Income Taxes

The components of income tax benefit (expense) in the consolidated statements of operations are as follows (in thousands):



	Federal		State			Total
2012
Current	$	16,500	$	3,600		$	20,100
Deferred	—		—			—
Income tax benefit	$	16,500	$	3,600		$	20,100
2011
Current	$	2,600	$	(200	)	$	2,400
Deferred	—		—			—
Income tax benefit (expense)	$	2,600	$	(200	)	$	2,400
2010
Current	$	6,500	$	500		$	7,000
Deferred	—		—			—
Income tax benefit	$	6,500	$	500		$	7,000

Deferred income taxes result from temporary differences in the financial and tax basis of assets and liabilities. Significant components of our deferred tax liabilities and assets are as follows (in thousands):



	November 30,
	2012			2011
Deferred tax liabilities:
Capitalized expenses	$	76,112		$	98,677
State taxes	64,577			61,550
Other	218			190
Total	$	140,907		$	160,417
Deferred tax assets:
Inventory impairments and land option contract abandonments	$	132,099		$	219,457
NOL from 2006 through 2012	442,621			412,901
Warranty, legal and other accruals	54,744			61,189
Employee benefits	68,644			57,699
Partnerships and joint ventures	132,851			83,693
Depreciation and amortization	7,467			13,577
Capitalized expenses	6,646			6,233
Tax credits	169,173			151,300
Deferred income	668			830
Other	6,107			2,517
Total	1,021,020			1,009,396
Valuation allowance	(880,113		)	(847,827		)
Total	140,907			161,569
Net deferred tax assets	$	—		$	1,152

The income tax benefit computed at the statutory U.S. federal income tax rate and the income tax benefit provided in the consolidated statements of operations differ as follows (in thousands):



	Years Ended November 30,
	2012			2011			2010
Income tax benefit computed at statutory rate	$	27,672		$	63,397		$	26,729
Increase (decrease) resulting from:
State taxes, net of federal income tax benefit	9,948			4,691			4,010
Reserve and deferred income	(9,146		)	(1,161		)	1,204
Capitalized expenses	7,960			(3,501		)	(88		)
Basis in joint ventures	42,503			4,401			13,729
NOL reconciliation	(5,345		)	715			(24,749		)
Inventory impairments	(59,401		)	(1,852		)	(2,736		)
Recognition of federal tax benefits	17,650			2,600			1,621
Tax credits	17,889			5,477			5,384
Valuation allowance for deferred tax assets	(32,286		)	(76,747		)	(21,115		)
Other, net	2,656			4,380			3,011
Income tax benefit	$	20,100		$	2,400		$	7,000

We recognized income tax benefits of $20.1 million in 2012, $2.4 million in 2011 and $7.0 million in 2010. The income tax benefit in 2012 primarily reflected the resolution of federal and state tax audits, which resulted in an income tax benefit of $20.1 million and the realization of $1.2 million of deferred tax assets. The income tax benefit in 2011 reflected the reversal of a $2.6 million liability for unrecognized tax benefits due to the status of federal and state tax audits. The income tax benefit in 2010 reflected the recognition of a $5.4 million federal income tax benefit from an additional carryback of our 2009 NOL to offset earnings we generated in 2004 and 2005, and the reversal of a $1.6 million liability for unrecognized tax benefits due to the status of federal and state tax audits. Due to the effects of our deferred tax asset valuation allowances, carrybacks of our NOL, and changes in our unrecognized tax benefits, our effective tax rates in 2012, 2011 and 2010 are not meaningful items as our income tax amounts are not directly correlated to the amount of our pretax losses for those periods.

In accordance with ASC 740, we evaluate our deferred tax assets quarterly to determine if adjustments to the valuation allowance are required. ASC 740 requires that companies assess whether a valuation allowance should be established based on the consideration of all available evidence using a “more likely than not” standard with respect to whether deferred tax assets will be realized. The ultimate realization of deferred tax assets depends primarily on the generation of future taxable income during the periods in which the differences become deductible. The value of our deferred tax assets will depend on applicable income tax rates. During 2012 and 2011, we recorded valuation allowances of $32.3 million and $76.7 million, respectively, against net deferred tax assets generated primarily from the pretax losses for those years. During 2010, we recorded a net increase of $21.1 million to the valuation allowance against net deferred tax assets, reflecting a $26.6 million valuation allowance recorded against the net deferred tax assets generated from the pretax loss for the year that was partially offset by the $5.4 million federal income tax benefit from the additional carryback of our 2009 NOL.

The majority of the tax benefits associated with our NOL can be carried forward for 20 years and applied to offset future taxable income. The federal NOL carryforwards of $313.5 million, if not utilized, will begin to expire in 2030 through 2032. The state NOL carryforwards of $129.1 million will begin to expire between 2013 and 2032 if not utilized.

In addition, $80.0 million of our tax credits, if not utilized, will begin to expire in 2015 through 2032. Included in the $80.0 million are $7.8 million of investment tax credits of which $7.0 million and $.8 million will expire in 2026 and 2027, respectively.

We had no net deferred tax assets at November 30, 2012. Our net deferred tax assets totaled $1.2 million at November 30, 2011. The deferred tax asset valuation allowance increased to $880.1 million at November 30, 2012 from $847.8 million at November 30, 2011, reflecting the net impact of the $32.3 million valuation allowance recorded in 2012. To the extent we generate sufficient taxable income in the future to fully utilize the tax benefits of the related deferred tax assets, we expect our effective tax rate to decrease as the valuation allowance is reversed.

Gross unrecognized tax benefits are the differences between a tax position taken, or expected to be taken in a tax return, and the benefit recognized for accounting purposes. A reconciliation of the beginning and ending balances of the gross unrecognized tax benefits, excluding interest and penalties, is as follows (in thousands):



	Years Ended November 30,
	2012			2011			2010
Balance at beginning of year	$	1,899		$	11,308		$	11,024
Additions for tax positions related to prior years	—			5			1,720
Reductions for tax positions related to prior years	(165		)	—			(1,183		)
Reductions related to settlement	—			(264		)	—
Reductions due to lapse of statute of limitations	(63		)	(2,476		)	—
Reductions due to resolution of federal and state audits	—			(6,674		)	(253		)
Balance at end of year	$	1,671		$	1,899		$	11,308

We recognize accrued interest and penalties related to unrecognized tax benefits in our consolidated financial statements as a component of the provision for income taxes. As of November 30, 2012, 2011 and 2010, there were $1.3 million, $1.8 million and $6.9 million, respectively, of gross unrecognized tax benefits (including interest and penalties), that if recognized would affect our annual effective tax rate. Our total accrued interest and penalties related to unrecognized income tax benefits was $.6 million at November 30, 2012 and $.9 million at November 30, 2011. Our liabilities for unrecognized tax benefits at November 30, 2012 and 2011 are included in accrued expenses and other liabilities in our consolidated balance sheets.

Included in the balance of gross unrecognized tax benefits at November 30, 2012 and 2011 are tax positions of $1.0 million for each year, for which the ultimate deductibility is highly certain but there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate, but would accelerate the payment of cash to a tax authority to an earlier period.

As of November 30, 2012, our gross unrecognized tax benefits (including interest and penalties) totaled $2.3 million. We anticipate that these gross unrecognized tax benefits will decrease by an amount ranging from $.2 million to $1.1 million during the 12 months from this reporting date due to various state filings associated with the resolution of a federal audit.

The fiscal years ending 2005 and later remain open to federal and state examinations.

The benefits of our NOL, built-in losses and tax credits would be reduced or potentially eliminated if we experienced an “ownership change” under Section 382. Based on our analysis performed as of November 30, 2012, we do not believe that we have experienced an ownership change as defined by Section 382, and, therefore, the NOL, built-in losses and tax credits we have generated should not be subject to a Section 382 limitation as of this reporting date.