11.

Income Taxes

Income taxes payable (receivable), including deferred benefits, consists of the following:

	Year Ended October 31,
(In thousands)	2017		2016
State income taxes:
Current	$	2,227	$	1,945
Deferred		-		(9,890	)
Federal income taxes:
Current		-		-
Deferred		-		(275,688	)
Total	$	2,227	$	(283,633	)

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

	Year Ended October 31,
(In thousands)	2017		2016			2015
Current income tax expense (benefit):
Federal (1)	$	-	$	(2,796	)	$	(1,497	)
State (2)		1,371		1,200			523
Total current income tax expense (benefit):		1,371		(1,596	)		(974	)
Federal		275,688		5,594			(8,461	)
State		9,890		1,257			3,770
Total deferred income tax expense (benefit):		285,578		6,851			(4,691	)
Total	$	286,949	$	5,255		$	(5,665	)

(

)

The current federal income tax did

not

include the use of federal net operating losses for the year ended

October 31, 2017.

The current federal income tax

benefit

is net of the use of federal net operating losses totaling

$4.4

million and

$3.7

million for the years ended

October

31,

2016

and

2015,

respectively.

(

)

The current state income tax expense

(benefit)

is net of the use of state net operating losses totaling

$18.2

million,

$16.4

million and

$12.3

million for the years ended

October

31,

2017,

2016

and

2015,

respectively.

The total income tax expense of

$286.9

million for the period ended

October 31, 2017

was primarily due to increasing our valuation allowance to fully reserve against our deferred tax assets (“DTAs”). In addition, the same periods were also impacted by state tax expense from income generated in some states, which was

not

offset by tax benefits in other states that had losses for which we fully reserve the net operating losses. 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 permanent difference in fiscal

2016

related to stock compensation arose because for tax purposes, the amount of stock compensation the Company expenses is the amount reported on an associate

’s W-

when the equity award is exercised or received, whereas for accounting purposes, the amount the Company expenses is based on the fair value of the equity award on the date of grant. Therefore, the permanent difference due to stock compensation was because of this different treatment, which does

not

arise until the time the equity award is exercised or received by the associate and therefore reported on an associate’s W-

The amount was significant because of the issuance in fiscal

2016

of stock to Company executives in respect of awards that had been granted over

ten

years ago at significantly higher stock prices and thus significantly higher fair values as compared to the time of issuance to the executive. As a result, at the time the stock awards were issued in fiscal

2016,

a significant permanent difference between book and tax was created impacting the effective tax rate for

2016.

The federal specified liability loss refund of taxes in fiscal year

2002

was due to an amendment of a prior year

’s tax return. The Internal Revenue Service issued the refund following the Company’s application therefor during the year ended

October 31, 2016.

The refund related to the portion of the fiscal year

2012

NOL attributable to a specified liability loss which, pursuant to Internal Revenue Code Section

172

(b)(

)(C), can be carried back

ten

years to

October 31, 2002.

A specified liability is any amount allowable as a deduction attributable to a product liability or expense incurred in investigation or settlement of claims because of a product liability. The refund was received in

February 2016

and therefore the tax credit was recorded in the

second

quarter of fiscal

2016.

Our federal net operating losses of

$1.6

billion expire between

2028

and

2037.

Our state NOLs of

$2.3

billion expire between

2018

and

2037.

Of the total state amount,

$247.1

million will expire between

2018

through

2022;

$463.1

million will expire between

2023

through

2027;

$1.2

billion will expire between

2028

through

2032;

and

$348.6

million will expire between

2033

through

2037.

Deferred federal and state income tax assets primarily represent the deferred tax benefits arising from net operating loss carryforwards and 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, 2017,

we considered all available positive and negative evidence to determine whether, based on the weight of that evidence, an additional valuation allowance for our DTAs was necessary in accordance with ASC

740.

Listed below, in order of the weighting of each factor, is the available positive and negative evidence that we considered in determining that it is more likely than

not

that all of our DTAs will

not

be realized. In analyzing these factors, overall the negative evidence, both objective and subjective, outweighed the positive evidence. Based on this analysis, we increased the valuation allowance against our DTAs such that we have a full valuation allowance and determined that the current valuation allowance for deferred taxes of

$918.2

million as of

October 31, 2017

is appropriate.

	1.	Fiscal 2017 financial results, especially the $50.2 million pre-tax loss in the third quarter of 2017 primarily from the $42.3 million loss on extinguishment of debt during the quarter, that put us in a cumulative three -year loss position as of July 31, 2017, and we are still in a cumulative three -year loss position as of October 31, 2017. Per ASC 740, cumulative losses are one of the most objectively verifiable forms of negative evidence. (Negative Objective Evidence)
	2.	In the third quarter of fiscal 2017, we completed a debt refinancing/restructuring transaction which, by extending our debt maturities, will enable us to allocate cash to invest in new communities and grow our community count to get back to sustained profitability. (Positive Objective Evidence)
	3.	Recent financial results of $12.3 pre-tax income in the fourth quarter of 2017. (Positive Objective Evidence)
	4.	The refinancing discussed above will increase our interest incurred in fiscal 2018 and future years (based on our longer term modeling) by $23.4 million per year. (Negative Objective Evidence)
	5.	We incurred pre-tax losses during the housing market decline and the slower than expected housing market recovery. (Negative Objective Evidence)
	6.	We exited two geographic markets and are winding down operations in two other markets that have historically had losses. By exiting these underperforming markets, the Company will be able to redeploy capital to better performing markets, which over time should improve our profitability. (Positive Subjective Evidence)
	7.	Evidence of a sustained recovery in the housing markets in which we operate, supported by economic data showing housing starts, homebuilding volume and prices all increasing and forecasted to continue to increase. (Positive Subjective Evidence)
	8.	The historical cyclicality of the U.S. housing market, a more restrictive mortgage lending environment compared to before the housing downturn, the uncertainty of the overall US economy and government policies and consumer confidence, all or any of which could continue to hamper a faster, stronger recovery of the housing market. (Negative Subjective Evidence)

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

	Year Ended October 31,
(In thousands)	2017			2016
Deferred tax assets:
Depreciation	$	246		$	1,729
Inventory impairment loss		122,584			174,489
Uniform capitalization of overhead		5,766			6,802
Warranty and legal reserves		8,763			13,238
Deferred income		2,341			5,061
Acquisition intangibles		4,420			8,829
Restricted stock bonus		4,202			4,526
Rent on abandoned space		101			1,006
Stock options		6,539			7,073
Provision for losses		38,831			34,505
Joint venture loss		12,028			4,171
Federal net operating losses		549,862			520,117
State net operating losses		172,307			170,014
Other		20,678			22,862
Total deferred tax assets		948,668			974,422
Deferred tax liabilities:
Debt repurchase income		30,465			60,901
Total deferred tax liabilities		30,465			60,901
Valuation allowance		(918,203	)		(627,943	)
Net deferred income taxes	$	-		$	285,578

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

2017,

2016

and

2015

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,
	2017			2016			2015
Computed “expected” tax rate		35.0	%		35.0	%		35.0	%
State income taxes, net of federal income tax benefit		1.0			65.4			(15.6	)
Permanent differences, net		(2.4	)		222.2			(0.4	)
Deferred tax asset valuation allowance impact		(667.8	)		-			-
Tax contingencies		-			0.3			3.2
Adjustments to prior years ’ tax accruals(1)		-			(107.2	)		3.8
Effective tax rate		(634.2	)%		215.7	%		26.0	%

(

)

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%

) for the year ended

October

31,

2016.

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:

	Year Ended October 31,
		2017			2016
Unrecognized tax benefit —November 1,		$	1.1		$	1.1
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	)		(0.2	)
Unrecognized tax benefit —October 31,		$	1.1		$	1.1

Related to the unrecognized tax benefits noted above, as of

October

31,

2017

and

2016,

we have recognized a liability for interest and penalties of

$0.3

million and

$0.3

million, respectively. For the years ended

October

31,

2017,

2016

and

2015,

we recognized $(

) thousand, $(

) thousand and $(

) thousand respectively, of interest and penalties in income tax benefit.

It is likely that, within the next

year, 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 as of both

October 31, 2017

and

2016.

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, 2016

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

2013

2016.