists of the following:

	Year Ended December 31, 2011		Year Ended December 31, 2010		Year Ended December 31, 2009
Current:
Federal	$	45,112	$	96,449	$	69,911
State		8,004		12,468		8,556
Deferred:
Federal		21,492		6,352		23,474
State		3,548		1,119		4,293
	$	78,156	$	116,388	$	106,234

In addition to amounts applicable to income before taxes, the following income tax benefits were recorded in shareholders’ equity:

	Year Ended December 31, 2011		Year Ended December 31, 2010		Year Ended December 31, 2009
Income tax benefits arising from compensation expense for tax purposes in excess of amounts recognized for financial statement purposes	$	22,835	$	63,558	$	66,448

Deferred income taxes on NVR’s consolidated balance sheets were comprised of the following:

	December 31,
	2011		2010
Deferred tax assets:
Other accrued expenses and contract land deposit reserve	$	83,744	$	96,459
Deferred compensation		10,939		11,642
Equity-based compensation expense		35,417		49,469
Inventory		6,622		5,495
Unrecognized tax benefit		25,594		24,514
Other		4,228		5,856
Total deferred tax assets		166,544		193,435
Less: deferred tax liabilities		2,128		948
Net deferred tax position	$	164,416	$	192,487

Deferred tax assets arise principally as a result of various accruals required for financial reporting purposes, stock option expense and deferred compensation, which are not currently deductible for tax return purposes.

Management believes that the Company will have sufficient available carry-backs and future taxable income to make it more likely than not that the net deferred tax assets will be realized. Federal taxable income is estimated to be $72,351 for the year ended December 31, 2011, and was $117,801 for the year ended December 31, 2010.

A reconciliation of income tax expense in the accompanying consolidated statements of income to the amount computed by applying the statutory Federal income tax rate of 35% to income before taxes is as follows:

	Year Ended December 31, 2011			Year Ended December 31, 2010			Year Ended December 31, 2009
Income taxes computed at the Federal statutory rate	$	72,652		$	112,838		$	104,445
State income taxes, net of Federal income tax benefit		8,071			7,731			7,467
Other, net		(2,567	)		(4,181	)		(5,678	)
	$	78,156		$	116,388		$	106,234

The Company’s effective tax rate in 2011, 2010 and 2009 was 37.65%, 36.10% and 35.60%, respectively. The 2009 effective tax rate was favorably impacted by the expiration of certain tax reserves, the receipt of tax refunds from the amendment of certain prior year federal and state returns, and a tax benefit related to compensation expense recorded for certain outstanding option grants that were previously considered to be a permanent non-deductible tax difference.

The Company files a consolidated U.S. federal income tax return, as well as state and local tax returns in all jurisdictions where the Company maintains operations. With few exceptions, the Company is no longer subject to income tax examinations by tax authorities for years prior to 2008.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

	Year Ended December 31, 2011			Year Ended December 31, 2010
Balance at beginning of year	$	44,722		$	48,669
Additions for tax positions for prior years		—			—
Additions based on tax positions related to the current year		3,291			4,092
Reductions for tax positions of prior years		(2,964	)		(8,039	)
Settlements		—			—
Balance at end of year	$	45,049		$	44,722

If recognized, the total amount of unrecognized tax benefits that would affect the effective tax rate (on a net basis) is $29,283.

The Company recognizes interest related to unrecognized tax benefits as a component of income tax expense. For the years ended December 31, 2011, 2010 and 2009 the Company accrued interest on unrecognized tax benefits in the amounts of $2,076, $573 and $932, respectively. As of December 31, 2011 and 2010, the Company had a total of $24,797 and $22,721, respectively, of accrued interest on unrecognized tax benefits which are included in “Accrued expenses and other liabilities” on the accompanying consolidated balance sheets. Based on its historical experience in dealing with various taxing authorities, the Company has found that it is the administrative practice of these authorities to not seek penalties from the Company for the tax positions it has taken on its returns, related to its unrecognized tax benefits. Therefore, the Company does not accrue penalties for the positions in which it has an unrecognized tax benefit. However, if such penalties were to be accrued, they would be recorded as a component of income tax expense.

The Company believes that within the next 12 months, it is reasonably possible that the unrecognized tax benefits will be reduced by approximately $3,945 due to statute expiration in various state jurisdictions. The Company is currently under audit by the states of New Jersey, South Carolina and Tennessee.