NOTE J - INCOME TAXES

We made an election under the Jobs Creation Act, effective January 1, 2005, 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 to indefinitely re-invest approximately $2.8 million, $4.4 million, and $24.4 million of our 2013, 2012 and 2011 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 our foreign flag fleet, future expansion of our foreign flag fleet, and our U.S. flag fleet’s operating cash needs are adequately met by its operations.

The American Taxpayer Relief Act of 2012, enacted on January 2, 2013, extended the active financing exception from Subpart F income. The extension was retroactive from January 1, 2012 through December 31, 2013.

For 2012, the Company has reflected its active financing income as approximately $2.0 million reduction to its current year U.S. net operating loss. During the first quarter of 2013, the Company’s U.S. net operating loss carryforward was increased by the $2.0 million to reflect the retroactive application of the new law.

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 2013, approximately $2.0 million in 2012, and $0 in 2011, 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, 2013.

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


		Year Ended December 31,
	(All Amounts in Thousands)		2013		2012
DEFERRED TAX LIABILITIES
	Fixed Assets	$	(10,067)	$	(7,576)
	Drydock Activities		(6,315)		(2,825)
	Intangibles/Goodwill		-		(173)
	Post-Retirement Benefits		(794)		(324)
	Total Deferred Tax Liabilities	$	(17,176)	$	(10,898)

DEFERRED TAX ASSETS
	Net Operating Loss Carryforwards	$	15,525	$	9,861
	Minimum Tax Credit		5,179		5,179
	Deferred Gain		2,374		2,524
	Pension/Postretirement		2,568		4,510
	Intangibles/Goodwill		586		-
	Insurance and Claims Reserve		76		411
	Work Opportunity Tax Credit		537		537
	Lease Incentives		508		546
	Other Assets		796		844
	Total Deferred Tax Assets	$	28,149	$	24,412
	Valuation Allowance		(869)		(13,514)
	Net Deferred Tax Assets	$	27,280	$	10,898

TOTAL DEFERRED TAX		$	10,104	$	-

DEFERRED TAX COMPONENTS
	Current	$	3,084	$	323
	Non-current		7,020		(323)
TOTAL DEFERRED TAX		$	10,104	$	-

The Current Deferred Tax is comprised of $633,000 tax on book/tax temporary differences and a $2.5 million tax benefit attributable to the projected 2014 utilization of Net Operating Loss Carryforwards both of which are included in the Current Deferred Tax Assets on the Consolidated Balance Sheets.

We established a valuation allowance against our 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.

Since the acquisition of UOS was concluded very late in 2012, we have monitored the effectiveness of the integration of UOS operations into our operations. Our 2013 operating results confirmed that the incremental profits generated from UOS operations resulted in consolidated profitable operations from our non tonnage tax regime companies. Furthermore, future projections prepared in December 2013 and January 2014 reflect profitability from non tonnage tax companies continuing into future years. We are confident that contract negotiations with UOS’s largest customers will result in continued profitable results, as recently evidenced by the December 2013 extension of UOS’s contract with Mosaic. As part of the projection process, we have undertaken a sensitivity analysis which reflects that even in the event contract negotiations proved unsuccessful with either of these two key customers UOS would continue to generate significant operating profit. We believe the projections provide strong evidence of significant profitability to be incurred in the non-tonnage tax regime companies. Considering the analysis undertaken in the fourth quarter, our conclusion is that it is more likely than not, that we will recognize the benefit of our federal tax attributes and therefore, we have reversed the previously recorded valuation allowance as of December 31, 2013.

In connection with our detailed analysis of deferred tax assets in 2013, we identified certain amounts that required adjustments to our 2012 financial statement disclosures of income taxes to properly reflect our deferred tax assets as of December 31, 2012. Accordingly, certain net deferred tax asset amounts in the 2012 column of the above table have been revised to reflect the appropriate amounts and to conform to the current year presentation. The revisions increased total deferred income tax assets and the corresponding valuation allowance at December 31, 2012 by approximately $2.8 million. The revisions had no impact on our previously reported net deferred tax assets, income tax provision, or shareholders’ equity.

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


	Year Ended December 31,
(All Amounts in Thousands)		2013		2012		2011
Domestic	$	8,439	$	16,668	$	11,704
Foreign		(584)		5,352		20,935

Total	$	7,855	$	22,020	$	32,639

The components of the income tax provision (benefit) are as follows:

	Year Ended December 31,
		2013		2012		2011
Current	$	83	$	296	$	680
Deferred		(12,046)		(453)		-

Total	$	(11,963)	$	(157)	$	680

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


	Year Ended December 31,
	2013		2012		2011
Statutory Rate	35.0	%	35.0	%	35.0	%
State Income Taxes	3.5	%	0.1	%	0.1	%
Effect of Tonnage Tax Rate	(15.4)	%	(35.0)	%	(19.9)	%
Foreign Earnings - Indefinitely Reinvested	(12.4)	%	(6.9)	%	(26.2)	%
Change in Valuation Allowance	(178.3)	%	3.5	%	7.6	%
Foreign Income Taxes	(0.1)	%	0.9	%	1.8	%
E&P Limitations	15.0	%	1.6	%	3.6	%
Permanent Differences and Other, Primarily Non-deductible Expenditures	0.4	%	0.1	%	0.1	%
	(152.3)	%	(0.7)	%	2.1	%

Included in the Provision (Benefit) for Income Taxes in our Consolidated Statements of Income is Tonnage Tax of $56,000, $64,000 and $78,000 for the years ended December 31, 2013, 2012, and 2011, respectively.

Our plan is to indefinitely re-invest our foreign earnings, and accordingly we 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 flow needs are adequately met by its operations. It is not practicable to calculate the potential deferred tax liability as there is a significant amount of uncertainty, complexity and judgment with respect to calculating the tax impact of the remittance of these earnings.

Foreign income taxes of ($4,000), $205,000 and $588,000 are included in our consolidated statements of income in the Provision (Benefit) for Income Taxes for the years ended December 31, 2013, 2012, and 2011, respectively. We pay foreign income taxes in Indonesia, Singapore and Mexico.

For U.S. federal income tax purposes, in 2013, we generated approximately $14.1 million in net operating loss carryforwards (“NOLs”), which will be added to the previous carryforward of approximately $27.5 million. The balance at December 31, 2013 of approximately $41.6 million will expire in 2025 through 2033. We also have approximately $5.2 million 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 2013, we generated approximately $5.9 million in NOLs, which will be added to the previous carryforward of approximately $17.2 million. The balance at December 31, 2013 of approximately $23.1 million will expire in 2025 through 2033.

For foreign income tax purposes, certain subsidiaries generated $130,000 in NOLs, resulting in a total carryforward of $6.4 million.

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 2007 and subsequent years remain open to examination. An audit of our 2009 federal income tax return was completed during 2012, with a favorable $94,000 adjustment. The audit further resulted in changes to both the net operating loss carryover and to certain temporary differences, with such changes being reflected in the components of net deferred income tax liability (asset) table contained in this footnote.

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, 2013 and 2012:


		2013		2012
Total unrecognized tax benefits as of: January 1,	$	-	$	1,400
Increases in unrecognized tax benefits as a result of:
Tax positions taken during a prior year		349		-
Lapse of applicable statute of limitations		-		(1,400)
Total unrecognized tax benefits as of: December 31,	$	349	$	-