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Note 11 - Income Taxes | 12 Months Ended
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Oct. 31, 2016
Notes to Financial Statements |
Income Tax Disclosure [Text Block] | 11. Income Taxes Income taxes payable (receivable), including deferred benefits, consists of the following:
|  | Year Ended October 31, |
(In thousands) |  | 2016 |  |  | 2015 |
State income taxes: |  |  |  |  |  |
Current |  | $1,945 |  |  | $2,151 |
Deferred |  | (9,890 | ) |  | (11,148 | )
Federal income taxes: |  |  |  |  |  |
Current |  | - |  |  | - |
Deferred |  | (275,688 | ) |  | (281,282 | )
Total |  | $(283,633 | ) |  | $(290,279 | )
The provision for income taxes is composed of the following charges (benefits):
|  | Year Ended October 31, |
(In thousands) |  | 2016 |  |  | 2015 |  |  | 2014 |
Current income tax (benefit) expense: |  |  |  |  |  |  |  |  |
Federal (1) |  | $(2,796 | ) |  | $(1,497 | ) |  | $(1,690 | )
State (2) |  | 1,200 |  |  | 523 |  |  | $2,466 |
Total current income tax (benefit) expense: |  | (1,596 | ) |  | (974 | ) |  | 776 |
Federal |  | 5,594 |  |  | (8,461 | ) |  | (272,822 | )
State |  | 1,257 |  |  | 3,770 |  |  | (14,918 | )
Total deferred income tax expense (benefit): |  | 6,851 |  |  | (4,691 | ) |  | (287,740 | )
Total |  | $5,255 |  |  | $(5,665 | ) |  | $(286,964 | )
(1) | The current federal income tax (benefit) expense is net of the use of federal net operating losses totaling $4.4 million, $3.7 million and $57.8 million for the years ended October 31, 2016, 2015 and 2014, respectively.
(2) | The current state income tax (benefit) expense is net of the use of state net operating losses totaling $16.4 million, $12.3 million and $24.5 million for the years ended October 31, 2016, 2015 and 2014, respectively.
The total income tax expense of $5.3 million for the period ended October 31, 2016 was primarily due to current state taxes and permanent differences related to stock compensation, partially offset by a federal tax benefit related to receiving a specified liability loss refund of taxes paid in fiscal year 2002. The total income tax benefit of $5.7 million recognized for the year ended October 31, 2015 was primarily due to deferred taxes resulting from the loss before income taxes plus the reversal of state tax reserves for uncertain state tax positions, partially offset by state tax expenses. The total income tax benefit of $287.0 million recognized for the year ended October 31, 2014 was primarily due to the reversal of a substantial portion of our valuation allowance previously recorded against our deferred tax assets, plus a refund received for a loss carryback to a previously profitable year and the impact of state tax reserves for uncertain state tax positions, partially offset by state tax expenses. Deferred federal and state income tax assets primarily represent the deferred tax benefits arising from temporary differences between book and tax income which will be recognized in future years as an offset against future taxable income. If the combination of future years’ income (or loss) and the reversal of the timing differences results in a loss, such losses can be carried forward to future years. 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. As of October 31, 2015, and again at October 31, 2016, we concluded that it was more likely than not that a substantial amount of our deferred tax assets (“DTA”) would be utilized. This conclusion was based on a detailed evaluation of all relevant evidence, both positive and negative. The positive evidence included factors such as positive earnings before income taxes for two of the last three fiscal years and the expectation of earnings going forward over the long term and evidence of a sustained recovery in the housing markets in which we operate. Economic data has also been affirming the housing market recovery. Housing starts, homebuilding volume and prices are increasing and forecasted to continue to increase. Historically low mortgage rates, affordable home prices, reduced foreclosures and a favorable home ownership to rental comparison are key factors in the recovery. Potentially offsetting this positive evidence is the fact that we had a loss before income taxes for the fiscal year ended October 31, 2015. However, we did have income before income taxes for the twelve months ended October 31, 2016 and October 31, 2014 and we are not in a three year cumulative loss position as of October 31, 2016. As per ASC 740, cumulative losses are one of the most objectively verifiable forms of negative evidence; we no longer have this negative evidence and we expect to be profitable going forward over the long term. Our recent three years cumulative performance and our expectations for the coming years based on our current backlog, community count and recent sales contracts provide evidence that reaffirms our conclusion that a full valuation allowance was not necessary and that the current valuation allowance for deferred taxes of $627.9 million as of October 31, 2016 is appropriate. Our state net operating losses of $2.2 billion expire between 2017 and 2036. 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) |  | 2016 |  |  | 2015 |
Deferred tax assets: |  |  |  |  |  |
Depreciation |  | $1,729 |  |  | $2,176 |
Inventory impairment loss |  | 174,489 |  |  | 210,716 |
Uniform capitalization of overhead |  | 6,802 |  |  | 11,203 |
Warranty and legal reserves |  | 13,238 |  |  | 13,319 |
Deferred income |  | 5,061 |  |  | 682 |
Acquisition intangibles |  | 8,829 |  |  | 13,374 |
Restricted stock bonus |  | 4,526 |  |  | 8,191 |
Rent on abandoned space |  | 1,006 |  |  | 1,888 |
Stock options |  | 7,073 |  |  | 7,474 |
Provision for losses |  | 34,505 |  |  | 36,350 |
Joint venture loss |  | 4,171 |  |  | 2,891 |
Federal net operating losses |  | 520,117 |  |  | 524,125 |
State net operating losses |  | 170,014 |  |  | 169,046 |
Other |  | 22,862 |  |  | 17,752 |
Total deferred tax assets |  | 974,422 |  |  | 1,019,187 |
Deferred tax liabilities: |  |  |  |  |  |
Debt repurchase income |  | 60,901 |  |  | 91,452 |
Total deferred tax liabilities |  | 60,901 |  |  | 91,452 |
Valuation allowance |  | (627,943 | ) |  | (635,305 | )
Net deferred income taxes |  | $285,578 |  |  | $292,430 |
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 has been the valuation allowance related to our deferred tax assets. Due to the effects of these factors, our effective tax rates for 2016, 2015 and 2014 are not correlated to the amount of our income or loss before income taxes. The sources of these factors were as follows:
|  | Year Ended October 31, |
|  | 2016 |  |  | 2015 |  |  | 2014 |
Computed “expected” tax rate |  | 35.0 | % |  | 35.0 | % |  | 35.0 | %
State income taxes, net of federal income tax benefit |  | 65.4 |  |  | (15.6 | ) |  | (3.5 | )
Permanent differences, net |  | 222.2 |  |  | (0.4 | ) |  | 0.8 |
Deferred tax asset valuation allowance impact |  | - |  |  | - |  |  | (1,393.3 | )
Tax contingencies |  | 0.3 |  |  | 3.2 |  |  | (0.6 | )
Adjustments to prior years’ tax accruals(1) |  | (107.2 | ) |  | 3.8 |  |  | (60.4 | )
Effective tax rate |  | 215.7 | % |  | 26.0 | % |  | (1,422.0 | ) %
(1) | The adjustments to prior years’ tax accruals includes the impact of a federal specified liability loss refund of taxes paid in fiscal year 2002 of (114.8%), 0.0% and (9.8%) for the years ended October 31, 2016, 2015 and 2014, respectively.
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:
|  | 2016 |  |  | 2015 |
Unrecognized tax benefit—November 1, |  | $1.1 |  |  | $1.7 |
Gross increases—tax positions in current period |  | 0.2 |  |  | 0.2 |
Decrease related to tax positions taken during a prior period |  | - |  |  | - |
Lapse of statute of limitations |  | (0.2 | ) |  | (0.8 | )
Unrecognized tax benefit—October 31, |  | $1.1 |  |  | $1.1 |
Related to the unrecognized tax benefits noted above, as of October 31, 2016 and 2015, we have recognized a liability for interest and penalties of $0.3 million and $0.3 million, respectively. For the years ended October 31, 2016, 2015 and 2014, we recognized $(2) thousand, $(91) thousand and $(30) thousand 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 $0.2 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 $1.1 million and $1.1 million as of October 31, 2016 and 2015, respectively. The recognition of unrecognized tax benefits could have an impact on the Company’s deferred tax assets and the valuation allowance. The consolidated federal tax returns have been audited through October 31, 2015 and these years are closed. 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 2012– 2015 .

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- 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. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(h)) -URI http://asc.fasb.org/extlink&oid=26873400&loc=d3e23780-122690 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=65882285&loc=d3e32559-109319 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 15 -URI http://asc.fasb.org/extlink&oid=65882285&loc=d3e32718-109319 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 9 -URI http://asc.fasb.org/extlink&oid=65882285&loc=d3e32639-109319 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=65882285&loc=d3e32537-109319 + Details
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