15.	Income Taxes

The total income tax expense for the

three

and

six

months ended

April 30, 2019

was

$0.3

million and

$0.7

million, respectively, and

$0.3

million and

$0.6

million, respectively, for the same periods of the prior year. For both the

three

and

six

months ended

April 30, 2019

and the

three

and

six

months ended

April 30, 2018,

the total income tax expense 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.

Our federal net operating losses of

$1.6

billion expire between

2028

and

2037,

and

$41.9

million have an indefinite carryforward period. Of our

$2.5

billion of state NOLs,

$145.3

million expire between

2019

through

2023;

$691.2

million expire between

2024

through

2028;

$1.3

billion expire between

2029

through

2033;

$316.1

million expire between

2034

through

2038;

and

$43.2

million have an indefinite carryforward period

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

April 30, 2019

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

$642.9

million as of

April 30, 2019,

which fully reserves for our DTAs, is appropriate.

Fiscal

2017

financial results, especially the

$50.2

million pre-tax loss in the

third

quarter of fiscal

2017

primarily from the

$42.3

million loss on extinguishment of debt during the quarter, that put us in a cumulative

three

-year pre-tax loss position as of

July 31, 2017.

As of

April 30, 2019,

the Company has slightly positive pre-tax income when adjusted for permanent differences on a

three

year cumulative basis. However, on a US GAAP basis, the Company is still in a

three

year cumulative pre-tax loss position as of

April 30, 2019.

Therefore, it is too early to conclude whether we will continue to

not

be in a

three

-year cumulative loss position going forward on a tax accounting basis. Per ASC

740,

cumulative losses are

one

of the most objectively verifiable forms of negative evidence. (Negative Objective Evidence)

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)

Recent financial results of

$48.1

million pre-tax income in the

fourth

quarter of fiscal

2018

and

$8.1

million pre-tax income for the year ended

October 31, 2018. (

Positive Objective Evidence)

Our net contracts per community declined in the

fourth

quarter of fiscal

2018

compared to the

fourth

quarter of fiscal

2017

and the

second

quarter of fiscal

2019

compared to the

second

quarter of fiscal

2018,

consistent with data for the overall housing market. This 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)

We incurred pre-tax losses during the housing market decline and the slower than expected housing market recovery. (Negative Objective Evidence)

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)

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 sustained, stronger recovery of the housing market. (Negative Subjective Evidence)