Income Taxes

Income tax expense from continuing operations consists of:



	Year Ended September 30, 2019			Nine Months Ended September 30, 2018			Year Ended December 31, 2017
	(In millions)
Current tax expense (benefit):
U.S. Federal	$	(0.3	)	$	(0.5	)	$	44.2
State and other	0.3			—			3.4
	—			(0.5		)	47.6
Deferred tax expense (benefit):
U.S. Federal	9.1			(23.5		)	(1.7		)
State and other	0.3			(1.3		)	(0.1		)
	9.4			(24.8		)	(1.8		)
Income tax expense (benefit)	$	9.4		$	(25.3	)	$	45.8

A reconciliation of the federal statutory rate to the Company's effective income tax rate from continuing operations follows:



	Year Ended September 30, 2019		Nine Months Ended September 30, 2018		Year Ended December 31, 2017
Federal statutory rate (benefit)	21	%	21	%	35	%
State, net of federal benefit	1		4		3
Valuation allowance	—		(81	)	(42	)
Tax rate change due to new tax act	—		—		40
Noncontrolling interests	(1	)	(1	)	(1	)
Stock based compensation	—		—		11
Goodwill	—		—		25
Merger costs	—		—		18
Other	—		—		(1	)
Effective tax rate	21	%	(57	)%	88	%

The effective tax rate for all years includes an expense for state income taxes and non-deductible expenses, reduced by a tax benefit related to noncontrolling interests. The Company's effective tax rate for the nine months ended September 30, 2018 also includes a benefit for the release of its federal valuation allowance and a portion of its state valuation allowance associated with its deferred tax assets. The Company's effective tax rate for 2017 includes an expense for non-deductible goodwill related to the sale of its owned mineral interests and non-deductible transaction costs related to its merger with D.R. Horton. Other differences, including the remeasurement of the Company's deferred tax assets and liabilities as a result of the Tax Cuts and Jobs Act (Tax Act), are fully offset by a change in its valuation allowance.

Significant components of deferred taxes are:



	September 30, 2019			September 30, 2018
	(In millions)
Deferred Tax Assets:
Real estate	$	10.2		$	11.0
Employee benefits	1.5			1.5
Net operating loss carryforwards	15.1			17.7
AMT credits	0.6			1.2
Accruals not deductible until paid	0.2			0.4
Gross deferred tax assets	27.6			31.8
Valuation allowance	(3.3		)	(3.4		)
Deferred tax asset net of valuation allowance	24.3			28.4
Deferred Tax Liabilities:
Deferral of profit on lot sales	(6.4		)	—
Convertible debt	(0.5		)	(1.5		)
Gross deferred tax liabilities	(6.9		)	(1.5		)
Net Deferred Tax Asset	$	17.4		$	26.9

In October 2017, D.R. Horton acquired 75% of the Company's common stock resulting in an ownership change under Section 382 of the Internal Revenue Code. Section 382 limits the Company's ability to use certain tax attributes and built-in losses and deductions in a given year. Any tax attributes or built-in losses and deductions that were limited in 2018 or 2019 are expected to be fully utilized in future years with the exception of some state net operating loss (NOL) carryforwards.

At September 30, 2019, the Company had tax benefits of $11.4 million related to federal NOL carryforwards, none of which have an expiration date. At September 30, 2019, the Company had tax benefits of $3.7 million related to state NOL carryforwards, of which $3.3 million will expire between 2030 and 2038 while the remaining $0.4 million does not have an expiration date.

At September 30, 2019 and 2018, the Company has provided a valuation allowance for its deferred tax asset of $3.3 million and $3.4 million for the portion of the deferred tax assets that the Company has determined is more likely than not to be unrealizable. The valuation allowance was recorded because it is more likely than not that a portion of the Company's state deferred tax assets, primarily NOL carryforwards, will not be realized because the Company is no longer operating in some states or the NOL carryforward periods are too brief to realize the related deferred tax asset. The Company will continue to evaluate both the positive and negative evidence in determining the need for a valuation allowance on its deferred tax assets. Any reversal of the valuation allowance in future periods will impact the effective tax rate.

The Company entered into a Tax Sharing Agreement with D.R. Horton. The Tax Sharing Agreement sets forth an equitable method for reimbursements of tax liabilities or benefits between the Company and D.R. Horton related to state and local income, margin or franchise tax returns that are filed on a unitary basis with D.R. Horton. In accordance with the tax sharing agreement, D.R. Horton reimbursed the Company $0.4 million in fiscal 2019 for its tax benefit generated in the nine months ended September 30, 2018.

The Company files income tax returns in the U.S. and in various state jurisdictions. The federal statute of limitations for tax years prior to 2017 is effectively closed and the statute of limitations in major state jurisdictions for tax years prior to 2015 is closed. The Internal Revenue Service (IRS) recently completed an audit of the Company's 2016 tax year with no changes. The Company is not currently being audited by the IRS or any state jurisdictions.

A reconciliation of the beginning and ending amount of tax benefits not recognized for book purposes is as follows:



	Year Ended September 30, 2019		Nine Months Ended September 30, 2018		Year Ended December 31, 2017
	(In millions)
Balance at beginning of year	$	1.6	$	1.1	$	2.5
Increases (decreases) for dispositions and other	—		0.5		(1.4		)
Balance at end of year	$	1.6	$	1.6	$	1.1

If the total amount of unrecognized tax benefits was recognized at September 30, 2019, it would result in a $1.6 million tax benefit.

The Company recognizes interest accrued related to unrecognized tax benefits in income tax expense. In fiscal years 2019, 2018 and 2017, no significant interest related to unrecognized tax benefits was recognized. At September 30, 2019, September 30, 2018 and December 31, 2017, there were no significant accrued interest or penalties.