Income Taxes

Our benefit from income taxes from continuing operations consists of the following for the periods presented:



	Fiscal Year Ended September 30,
(In thousands)	2015			2014			2013
Current federal	$	(64	)	$	(44,789	)	$	(4,409	)
Current state	520			322			(394		)
Deferred federal ^(a)	(314,651		)	2,385			1,476
Deferred state ^(a)	(10,374		)	285			(162		)
Total	$	(324,569	)	$	(41,797	)	$	(3,489	)

^(a) Benefit due to release of a substantial portion of the valuation allowance on our deferred tax assets; refer to discussion below titled “Valuation Allowance.”

The benefit from income taxes from continuing operations differs from the amount computed by applying the federal income tax statutory rate as follows for the periods presented:



	Fiscal Year Ended September 30,
(In thousands)	2015			2014			2013
Income tax computed at statutory rate	$	7,711		$	(2,406	)	$	(12,479	)
State income taxes, net of federal benefit	2,485			(172		)	(684		)
Decrease in valuation allowance - IRS Settlement	—			(26,846		)	—
(Decrease)/Increase in valuation allowance - other ^(a)	(334,605		)	3,023			11,729
Changes for uncertain tax positions	42			(14,276		)	(1,909		)
IRS interest refund	—			(1,714		)	—
Other, net	(202		)	594			(146		)
Total	$	(324,569	)	$	(41,797	)	$	(3,489	)

^(a)Amount includes $335.2 million release of a substantial portion of the valuation allowance on our deferred tax assets; refer to discussion below titled “Valuation Allowance.”

The principal differences between our effective tax rate and the U.S. federal statutory rate relates to changes in our valuation allowance and our unrecognized tax benefits.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of our assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of significant temporary differences that give rise to the net deferred tax assets are as follows as of September 30, 2015 and September 30, 2014:



(In thousands)	September 30, 2015			September 30, 2014
Deferred tax assets:
Warranty and other reserves	$	14,913		$	11,587
Incentive compensation	10,780			18,993
Property, equipment and other assets	2,866			2,750
Federal and state tax carryforwards	292,346			357,146
Inventory adjustments	87,335			95,237
Uncertain tax positions	1,917			1,911
Other	3,814			3,923
Total deferred tax assets	413,971			491,547
Deferred tax liabilities:
Deferred revenues	(30,939		)	(43,496		)
Total deferred tax liabilities	(30,939		)	(43,496		)
Net deferred tax assets before valuation allowance	383,032			448,051
Valuation allowance	(57,659		)	(445,228		)
Net deferred tax assets	$	325,373		$	2,823

At September 30, 2015, our gross deferred tax assets above included $250.5 million for federal net operating loss carryforwards, $30.9 million for state net operating loss carryforwards, $9.8 million for an alternative minimum tax credit and $4.9 million for general business credits. The net operating loss carryforwards expire at various dates through 2033 and the general business credits expire at various dates through 2035. The alternative minimum tax credit has an unlimited carryforward period.

We recognized an income tax benefit of $324.6 million in our fiscal 2015, $41.8 million in our fiscal 2014 and $3.5 million in our fiscal 2013. The income tax benefit in our fiscal 2015 primarily resulted from the release of a substantial portion of the valuation allowance on our deferred tax assets. The income tax benefit in our fiscal 2014 was due to the resolution of a federal tax audit, which resulted in a refund of $26.8 million, as well as the recognition of unrecognized tax benefits of $14.3 million. In fiscal 2013, our income tax benefit primarily reflected a specified loss carryback claim that resulted in a refund of $2.5 million. Due to the effects of changes in our valuation allowance on our deferred tax balance and changes in our unrecognized tax benefits, our effective tax rates in fiscal 2015, 2014 and 2013 are not meaningful metrics, as our income tax amounts are not directly correlated to the amount of our pretax income (loss) for those periods.

Valuation Allowance

A reduction of the carrying amounts of deferred tax assets by a valuation allowance is required if, based on the available evidence, it is more likely than not that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed periodically based on the more-likely-than-not realization threshold criterion. In the assessment for a valuation allowance, appropriate consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and 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.

Based upon an evaluation of all available evidence, the most important of which was recent losses incurred, we established a valuation allowance for substantially all of our deferred tax assets during our fiscal 2008. We have continued to evaluate the need for our valuation allowance by assessing all positive and negative evidence indicating our ability to realize our deferred tax assets. In these evaluations, we gave more significant weight to objective evidence, such as our actual financial condition and results of operations, as compared to subjective evidence.

The positive evidence we considered as part of our analysis during the fourth quarter of 2015 included our ten quarters of cumulative income from continuing operations; our sustained growth in backlog units in comparable periods; significant growth in our ASP for both backlog and actual closings over the past fifteen quarters and an increase in closings from fiscal year 2014 to fiscal year 2015. Our $30.7 million in income from continuing operations for the quarter-ended September 30, 2015 represents a significant increase over the prior two comparable periods and further emphasizes our continued earnings and evidence of a sustained recovery. Our current levels of backlog (in both units and dollars) support our expectations of future profitability.

The negative evidence we considered as part of our analysis centered around significant quarterly losses that the Company incurred through the quarter-ended March 31, 2013. These losses will roll-off in the first half of fiscal 2016 as we continue to monitor our 36-month cumulative income position. The removal of these losses from our analysis provides a significant increase in our recent earnings trend and, coupled with our actual improvements in continuing operations, point to an objectively verifiable increase in our earnings profile.

Therefore, during the fourth quarter ended September 30, 2015, we concluded that it was more likely than not that a substantial amount of our deferred tax assets would be realized. This conclusion was based on an evaluation of all relevant evidence, both positive and negative, as discussed above. The principal positive evidence that led us to this determination was our improved pre-tax earnings profile, particularly over our most recent two fiscal years. Given the remaining recovery period for the majority of our deferred tax assets, our recent historical operating results support the realization of a significant amount of our deferred tax assets. Therefore, the Company's valuation allowance on its deferred tax assets was reduced during the fourth quarter ended September 30, 2015 to $57.7 million, as compared to $445.2 million as of September 30, 2014. The remaining valuation allowance is balanced between various federal and state attributes for which the Company has concluded it is not more likely than not that these attributes will be realized at this time.

In addition to our improving historic results, the release is further supported by the underlying momentum of our business, a generally improving housing market and stabilization in broader economic conditions over the past few years. Positive evidence related to our business momentum includes factors such as evidence of recovery in the housing markets specific to where we operate, a strong backlog and significant increases in other key financial indicators over the last few years, including new orders, revenue, gross margin and community count. We continue to see increases in our average sales price in both our closed homes and backlog that further supports our improved historical operating results and assessment of our ability to realize our deferred tax assets. The overall housing market recovery is supported by increases in housing starts and homebuilding volume, reduced foreclosures and continued low mortgage rates. Even though home prices are rising, home ownership remains affordable, especially when compared to renting, and household growth is expected to continue.

Section 382 Ownership Change

We experienced an “ownership change” as defined in Section 382 of the Internal Revenue Code (Section 382) as of January 12, 2010. Section 382 contains rules that limit the ability of a company that undergoes an “ownership change” to utilize its net operating loss carryforwards (NOLs) and certain built-in losses or deductions recognized during the five-year period after the ownership change to offset future taxable income. Therefore, our ability to utilize our pre-ownership change net operating loss carryforwards and recognize certain built-in losses or deductions is limited by Section 382 to an estimated maximum amount of approximately $11.4 million ($4.0 million tax-effected) annually. Certain deferred tax assets are not subject to any limitation imposed by Section 382.

Due to the Section 382 limitation and the maximum carryforward period of our NOLs, we are unable to fully recognize certain deferred tax assets. Accordingly, during our fiscal 2015 and 2014, we reduced our gross deferred tax assets and corresponding valuation allowance by $17.9 million and $9.9 million, respectively. As future economic conditions become known, we will be able to confirm whether additional deferred tax assets will not provide any future tax benefit. At such time, we will eliminate these deferred tax assets and any corresponding valuation allowance, if applicable.

Accordingly, a portion of our $414.0 million of total gross deferred tax assets related to accrued losses on our inventory were unavailable due to the limitation imposed by Section 382. Previously, we provided a range of gross deferred tax assets that may be unavailable based on estimates of activity occurring in the five-year period following our “ownership change.” As of June 30, 2015, because the five-year period expired, we have determined the actual impact and final classification of those amounts, which is incorporated into the table below. The actual realization of our deferred tax assets is difficult to predict and is dependent on future events.

Considering the limitation imposed by Section 382, the table below depicts the classifications of our deferred tax assets as of September 30, 2015:



(In thousands)	September 30, 2015
Deferred tax assets:
Subject to annual limitation	$	93,741
Generally not subject to annual limitation	320,230
Total deferred tax assets	413,971
Deferred tax liabilities	(30,939		)
Net deferred tax assets before valuation allowance	383,032
Valuation allowance	(57,659		)
Net deferred tax assets	$	325,373

Unrecognized Tax Benefits

A reconciliation of our unrecognized tax benefits follows for the beginning and end of each period presented:



	Fiscal Year Ended September 30,
(In thousands)	2015			2014			2013
Balance at beginning of year	$	4,616		$	17,464		$	19,630
Additions for (reductions in) tax positions related to current year	251			150			(1,620		)
Additions for tax positions related to prior years	—			1,365			—
Reductions for tax positions of prior years	(10		)	(14,201		)	—
Lapse of statute of limitations	(136		)	(162		)	(546		)
Balance at end of year	$	4,721		$	4,616		$	17,464

If we were to recognize our $4.7 million of gross unrecognized tax benefits remaining as of September 30, 2015, substantially all would impact our effective tax rate. Additionally, we had $0.4 million of accrued interest and penalties as of September 30, 2015 and 2014. Our income tax benefit includes tax related interest.

In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (ASU 2013-11), to provide guidance on the presentation of unrecognized tax benefits. ASU 2013-11 requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward with certain limited exceptions. ASU 2013-11 was effective for annual reporting periods beginning on or after December 15, 2013 and interim periods within those annual periods. The Company adopted this guidance in the quarter ended December 31, 2014, which was the first quarter of our fiscal 2015, with no significant impact to our financial statements.

In the normal course of business, we are subject to audits by federal and state tax authorities regarding various tax liabilities. Our federal income tax returns for fiscal years 2011 through 2012 were agreed to with the IRS Appeals Office and approved by the Joint Committee on Taxation in the first quarter of fiscal year 2015. Certain state income tax returns for various fiscal years are under routine examination. The statute of limitations for our major tax jurisdictions remains open for examination for fiscal years 2007 and subsequent years. As of September 30, 2015, it is reasonably possible that none of our uncertain tax positions will reverse within the next twelve months.