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

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

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

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