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Note 15 - Income Taxes | 6 Months Ended
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Apr. 30, 2017
Notes to Financial Statements |
Income Tax Disclosure [Text Block] |
1 5 . | Income Taxes
The total income tax benefit of $1. 1 million and $0.6 million for the three and six months ended April 30, 2017, respectively, was primarily due to the federal tax benefit on the pre-tax loss for the periods, partially offset 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 be nefit of $9.1 million and $6.2 million for the three and six months ended April 30, 2016, respectively, was primarily due to a permanent difference related to stock compensation and a federal tax benefit related to receiving a specified liability loss refund of taxes paid in fiscal year 2002, partially offset by state tax expenses and state tax reserves for uncertain tax positions. T he permanent difference 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- 2 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 for the first six months of fiscal 2016 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- 2. 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 10 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)( 1 )(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 state NOLs of $2.2 billion expire between 2017 and 2036. Of the total amount, $301.7 million will expire between 2017 through 2021; $253.9 million will expire between 2022 through 2026; $1,327.3 million will expire between 2027 through 2031; and $348.0 million will expire between 2032 through 2036. Deferred federal and state income tax assets primarily represent the deferred tax benefits arising from temporary differences between book and tax income which will b e 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, 2014, we concluded that it was more likely than not that a portion of our deferred tax assets (“DTA”) would be utilized. This conclusion was based on a detailed evaluation of all relevant evidence available at that time, both positive and negative. As a result of this conclusion, our valuation allowance for our DTA was reduced in the fourth quarter of fiscal 2014. As expected at the time of that conclusion, our earnings have continued to improve such that we have not been and are currently not in a three -year cumulative loss position as of April 30, 2017. As per ASC 740, cumulative losses are one of the most objectively verifiable forms of negative evidence; we no longer have this negative evidence that we had when the full valuation allowance was recorded 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 and sales pace provide evidence that reaffirms our conclusion that a full valuation allowance was not necessary and that the current valuation allowance for deferred taxes of $628 million as of April 30, 2017 is appropriate. The following is a discussion of the significant estimates and assumptions we used for our analysis of deferred taxes and our determination of the valuation allowance to record. The realization of our DTA is not dependent upon assumed future events or a minimum annualized rate of increase of taxable inc ome. As discussed above, we projected pretax income based on our recent three years cumulative performance as well as our expectations for fiscal 2017. Conservatively, we assumed the 2017 level of pretax profit (excluding the gains on extinguishment of debt in 2017 ) for the remaining 19 years used in the analysis even though our longer-term projections show growth in pretax profit in these future years. After projecting the pretax income, we then scheduled all temporary and permanent tax differences for all NOL carryforward periods. Realization of deferred tax assets/liabilities was scheduled by year of forecasted realization based on the Internal Revenue Code. We considered all available positive and negative evidence to determine whether, based on the weight of that evidence, an add itional 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 det ermining that it is more likely than not that the DTAs that do not have a valuation allowance will be realized. In analyzing all of these factors, overall the positive evidence, both objective and subjective, outweighed the negative evidence.
| 1. | Recent financial results that put us in a cumulative three -year income position as of April 30, 2017. ( Positive Objective Evidence)
| 2. | Our ability to schedule the use of most DTAs related to temporary differences. (Positive Objective Evidence)
| 3. | In the fourth quarter of fiscal 2016, we completed several debt refinancing/restructuring transactions which will significantly reduce our interest incurred in fiscal 2017 and future years (based on our longer-term modeling) by $20 million per year. (Positive Objective Evidence)
| 4. | We incurred pre-tax losses during the housing market decline and the slower than expected housing market recovery. (Negative Objective Evidence)
| 5. | 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)
| 6. | 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)
| 7. | As noted in our Management ’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) under Item 2, our gross margins have been negatively impacted by pricing of land purchased in 2013 and 2014 during a brief period of market improvement. As we work through that land position, we expect more recent land purchases to have higher gross margins, which will improve our overall gross margin as the mix of new communities exceeds the older communities. We did not include this improvement in our projections, but it provides evidence of potential additional improvement. (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)
After considering the timing of when existing DTAs will be expensed for tax purposes, we will be required to gen erate minimum taxable income of approximately $275 million over the next 19 years to support realizing our DTAs that did not, as of April 30, 2017, have a valuation allowance. The Company is not currently relying on any tax planning strategies to support the realization of our DTAs .

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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 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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