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 $2.5 million, $2.8 million, and $4.4 million of our 2014, 2013 and 2012 respective foreign earnings (losses excluded) in our foreign subsidiaries, and accordingly, have not provided deferred taxes against those earnings. We believe our position is supported by our maintenance of a substantial foreign flag fleet that requires future capital; our plan selectively increases that fleet when merited by market conditions, and the historical ability of our U.S. flag fleet vessels to satisfy the cash requirements of our domestic operations. It is not practicable to calculate the potential deferred tax liability as there is a significant amount of uncertainty, complexity, and judgment involved with respect to calculating the tax impact of the remittance of these foreign earnings.

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. Conducted through our financing subsidiary, our active financing is excluded from Subpart F income. For 2012, the Company has reflected its active financing income as approximately a $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. The Tax Increase Prevention Act of 2014, enacted on December 19, 2014, extended the active financing exception from Subpart F income; thereby precluding the recognition of any Subpart F income in 2014.

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 $2.5 million in 2014, $0 in 2013, and approximately $2.0 million in 2012, has been included in our federal tax provision calculation. No foreign tax credits are expected to be utilized on our federal return for the year ended December 31, 2014.

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


		Year Ended December 31,
	(All Amounts in Thousands)		2014		2013
DEFERRED TAX LIABILITIES
	Fixed Assets	$	(12,376)	$	(10,067)
	Drydock Activities		(5,275)		(6,315)
	Insurance and Claims Reserve		(228)		-
	Post-Retirement Benefits		-		(794)
	Total Deferred Tax Liabilities	$	(17,879)	$	(17,176)

DEFERRED TAX ASSETS
	Net Operating Loss Carryforwards	$	17,753	$	15,525
	Minimum Tax Credit		5,179		5,179
	Deferred Gain		1,973		2,374
	Pension/Postretirement		2,500		2,568
	Intangibles/Goodwill		1,285		586
	Unconsolidated Subsidiaries		383		305
	Insurance and Claims Reserve		-		76
	Work Opportunity Tax Credit		537		537
	Lease Incentives		503		508
	Assets Held for Sale		931		-
	Other Assets		771		796
	Total Deferred Tax Assets	$	31,815	$	28,454
	Valuation Allowance		(13,936)		(869)
	Net Deferred Tax Assets	$	17,879	$	27,585

TOTAL DEFERRED TAX		$	-	$	10,409

DEFERRED TAX COMPONENTS
	Current	$	408	$	3,084
	Non-current		(408)		7,325
TOTAL DEFERRED TAX		$	-	$	10,409

Subsequent to the acquisition of UOS (which was concluded in late 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, our future projections prepared in December 2013 and January 2014 reflected profitability from non-tonnage tax companies continuing into future years. As part of the 2014 projection process, we performed a sensitivity analysis which reflected that even in the event our contract negotiations proved unsuccessful with either of our two key customers UOS would continue to generate significant operating profit. We believe the projections provided strong evidence of significant profitability to be incurred in the non-tonnage tax regime companies. Based on the analysis undertaken in the fourth quarter of 2013, we concluded that it was more likely than not, that we would recognize the benefit of our federal tax attributes and therefore, we reversed the previously recorded valuation allowance as of December 31, 2013.

Management considered key changes during the fourth quarter of 2014, including the unfavorable renewal of the TEC contract. Also, it was determined in the fourth quarter that an impairment charge of $6.6 million was required against the carrying value of one of our UOS vessels. These events negatively impacted our projection of future profitability for fiscal year 2015 and beyond and our ability to realize the benefits of our deferred tax assets.

We continue to believe that we will fully recognize the full benefits of our federal tax attributes due to our long term position within the market. However, under the prescribed method of weighting the positive and negative evidence, we must put more emphasis on our forecasted short term results and contractual evidence while limiting the weighting of evidence from our long-term forecasted results. Therefore, we believe that it is more likely than not that we will not recognize the benefits of our federal tax attributes and therefore, have recorded a valuation allowance of $13.9 million on our deferred tax assets during the fourth quarter of 2014.

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)		2014		2013		2012
Domestic	$	(5,209)	$	8,509	$	16,668
Foreign		(39,071)		(584)		5,352

Total	$	(44,280)	$	7,925	$	22,020

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

	Year Ended December 31,
		2014		2013		2012
Current	$	79	$	83	$	296
Deferred		10,350		(12,351)		(453)

Total	$	10,429	$	(12,268)	$	(157)

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


	Year Ended December 31,
	2014		2013		2012
Statutory Rate	35.0	%	35.0	%	35.0	%
State Income Taxes	(0.2)	%	3.4	%	0.1	%
Effect of Tonnage Tax Rate	(1.0)	%	(15.3)	%	(35.0)	%
Foreign Earnings - Indefinitely Reinvested	(30.9)	%	(12.3)	%	(6.9)	%
Change in Valuation Allowance	(26.5)	%	(180.7)	%	3.5	%
Foreign Income Taxes	-	%	(0.1)	%	0.9	%
E&P Limitations	-	%	14.9	%	1.6	%
Permanent Differences and Other, Primarily Non-deductible Expenditures	-	%	0.3	%	0.1	%
	(23.6)	%	(154.8)	%	(0.7)	%

Included in the Provision (Benefit) for Income Taxes in our Consolidated Statements of Income is Tonnage Tax of $52,000, $56,000, and $64,000 for the years ended December 31, 2014, 2013, and 2012, respectively.

Foreign income taxes of $0, ($4,000), and $205,000 are included in our consolidated statements of income in the Provision (Benefit) for Income Taxes for the years ended December 31, 2014, 2013, and 2012, respectively. We pay foreign income taxes in Indonesia, Singapore and Mexico.

For U.S. federal income tax purposes, in 2014, we generated approximately $5.3 million in net operating loss carryforwards (“NOLs”), which will be added to the previous carryforward of approximately $41.8 million. The balance at December 31, 2014 of approximately $47.1 million will expire in 2025 through 2034. 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 2014, we generated approximately $1.2 million in NOLs, which will be added to the previous carryforward of approximately $23.1 million. The balance at December 31, 2014 of approximately $24.3 million will expire in 2025 through 2034.

At December 31, 2014, we have foreign NOLs of approximately $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 2008 and subsequent years remain open to examination.

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, 2014 and 2013:


		2014		2013
Total unrecognized tax benefits as of: January 1,	$	349	$	-
Increases in unrecognized tax benefits as a result of:
Tax positions taken during a prior year		(99)		349
Lapse of applicable statute of limitations		-		-
Total unrecognized tax benefits as of: December 31,	$	250	$	349