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Income Taxes
 6 Months Ended
Jun. 30, 2011
Income Taxes  
Income Taxes

NOTE G – INCOME TAXES

As of June 30, 2011, the Company had consolidated income tax net operating loss ("NOL") carryforwards for federal tax purposes of approximately $110 million. The NOL will expire in various years beginning in 2017 and ending through the year 2031. From 2017 through 2021, approximately $4 million of the NOL will expire, from 2022 through 2026, approximately $42 million of the NOL will expire and from 2027 through 2031, approximately $64 million of the NOL will expire.

Deferred income taxes reflect the net tax effects of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows:

 

Deferred tax assets:

   

Net operating loss and capital loss carryforwards

    $ 39,306,619   

Accrued expenses

      65,031   

Reserve for accounts receivable

      2,682,180   

Reserve for inventory

      170,617   

Start-up costs

      111,186   

Excess of book over tax depreciation

      1,271,660   

Stock option expense

      2,149,382   

Investment in unconsolidated entity

      2,087,159   

Less: valuation allowance

      (47,736,453 ) 
  

 

 

  
   $ 107,380   
  

 

 

  

Deferred tax liability:

   

Property and equipment basis

    $ 71,920   

Prepaid expenses

      35,460   
  

 

 

  
   $ 107,380   
  

 

 

  

Net deferred tax asset

    $ —     
  

 

 

  

 

As reflected above, we have recorded a net deferred tax asset of $0 at June 30, 2011. 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 and thus a valuation allowance has been recorded as of June 30, 2011. While we have recovered more than 17 tons of silver coins and hundreds of gold coins and other artifacts from the "Black Swan" project, we do not have the ability to monetize the recovered cargo unless and until we are awarded title or a salvage award by the court or otherwise reach a settlement of the matter.

The change in the valuation allowance is as follows:

 

June 30, 2011

    $ 47,736,453   

December 31, 2010

      45,983,926   
  

 

 

  

Change in valuation allowance

    $ 1,752,527   
  

 

 

  

Income taxes for the six-month periods ended June 30, 2011 and 2010 differ from the amounts computed by applying the effective federal income tax rate of 34.0% to income (loss) before income taxes as a result of the following:

 

     June 30,
2011		     June 30,
2010		  

Expected (benefit)

    $ (2,415,560 )    $ (2,247,400 ) 

State income taxes net of federal benefits

      (138,430 )      (82,266 ) 

Nondeductible expense

      7,920        6,666   

Stock options

      188,855        —     

Derivatives

      198,771        —     

Change in valuation allowance

      1,752,527        2,431,546   

Effects of:

     

Change in apportionment estimate

      406,193        (109,026 ) 

Other, net

      (276 )      480   
  

 

 

    

 

 

  
   $ —        $ —     
  

 

 

    

 

 

  

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 2007.