
NOTE G —	INCOME TAXES

The components of the Company’s income tax benefit attributable to continuing operations are as follows:


	Year Ended September 30,
	2011			2010			2009
	(In millions)

Current tax expense (benefit):
Federal	$	(53.6	)	$	(153.1	)	$	(213.9	)
State		(6.1	)		7.5			(6.6	)

		(59.7	)		(145.6	)		(220.5	)

Deferred tax expense:
Federal		—			—			200.7
State		—			—			12.8

		—			—			213.5

Total income tax benefit	$	(59.7	)	$	(145.6	)	$	(7.0	)

The income tax benefit in fiscal 2011 was due to the Company reducing its accrual for unrecognized tax benefits and corresponding interest by $61.4 million, partially offset by an accrual for state income taxes of $1.7 million. In fiscal 2010, a tax law change regarding net operating loss (NOL) carrybacks resulted in an income tax benefit of $208.3 million, which was partially offset by an increase in unrecognized tax benefits and state income tax expense.

The Company does not have meaningful effective tax rates in fiscal years 2009, 2010 and 2011 because its net deferred tax assets are offset fully by a valuation allowance. The difference between income tax expense (benefit) and tax computed by applying the federal statutory rate of 35% to income (loss) before income taxes during each year is due to the following:


	Year Ended September 30,
	2011			2010			2009
	(In millions)

Income taxes at federal statutory rate	$	4.2		$	34.8		$	(194.9	)
Increase (decrease) in tax resulting from:
State income taxes, net of federal benefit		2.4			9.8			(13.0	)
Domestic production activities deduction		—			(6.2	)		8.1
Uncertain tax positions, net of deferred tax		(11.2	)		13.5			—
Valuation allowance		(54.1	)		(170.6	)		164.8
Tax credits		(2.2	)		(30.0	)		30.0
Other		1.2			3.1			(2.0	)

Total income tax benefit	$	(59.7	)	$	(145.6	)	$	(7.0	)

The Company had income taxes receivable of $12.4 million and $16.0 million at September 30, 2011 and 2010, respectively. The income taxes receivable at September 30, 2011 relates to federal tax refunds the Company expects to receive.

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,
	2011			2010
	(In millions)

Deferred tax assets:
Inventory costs	$	66.3		$	105.6
Inventory impairments		387.3			449.2
Warranty and construction defect costs		111.4			107.2
Net operating loss carryforwards		238.2			183.6
Tax credit carryforwards		3.2			1.0
Incentive compensation plans		51.4			45.9
Deferral of profit on home sales		0.6			0.8
Goodwill impairment		3.4			8.9
Other		34.3			48.1

Total deferred tax assets		896.1			950.3
Valuation allowance		(848.5	)		(902.6	)

Total deferred tax assets, net of valuation allowance		47.6			47.7
Deferred tax liabilities		47.6			47.7

Deferred income taxes, net	$	—		$	—

Deferred tax assets of $241.3 million for NOL carryforwards as of September 30, 2011 were reduced by $3.1 million for excess tax benefits related to the exercise of stock options. The excess tax benefits from the exercise of stock options will result in an increase to additional paid-in capital when the excess tax benefits reduce current income taxes payable.

At September 30, 2011, the Company had federal NOL carryforwards of $436.2 million that expire in fiscal 2030 and 2031. Also at September 30, 2011, the Company had tax benefits for state NOL carryforwards of $88.7 million that expire (beginning at various times depending on the tax jurisdiction) from fiscal 2013 to fiscal 2031. At September 30, 2011, the Company had federal tax credit carryforwards of $3.2 million that expire in fiscal years 2029 through 2031.

The Company has been in a three-year cumulative pre-tax loss position at the end of each fiscal year since fiscal 2008 due to challenging market conditions in the homebuilding industry. At the end of fiscal 2011 the amount of the cumulative three-year pre-tax loss was $445 million. A cumulative loss in recent years is significant negative evidence that generally indicates a valuation allowance is required for some portion or all of the deferred tax assets. Since the Company cannot overcome the significant negative evidence of its cumulative loss with positive evidence of recoverability, the Company has recorded a valuation allowance to reduce the carrying amount of its deferred tax assets. At September 30, 2011 and 2010, the Company had net deferred tax assets of $848.5 million and $902.6 million, respectively, offset by valuation allowances of $848.5 million and $902.6 million, respectively.

The realization of the Company’s deferred tax assets ultimately depends upon the existence of sufficient taxable income in future periods. The Company continues to analyze the positive and negative evidence in determining the need for a valuation allowance with respect to its deferred tax assets on a jurisdictional basis. The valuation allowance could be reduced in future periods if there is sufficient evidence to support a conclusion that it is not needed for some portion or all of the deferred tax assets. Realization of a significant portion of the Company’s deferred tax assets for state NOL carryforwards is more unlikely than the remaining deferred tax assets due to the need to generate a substantially higher level of taxable income prior to the expirations of the various state carryforward periods which expire sooner than the federal NOL carryforwards. 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.

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,
	2011			2010			2009
	(In millions)

Unrecognized tax benefits, beginning of year	$	65.0		$	17.8		$	13.8
Additions attributable to tax positions taken in the current year		—			—			—
Additions attributable to tax positions taken in prior years		—			49.8			7.1
Reductions attributable to tax positions taken in prior years		(48.7	)		(2.6	)		(3.1	)
Settlements		—			—			—

Unrecognized tax benefits, end of year	$	16.3		$	65.0		$	17.8

At September 30, 2011, 2010 and 2009 all tax positions, if recognized, would affect the Company’s annual effective tax rate. The increase in unrecognized tax benefits to $65.0 million at September 30, 2010 from $17.8 million at September 30, 2009 resulted in large part from the Company’s election to carryback its fiscal 2009 NOL to fiscal 2004 and 2005, thereby reopening those previously closed years to further tax assessments. The decrease in unrecognized tax benefits to $16.3 million at September 30, 2011 from $65.0 million at September 30, 2010 resulted from the Company receiving a favorable result from the Internal Revenue Service (IRS) on a ruling request concerning the capitalization of inventory costs and a reduction in its accrual for state income tax issues.

The Company classifies interest expense and penalties on income taxes as income tax expense. During fiscal 2011, 2010 and 2009, the Company recognized interest expense (benefit) related to unrecognized tax benefits of ($12.7) million, $11.6 million and $1.3 million, respectively, in its consolidated statements of operations. At September 30, 2011 and 2010, the Company’s total accrued interest expense relating to unrecognized tax benefits was $5.1 million and $17.8 million, respectively, and there were no accrued penalties. As a result of the Company’s full valuation allowance on its net deferred tax assets, all accrued interest expense would affect the Company’s annual effective tax rate if the associated tax positions were recognized.

A reduction of $2.5 million in the amount of unrecognized tax benefits and accrued interest with respect to state issues is reasonably possible within the next 12 months and would result in an income tax benefit in the consolidated statement of operations.

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 2004 through 2011. The Company is currently being audited by the IRS for fiscal years 2006 and 2007, and by various states. Its federal NOL refunds from fiscal 2008 and 2009 are subject to Congressional Joint Committee review.