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Note 12 - Income Taxes

12 Months Ended

Oct. 31, 2013

12. Income Taxes

Income taxes payable consists of the following:

	Year Ended October 31,
(In thousands)	2013		2012
State income taxes:
Current		$3,301		$940
Deferred		-		-
Federal income taxes:
Current		-		5,942
Deferred		-		-
Total		$3,301		$6,882

The provision for income taxes is composed of the following charges (benefits):

	Year Ended October 31,
(In thousands)	2013			2012			2011
Current income tax (benefit) expense:
Federal		$(9,878	)		$277			$(1,577	)
State (1)		518			(35,328	)		(3,924	)
Total current income tax (benefit):		(9,360	)		(35,051	)		(5,501	)
Total deferred income tax (benefit):		-			-			-
Total		$(9,360	)		$(35,051	)		$(5,501	)

(1)

The current state income tax expense (benefit) is net of the use of state net operating losses totaling $23.1 million, $3.4 million, and $0.5 million for the years ended October 31, 2013, 2012, and 2011, respectively.

The total income tax benefit of $9.4 million recognized for the twelve months ended October 31, 2013 was primarily due to the release of reserves for a federal tax position that was settled with the Internal Revenue Service and a favorable state tax audit settlement, partially offset by state tax expenses and state tax reserves for uncertain state tax positions. The total income tax benefit was $35.1 million for the twelve months ended October 31, 2012 primarily due to the elimination of reserves for uncertain state tax positions consistent with past practices and precedents of the relevant taxing authorities in their dealings with the Company, offset slightly by state tax expenses. The total income tax benefit was $5.5 million for the year ended October 31, 2011 primarily due to a decrease in tax reserves for uncertain tax positions.

In accordance with ASC 740, we evaluate our deferred tax assets quarterly to determine if valuation allowances are required. ASC 740 requires that companies assess whether valuation allowances should be established based on the consideration of all available evidence using a “more likely than not” standard. Because of the downturn in the homebuilding industry, resulting in significant inventory and intangible impairments in prior years, we are in a three-year cumulative loss position as of October 31, 2013. According to ASC 740, a three-year cumulative loss is significant negative evidence in considering whether deferred tax assets are realizable, and in this circumstance, the Company does not rely on projections of future income to support the recovery of deferred tax assets. Therefore, we have valuation allowances for the full amount of our deferred tax assets as of October 31, 2013 and 2012.

During 2013, the valuation allowance decreased by $10.8 million against our deferred tax assets. Our valuation allowance decreased to $927.1 million at October 31, 2013 from $937.9 million at October 31, 2012 primarily due to a decrease in deferred tax assets offset by additional valuation allowance recorded for the federal and state tax benefits related to the tax losses incurred during this period. Our state net operating losses of approximately $2.3 billion expire between 2014 and 2033. Our federal net operating losses of $1.5 billion expire between 2028 and 2033.

The deferred tax assets and liabilities have been recognized in the Consolidated Balance Sheets as follows:

	Year Ended October 31,
(In thousands)	2013			2012
Deferred tax assets:
Depreciation		$2,345			$1,870
Inventory impairment loss		230,553			255,996
Uniform capitalization of overhead		6,208			6,046
Warranty and legal reserves		15,571			16,320
Deferred income		551			1,173
Acquisition intangibles		22,523			27,598
Restricted stock bonus		5,781			5,830
Rent on abandoned space		3,591			5,318
Stock options		6,994			5,831
Provision for losses		38,923			32,647
Joint venture loss		5,360			12,496
Federal net operating losses		542,409			528,117
State net operating losses		182,940			180,184
Other		16,350			11,362
Total deferred tax assets		1,080,099			1,090,788
Deferred tax liabilities:
Acquisition intangibles		351			296
Debt repurchase income		152,450			152,414
Other		164			197
Total deferred tax liabilities		152,965			152,907
Valuation allowance		(927,134	)		(937,881	)
Net deferred income taxes		$-			$-

The effective tax rate varied from the statutory federal income tax rate. The effective tax rate is affected by a number of factors, the most significant of which is the valuation allowance recorded against our deferred tax assets. The sources of these factors were as follows:

	Year Ended October 31,
	2013			2012			2011
Computed “expected” tax rate		35.0	%		35.0	%		35.0	%
State income taxes, net of Federal income tax benefit		14.0			(2.6	)		(0.1	)
Permanent differences, net		11.3			(0.3	)		(1.2	)
Deferred tax asset valuation allowance impact		(66.2	)		(32.3	)		(25.8	)
Tax contingencies		(36.8	)		34.8			(3.2	)
Adjustments to prior years’ tax accruals		-			-			(2.8	)
Effective tax rate		(42.7	)%		34.6	%		1.9	%

ASC 740-10 provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits.

Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of ASC 740-10 and in subsequent periods. This interpretation also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

We recognize tax liabilities in accordance with ASC 740-10 and we adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a liability that is materially different from our current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which they are determined.

We recognize interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying consolidated statement of operations. Accrued interest and penalties are included within the related tax liability line in the consolidated balance sheet.

The following is a tabular reconciliation of the total amount of unrecognized tax benefits for the year (in millions) excluding interest and penalties:

	2013			2012
Unrecognized tax benefit—November 1,		$9.9			$26.8
Gross increases—tax positions in current period		1.2			0.6
Decrease related to tax positions taken during a prior period		(9.3	)		(16.2	)
Lapse of statute of limitations		-			(1.3	)
Unrecognized tax benefit—October 31,		$1.8			$9.9

Related to the unrecognized tax benefits noted above, as of October 31, 2013 and 2012, we have recognized a liability for interest and penalties of $0.5 million and $0.4 million, respectively. For the years ended October 31, 2013, 2012 and 2011, we recognized $0.1 million, $(18.3) million and $(2.0) million, respectively, of interest and penalties in income tax benefit.

It is likely that, within the next twelve months, the amount of the Company's unrecognized tax benefits will decrease by approximately $0.3 million, excluding penalties and interest. This reduction is expected primarily due to the expiration of the statutes of limitation. The portion of unrecognized tax benefits that, if recognized, would affect the Company’s effective tax rate (excluding any related impact to the valuation allowance) is $1.2 million and $9.9 million as of October 31, 2013 and 2012, respectively. The recognition of unrecognized tax benefits could have an impact on the Company’s deferred tax assets and the valuation allowance.

There is an open federal audit for the year ended October 31, 2012. We are also subject to various income tax examinations in the states in which we do business. The outcome for a particular audit cannot be determined with certainty prior to the conclusion of the audit, appeal, and in some cases, litigation process. As each audit is concluded, adjustments, if any, are appropriately recorded in the period determined. To provide for potential exposures, tax reserves are recorded, if applicable, based on reasonable estimates of potential audit results. However, if the reserves are insufficient upon completion of an audit, there could be an adverse impact on our financial position and results of operations. The statute of limitations for our major tax jurisdictions remains open for examination for tax years 2009 – 2012.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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