NOTE L - INCOME TAXES

The components of income tax expense (benefit) for the years ended December 31, 2011, 2010 and 2009 are as follows:

	2011		2010			2009
Current
Federal	$	-	$	-		$	(34,248	)
State		-		-			-
Total current		-		-			(34,248	)

Deferred
Federal		473		(375	)		1,189
State		-		-			199
Total deferred		473		(375	)		1,388
Total income tax expense (benefit)	$	473	$	(375	)	$	(32,860	)

On November 6, 2009, the Worker, Homeownership, and Business Assistance Act of 2009 was enacted into law and amended Section 172 of the Internal Revenue Code to extend the permitted carryback period for offsetting certain net operating losses (NOLs) against earnings for up to five years. Due to this enacted federal tax legislation, AV Homes carried back its 2009 NOL against earnings it generated in the five previous years. As a result, AV Homes received a federal tax refund of $33,627 during 2010.

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred income tax assets and liabilities as of December 31, 2011 and 2010 are as follows:

	2011			2010
Deferred income tax assets
Tax over book basis of land inventory	$	14,524		$	13,824
Unrecoverable land development costs		6,965			2,143
Executive incentive compensation		548			637
Net operating loss carry forward		19,987			14,026
Impairment charges		56,973			15,196
Other		5,945			279
Total deferred income tax assets		104,942			46,105
Valuation allowance for deferred tax assets		(91,483	)		(22,522	)
Net deferred income tax assets		13,459			23,583
Deferred income tax liability
Book over tax income recognized on sale of the Ocala Property		(12,899	)		(21,925	)
Tax over book on 4.50% Convertible Notes		(767	)		(912	)
Book over tax basis of depreciable assets		207			(696	)
Restricted stock		-			(50	)
		(13,459	)		(23,583	)
Net deferred income tax liability	$	-		$	-

In accordance with ASC 740, AV Homes evaluates its deferred tax assets 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. Our cumulative loss position over the evaluation period and the uncertain and volatile market conditions provided significant evidence supporting the need for a valuation allowance. During 2011 and 2010 we recognized an increase of $68,961 and $12,103, respectively, in the valuation allowance. As of December 31, 2011, our deferred tax asset valuation allowance was $91,483. In future periods, the allowance could be reduced based on sufficient evidence indicating that it is more likely than not that a portion of our deferred tax assets will be realized.

In 2006, we sold property we owned in Marion County, Florida to the Board of Trustees of the Internal Improvement Trust Fund of the State of Florida under threat of condemnation. The bulk of the land was transferred in 2006 and the final closing took place in 2007. These transactions and subsequent correspondence with the Internal Revenue Service entitled us to defer payment of income taxes of $24,355 from the gain on these sales until December 31, 2010 provided we obtained qualifying replacement property for the Marion property by such date. We believe that we acquired appropriate replacement properties by December 31, 2010. If the Internal Revenue Service determines in the future that some or all of the properties acquired by us as replacement properties do not qualify as replacement properties, we may be required to make an income tax payment plus interest on the value of the portion of the properties determined not to qualify as replacement property.

No additional income tax benefits were generated from the exercise of share-based compensation during 2011, 2010 and 2009.

A reconciliation of income tax expense (benefit) to the expected income tax expense (benefit) at the federal statutory rate of 35% for each of the years ended December 31, 2011, 2010 and 2009 is as follows:

	2011			2010			2009
Income tax (benefit) expense computed at statutory rate	$	(57,893	)	$	(12,419	)	$	(21,645	)
State income tax (benefit) expense, net of federal benefit		(6,521	)		(1,200	)		(2,093	)
Adjustment to 2009 net operating loss carryback		-			795			-
Change in valuation allowance on deferred tax assets		68,961			12,103			(9,148	)
Prior period adjustments charged to retained earnings		(4,044	)		-			-
Other		(30	)		346			26
Income tax (benefit) expense	$	473		$	(375	)	$	(32,860	)

During 2010 and 2009, we received income tax payment refunds of approximately $33,627 and $21,356, respectively, related to taxable losses generated during 2009 and 2008, respectively. We did not receive income tax payment refunds in 2011.

On February 10, 2012, AV Homes agreed with the Internal Revenue Service's Notice of Proposed Adjustment to the 2009 net operating loss carryback. This adjustment generated an income tax expense of $473 for 2011 with a reduction in the anticipated income tax receivable in the same amount. The anticipated income tax receivable as of December 31, 2011 is $1,293.