INCOME TAXES

Income Tax Expense

The components of the Company’s income tax expense are as follows:



	Year Ended September 30,
	2015			2014		2013
	(In millions)
Current tax expense:
Federal	$	356.4		$	253.6	$	66.6
State	13.2			9.1		6.8
	369.6			262.7		73.4
Deferred tax expense (benefit):
Federal	(3.1		)	2.9		146.3
State	6.2			15.1		(24.6		)
	3.1			18.0		121.7
Total income tax expense	$	372.7		$	280.7	$	195.1

The Company's effective tax rate was 33.2%, 34.5% and 29.7% in fiscal 2015, 2014 and 2013, respectively. The effective tax rate for fiscal 2015 includes an expense for state income taxes that was reduced by a tax benefit for the domestic production activities deduction and a tax benefit for a reduction in the valuation allowance on deferred tax assets. The effective tax rate for fiscal 2014 includes an expense for state income taxes that was reduced by a tax benefit for the domestic production activities deduction and a reduction in unrecognized tax benefits and the related interest. In fiscal 2013, a reduction in the valuation allowance on deferred tax assets, as well as a reduction in unrecognized tax benefits and related interest, contributed to the low effective tax rate.

Reconciliation of Expected Income Tax Expense

Differences between income tax expense and tax computed by applying the federal statutory rate of 35% to income before income taxes during each year is due to the following:



	Year Ended September 30,
	2015			2014			2013
	(In millions)
Income taxes at federal statutory rate	$	393.2		$	285.0		$	230.2
Increase (decrease) in tax resulting from:
State income taxes, net of federal benefit	37.0			24.9			6.5
Domestic production activities deduction	(35.7		)	(22.4		)	(6.5		)
Uncertain tax positions	—			(6.4		)	(12.7		)
Valuation allowance	(21.0		)	0.1			(24.1		)
Tax credits	(2.2		)	(0.9		)	(1.1		)
Other	1.4			0.4			2.8
Total income tax expense	$	372.7		$	280.7		$	195.1

Deferred Income Taxes

Deferred tax assets and liabilities reflect the tax consequences of temporary differences between the financial statement amounts of assets and liabilities and their tax bases, and of tax loss and credit carryforwards. Components of deferred income taxes are summarized as follows:



	September 30,
	2015			2014
	(In millions)
Deferred tax assets:
Inventory costs	$	113.7		$	88.6
Inventory impairments	180.4			234.7
Warranty and construction defect costs	127.1			117.3
Net operating loss carryforwards	58.5			84.5
Tax credit carryforwards	7.6			7.6
Incentive compensation plans	79.3			69.3
Deferral of profit on home sales	2.0			1.9
Other	14.4			19.9
Total deferred tax assets	583.0			623.8
Valuation allowance	(10.1		)	(31.1		)
Total deferred tax assets, net of valuation allowance	572.9			592.7
Deferred tax liabilities	14.8			27.7
Deferred income taxes, net	$	558.1		$	565.0

Tax benefits of $58.5 million exist for state net operating loss (NOL) carryforwards that will expire at various times depending on the tax jurisdiction. Of the total amount, $1.8 million of the tax benefits will expire from fiscal years 2016 to 2020, $19.8 million will expire from fiscal years 2021 to 2025 and $36.9 million will expire from fiscal years 2026 to 2035. Tax benefits for state tax credit carryforwards of $5.4 million will expire from fiscal years 2017 to 2026 and $2.2 million of tax benefits for state tax credit carryforwards have no expiration date.

The accounting for deferred taxes is based upon estimates of future results. Differences between the anticipated and actual outcomes of these future results could have a material impact on the Company's consolidated results of operations or financial position. Also, changes in existing federal and state tax laws and tax rates could affect future tax results and the valuation of the Company's deferred tax assets.

Valuation Allowance

When assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of its deferred tax assets will not be realized. The realization of deferred tax assets is dependent upon the generation of sufficient taxable income in future periods. The Company records a valuation allowance when it determines it is more likely than not that a portion of the deferred tax assets will not be realized.

The Company has a valuation allowance related to its state deferred tax assets for NOL carryforwards and tax credit carryforwards. The Company believes it is more likely than not that a portion of its state NOL carryforwards and state tax credits will not be realized because some state NOL and tax credit carryforward periods are too brief to realize the related deferred tax assets. During the fourth quarter of fiscal 2015, the Company concluded it was more likely than not that it would realize more of its deferred tax assets related to state NOL carryforwards than previously anticipated. The Company based this conclusion on additional positive evidence related to the actual taxable income achieved during fiscal 2015 and higher levels of forecasted profitability for future years. Accordingly, during the fourth quarter the Company reduced the valuation allowance by $17.5 million as a result of this additional positive evidence. As of September 30, 2015, the remaining valuation allowance on state deferred tax assets is $10.1 million. The Company will continue to evaluate both the positive and negative evidence in determining the need for a valuation allowance with respect to its remaining state NOL carryforwards and state tax credits.

Unrecognized Tax Benefits

Unrecognized tax benefits are the differences between tax positions taken or expected to be taken in a tax return and the benefits recognized for accounting purposes. A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:



	Year Ended September 30,
	2015		2014			2013
	(In millions)
Unrecognized tax benefits, beginning of year	$	—	$	4.2		$	14.1
Reductions attributable to tax positions taken in prior years	—		(4.2		)	(2.4		)
Reductions attributable to lapse of statute of limitations	—		—			(7.5		)
Unrecognized tax benefits, end of year	$	—	$	—		$	4.2

The Company had no unrecognized tax benefits at September 30, 2015. The Company classifies interest expense and penalties on income taxes as income tax expense. The Company recognized interest benefits of $2.2 million and $2.8 million during fiscal 2014 and 2013, respectively, in its consolidated statements of operations. At September 30, 2015 and 2014, the Company had no accrued interest or penalties related to unrecognized tax benefits.

Regulations and Legislation

The Company is subject to federal income tax and to income tax in multiple states. The statute of limitations for the Company's major tax jurisdictions remains open for examination for fiscal years 2010 through 2015. The Company is currently being audited by various states.