21. Income Taxes

12 Months Ended

Dec. 31, 2012

Income Tax Disclosure [Abstract]

Income Taxes

(21) Income Taxes

LE is a limited liability company and, prior to the LE Acquisition, its taxable income or loss flowed through to its sole member for federal and state income tax purposes. Blue Dolphin is a “C” corporation and is a taxable entity for federal and state income tax purposes. Upon LE's Acquisition, LE became the legal subsidiary of Blue Dolphin and LE’s taxable income or loss flows through to Blue Dolphin for federal and state income tax purposes. As a result of the LE Acquisition, Section 382 of the Internal Revenue Code imposes a limitation on the use Blue Dolphin’s NOLs. At December 31, 2012, we did not recognize any deferred tax assets resulting from our NOLs due to the uncertainty of their use.

Income tax expense was $9,678 for the twelve months ended December 31, 2012. Income tax expense related to state income tax.

The income tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 2012 is presented below:

Deferred tax assets (liabilities):
Net operating loss and capital loss carryforwards	$	8,482,237
Start-up costs (Nixon Refinery)		1,922,708
Basis differences in property and equipment		(1,044,223	)
Other		312,826
Total deferred tax assets		9,673,548
Less: valuation allowance		(9,673,548	)
Deferred tax assets, net	$	-

In assessing the recoverability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will be realized. A full valuation allowance against our net deferred tax asset was recorded at December 31, 2012 due to our uncertainty as to the utilization of the deferred tax assets in the foreseeable future.

Our effective tax rate applicable to continuing operations in 2012 was as follows:

Expected tax rate	34.00	%
Permanent differences	(0.17	%)
State tax	(0.04	%)
Change in valuation allowance	(33.84	%)
	(0.05	%)

As a result of the LE Acquisition, Section 382 of the Internal Revenue code imposes potential limitations on the use of our net operating loss (“NOL”) carryovers. The amount of NOL subject to such limitations is approximately $18.5 million. The NOL generated subsequent to the LE Acquisition, approximately $6.4 million, is not subject to any such limitation. For the twelve months ended December 31, 2012, we did not recognize any deferred tax asset related to such NOL’s due to the uncertainty of its use.

We have adopted the provisions of the ASC guidance on accounting for uncertainty in income taxes. The guidance clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The guidance also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The standard also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

The provisions of the guidance on accounting for uncertainty in income taxes have been applied to all of our material tax positions taken for all open tax years on the date of adoption through the fiscal year ended December 31, 2012. We have determined that all of our material tax positions taken in our income tax returns and the positions we expect to take in our future income tax filings meet the more likely-than-not recognition threshold. In addition, we have determined that, based on our judgment, none of these tax positions meet the definition of “uncertain tax positions” that are subject to the non-recognition criteria set forth in the guidance.

As part of this guidance, we record income tax related interest and penalties, if applicable, as a component of the provision for income tax expense. However, there were no amounts recognized relating to interest and penalties in the consolidated statements of operations for the year ended December 31, 2012. Furthermore, none of our federal and state income tax returns are currently under examination by the Internal Revenue Service (“IRS”) or state authorities. As of December 31, 2012, fiscal years 2009 and later remain subject to examination by the IRS and fiscal years 2008 and later remain subject to examination by State of Texas. We believe there are no uncertain tax positions for both federal and state income taxes.

The State of Texas has a Texas margins tax (“TMT”), which is a form of business tax imposed on gross margin revenue to replace the state’s prior franchise tax structure. Although TMT is imposed on an entity’s gross profit revenue rather than on its net income, certain aspects of TMT make it similar to an income tax. At December 31, 2012, we accrued $0 in TMT.