(

) INCOME TAXES

Emergence from Bankruptcy and Fresh Start Accounting

Under the Plan, the Predecessor

’s pre-petition equity, bank related debt and certain other obligations were cancelled and extinguished. Absent an exception, a debtor recognizes cancellation of debt income, or CODI, upon discharge of its outstanding indebtedness for an amount of consideration that is less than its adjusted issue price. In accordance with Section

108

of the Code, the Predecessor excluded the amount of discharged indebtedness from taxable income since the Code provides that a debtor in a bankruptcy case

may

exclude CODI from income but must reduce certain tax attributes by the amount of CODI realized as a result of the consummation of a plan of reorganization. The amount of CODI realized by a taxpayer is the adjusted issue price of any indebtedness discharged less than the sum of (i) the amount of cash paid, (ii) the issue price of any new indebtedness issued, and (iii) the fair market value the of any other consideration, including equity, issued.

CODI from the discharge of indebtedness was

$297.3

million. As a result of the CODI and in accordance with rules under the Code,

we reduced our gross federal net operating loss, or NOL, carryforwards by

$229.3

million. The Predecessor was able to retain

$48.1

million of gross federal NOLs,

$0.3

million of alternative minimum tax credit and

$4.1

million of foreign tax credit carryforwards following the bankruptcy.

Pursuant to the Plan, on the Effective Date, the existing equity interests of the Predecessor were extinguished. New equity interests were issued to creditors in connection with the terms of the Plan, resulting in an ownership change as defined under Section

382

of the Code. Section

382

generally places a limit on the amount of NOLs and other tax attributes arising before the change that

may

be used to offset taxable income generated after the ownership change. The utilization of

our remaining attributes will depend on several factors, including its future financial performance and certain tax elections. Specifically, utilization of NOLs will be governed by Section

382

(l)(

), which will subject us to an overall annual limitation on its use of NOLs and foreign tax credits. This Section

382

limitation is

not

expected at this time to significantly impact our ability to realize these attributes.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than

not

that some portion or all of the deferred tax assets will

not

be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of existing deferred tax liabilities, projected future results of operations, and tax planning strategies in making this assessment. Based upon the scheduled reversal of existing deferred tax liabilities relating to the U.S. based Vessels, management has concluded that a partial valuation allowance was appropriate as of

December 31, 2017.

The

2017

Tax Act was enacted on

December 22, 2017.

The

2017

Tax Act reduces the U.S. federal corporate tax rate from

35%

21%,

requires companies to recognize a

one

-time transition income inclusion related to all earnings of certain foreign subsidiaries that were previously deferred from U.S. tax and will also create a new tax regime on certain future foreign sourced earnings. As of

December 31, 2017,

we have

not

completed our accounting for the tax effects of enactment of the

2017

Tax Act; however, in certain cases, as described below, we have made a reasonable estimate of the effects on our existing deferred tax balances and the

one

-time transition income inclusion. In other cases, we have

not

been able to make a reasonable estimate and continue to account for those items based on our existing accounting under FASB ASC

No.

740,

“Income Taxes,” and the provisions of the tax laws that were in effect immediately prior to enactment. For the items for which we were able to determine a reasonable estimate, we recognized a provisional income tax benefit of

$15.2

million, which is included as a component of income tax expense from continuing operations. In all cases, we will continue to make and refine our calculations as additional analysis is completed. In addition, our estimates

may

also be affected as we gain a more thorough understanding of the tax law.

Provisional Amounts

Deferred tax assets and liabilities: We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally

21%.

However, we are still analyzing certain aspects of the

2017

Tax Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional tax benefit recorded related to the remeasurement of our deferred tax liabilities was

$1.5

million.

Foreign Tax Effects

The

one

-time transition tax is based on our total post-

1986

earnings and profits, or E&P, that we had previously recognized at

35%,

net of future foreign tax credits. The

one

-time transition tax was fully offset by the tax effects of tax carryforwards and thus did

not

have a material impact to the income tax provision. We have

not

yet completed our calculation of the total post-

1986

E&P for these foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount

may

change when we finalize the calculation of post-

1986

foreign E&P previously deferred from U.S. federal taxation and finalize the amounts held in cash or other specified assets.

additional income taxes have been provided for any remaining undistributed foreign earnings

not

subject to the transition tax, or any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations. Determining the amount of unrecognized deferred tax liability related to any remaining undistributed foreign earnings

not

subject to the transition tax and additional outside basis difference in these entities (

i.e

., basis difference in excess of that subject to the

one

-time transition tax) is

not

practicable.

In addition, we had provided deferred tax liabilities in the past on foreign earnings that were

not

indefinitely reinvested. As a result of the

2017

Tax Act, we reversed an estimate of the deferred taxes that are

longer expected to be needed due to the change to the territorial tax system. The provisional tax benefit recorded related to the reversal of previously recognized deferred tax liabilities relating to existing undistributed earnings was

$15.2

million.

The majority of our non-U.S. based operations are subject to foreign tax systems that provide significant incentives to qualified shipping activities. Our U.K. and Norway based vessels are taxed under “tonnage tax” regimes. Our qualified Singapore based vessels are exempt from Singapore taxation through

December

2027

with extensions available in certain circumstances beyond

2027.

The qualified Singapore vessels are also subject to specific qualification requirements which if

not

met could jeopardize our qualified status in Singapore. The tonnage tax regimes provide for a tax based on the net tonnage weight of a qualified vessel. These beneficial foreign tax structures continued to result in our earnings incurring significantly lower taxes than those that would apply under the U.S. statutory tax rates or if we were

not

a qualified shipping company in those foreign jurisdictions.

Should our operational structure change or should the laws that created these shipping tax regimes change, we could be required to provide for taxes at rates much higher than those currently reflected in our financial statements. Additionally, if our pre-tax earnings in higher tax jurisdictions increase, there could be a significant increase in our annual effective tax rate. Any such increase could cause volatility in the comparisons of our effective tax rate from period to period.

Tax Provision

Income (loss) before income taxes attributable to domestic and foreign operations was (in thousands):

	Successor			Predecessor
	Period from November 15, 2017 Through December 31, 2017			Period from January 1, 2017 Through November 14, 2017			Year ended December 31, 2016			Year ended December 31, 2015
U.S. (a)	$	(3,688	)	$	4,835		$	(133,572	)	$	(198,175	)
Foreign (b)		(3,105	)		(443,998	)		(108,865	)		(22,693	)
	$	(6,793	)	$	(439,163	)	$	(242,437	)	$	(220,868	)

(a) - Included in this amount is $228.9 million of adjustments to domestic assets and liabilities as a result of the application of the guidance in ASC 805
(b) - Included in this amount is $405.1 million of adjustments to foreign assets and liabilities as a result of the application of the guidance in ASC 805

he components of our tax provision (benefit) attributable to income before income taxes are as follows for the following periods (in thousands):

	Successor											Predecessor
	Period from November 15, 2017 Through December 31, 2017											Period from January 1, 2017 Through November 14, 2017
	Current		Deferred			Other			Total			Current		Deferred			Other (a)			Total
U.S & State	$	-	$	(10,381	)	$	-		$	(10,381	)	$	3	$	64,485		$	(101,784	)	$	(37,296	)
Foreign		357		(75	)		(205	)		77			1,058		(998	)		(1,008	)		(948	)
	$	357	$	(10,456	)	$	(205	)	$	(10,304	)	$	1,061	$	63,487		$	(102,792	)	$	(38,244	)

	Predecessor
	Year Ended December 31, 2016											Year Ended December 31, 2015
	Current		Deferred			Other			Total			Current			Deferred			Other			Total
U.S & State	$	-	$	(36,442	)	$	(6	)	$	(36,448	)	$	(69	)	$	(3,270	)	$	39		$	(3,300	)
Foreign		1,419		(2,014	)		(2,415	)		(3,010	)		1,130			(553	)		(2,910	)		(2,333	)
	$	1,419	$	(38,456	)	$	(2,421	)	$	(39,458	)	$	1,061		$	(3,823	)	$	(2,871	)	$	(5,633	)

(a) Includes inc

ome tax effects of Fresh Start Accounting adjustments.

The mix of our operations within various taxing jurisdictions affects our overall tax provision. The difference between the provision at the statutory U.S. federal tax rate and the tax provision attributable to income before income taxes in the accompanying consolidated statements of operations is as follows:

	Successor			Predecessor
	For the Period from November 15, 2017 Through December 31, 2017			For the Period from January 1, 2017 Through November 14, 2017			For the Year Ended December 31, 2016			For the Year Ended December 31, 2015
U.S. federal statutory income tax rate		(35.0	%)		(35.0	%)		(35.0	%)		(35.0	%)
Effect of foreign operations		16.0			3.1			14.5			2.5
US state income taxes net of Federal benefit		14.5			(0.1	)		(1.1	)		(1.7	)
Foreign earnings repatriation		-			(3.1	)		6.7			34.4
U.S. foreign tax credit		-			(1.0	)		(2.7	)		(7.8	)
Valuation allowance		76.5			21.7			1.8			5.1
Gain on extinguishment of debt		-			(27.3	)		-			-
Fresh-Start Reporting Adjustments		-			27.1			-			-
Transaction Costs		-			2.8			-			-
Effects of U.S. Tax Reform		(224.1	)		-			-			-
Other		0.4			2.9			(0.5	)		(0.1	)
Total		(151.7	%)		(8.7	%)		(16.3	%)		(2.6	%)

Deferred Taxes

Deferred income taxes reflect the impact of temporary differences between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. The components of the net deferred tax assets and liabilities at

December

31,

2017

and

2016

were as follows:

	Successor			Predecessor
	December 31,
	2017			2016
	(in thousands)			(in thousands)
Deferred tax assets
Net operating loss carryforwards	$	28,638		$	60,772
Items currently not deductible for tax purposes		3,071			21,445
Foreign and other tax credit carryforwards		4,822			34,131
		36,531			116,348
Less valuation allowance		(29,051	)		(33,037	)
Net deferred tax assets	$	7,480		$	83,311

Deferred tax liabilities
Depreciation	$	(6,343	)	$	(91,105	)
Other		(4,129	)		(48,922	)
Total deferred tax liabilities	$	(10,472	)	$	(140,027	)
Net deferred tax liability	$	(2,992	)	$	(56,716	)

The change in the valuation allowance for the year ended

December 31, 2017

from

December 31, 2016

was a decrease of

$4.0

million. As of

December 31, 2017,

we had NOL carryforwards for income tax purposes totaling

$8.1

million in the federal U.S.,

$6.2

million in Louisiana,

$2.6

million in Mexico,

$3.0

million in Norway,

$0.2

million in the U.K.,

$0.2

million in Singapore, and

$8.3

million in Brazil that are, subject to certain limitations, available to offset future taxable income. We have deferred tax liability reversals for depreciation for which we expect to partially utilize the U.S. NOLs. The U.S. NOLs will begin to expire beginning in

2027.

It is more likely than

not

that the Mexico NOLs, Norway NOLs and Brazilian NOLs will

not

be utilized and a full valuation allowance has been established for such NOLs.

Under the

2017

Tax Act, many of the foreign tax credit utilization rules were changed that required us to reassess the realizability of our foreign tax credit deferred tax asset. After review, it was determined that under the new U.S. foreign tax credit rules we would

not

ultimately realize the full benefit associated with our foreign tax credits at

December 31, 2017.

Accordingly, we recognized a provisional estimate of a valuation allowance related to our foreign tax credits in the amount of

$4.1

million.

Based on future expected taxable losses in Mexico, we do

not

anticipate we will benefit from certain deferred tax assets and have recorded a valauation allowance of

$1.6

million against them. The following table provides information about the activity of our deferred tax valuation allowance:

	Successor			Predecessor
	December 31,
	2017			2016
	(in thousands)			(in thousands)

Balance, beginning of period	$	(33,037	)	$	(24,112	)
Additions (reductions) recorded in the provision for income taxes		(89,399	)		(8,925	)
Fresh-Start Reporting (a)		93,385			-
Balance, end of period	$	(29,051	)	$	(33,037	)

(a) Represents release of the valuation allowance in fresh-start reporting due to the write-off of related deferred tax assets primarily as a result of cancellation of indebtedness (COD) income excluded from gross from gross income for US federal income tax purposes and applied to reduce net operating loss carryforwards.

Based on a more likely than

not,

or greater than

50%

probability, recognition threshold and criteria for measurement of a tax position taken or expected to be taken in a tax return, we evaluate and record in certain circumstances an income tax liability for uncertain income tax positions. Numerous factors contribute to our evaluation and estimation of our tax positions and related tax liabilities and/or benefits, which

may

be adjusted periodically and

may

ultimately be resolved differently than we anticipate. We also consider existing accounting guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. Accordingly, we continue to recognize income tax related penalties and interest in our provision for income taxes and, to the extent applicable, in the corresponding balance sheet presentations for accrued income tax assets and liabilities, including any amounts for uncertain tax positions included in other income taxes payable in the consolidated balance sheets and which total

$21.7

million at

December

31,

2017,

$21.1

million at

December

31,

2016

and

$24.7

million at

December 31, 2015.

In addition, the deferred tax asset was reduced by a

$3.3

million unrecognized tax benefit for an uncertain tax position.

A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:

	Successor			Predecessor
	As of December 31, 2017			As of December 31, 2016
	(in thousands)			(in thousands)

Unrecognized tax benefits balance at January 1,	$	9,174		$	10,899
Gross increases for tax positions taken in prior years		135			240
Gross decreases for tax positions taken in prior years		(565	)		(152	)
Other		469			(1,813	)
Unrecognized tax benefits balance at December 31,	$	9,213		$	9,174

We accrue interest and penalties related to unrecognized tax benefits in our provision for income taxes. At

December

31,

2017,

we had accrued interest and penalties related to unrecognized tax benefits of

$12.5

million. The amount of interest and penalties recognized in our tax provision for the year ended

December

31,

2017

was

$0.6

million. The unrecognized tax benefits if recognized would affect the effective tax rate. We do

not

expect a significant change to our unrecognized tax benefits in the next

months.

As of

December

31,

2017,

may

be subject to examination in the U.S. for years after

2002

and in

seven

major foreign tax jurisdictions with open years from

2002

2016.