NOTE 14 —TAXES:

As more fully described in Note 2, “Company Inquiry and Restatement,” the Company determined that there were errors in its previously issued financial statements and specifically its tax provision for each of the twelve years in the twelve year period ended December 31, 2011. As a result of certain credit agreements under which OIN was a co-obligor with the Company on a joint and several basis, as well as intercompany balances that exist between the Company’s domestic and international entities within the Company, the Company has concluded that, as of December 31, 2000 and at each subsequent year end through December 31, 2011, it could not assert its intent to permanently reinvest OIN’s earnings to the extent these earnings could be deemed repatriated as a result of OIN’s joint and several liability under the Credit Facilities or as a result of the intercompany balances, as discussed above.

Income of foreign shipping companies earned from January 1, 1976 through December 31, 1986 was excluded from U.S. income taxation to the extent that such income was reinvested in foreign shipping operations. Foreign shipping income earned before 1976 is not subject to tax unless distributed to the U.S. parent. A determination of the amount of qualified investments in foreign shipping operations, as defined, is made at the end of each year and such amount is compared with the corresponding amount at December 31, 1986. If, during any determination period, there is a reduction of qualified investments in foreign shipping operations, earnings of the foreign shipping companies, limited to the amount of such reduction and to the amount of earnings not previously subject to U.S. income taxation, would become subject to tax. From January 1, 1987 through December 31, 2004, earnings of the foreign shipping companies (exclusive of foreign joint ventures in which the Company has a less than 50% interest) were subject to U.S. income taxation in the year earned and could therefore be distributed to the U.S. parent without further tax. For years beginning after December 31, 2004, the earnings from shipping operations of the Company’s foreign subsidiaries are not subject to U.S. income taxation as long as such earnings are not repatriated to the U.S.

For the year ended December 31, 2012, the amount borrowed under credit agreements for which OIN was a co-obligor with the Company on a joint and several basis is $1,489,000. As of December 31, 2012, the Company could be deemed to have received in the aggregate deemed dividends from its foreign subsidiaries or less than 50% owned foreign shipping joint ventures of (1) $1,194,150 in connection with the Credit Facilities and (2) $77,000 related to intercompany balances. The year in which such deemed dividends are included in taxable income is subject to ongoing discussions with the IRS. Accordingly, the Company has recorded in respect of previous years provisions for U.S. income taxes on the income of its foreign subsidiaries or its less than 50%-owned foreign shipping joint ventures to the extent it did not anticipate permanently reinvesting the earnings. The Company has determined that because it is in bankruptcy as of December 31, 2012, and its actions are subject to Bankruptcy Court approval, it can no longer make the assertion that it has both the ability and intent to permanently reinvest the remaining undistributed, previously untaxed, earnings of its foreign subsidiaries indefinitely outside the U.S. The Company has analyzed the book and tax basis differences for its foreign assets and analyzed how foreign earnings would likely be repatriated. Such repatriation would be dependent on the sale of foreign assets, which based on current fair values would significantly erode accumulated earnings by an amount that would exceed previously untaxed earnings. As a result, it is likely that there is no incremental tax expense to be recorded as of December 31, 2012.

The significant components of the Company’s deferred tax liabilities and assets follow:

As of December 31,	2012		2011 (As Reported)		2011 (As Restated)
Deferred tax liabilities:
Excess of book over tax basis of depreciable or amortizable assets—net	$	301,301	$	267,687	$	267,687
Unremitted earnings of foreign subsidiaries		103,388		-		216,738
Costs capitalized and amortized for book, expensed for tax		13,058		11,391		11,391
Other—net		11,656		67		326
Total deferred tax liabilities		429,403		279,145		496,142
Deferred tax assets:
Net operating loss carryforward		4,321		110,908		40,892
Employee compensation and benefit plans		24,553		23,201		23,201
Other comprehensive income		7,349		8,533		8,533
Other—net		26,121		6,262		26,837
Total deferred tax assets		62,344		148,904		99,463
Valuation allowance		2,003		72,888		-
Net deferred tax assets		60,341		76,016		99,463
Net deferred tax liabilities		369,062		203,129		396,679
Current deferred tax liabilities		25,900		-		-
Noncurrent deferred tax liabilities	$	343,162	$	203,129	$	396,679

As of December 31, 2012, the Company had U.S. state net operating loss carryforwards of $4,321, which are available to reduce future taxes, if any. These net operating loss carryforwards expire between 2014 and 2031.

The Company previously established a valuation allowance against deferred tax assets because the Company could not conclude that it was more likely than not that the full amount of the deferred tax assets generated primarily by vessel impairments and net operating losses would be realized through the generation of taxable income in the future. The valuation allowance associated with these federal deferred tax assets was reversed in its restated financial statements as the Company estimated that there would be sufficient taxable income to realize such deferred tax assets. The valuation allowance as of December 31, 2012 relates to state deferred tax assets.

In December 2009, OSG consummated a tender offer for the outstanding units of OSG America L.P. that were held by the public. The completion of the tender offer did not result in a change of control of OSG America L.P. The acquisition of the noncontrolling interest was accounted for as an equity transaction and the difference between the carrying amount of the noncontrolling interest and the consideration paid was recognized in the equity attributable to the parent. The direct tax effect, net of any valuation allowance, was likewise recorded in equity.

Under U.S. tax law, the unit repurchase caused a reduction to the tax basis of the vessels held by OSG America L.P. of approximately $49,000. Since the carrying book basis in these assets did not change, the result of the tax basis reduction was an increase to the deferred tax liabilities associated with these vessels. The associated tax impact was recorded as a reduction to the Company’s paid-in additional capital in 2010 in the accompanying statement of changes in equity.

The components of loss before income taxes follow:

For the year ended December 31,	2012		2011 (As Restated)		2010 (As Restated)
Foreign	$	(484,306)	$	(129,051)	$	(13,259)
Domestic		2,711		(70,326)		(128,440)
	$	(481,595)	$	(199,377)	$	(141,699)

Substantially all of the above foreign losses resulted from the operations of companies that were not subject to income taxes in their countries of incorporation.

The components of the income tax (provisions)/benefits follow:

For the year ended December 31,	2012		2011 (As Restated)		2010 (As Restated)
Current	$	(28,270)	$	(31,622)	$	2,043
Deferred		29,751		29,636		17,114
	$	1,481	$	(1,986)	$	19,157

Reconciliations of the actual income tax rate attributable to pretax results and the U.S. statutory income tax rate follow:

For the year ended December 31,	2012			2011 (As Restated)			2010 (As Restated)
Actual income tax rate		0.3	%		(1.0)	%		13.5	%
Adjustments due to:
Income not subject to U.S. income taxes		31.3	%		25.2	%		10.5	%
State taxes, net of federal benefit		1.8	%		0.0	%		0.0	%
Basis adjustment recognized related to liquidation of OSG America L.P.		0.0	%		0.0	%		1.4	%
Provision for unrecognized tax benefits		(0.6)	%		9.8	%		11.2	%
Other		2.2	%		1.0	%		(1.6)	%
Valuation allowance		0.0	%		0.0	%		0.0	%
U.S. statutory income tax rate		35.0	%		35.0	%		35.0	%

Unrecognized tax benefits presented on the balance sheet include interest and are reduced by available tax attributes, such as the offset of net operating loss carryforwards. Such unrecognized tax benefits are substantially related to the tax effects of the cumulative potential deemed dividends based on, a deemed repatriation of (1) $1,194,150 of foreign earnings in connection with the Credit Facilities and (2) $77,000 of foreign earnings related to intercompany balances and other issues currently under examination by taxing authorities and aggregate $326,121 and are included in current liabilities as of December 31, 2012. In addition, a noncurrent reserve of approximately $17,067 has been recorded for uncertain tax positions as of December 31, 2012, which is also substantially related to the tax effects of the cumulative potential deemed dividends.

The following is a roll-forward of the Company’s unrecognized tax benefits (excluding interest and penalties) for 2012 and 2011:

	2012		2011 (As Restated)		2010 (As Restated)
Balance of unrecognized tax benefits as of January 1,	$	361,829	$	335,432	$	331,241
Increases for positions taken in prior years		482		-		1,072
Decreases for positions taken in prior years		-		(36)
Increases for positions related to the current year		13,514		26,530		4,302
Amounts of decreases related to settlements		(384)		-		(812)
Reductions due to lapse of statutes of limitations		(615)		(97)		(371)
Balance of unrecognized tax benefits as of December 31,	$	374,826	$	361,829	$	335,432

Included in the balance of unrecognized tax benefits as of December 31, 2012 and 2011, are $13,361 and $14,200, respectively, of tax benefits that, if recognized, would affect the effective tax rate. Also included in the balance of unrecognized tax benefits as of December 31, 2012 and 2011, are $361,465 and $347,629, respectively, of tax benefits that, if recognized, would result in adjustments to other tax accounts, primarily deferred taxes.

The Company records interest and penalties on unrecognized tax benefits in its provision for income taxes. Accrued interest and penalties are included within the related tax liability line in the consolidated balance sheet. Related to the unrecognized tax benefits noted above, the Company recorded interest of $8,306 during 2012 and in total as of December 31, 2012, had recognized a liability for interest of $64,024. During 2011, the Company accrued interest of $28,476 and in total as of December 31, 2011, had recognized a liability for interest of $55,719.

The Company believes that it is possible that a decrease of up to $368,539 in unrecognized tax benefits related to issues currently under examination by the taxing authorities will be settled during 2013. This amount after taking into consideration tax attributes, such as net operating loss carryforwards, and interest aggregates $326,121 and is reflected in current liabilities on the consolidated balance sheet in income taxes payable.

The Company is subject to taxation in the U.S. and various states and foreign jurisdictions. With few exceptions, as of December 31, 2012, the Company is not subject to U.S. federal, state or local, or foreign examinations by tax authorities for years before 2004.