Income Taxes

Income Tax Benefit (Expense). The components of income tax benefit (expense) in the consolidated statements of operations are as follows (in thousands):



	Federal		State			Total
2013
Current	$	—	$	1,600		$	1,600
Deferred	—		—			—
Income tax benefit	$	—	$	1,600		$	1,600
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

We recognized an income tax benefit of $1.6 million in 2013, $20.1 million in 2012 and $2.4 million in 2011. The income tax benefit for 2013 was due to the resolution of a state tax audit, which resulted in a refund receivable of $1.4 million, as well as the recognition of unrecognized tax benefits of $1.0 million, partly offset by the state tax liability of $.8 million. The income tax benefit of $20.1 million in 2012 primarily reflected the resolution of federal and state tax audits, which also resulted in 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. 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 2013, 2012 and 2011 are not meaningful items as our income tax amounts are not directly correlated to the amount of our pretax income (loss) for those periods.

Deferred Income Taxes. 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,
	2013			2012
Deferred tax liabilities:
Capitalized expenses	$	87,599		$	76,112
State taxes	62,884			64,577
Depreciation and amortization	300			—
Other	208			218
Total	$	150,991		$	140,907
Deferred tax assets:
Inventory impairments and land option contract abandonments	$	110,745		$	132,099
NOL from 2006 through 2013	459,885			442,621
Warranty, legal and other accruals	50,110			54,744
Employee benefits	73,039			68,644
Partnerships and joint ventures	122,081			132,851
Depreciation and amortization	—			7,467
Capitalized expenses	9,359			6,646
Tax credits	173,289			169,173
Deferred income	656			668
Other	11,267			6,107
Total	1,010,431			1,021,020
Valuation allowance	(859,440		)	(880,113		)
Total	150,991			140,907
Net deferred tax assets	$	—		$	—

Reconciliation of Expected Income Tax Benefit (Expense). The income tax benefit (expense) 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,
	2013			2012			2011
Income tax benefit (expense) computed at statutory rate	$	(13,427	)	$	27,672		$	63,397
State taxes, net of federal income tax benefit	(1,947		)	9,948			4,691
Reserve and deferred income	(1,808		)	(9,146		)	(1,161		)
Capitalized expenses	—			7,960			(3,501		)
Basis in joint ventures	(9,598		)	42,503			4,401
NOL reconciliation	(3,806		)	(5,345		)	715
Inventory impairments	2,827			(59,401		)	(1,852		)
Recognition of federal and state tax benefits	1,600			17,650			2,600
Tax credits	2,675			17,889			5,477
Valuation allowance for deferred tax assets	20,673			(32,286		)	(76,747		)
Depreciation and amortization	4,523			2,482			—
Other, net	(112		)	174			4,380
Income tax benefit	$	1,600		$	20,100		$	2,400

Valuation Allowance. 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 positive and negative 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. The value of our deferred tax assets will depend on applicable income tax rates. During 2013, we reduced the valuation allowance by $20.7 million to account for adjustments to our deferred tax assets associated with the pretax income generated during the year and the loss of state NOLs due to the expiration of the applicable statute of limitations. 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. One of the primary pieces of negative evidence that we consider in evaluating the need for a valuation allowance is our three-year cumulative loss position, which is largely the result of our pretax losses in 2012 and 2011, as we generated pretax income in 2013. In 2013, we had two consecutive quarters of pretax income and have experienced year-over-year increases in our homes delivered, revenues, housing gross profit margin and net orders. In addition, our backlog value at November 30, 2013 was higher than at November 30, 2012. If such positive trends in our business continue, together with improvements in housing markets and the homebuilding industry, and we are profitable on a sustained basis, we believe that there could be sufficient positive evidence to support reducing a large portion of our valuation allowance during 2014.

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 $329.0 million, if not utilized, will begin to expire in 2030 through 2033. The state NOL carryforwards of $130.9 million will begin to expire between 2014 and 2033 if not utilized. During 2013, $3.5 million of state NOL carryforwards expired.

In addition, $84.4 million of our tax credits, if not utilized, will begin to expire in 2015 through 2033. Included in the $84.4 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, 2013 or 2012 as we maintained a full valuation allowance against our deferred tax assets. The deferred tax asset valuation allowance decreased to $859.4 million at November 30, 2013 from $880.1 million at November 30, 2012, reflecting a reduction of $20.7 million due to the use of deferred tax assets to offset the income taxes associated with the net income generated during 2013, and the loss of certain state NOLs due to the expiration of the applicable statute of limitations. 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.

Unrecognized Tax Benefits. 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,
	2013			2012			2011
Balance at beginning of year	$	1,671		$	1,899		$	11,308
Additions for tax positions related to prior years	—			—			5
Reductions for tax positions related to prior years	—			(165		)	—
Reductions due to lapse of statute of limitations	(1,465		)	(63		)	(2,476		)
Reductions due to resolution of federal and state audits	—			—			(6,938		)
Balance at end of year	$	206		$	1,671		$	1,899

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, 2013, 2012 and 2011, there were $.3 million, $1.3 million and $1.8 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 $.3 million at November 30, 2013 and $.6 million at November 30, 2012. Our liabilities for unrecognized tax benefits at November 30, 2013 and 2012 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, 2013 and 2012 were tax positions of $.2 million and $1.0 million, respectively, for which the ultimate deductibility is highly certain but the timing of such deductibility is uncertain. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect our annual effective tax rate, but would accelerate the payment of cash to a tax authority to an earlier period.

As of November 30, 2013, our gross unrecognized tax benefits (including interest and penalties) totaled $.5 million. We anticipate that these gross unrecognized tax benefits will decrease by an amount ranging from $.1 million to $.3 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 2010 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, 2013, 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.