NOTE G - INCOME TAXES

In December of 2004, we made an election under the American Jobs Creation Act of 2004 (“Jobs Creation Act”) to have our qualifying U.S. Flag operations taxed under a “tonnage tax” regime rather than under the traditional U.S. corporate income tax regime. As a result of the election made in accordance with the provisions of the Jobs Creation Act, our U.S. subsidiaries owning and/or operating qualifying vessels are taxed solely under this “tonnage tax” regime. Income for U.S. income tax purposes with respect to qualifying shipping activities of US Flag vessels excludes (1) income from qualifying shipping activities in U.S. foreign trade, (2) income from bank deposits and temporary investments that are reasonably necessary to meet the working capital requirements of qualifying shipping activities and (3) income from cash or other intangible assets accumulated pursuant to a plan to purchase qualifying shipping assets.

Under the tonnage tax regime, qualifying U.S. Flag vessels are assessed a tax based on “daily notional shipping income”, derived from the net tonnage of the qualifying vessel(s). The daily notional shipping income is 40 cents per 100 tons of the net tonnage of the vessel up to 25,000 net tons, and 20 cents per 100 tons of the net tonnage of the vessel in excess of 25,000 net tons. This daily notional shipping income is taxed at the highest corporate income tax rate (currently 35%) with no allowances for offsetting deductions or credits. All other U.S. operations are taxed under the regular corporate income tax regime and at the statutory tax rate.

Certain foreign operations are exempt from foreign income taxation under existing provisions of the laws of those jurisdictions. Pursuant to existing U.S. tax laws, earnings from certain foreign operations will be subject to U.S. income tax when those earnings are repatriated. Our intention has been and remains to indefinitely re-invest $24,391,000, $12,583,000 and $3,051,000 of our 2011, 2010 and 2009 respective foreign earnings (losses excluded) in our foreign subsidiaries, and accordingly, have not provided deferred taxes against those earnings. The principal reasons for this position are as follows: maintenance of foreign flag fleet, future expansion of foreign flag fleet, and U.S. flag fleet's operating cash needs are adequately met by its operations.

Our U.S. Federal income tax return is filed on a consolidated basis and includes the results of operations of our wholly-owned U.S. subsidiaries. Pursuant to the Tax Reform Act of 1986, the current recognition of earnings (losses excluded) of foreign subsidiaries, which were $0 in 2011, $2,564,000 in 2010, and $2,015,000 in 2009, has been included in our federal tax provision calculation. No foreign tax credits are expected to be utilized on the federal return as of December 31, 2011.

Components of the net deferred tax (liability) asset are as follows:

			December 31,
		(Amounts in thousands)	2011	2010
DEFERRED TAX LIABILITIES
	Vessel, Property, and Other Equipment		$ (7,989)	$ (9,615)
	Deferred Charges		(21)	(2,668)
	Post-Retirement Benefits		(13)	-
	Other Liability		-	(236)
		Total Deferred Tax Liabilities	$ (8,023)	$ (12,519)

DEFERRED TAX ASSETS
	Net Operating Loss Carryforwards		$ 6,220	$ 5,053
	Minimum Tax Credit		5,179	4,577
	Market Value Adjustments		1,588	1,492
	Post-Retirement Benefits		-	814
	Insurance and Claims Reserve		954	-
	Other Assets		1,306	1,035
		Total Deferred Tax Assets	$ 15,247	$ 12,971
	Valuation Allowance		(7,224)	(452)

		Net Deferred Tax Assets	$ 8,023	$ 12,519

TOTAL DEFERRED TAX			-	-

DEFERRED TAX COMPONENTS
	Current		$ (158)	$ (137)
	Non-current		158	137
TOTAL DEFERRED TAX			$ -	$ -

We established a valuation allowance against deferred tax assets in 2010 because, based on available information, we could not conclude that it was more likely than not that the full amount of deferred tax assets generated primarily by NOL carryforwards and AMT credits would be realized through the generation of taxable income in the near future. We have and will continue to evaluate the need for a valuation allowance on an annual basis.

The components of Income Before Provision (Benefit) for Income Taxes and Equity in Net (Loss) Income of Unconsolidated Entities are as follows:

(Amounts in Thousands)
		Year Ending December 31,
		Year Ending December 31,
		2011	2010	2009
	Domestic	11,704	29,321	29,325
	Foreign	20,935	(24,591)	2,398

	Total	32,639	4,730	31,723





	The components of the income tax provision (benefit) are as follows:
		Year Ending December 31,
		2011	2010	2009
	Current	680	692	306
	Deferred	-	(1,982)	(3,845)

	Total	680	(1,290)	(3,539)

The following is a reconciliation of the U.S. statutory tax rate to our effective tax rate expense (benefit):

	Year Ended December 31,
	2011			2010			2009
Statutory Rate		35.00	%		35.00	%		35.00	%
State Income Taxes		0.03	%		0.70	%		(0.05	)%
Effect of Tonnage Tax Rate		(19.87	)%		(280.91	)%		(46.30	)%
Foreign Earnings - Indefinitely Reinvested		(26.16	)%		(31.86	)%		(1.18	)%
Foreign Earnings		-			7.29	%		-
Change in Valuation Allowance		7.62	%		9.56	%		-
Foreign Income Taxes		1.80	%		10.23	%		0.55	%
E&P Limitations		3.57	%		225.53	%		0.65	%
Permanent Differences and Other, Primarily Non-deductible Expenditures		0.09	%		(2.79	)%		0.17	%
		2.08	%		(27.25	)%		(11.16	)%

Included in the Provision (Benefit) for Income Taxes in our consolidated statements of income is Tonnage Tax of $78,000, $78,000, and $78,000 for the years ended December 31, 2011, 2010, and 2009, respectively.

Foreign income taxes of $588,000, $581,000, and $497,000 are included in our consolidated statements of income in the Provision (Benefit) for Income Taxes for the years ended December 31, 2011, 2010, and 2009, respectively. We pay foreign income taxes in Indonesia, Singapore and Mexico.

For U.S. federal income tax purposes, in 2011, we generated $931,000 in net operating loss carryforwards (“NOLs”), which will be added to the previous carryforward of $19,271,000. The balance at December 31, 2011 of approximately $20,202,000 will expire in 2024 through 2031. We also have approximately $5,179,000 of alternative minimum tax credit carryforwards, which are not subject to expiration and are available to offset future regular income taxes subject to certain limitations.

For state income tax purposes, in 2011, we generated $931,000 in NOLs, which will be added to the previous carryforward of $12,061,000. The balance at December 31, 2011 of approximately $12,992,000 will expire in 2024 through 2031.

We file income tax returns in the U.S. federal, various state and foreign jurisdictions. The years remaining open under the statute of limitations and subject to audit vary depending upon the tax jurisdiction. Our U.S. income tax returns for 2004 and subsequent years remain open to examination. An audit of our 2009 federal income tax return was commenced during 2011, with no adjustments proposed thus far.

It is our policy to recognize interest and penalties associated with underpayment of income taxes as interest expense and general and administrative expenses, respectively. If recognized, substantially all of our unrecognized tax benefits would impact our effective rate.

The following is a reconciliation of the total amounts of unrecognized tax benefits as of December 31, 2011 and 2010:

(Amounts in thousands)	2011		2010
Total unrecognized tax benefits as of: January 1,	$	1,400	$	1,400
Increases (decreases) in unrecognized tax benefits as a result of: Tax positions taken during a prior year		-		-
Lapse of applicable statute of limitations		-		-
Total unrecognized tax benefits as of: December 31,	$	1,400	$	1,400