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Note 11 - Income Taxes | 12 Months Ended
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Oct. 31, 2018
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) |  | 2018 |  |  | 2017 |
State income taxes: |  |  |  |  |  |
Current |  | $3,334 |  |  | $2,227 |
Deferred |  | - |  |  | - |
Federal income taxes: |  |  |  |  |  |
Current |  | - |  |  | - |
Deferred |  | - |  |  | - |
Total |  | $3,334 |  |  | $2,227 |
The provision for income taxes is composed of the following charges (benefits):
|  | Year Ended October 31, |
(In thousands) |  | 2018 |  |  | 2017 |  |  | 2016 |
Current income tax expense (benefit): |  |  |  |  |  |  |  |  |
Federal (1) |  | $- |  |  | $- |  |  | $(2,796 | )
State (2) |  | 3,626 |  |  | 1,371 |  |  | 1,200 |
Total current income tax expense (benefit): |  | 3,626 |  |  | 1,371 |  |  | (1,596 | )
Federal |  | - |  |  | 275,688 |  |  | 5,594 |
State |  | - |  |  | 9,890 |  |  | 1,257 |
Total deferred income tax expense (benefit): |  | - |  |  | 285,578 |  |  | 6,851 |
Total |  | $3,626 |  |  | $286,949 |  |  | $5,255 |
( 1 ) | The current federal income tax expense did not include the use of federal net operating losses for the year s ended October 31, 2018 and 2017. The current federal income tax benefit is net of the use of federal net operating losses totaling $4.4 million for the year ended October 31, 2016 .
( 2 ) | The current state income tax expense (benefit) is net of the use of state net operating losses totaling $4.4 million, $18.2 million and $16.4 million for the years ended October 31, 2018, 2017 and 2016, respectively.
The total income tax expense of $3.6 million for the period ending October 31, 2018 was primarily related to state tax expense from income generated that was not offset by tax benefits in states where we fully reserve the tax benefit from net operating losses. 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 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- 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. 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 therefore 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 federal net operating losses of $1.6 billion expire between 2028 and 2037, and $16.4 million have an indefinite carryforward period. Our state NOLs of $2.5 billion expire between 2019 and 2038, and some have an indefinite carryforward period. Of the total state amount $145.3 million will expire between 2019 through 2023; $691.2 million will expire between 2024 through 2028; $1.3 billion will expire between 2029 through 2033; $320.0 million will expire between 2034 through 2038; and $43.3 million have an indefinite carryforward period . On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act of 2017 (the “Act”). Effective January 1, 2018, the comprehensive U.S. tax reform package, among other things, lowered the corporate tax rate from 35% to 21%. Under the accounting rules, companies are required to recognize the effects of changes in tax laws and tax rates on deferred tax assets and liabilities in the period in which the new legislation is enacted. The effects of the Act on the Company include one major category which is the remeasurement of deferred taxes. Consequently, we have recorded a decrease related to deferred tax assets and liabilities of $298.5 million and $12.2 million, respectively, with a corresponding net adjustment to the valuation allowance in fiscal 2018, and there was no income tax expense or benefit as a result of the tax law changes. The Act contained additional changes that will impact our taxable income determinations, including, but not limited to elimination of the corporate alternative minimum tax and limitations on the deductibility of certain executive compensation. Although these provisions are not applicable until our fiscal year 2019, we anticipated limitations on the deductibility of executive compensation in our fiscal year 2018. We will continue to evaluate the impact of the tax reform as additional regulatory guidance is obtained. The ultimate impact of tax reform may differ from our interpretations and assumptions due to additional regulatory guidance that may be issued. As of October 31, 2018, we have completed our analysis of the impacts of the Act under SAB 118 with immaterial differences to our provisional amounts previously recorded. Deferred federal and state income tax assets (“DTAs”) primarily represent the deferred tax benefits arising from NOL 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 DTAs 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, 2018 , we considered all available positive and negative evidence to determine whether, based on the weight of that evidence, our valuation allowance for our DTAs was appropriate 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 determined that the current valuation allowance for deferred taxes of $638.2 million as of October 31, 2018, which fully reserves for our DTAs, 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 pretax loss position as of July 31, 2017. We are still in a cumulative three -year US GAAP pretax loss position as of October 31, 2018. 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 and second and third quarters of fiscal 2018, we completed debt refinancing/restructuring transactions 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 $48.1 million pre-tax income in the fourth quarter of 2018 and $8.1 million pre-tax income for the twelve months ending October 31, 2018. ( Positive Objective Evidence)
| 4. | Our net contracts per community declined in the fourth quarter of fiscal 2018 compared to the fourth quarter of 2017, consistent with data for the overall housing market. This recent slow down may be the beginning of a cyclical housing downturn or may just be temporary because of recent increases in mortgage rates. (Negative Objective Evidence)
| 5. | The refinancing in the third quarter of fiscal 2017 discussed in item 2 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)
| 6. | We incurred pre-tax losses during the housing market decline and the slower than expected housing market recovery. (Negative Objective Evidence)
| 7. | We exited two geographic markets in fiscal 2016 and completed the wind down of operations in two other markets in fiscal 2018, 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)
| 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) |  | 2018 |  |  | 2017 |
Deferred tax assets: |  |  |  |  |  |
Inventory impairment loss |  | $60,854 |  |  | $122,584 |
Uniform capitalization of overhead |  | 4,183 |  |  | 5,766 |
Warranty and legal reserves |  | 4,774 |  |  | 8,763 |
Acquisition intangibles |  | 1,185 |  |  | 4,420 |
Restricted stock bonus |  | 1,344 |  |  | 4,202 |
Stock options |  | 4,358 |  |  | 6,539 |
Provision for losses |  | 18,044 |  |  | 38,831 |
Joint venture loss |  | 3,384 |  |  | 12,028 |
Federal net operating losses |  | 334,971 |  |  | 549,862 |
State net operating losses |  | 191,064 |  |  | 172,307 |
Other |  | 14,030 |  |  | 23,366 |
Total deferred tax assets |  | 638,191 |  |  | 948,668 |
Deferred tax liabilities: |  |  |  |  |  |
Debt repurchase income |  | - |  |  | 30,465 |
Total deferred tax liabilities |  | - |  |  | 30,465 |
Valuation allowance |  | (638,191 | ) |  | (918,203 | )
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 has been the valuation allowance related to our deferred tax assets. Due to the effects of these factors, our effective tax rates for 2018, 2017 and 2016 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, |
|  | 2018 |  |  | 2017 |  |  | 2016 |
Computed “expected” tax rate |  |  | 21.0 | % |  |  | 35.0 | % |  |  | 35.0 | %
State income taxes, net of federal income tax benefit |  |  | 17.2 |  |  |  | 1.0 |  |  |  | 65.4 |
Permanent differences, net |  |  | 74.0 |  |  |  | (2.4 | ) |  |  | 222.2 |
Deferred tax asset valuation allowance impact |  |  | (70.8 | ) |  |  | (667.8 | ) |  |  | - |
Tax contingencies |  |  | 1.0 |  |  |  | - |  |  |  | 0.3 |
Adjustments to prior years’ tax accruals(1) |  |  | 2.1 |  |  |  | - |  |  |  | (107.2 | )
Effective tax rate |  |  | 44.5 | % |  |  | (634.2 | )% |  |  | 215.7 | %
( 1 ) | For the year ended October 31, 2017, 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% ).
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 Statements of Operations. Accrued interest and penalties are included within the related tax liability line in the Consolidated Balance Sheets. 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, |
|  |  |  | 2018 |  |  | 2017 |
Unrecognized tax benefit—November 1, |  | $1.1 |  |  | $1.1 |
Gross increases—tax positions in current period |  | 0.3 |  |  | 0.2 |
Lapse of statute of limitations |  | (0.2 | ) |  | (0.2 | )
Unrecognized tax benefit—October 31, |  | $1.2 |  |  | $1.1 |
Related to the unrecognized tax benefits noted above, as of both October 31, 2018 and 2017, we have recognized a liability for interest and penalties of $0.3 million. For the years ended October 31, 2018, 2017 and 2016, we recognized $( 41 ) thousand, $( 45 ) thousand and $( 2 ) 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 $1.2 million and $1.1 million for the years ended October 31, 2018 and 2017 . 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, 2017 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 2014 through 2017 .

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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://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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