NOTE L - 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.

In accordance with Internal Revenue Code (IRC) Section 1359 disposition of qualifying vessels, we have elected to defer taxable gains on the sale of qualifying tonnage tax vessels operating under the tonnage tax regime. IRC Section 1359(b) defers the recognition of taxable gains for three years after the close of the first taxable year in which the gain is realized or subject to such terms and conditions as may be specified by the Secretary of the Internal Revenue Service, on such later date as the Secretary may designate upon application by the taxpayer. Deferred gains on the sale of qualifying vessels must be recognized if the amount realized upon such sale or disposition exceeds the cost of the replacement qualifying vessel, limited to the gain recognized on the transaction. We have elected to defer gains of approximately $93.9 million from the dispositions of qualifying vessels in prior years, of which $79.3 million of such deferred gain originated in the year ending December 31, 2012. In order to meet the non-recognition requirements on the 2012 dispositions, we needed to acquire qualifying replacement property by December 31, 2015.

During the quarter ended September 30, 2015, we acquired qualified replacement property totaling approximately $45.6 million. We anticipated a transaction for an additional $25.0 million of replacement property before December 31, 2015, which would have been applied to deferred gains of $17.3 million and $7.7 million with replacement years of 2015 and 2018, respectively. We did not complete the additional transaction and have reduced our existing tax attributes to offset the recognized gain of $16.4 million for the year ended December 31, 2015. As a result of modifications to the Strategic Plan, during the fourth quarter of 2015 we changed our view that we were more likely than not to acquire qualified replacement property to instead take the position that we are unlikely to acquire the necessary qualified replacement property to offset all of its deferred gains by the expiration date of each deferred gain. Due to uncertainty regarding the acquisition of qualified replacement property to offset our deferred gains, we recorded a deferred tax liability totaling $12.5 million during the third quarter of 2015.

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. During the quarter ending September 30, 2015, we changed our previously asserted tax position that we planned to indefinitely re-invest foreign earnings of our controlled foreign corporations. The principal reason for changing our position is our current plan to divest foreign business use assets and repatriate excess foreign cash to pay down U.S. debt of domestic affiliates. We have recorded a deferred tax liability of $5.3 million related to our controlled foreign corporations as a result of our change in position pursuant to APB 23. We reduced our valuation allowance by $5.3 million to offset this deferred tax liability.

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 $2.0 million and $2.5 million in 2015 and 2014, respectively, have 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, 2015.

Components of the net deferred tax asset (liability) as of December 31, 2015 and 2014 are as follows:



(All Amounts in Thousands)
		2015		2014
DEFERRED TAX LIABILITIES
Fixed Assets	$	(3,853)	$	(12,376)
Drydock Activities		(4,604)		(5,275)
Insurance and Claims Reserve		(339)		(228)
Deferred Gain		(10,993)		-
Unremitted Foreign Earnings		(5,329)		-
Total Deferred Tax Liabilities	$	(25,118)	$	(17,879)

DEFERRED TAX ASSETS
Net Operating Loss Carryforwards	$	22,036	$	17,753
Minimum Tax Credit		5,425		5,179
Deferred Gain		-		1,973
Pension/Postretirement		2,140		2,500
Intangibles/Goodwill		10,163		1,285
Stock Based Compensation		312		-
Unconsolidated Subsidiaries		520		383
Work Opportunity Tax Credit		537		537
Lease Incentives		835		503
Assets Held for Sale		780		931
Other Assets		863		771
Total Deferred Tax Assets	$	43,611	$	31,815
Valuation Allowance		(18,493)		(13,936)
Net Deferred Tax Assets	$	25,118	$	17,879

TOTAL DEFERRED TAX	$	-	$	-

DEFERRED TAX COMPONENTS
Current	$	309	$	408
Non-current		(309)		(408)
TOTAL DEFERRED TAX	$	-	$	-

Management continues to weigh positive and negative evidence related to the company’s ability to realize the future tax benefits of our net U.S. deferred tax assets. Based on the analysis conducted during the fourth quarter of 2015, we concluded that it is not more likely than not, that we would recognize the benefit of our federal tax attributes and have maintained the recorded valuation allowance for the year ended December 31, 2015. We recorded an increase in our tax valuation allowance of $4.6 million for the year ended December 31, 2015.

The components of Income (Loss) before Provision (Benefit) for Income Taxes and Equity in Net Income (Loss) of Unconsolidated Entity for the years ended December 31, 2015 and 2014 are as follows:



(All Amounts in Thousands)
		2015		2014
Domestic	$	(72,525)	$	(5,209)
Foreign		(102,680)		(39,071)
Total	$	(175,205)	$	(44,280)

The components of the income tax provision for the years ended December 31, 2015 and 2014 are as follows:



(All Amounts in Thousands)
		2015		2014
Current	$	439	$	79
Deferred		-		10,350
Total	$	439	$	10,429

The following is a reconciliation of the U.S. statutory tax rate to our effective tax rate expense (benefit) for the years ended December 31, 2015 and 2014:




	2015		2014
Statutory Rate	35.0	%	35.0	%
State Income Taxes	(0.1)		(0.2)
Effect of Tonnage Tax Rate	0.5		(1.0)
Foreign Earnings - Indefinitely Reinvested	-		(30.9)
Foreign Earnings	(20.5)		-
Change in Valuation Allowance	(15.0)		(26.5)
Permanent Differences and Other, Primarily Non-deductible Expenditures	(0.2)		-
Effective Tax Rate	(0.3)	%	(23.6)	%

Included in the Provision for Income Taxes in our Consolidated Statements of Operations is tonnage tax of $54,000 and $52,000 for the years ended December 31, 2015 and 2014, respectively. We did not pay foreign income tax in 2015 and 2014.

For U.S. federal income tax purposes, in 2015, we generated approximately $26.1 million in net operating loss carryforwards (“NOLs”), which will be added to the previous carryforward of approximately $49 million following reduction of $16.4 million for recognition of previously deferred tax gains and an increase of $0.7 million due to restricted stock unit adjustments during the year ended December 31, 2015. The balance at December 31, 2015 of approximately $59.4 million will expire in 2025 through 2035. We also have approximately $5.4 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 2015, we generated approximately $11.5 million in NOLs, which will be added to the previous carryforward of approximately $31.3 million. The balance at December 31, 2015 of approximately $42.8 million will expire in 2025 through 2035.

At December 31, 2015, we had foreign NOLs of approximately $4.0 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. During the quarter ending December 31, 2015, we calculated and recognized an adjustment to increase our Federal net operating loss by $0.7 million and recorded a deferred tax asset of $0.3 million to incorporate the unrecognized tax benefits related to our restricted stock units previously provided for in the disclosure of uncertain tax benefits below. This was previously disclosed as an uncertain tax position. We followed book treatment on the expense related to restricted stock from 2008 through 2014. We made this correction in 2015, which was not material to historical periods. As of December 31, 2015, the deferred tax asset for the NOL carryforward excludes $1.6 million related to operating loss carryforwards resulting from excess tax benefits related to share-based rewards, the tax benefits of which, when recognized, will be accounted for as a credit to additional paid-in capital when they reduce taxes payable.

The following is a reconciliation of the total amounts of unrecognized tax benefits as of December 31, 2015 and 2014:



(All Amounts in Thousands)
		2015		2014
Total unrecognized tax benefits as of: January 1,	$	250	$	349
Increases in unrecognized tax benefits as a result of:
Tax positions taken during a prior year		(250)		(99)
Lapse of applicable statute of limitations		-		-
Total unrecognized tax benefits as of: December 31,	$	-	$	250