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Note 11 - Income Taxes | 12 Months Ended
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Oct. 31, 2020
Notes to Financial Statements |
Income Tax Disclosure [Text Block] | 11. Income Taxes Income taxes payable, including deferred benefits, consists of the following:
|  | Year Ended October 31, |
(In thousands) |  | 2020 |  |  | 2019 |
State income taxes: |  |  |  |  |  |  |  |
Current |  | $ | 3,832 |  |  | $ | 2,301 |
Deferred |  |  | - |  |  |  | - |
Federal income taxes: |  |  |  |  |  |  |  |
Current |  |  | - |  |  |  | - |
Deferred |  |  | - |  |  |  | - |
Total |  | $ | 3,832 |  |  | $ | 2,301 |
The provision for income taxes is composed of the following charges:
|  | Year Ended October 31, |
(In thousands) |  | 2020 |  |  | 2019 |  |  | 2018 |
Current income tax expense: |  |  |  |  |  |  |  |  |  |  |  |
Federal (1) |  | $ | - |  |  | $ | - |  |  | $ | - |
State (2) |  |  | 4,475 |  |  |  | 2,449 |  |  |  | 3,626 |
Total current income tax expense: |  |  | 4,475 |  |  |  | 2,449 |  |  |  | 3,626 |
Federal |  |  | - |  |  |  | - |  |  |  | - |
State |  |  | - |  |  |  | - |  |  |  | - |
Total deferred income tax expense: |  |  | - |  |  |  | - |  |  |  | - |
Total |  | $ | 4,475 |  |  | $ | 2,449 |  |  | $ | 3,626 |
(1) | The current federal income tax expense is net of the use of federal net operating losses totaling $183.0 million (tax effected $38.4 million) and $4.0 million (tax effected $0.8 million) for the years ended October 31, 2020 and 2019, respectively. The current federal income tax expense did not include the use of federal net operating losses for the year ended October 31, 2018.
(2) | The current state income tax expense is net of the use of state net operating losses totaling $72.5 million, $1.3 million and $4.4 million for the years ended October 31, 2020, 2019 and 2018, respectively.
The total income tax expense of $4.5 million, $2.4 million, and $3.6 million for the periods ending October 31, 2020, 2019 and 2018, respectively, was primarily related to state tax expense from income generated in states where we do not have net operating loss carryforwards to offset the current year income. In addition, the expense for the year ended October 31, 2020 was primarily related to state tax expense from the impact of a cancellation of debt income recorded for tax purposes but not for GAAP purposes, creating a permanent difference. Our federal net operating losses of $1.4 billion expire between 2028 and 2038, and $15.7 million have an indefinite carryforward period. Of our $2.4 billion of state NOLs, $232.6 million expire between 2021 through 2025; $1.3 billion expire between 2026 through 2030; $587.9 million expire between 2031 through 2035; $239.2 million expire between 2036 through 2040; and $48.8 million have an indefinite carryforward period. On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was enacted and signed into U.S. law to provide economic relief to individuals and businesses facing economic hardship as a result of the COVID-19 pandemic. The CARES Act did not have a material impact on the Company's consolidated financial condition or results of operations as of and for the year ended October 31, 2020. The Company deferred the timing of estimated payments and payroll taxes as permitted by federal and state legislation, including under the CARES Act. We will continue to monitor additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service and various state agencies. 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, 2020, 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 $577.5 million as of October 31, 2020, which fully reserves for our DTAs, is appropriate.
| 1. | As of October 31, 2020, on a tax basis, the Company had pre-tax income when adjusted for permanent differences on a three-year cumulative basis. However, on a U.S. GAAP basis, the Company has generated only $23.8 million of cumulative pre-tax income in the three years ended October 31, 2020. That cumulative profit was generated over those three years as follows: $8.1 million in fiscal 2018, $39.7 million loss in fiscal 2019 and $55.4 million of income in fiscal 2020. As noted, we had a significant loss in fiscal 2019 and generated a low level of profit in fiscal 2018. While the fiscal 2020 profit is a positive for the Company, it benefited greatly from the extremely strong housing market in the last half of the year. This strong market, as a result of low interest rates and lack of available supply from resale, resulted in contract pace per average active selling community of 17.8 and 16.4 for the third and fourth quarters of fiscal 2020, respectively, both of which are higher than any quarterly sales per community ever recorded by the Company. This increase in sales pace resulted in a 61.3% increase in dollar value of our backlog from October 31, 2019 to October 31, 2020. The Company believes that it is premature to conclude that this pace is sustainable, and in fact the pace has slowed somewhat in November 2020. We remain uncertain regarding the full long-term magnitude or duration of the business and economic impacts from the unprecedented COVID-19 pandemic. Further, it remains unknown whether recent, current or anticipated demand will continue once the current COVID-19 pandemic subsides. These uncertainties bring into doubt the Company’s ability to generate substantive positive income prospectively. Per ASC 740, cumulative losses are one of the most objectively verifiable forms of negative evidence. (Negative Objective Evidence)
| 2. | Over the last several years, we have completed a number of 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. | We incurred pre-tax losses during the housing market decline and the slower than expected housing market recovery. Given our current highly leveraged balance sheet, a downturn in the housing market, perhaps as a result of a prolonged pandemic, would be significantly more damaging to the Company than to other better capitalized homebuilders and make it very difficult for the Company to avoid future losses, given our high interest burden. (Negative Objective Evidence)
| 4. | We exited several geographic markets over the last few years that have historically had losses. By exiting these underperforming markets, the Company has been able to redeploy capital to better performing markets, which over time should improve our profitability. (Positive Subjective Evidence)
| 5. | The historical cyclicality of the U.S. housing market, a more restrictive mortgage lending environment compared to before the housing downturn of 2007-2009, the uncertainty of the overall US economy and government policies and consumer confidence, and impacts of the COVID 19 pandemic, all or any of which could continue to hamper a sustained, 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) |  | 2020 |  |  | 2019 |
Deferred tax assets: |  |  |  |  |  |  |  |
Inventory impairment loss |  | $ | 42,120 |  |  | $ | 47,000 |
Uniform capitalization of overhead |  |  | 3,870 |  |  |  | 3,917 |
Warranty and legal reserves |  |  | 4,848 |  |  |  | 4,404 |
Acquisition intangibles |  |  | - |  |  |  | 424 |
Compensation |  |  | 9,554 |  |  |  | 8,477 |
Deferred Income |  |  | 3,793 |  |  |  | 5,167 |
Interest Expense |  |  | 3,930 |  |  |  | 6,616 |
Restricted stock bonus |  |  | 1,644 |  |  |  | 1,553 |
Stock options |  |  | 4,026 |  |  |  | 4,288 |
Provision for losses |  |  | 16,566 |  |  |  | 16,820 |
Joint venture loss |  |  | 3,020 |  |  |  | 4,392 |
Federal net operating losses |  |  | 299,854 |  |  |  | 334,142 |
State net operating losses |  |  | 181,050 |  |  |  | 184,740 |
Other |  |  | 3,259 |  |  |  | 1,280 |
Total deferred tax assets |  |  | 577,534 |  |  |  | 623,220 |
Total deferred tax liabilities |  |  | - |  |  |  | - |
Valuation allowance |  |  | (577,534 | ) |  |  | (623,220 | )
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 2020, 2019 and 2018 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, |
|  | 2020 |  |  | 2019 |  |  | 2018 |
Computed “expected” tax rate |  |  | 21.0 | % |  |  | 21.0 | % |  |  | 21.0 | %
State income taxes, net of federal income tax benefit |  |  | 10.6 |  |  |  | (5.0 | ) |  |  | 17.2 |
Permanent differences, net |  |  | 53.2 |  |  |  | (42.4 | ) |  |  | 74.0 |
Deferred tax asset valuation allowance impact |  |  | (83.3 | ) |  |  | 20.8 |  |  |  | (70.8 | )
Tax contingencies |  |  | (0.5 | ) |  |  | 0.5 |  |  |  | 1.0 |
Adjustments to prior years’ tax accruals |  |  | 7.0 |  |  |  | (1.0 | ) |  |  | 2.1 |
Effective tax rate |  |  | 8.0 | % |  |  | (6.1 | )% |  |  | 44.5 | %
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 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:
|  | 2020 |  |  | 2019 |
Unrecognized tax benefit—November 1, |  | $ | 0.9 |  |  | $ | 1.2 |
Gross increases—tax positions in current period |  |  | - |  |  |  | - |
Lapse of statute of limitations |  |  | (0.2 | ) |  |  | (0.3 | )
Unrecognized tax benefit—October 31, |  | $ | 0.7 |  |  | $ | 0.9 |
Related to the unrecognized tax benefits noted above, as of October 31, 2020 and 2019, we recognized a liability for interest and penalties of $0.3 and $0.4 million, respectively. For the year ended October 31, 2020, we recognized $60 thousand of interest and penalties in net income tax benefit. For the years ended October 31, 2019 and 2018, we recognized $32 thousand and $41 thousand, respectively, of interest and penalties in income tax expense. 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 $0.7 million and $0.9 million for the years ended October 31, 2020 and 2019. 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, 2019 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 2016 – 2019.

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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/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=84230637&loc=d3e32857-109319 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section S99 -Paragraph 2 -Subparagraph (SAB Topic 11.C) -URI http://asc.fasb.org/extlink&oid=116825942&loc=d3e330215-122817 Reference 3: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 17 -Subparagraph (b) -URI http://asc.fasb.org/extlink&oid=84230637&loc=d3e32809-109319 Reference 4: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SAB TOPIC 6.I.5.Q1) -URI http://asc.fasb.org/extlink&oid=116825942&loc=d3e330036-122817 Reference 5: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 14 -URI http://asc.fasb.org/extlink&oid=84230637&loc=d3e32705-109319 Reference 6: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 270 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6424409&loc=d3e44925-109338 Reference 7: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 Reference 8: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 30 -Section 50 -Paragraph 2 -Subparagraph (a) -URI http://asc.fasb.org/extlink&oid=6424122&loc=d3e41874-109331 + Details
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