NOTE G—INCOME TAXES

As of June 30, 2014 we generated approximately $12.1 million of the federal NOL carryforwards and $2.1 million of foreign NOL carryforwards. As of June 30, 2014, the Company had consolidated income tax net operating loss (“NOL”) carryforwards for federal tax purposes of approximately $120.6 million and net operating loss carryforwards for foreign income tax purposes of approximately $11.3 million. The federal NOL carryforwards from 1998 forward will expire in various years beginning in 2018 and ending through the year 2032.

Deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to be recovered or settled. We have recorded a net deferred tax asset of $0 at June 30, 2014. As required by the Accounting for Income Taxes topic in the ASC, we have evaluated whether it is more likely than not that the deferred tax assets will be realized. Based on the available evidence, we have concluded that it is more likely than not that those assets would not be realized without the recovery and rights of ownership or salvage rights of high-value shipwrecks or other forms of taxable income, thus a valuation allowance has been recorded as of June 30, 2014. There was no U.S. income tax expense for the three months ended June 30, 2014 due to the generation of net operating losses which were not previously benefited in the Company’s financial statements.

The increase in the valuation allowance as of June 30, 2014 is due to the generation of approximately $14.2 million in net operating loss carryforwards year-to-date.

The change in the valuation allowance is as follows:


June 30, 2014	$	56,604,359
December 31, 2013		51,625,159

Change in valuation allowance	$	4,979,200

Our estimated annual effective tax rate as of June 30, 2014 is 34.83% while our June 30, 2014 effective tax rate is 10.70%. Generally we would expect our quarterly effective tax rate to be 0% because we are in a full valuation allowance, however, we have an income tax benefit being recognized in the three-months ended June 30, 2014 of $481,055 related to a reversal of our December 31, 2013 AMT income tax accrual based on the acceptance of our private letter ruling discussed below.

On July 3, 2014 we received confirmation from the Internal Revenue Service that our private letter ruling was accepted granting us relief to make the election to carryback our 2008 federal net operating loss five taxable years preceding the taxable year of the NOL in lieu of the general two-year carryback period. There will be no cash-tax benefit related to the carryback as we had a taxable loss during the 2003 tax year. The benefit of making the five year carryback election is that the 2008 NOL will now be able to offset 100 percent of future alternative minimum taxable income instead of only 90 percent. The AMT tax accrual for 2013 in the amount of $481,055 was reversed during the three-months ended June 30, 2014 resulting in a tax benefit.

We have not recognized a material adjustment in the liability for unrecognized tax benefits and have not recorded any provisions for accrued interest and penalties related to uncertain tax positions. The earliest tax year still subject to examination by a major taxing jurisdiction is 2010.