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Note 11 - Income Taxes | 12 Months Ended
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Oct. 31, 2021
Notes to Financial Statements |
Income Tax Disclosure [Text Block] | 11. Income Taxes Income taxes (receivable) payable, including deferred benefits, consists of the following:
|  | Year Ended October 31, |
(In thousands) |  | 2021 |  |  | 2020 |
State income taxes: |  |  |  |  |  |  |  |
Current |  | $ | 3,851 |  |  | $ | 3,832 |
Deferred |  |  | (90,070 | ) |  |  | - |
Federal income taxes: |  |  |  |  |  |  |  |
Current |  |  | - |  |  |  | - |
Deferred |  |  | (335,608 | ) |  |  | - |
Total |  | $ | (421,827 | ) |  | $ | 3,832 |
The (benefit) provision for income taxes is composed of the following charges:
|  | Year Ended October 31, |
(In thousands) |  | 2021 |  |  | 2020 |  |  | 2019 |
Current income tax expense: |  |  |  |  |  |  |  |  |  |  |  |
Federal (1) |  | $ | - |  |  | $ | - |  |  | $ | - |
State (2) |  |  | 7,722 |  |  |  | 4,475 |  |  |  | 2,449 |
Total current income tax expense: |  |  | 7,722 |  |  |  | 4,475 |  |  |  | 2,449 |
Federal |  |  | (335,608 | ) |  |  | - |  |  |  | - |
State |  |  | (90,070 | ) |  |  | - |  |  |  | - |
Total deferred income tax expense: |  |  | (425,678 | ) |  |  | - |  |  |  | - |
Total |  | $ | (417,956 | ) |  | $ | 4,475 |  |  | $ | 2,449 |
(1) | The current federal income tax expense is net of the use of federal net operating losses totaling $173.8 million (tax effected $36.5 million), $183.0 million (tax effected $38.4 million) and $4.0 million (tax effected $0.8 million) for the years ended October 31, 2021, 2020 and 2019, respectively.
(2) | The current state income tax expense is net of the use of state net operating losses totaling $55.7 million, $72.5 million and $1.3 million for the years ended October 31, 2021, 2020 and 2019, respectively.
The total benefit for the year ended October 31, 2021 was $418.0 million. The benefit was primarily due to the reversal of a substantial portion of our valuation allowance previously recorded against our deferred tax assets. The total income tax expense of $4.5 million and $2.4 million for the years ended October 31, 2020 and 2019, 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 $1.2 billion expire between 2029 and 2038, and $15.7 million have an indefinite carryforward period. Of our $2.4 billion of state NOLs, $229.8 million expire between 2022 through 2026; $1.5 billion expire between 2027 through 2031; $397.2 million expire between 2032 through 2036; $169.8 million expire between 2037 through 2041; and $53.9 million have an indefinite carryforward period. On December 27, 2020, the Consolidated Appropriations Act (CAA) was enacted and signed into U.S. law to provide additional economic relief in response to the ongoing coronavirus pandemic. The CAA did not have a material impact on the Company’s consolidated financial conditions or results of operations as of and for the year ended October 31, 2021. We will continue to monitor additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service and various state agencies. The Company recognizes deferred income taxes for 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. A valuation allowance is provided to offset deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Future realization of deferred tax assets depends on the existence of sufficient taxable income of the appropriate character. Sources of taxable income include future reversals of existing taxable temporary differences, expected future taxable income, taxable income in prior carryback years if permitted under the tax law, and tax planning strategies. Management has determined that it is more likely than not that sufficient taxable income will be generated in the future to realize its deferred tax assets except for a portion related to state deferred tax assets. The Company’s deferred tax assets as of October 31, 2021, were $425.7 million. As of October 31, 2021, we considered all available positive and negative evidence to determine whether, based on the weight of that evidence, our valuation allowance for our deferred federal and state income tax assets ("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 we will realize a substantial portion of our DTAs and that a full valuation allowance is not necessary. In analyzing these factors, overall the positive evidence, both objective and subjective, outweighed the negative evidence. Based on this analysis, we determined that the current valuation allowance for deferred taxes of $101.6 million as of October 31, 2021, which partially reserves for our state DTAs, is appropriate.
| 1. | As of October 31, 2021, on a tax basis, the Company had adjusted pre-tax income, which is income before income taxes excluding land-related charges and loss (gain) on extinguishment of debt, on a three-year cumulative basis. On a U.S. GAAP basis, the Company had generated $205.6 million of cumulative pre-tax income in the three years ended October 31, 2021, with $189.9 million of that generated in the last twelve months. We also generated $55.4 million of pre-tax income for our fiscal year ended October 31, 2020. We believe this positive improvement over the last 24 months will continue given the strength of our contract backlog and current homebuilding market conditions. (Positive 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. | On July 30, 2021 we paid off in full $111.2 million of 10.0% 2022 Notes and on August 2, 2021, we paid off in full $69.7 million of 10.5% 2024 Notes. These actions reduced our annual interest incurred by approximately $19 million, which will enhance our profitability going forward. (Positive Objective Evidence)
| 4. | We incurred pre-tax losses during the housing market decline that began in 2007 and the slower than expected housing market recovery. Given our current highly leveraged balance sheet, a downturn in the housing market, 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)
| 5. | 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)
| 6. | 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 U.S. 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 significant positive improvement in our operations in the last 24 months, which further accelerated in the fourth quarter ended October 31, 2021, coupled with our contract backlog of $1.6 billion as of October 31, 2021 provided positive evidence to support the conclusion that a full valuation allowance is not necessary for all of our DTAs. As such, we used our go forward projections to estimate our usage of our existing federal and state DTAs. From that review, we concluded that we no longer needed any valuation allowance for our federal DTAs. However, with respect to our state DTAs, we concluded that a valuation allowance of $101.6 million was still necessary related to states that have shorter carryforward periods or from states where we have significantly reduced or eliminated our operations and thus are not able to project that we will fully utilize those DTAs. As of October 31, 2020, we had a valuation allowance of $396.5 million of federal deferred tax assets related to NOLs, as well as other matters, all of which has been reversed as of October 31, 2021. We also had a valuation allowance of $181.0 million of deferred tax assets related to state NOLs as of October 31, 2020, of which $78.1 million was reversed in the second quarter of fiscal 2021 and $101.6 million remains at October 31, 2021. The deferred tax assets and liabilities have been recognized in the Consolidated Balance Sheets as follows:
|  | Year Ended October 31, |
(In thousands) |  | 2021 |  |  | 2020 |
Deferred tax assets: |  |  |  |  |  |  |  |
Inventory impairment loss |  | $ | 34,973 |  |  | $ | 42,120 |
Uniform capitalization of overhead |  |  | 4,483 |  |  |  | 3,870 |
Warranty and legal reserves |  |  | 5,671 |  |  |  | 4,848 |
Compensation |  |  | 12,464 |  |  |  | 9,554 |
Deferred Income |  |  | 1,420 |  |  |  | 3,793 |
Interest Expense |  |  | 2,582 |  |  |  | 3,930 |
Restricted stock bonus |  |  | 1,159 |  |  |  | 1,644 |
Stock options |  |  | 1,009 |  |  |  | 4,026 |
Provision for losses |  |  | 17,064 |  |  |  | 16,566 |
Joint venture loss |  |  | 743 |  |  |  | 3,020 |
Federal net operating losses |  |  | 263,366 |  |  |  | 299,854 |
State net operating losses |  |  | 177,163 |  |  |  | 181,050 |
Other |  |  | 5,136 |  |  |  | 3,259 |
Total deferred tax assets |  |  | 527,233 |  |  |  | 577,534 |
Total deferred tax liabilities |  |  | - |  |  |  | - |
Valuation allowance |  |  | (101,555 | ) |  |  | (577,534 | )
Net deferred income taxes |  | $ | 425,678 |  |  | $ | - |
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 2021, 2020 and 2019 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, |
|  | 2021 |  |  | 2020 |  |  | 2019 |
Federal statutory income tax rate |  |  | 21.0 | % |  |  | 21.0 | % |  |  | 21.0 | %
State income taxes, net of federal income tax benefit |  |  | 4.0 |  |  |  | 10.6 |  |  |  | (5.0 | )
Permanent differences, net |  |  | 3.6 |  |  |  | 53.2 |  |  |  | (42.4 | )
Deferred tax asset valuation allowance impact |  |  | (248.5 | ) |  |  | (83.3 | ) |  |  | 20.8 |
Tax contingencies |  |  | (0.2 | ) |  |  | (0.5 | ) |  |  | 0.5 |
Adjustments to prior years’ tax accruals |  |  | 0.0 |  |  |  | 7.0 |  |  |  | (1.0 | )
Effective tax rate |  |  | (220.1 | )% |  |  | 8.0 | % |  |  | (6.1 | )%
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:
|  | Year Ended October 31, |
|  | 2021 |  |  | 2020 |
Unrecognized tax benefit—November 1, |  | $ | 0.7 |  |  | $ | 0.9 |
Gross increases—tax positions in current period |  |  | - |  |  |  | - |
Lapse of statute of limitations |  |  | (0.2 | ) |  |  | (0.2 | )
Unrecognized tax benefit—October 31, |  | $ | 0.5 |  |  | $ | 0.7 |
Related to the unrecognized tax benefits noted above, as of both October 31, 2021 and 2020, we recognized a liability for interest and penalties of $0.3 million. For the years ended October 31, 2021 and 2020, we recognized $84 thousand and $60 thousand, respectively, of interest and penalties in net income tax benefit. For the year ended October 31, 2019, we recognized $32 thousand 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 $0.3 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 $0.5 million and $0.7 million for the years ended October 31, 2021 and 2020. The recognition of unrecognized tax benefits could have an impact on the Company’s deferred tax assets. The consolidated federal tax returns have been audited through October 31, 2020 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 2017 – 2020.

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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=121826272&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=122134291&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=121826272&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=122134291&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=121826272&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 Reference 9: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08(h)(2)) -URI http://asc.fasb.org/extlink&oid=120395691&loc=d3e23780-122690 + Details
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