Entity information:
Income Taxes
The benefit (provision) for income taxes consisted of the following:
 
Years Ended November 30,
(In thousands)
2017
 
2016
 
2015
Current:
 
 
 
 
 
Federal
$
(309,235
)
 
(300,116
)
 
(343,635
)
State
(17,572
)
 
(19,777
)
 
(52,420
)
 
$
(326,807
)
 
(319,893
)
 
(396,055
)
Deferred:
 
 
 
 
 
Federal
$
(40,641
)
 
(43,775
)
 
12,872

State
(50,409
)
 
(53,710
)
 
(7,233
)
 
(91,050
)
 
(97,485
)
 
5,639

 
$
(417,857
)
 
(417,378
)
 
(390,416
)

A reconciliation of the statutory rate and the effective tax rate was as follows:
 
Percentage of Pretax Income
 
2017
 
2016
 
2015
Statutory rate
35.00
 %
 
35.00
 %
 
35.00
 %
State income taxes, net of federal income tax benefit
3.29

 
3.21

 
3.22

Domestic production activities deduction
(2.77
)
 
(2.78
)
 
(3.01
)
Tax reserves and interest expense
0.27

 
(0.89
)
 
2.64

Deferred tax asset valuation allowance
0.17

 
(0.01
)
 
(0.09
)
State net operating loss adjustment (1)
—

 
—

 
(3.00
)
Tax credits
(2.03
)
 
(3.46
)
 
(1.92
)
Other
0.09

 
0.33

 
(0.12
)
Effective rate
34.02
%
 
31.40
%
 
32.72
%

(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)
2017
 
2016
Deferred tax assets:
 
 
 
Inventory valuation adjustments
$
54,511

 
56,733

Reserves and accruals
164,868

 
198,270

Net operating loss carryforwards
100,338

 
92,362

Rialto investments in partnerships
15,705

 
11,352

Capitalized expenses
197,204

 
106,270

Investments in unconsolidated entities
38,627

 
42,796

Other assets
68,857

 
57,890

Total deferred tax assets
640,110

 
565,673

Valuation allowance
(6,423
)
 
(5,773
)
Total deferred tax assets after valuation allowance
633,687

 
559,900

Deferred tax liabilities:
 
 
 
Capitalized expenses
79,440

 
30,632

Deferred income
244,969

 
226,195

Other
11,583

 
25,675

Total deferred tax liabilities
335,992

 
282,502

Net deferred tax assets
$
297,695

 
277,398


The detail of the Company's net deferred tax assets were as follows:
 
November 30,
(In thousands)
2017
 
2016
Net deferred tax assets (liabilities): (1)
 
 
 
Lennar Homebuilding
$
279,900

 
249,714

Rialto
21,944

 
26,547

Lennar Financial Services
(1,176
)
 
5,919

Lennar Multifamily
(2,973
)
 
(4,782
)
Net deferred tax assets
$
297,695

 
277,398

(1)
Net deferred tax assets and net deferred tax liabilities detailed above are included within other assets and other liabilities in the respective segments.
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, 2017 and 2016, the net deferred tax assets included a valuation allowance of $6.4 million and $5.8 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, 2016, the Company reversed $0.2 million, of valuation allowance primarily due to the utilization of state net operating losses. During the year ended November 30, 2017, the Company increased its valuation allowance against deferred tax assets relating to state net operating losses by $0.7 million.
At November 30, 2017 and 2016, the Company had federal tax effected NOL carryforwards totaling $34.1 million and $1.8 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, 2017 and 2016, the Company had state tax effected NOL carryforwards totaling $66.2 million and $90.6 million, respectively, that may be carried forward from 5 to 20 years, depending on the tax jurisdiction, with losses expiring between 2018 and 2036.
The following table summarizes the changes in gross unrecognized tax benefits:
 
Years Ended November 30,
(In thousands)
2017
 
2016
 
2015
Gross unrecognized tax benefits, beginning of year
$
12,285

 
12,285

 
7,257

Increase due to tax positions taken during prior period (1)
—

 
—

 
5,028

Gross unrecognized tax benefits, end of year
$
12,285

 
12,285

 
12,285


(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.
If the Company were to recognize its gross unrecognized tax benefits as of November 30, 2017, $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)
2017
 
2016
Accrued interest and penalties, beginning of the year
$
45,973

 
65,145

Accrual of interest and penalties (primarily related to federal and state audits)
4,184

 
3,251

Reduction of interest and penalties (1)
(434
)
 
(22,423
)
Accrued interest and penalties, end of the year
$
49,723

 
45,973


(1)
The Company's accrual for interest and penalties was reduced during the year ended November 30, 2016 primarily due to a settlement with the IRS.
The IRS is currently examining the Company’s federal income tax returns for fiscal year 2016, 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.
On December 22, 2017, the President signed into law the Tax Cuts and Jobs Act. This Act will materially affect the taxes owed by the Company in 2018 and subsequent years. Among other things, it will reduce the maximum federal corporate income tax rate to 21%, which should have a positive effect on the Company's net earnings and earnings per share. It will also limit or eliminate certain deductions to which the Company has been entitled in past years and it will reduce the value of the Company's deferred tax assets, which will require the Company to recognize in the first quarter of fiscal year 2018 a charge against earnings for impairment of those assets of approximately $70 million.