Income Taxes

The benefit (provision) for income taxes consisted of the following:



	Years Ended November 30,
(In thousands)	2015			2014		2013
Current:
Federal	$	(343,635	)	(261,306	)	(2,495	)
State	(52,420		)	3,340		(5,740	)
	$	(396,055	)	(257,966	)	(8,235	)
Deferred:
Federal	$	12,872		(42,847	)	(207,588	)
State	(7,233		)	(40,278	)	38,808
	5,639			(83,125	)	(168,780	)
	$	(390,416	)	(341,091	)	(177,015	)

A reconciliation of the statutory rate and the effective tax rate was as follows:



	Percentage of Pretax Income
	2015		2014		2013
Statutory rate	35.00	%	35.00	%	35.00	%
State income taxes, net of federal income tax benefit	3.22		3.17		3.16
Domestic production activities deduction	(3.01	)	(2.81	)	—
Tax reserves and interest expense	2.64		0.59		0.56
Deferred tax asset valuation reversal	(0.09	)	(0.28	)	(10.22	)
State net operating loss adjustment (1)	(3.00	)	—		—
Tax credits	(1.92	)	(0.41	)	(0.45	)
Other	(0.12	)	(0.46	)	(1.09	)
Effective rate	32.72	%	34.80	%	26.96	%


(1)	During the year ended November 30, 2015, the Company recorded a benefit for additional state net operating loss carryforwards as a result of the conclusion of a state tax examination.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of significant temporary differences that give rise to the net deferred tax assets were as follows:



	November 30,
(In thousands)	2015			2014
Deferred tax assets:
Inventory valuation adjustments	$	58,902		59,208
Reserves and accruals	197,980			158,858
Net operating loss carryforwards	122,573			115,850
Capitalized expenses	91,873			66,768
Investments in unconsolidated entities	10,407			24,843
Other assets	45,725			32,904
Total deferred tax assets	527,460			458,431
Valuation allowance	(5,945		)	(8,029	)
Total deferred tax assets after valuation allowance	521,515			450,402
Deferred tax liabilities:
Capitalized expenses	32,954			64,448
Convertible debt basis difference	229			5,833
Rialto investments in partnerships	11,055			22,262
Deferred income	104,270			7,707
Other	32,282			36,323
Total deferred tax liabilities	180,790			136,573
Net deferred tax assets	$	340,725		313,829

The detail of the Company's net deferred tax assets were as follows:



	November 30,
(In thousands)	2015		2014
Deferred tax assets (liabilities): (1)
Lennar Homebuilding	$	327,645	325,779
Rialto	10,518		(3,335	)
Lennar Financial Services	2,562		(8,615	)
Net deferred tax assets	$	340,725	313,829


(1)	Deferred tax assets are included in other assets and deferred tax liabilities are included in other liabilities in the respective assets and liabilities for each segment detailed above.

A reduction of the carrying amounts of deferred tax assets by a valuation allowance is required if, based on the available evidence, it is more likely than not that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed each reporting period by the Company 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. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, actual earnings, forecasts of future profitability, the duration of statutory carryforward periods, the Company’s experience with loss carryforwards not expiring unused and tax planning alternatives.

As of November 30, 2015 and 2014, the net deferred tax assets included a valuation allowance of $5.9 million and $8.0 million, respectively, primarily related to state net operating loss ("NOL") carryforwards that are not more likely than not to be utilized due to an inability to carry back these losses in most states and short carryforward periods that exist in certain states. During the year ended November 30, 2015, the Company reversed $2.1 million of valuation allowance due to the utilization or expiration of state net operating losses. During the year ended November 30, 2014, the Company reversed $4.7 million of valuation allowance, primarily due to the utilization of federal and state net operating losses.

At November 30, 2015 and 2014, the Company had federal tax effected NOL carryforwards totaling $1.9 million and $2.0 million, respectively, that may be carried forward up to 20 years to offset future taxable income and begin to expire in 2029. At November 30, 2015 and 2014, the Company had state tax effected NOL carryforwards totaling $120.7 million and $113.8 million, respectively, that may be carried forward from 5 to 20 years, depending on the tax jurisdiction, with losses expiring between 2016 and 2035. State tax effected NOL carryforwards increased during the year ended November 30, 2015 primarily as a result of the conclusion of a state tax examination.

The following table summarizes the changes in gross unrecognized tax benefits:



	Years Ended November 30,
(In thousands)	2015		2014		2013
Gross unrecognized tax benefits, beginning of year	$	7,257	10,459		12,297
Increase due to tax positions taken during prior period (1)	5,028		—		—
Increases due to tax positions taken during the current period (2)	—		—		1,982
Decreases due to settlements with taxing authorities (3)	—		(3,202	)	(3,820	)
Gross unrecognized tax benefits, end of year	$	12,285	7,257		10,459


(1)	Increased the Company's effective tax rate for the year ended November 30, 2015 from 32.30% to 32.72% due to state audits.


(2)	Increased the Company's effective tax rate for the year November 30, 2013 from 26.71% to 26.96%.


(3)	Decreased the Company's effective tax rate for the year ended November 30, 2014 from 35.13% to 34.80%. The decrease for the year ended November 30, 2013 had no effect on the Company's effective tax rate.

If the Company were to recognize its gross unrecognized tax benefits as of November 30, 2015, $8.0 million would affect the Company’s effective tax rate. The Company does not expect the total amount of unrecognized tax benefits to increase or decrease by a material amount within the following twelve months.

The following summarizes the changes in interest and penalties accrued with respect to gross unrecognized tax benefits:



	November 30,
(In thousands)	2015			2014
Accrued interest and penalties, beginning of the year	$	31,469		19,124
Accrual of interest and penalties (primarily related to federal and state audits)	33,841			13,956
Reduction of interest and penalties	(165		)	(1,611	)
Accrued interest and penalties, end of the year	$	65,145		31,469

The IRS is currently examining the Company’s federal income tax returns for fiscal years 2013 and 2014, and certain state taxing authorities are examining various fiscal years. The final outcome of these examinations is not yet determinable. The statute of limitations for the Company’s major tax jurisdictions remains open for examination for fiscal year 2005 and subsequent years. The Company participates in an IRS examination program, Compliance Assurance Process, "CAP." This program operates as a contemporaneous exam throughout the year in order to keep exam cycles current and achieve a higher level of compliance.