Income Taxes

12 Months Ended

Oct. 31, 2011

7. Income Taxes

A reconciliation of the Company’s effective tax rate from the federal statutory tax rate for the fiscal years ended October 31, 2011, 2010 and 2009 is set forth below ($ amounts in thousands).


	2011						2010						2009
	$			%*			$			%*			$			%*
Federal tax benefit at statutory rate		(10,278	)		35.0			(41,015	)		35.0			(173,763	)		35.0
State taxes, net of federal benefit		(954	)		3.2			(3,809	)		3.3			(14,522	)		2.9
Reversal of accrual for uncertain tax positions		(52,306	)		178.1			(39,485	)		33.7			(77,337	)		15.6
Accrued interest on anticipated tax assessments		3,055			(10.4	)		9,263			(7.9	)		6,828			(1.4	)
Increase in unrecognized tax benefits								35,575			(30.3	)		39,500			(8.0	)
Increase in deferred tax assets, net		(25,948	)		88.4
Valuation allowance — recognized		43,876			(149.4	)		55,492			(47.4	)		458,280			(92.3	)
Valuation allowance — reversed		(25,689	)		87.5			(128,640	)		109.7
Reversal of tax credits														10,000			(2.0	)
Other		(917	)		3.1			(1,194	)		1.0			10,374			(2.1	)

Tax (benefit)provision		(69,161	)		235.5			(113,813	)		97.1			259,360			(52.3	)


*		Due to rounding, amounts may not add.

The Company currently operates in 19 states and is subject to various state tax jurisdictions. The Company estimates its state tax liability based upon the individual taxing authorities’ regulations, estimates of income by taxing jurisdiction and the Company’s ability to utilize certain tax-saving strategies. Due primarily to a change in the Company’s estimate of the allocation of income or loss, as the case may be, among the various taxing jurisdictions and changes in tax regulations and their impact on the Company’s tax strategies, the Company’s estimated rate for state income taxes was 5.0% for each of fiscal 2011, and 2010 and 4.5% for fiscal 2009.

The (benefit) provision for income taxes for each of the fiscal years ended October 31, 2011, 2010 and 2009 is set forth below (amounts in thousands).


	2011			2010			2009
Federal	$	(21,517	)	$	(67,318	)	$	333,311
State		(47,644	)		(46,495	)		(73,951	)

	$	(69,161	)	$	(113,813	)	$	259,360


Current	$	(43,212	)	$	(156,985	)	$	(229,003	)
Deferred		(25,949	)		43,172			488,363

	$	(69,161	)	$	(113,813	)	$	259,360

A reconciliation of the change in the unrecognized tax benefits for the years ended October 31, 2011, 2010 and 2009 is set forth below (amounts in thousands).


	2011			2010			2009
Balance, beginning of year	$	160,446		$	171,366		$	320,679
Increase in benefit as a result of tax positions taken in prior years		8,168			14,251			11,000
Increase in benefit as a result of tax positions taken in current year					15,675			47,500
Decrease in benefit as a result of settlements		(17,954	)					(138,333	)
Decrease in benefit as a result of completion of audits		(33,370	)
Decrease in benefit as a result of lapse of statute of limitation		(12,621	)		(40,846	)		(69,480	)

Balance, end of year	$	104,669		$	160,446		$	171,366

The Company has reached final settlement of its federal tax returns for fiscal years through 2009. The federal settlements resulted in a reduction in the Company’s unrecognized tax benefits. The state impact of any amended federal return remains subject to examination by various states for a period of up to one year after formal notification of such amendments is made to the states.

The Company’s unrecognized tax benefits are included in “Income taxes payable” on the Company’s consolidated balance sheets. If these unrecognized tax benefits reverse in the future, they would have a beneficial impact on the Company’s effective tax rate at that time. During the next twelve months, it is reasonably possible that the amount of unrecognized tax benefits will change but we are not able to provide a range of such change. The anticipated changes will be principally due to the expiration of tax statutes, settlements with taxing jurisdictions, increases due to new tax positions taken and the accrual of estimated interest and penalties.

The Company recognizes in its tax provision, potential interest and penalties. Information as to the amounts recognized in its tax provision, before reduction for applicable taxes and reversal of previously accrued interest and penalties, of potential interest and penalties in the twelve-month periods ended October 31, 2011, 2010 and 2009, and the amounts accrued for potential interest and penalties at October 31, 2011 and 2010 is set forth in the table below (amounts in thousands).


Recognized in statements of operations:
Fiscal year
2011	$	4,700
2010	$	14,300
2009	$	11,000


Accrued at:
October 31, 2011	$	29,200
October 31, 2010	$	39,209

The amounts accrued for interest and penalties are included in “Income taxes payable” on the Company’s consolidated balance sheets.

Since the beginning of fiscal 2007, the Company has recorded significant deferred tax assets. These deferred tax assets were generated primarily by inventory impairments and impairments of investments in and advances to unconsolidated entities. In accordance with ASC 740, the Company assessed whether a valuation allowance should be established based on its determination of whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company believes that the continued downturn in the housing market, the uncertainty as to its length and magnitude, the cumulative operating losses in recent years, and the Company’s continued recognition of impairment charges, are significant evidence of the continued need for a valuation allowance against its net deferred tax assets. The Company has recorded valuation allowances against its entire net deferred tax asset as of October 31, 2011 and 2010.

The components of net deferred tax assets and liabilities at October 31, 2011 and 2010 are set forth below (amounts in thousands).


	2011			2010
Deferred tax assets:
Accrued expenses	$	5,573		$	4,917
Impairment charges		427,807			415,801
Inventory valuation differences		10,036			13,093
Stock-based compensation expense		44,319			48,657
Amounts related to unrecognized tax benefits		47,387			55,090
State tax, net operating loss carryforward		18,406			11,159
Federal tax net operating loss carryforward		11,232
Other		5,382			3,497

Total assets		570,142			552,214

Deferred tax liabilities:
Capitalized interest		94,129			91,731
Deferred income		(10,553	)		(10,097	)
Depreciation		32,416			29,334
Deferred marketing		(9,295	)		(3,635	)
Other		36,074			35,698

Total liabilities		142,771			143,031

Net deferred tax assets before valuation allowances		427,371			409,183
Cumulative valuation allowance — state		(74,030	)		(45,030	)
Cumulative valuation allowance — federal		(353,341	)		(364,153	)

Net deferred tax assets	$	—		$	—

On November 6, 2009, the Worker, Homeownership, and Business Assistance Act of 2009 (the “Act”) was enacted into law. The Act amended Section 172 of the Internal Revenue Code to allow net operating losses realized in a tax year ending after December 31, 2007 and beginning before January 1, 2010 to be carried back for up to five years (such losses were previously limited to a two-year carryback). This change allowed the Company to carry back its fiscal 2010 taxable loss against taxable income reported in fiscal 2006 and receive a federal tax refund in its second quarter of fiscal 2011 of $154.3 million. The tax losses generated in fiscal 2010 were primarily from the recognition for tax purposes of previously recognized book impairments and the recognition of stock option expenses recognized for book purposes in prior years.

For federal income tax purposes, the Company carried back tax losses incurred in fiscal 2009 against taxable income it reported in fiscal 2007 and received a tax refund in fiscal 2010 of $152.7 million. The tax losses generated in fiscal 2009 were primarily from the recognition for tax purposes of previously recognized book impairments and the recognition of stock option expenses not recognized for book purposes.

The Company is allowed to carry forward tax losses for 20 years and apply such tax losses to future taxable income to realize federal deferred tax assets. As of October 31, 2011, the Company estimates that it will have approximately $45.0 million of tax loss carryforwards, resulting from losses that it expects to recognize on its fiscal 2011 tax return. In addition, the Company expects to be able to reverse its previously recognized valuation allowances against future tax provisons during any future period in which it reports book income before income taxes. The Company will continue to review its deferred tax assets in accordance with ASC 740.

For state tax purposes, due to past and projected losses in certain jurisdictions where the Company does not have carryback potential and/or cannot sufficiently forecast future taxable income, the Company has recognized net cumulative valuation allowances against its state deferred tax assets of $74.0 million as of October 31, 2011 and $45.0 million as of October 31, 2010. In 2011, the Company took steps to merge a number of entities to better align financial and tax reporting and to reduce administrative complexity going forward. Some of these mergers occurred in higher state tax jurisdictions creating additional state tax deferred assets of $28.9 million, offset entirely by an increase in the state tax valuation allowance. Future valuation allowances in these jurisdictions may continue to be recognized if the Company believes it will not generate sufficient future taxable income to utilize any future state deferred tax assets.