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Income Taxes
9 Months Ended
Sep. 30, 2011
Income Taxes [Abstract] 
Income Taxes

(8) Income Taxes

Ambac files a consolidated Federal income tax return with its subsidiaries. Ambac and its subsidiaries also file separate or combined income tax returns in various states, local and foreign jurisdictions. The following are the major jurisdictions in which Ambac and its affiliates operate and the earliest tax years subject to examination:

 

Jurisdiction

    Tax Year  

United States

      2005   

New York State

      2008   

New York City

      2011   

United Kingdom

      2005   

Italy

      2006   

As described in Note 12, Ambac intends to submit to the Department of Justice a proposal to settle the IRS Dispute which includes the following terms that Ambac believes will be acceptable to the United States: (i) a payment by Ambac Assurance of approximately $100,000, as permitted by the Mediation Agreement dated September 21, 2011, and a payment by Ambac of approximately $1,900 in connection with the IRS's claim for the recovery of certain federal tax refunds that were received prior to November 7, 2010 by Ambac and (ii) a $1,000,000 reduction of the NOL of the Ambac Consolidated Group. Ambac will continue to negotiate the terms of a final settlement with the IRS. The terms of any final settlement would require the approval of OCI, the IRS, the Department of Justice, Tax Division, the Joint Committee on Taxation, the Bankruptcy Court, the Rehabilitation Court and the boards of directors of both Ambac and Ambac Assurance. There can be no assurance that the IRS Dispute will be settled on the terms described above, if at all, or as to the timing of any such settlement. Nevertheless, this possible settlement is being provided for in the current quarter ending September 30, 2011 in accordance with ACS Topic 740, Income Taxes.

 

In the third quarter of 2011, Ambac agreed to settle tax years 2000 through 2010 with New York City for a cash payment of $2,000 (paid in October 2011) and forfeiture of a $1,234 over payment, which was being applied to future tax years.

As of September 30, 2011 and December 31, 2010, the liability for unrecognized tax benefits is approximately $101,900 and $23,050, respectively. Included in these balances at September 30, 2011, and December 31, 2010 are $101,900 and $23,050, respectively, of unrecognized tax benefits that, if recognized, would affect the effective tax rate.

As a result of the development of additional losses and the related impact on the Company's cash flows, management believes it is more likely than not that the Company will not generate sufficient taxable income to recover the deferred tax operating asset. As of September 30, 2011 a full valuation allowance of $2,722,074 has been established against the deferred tax asset. As of December 31, 2010, the company had a valuation allowance of $2,411,107.

In June 2010, AAC settled its obligations under certain CDS by paying the CDS counterparties $2,600,000 in cash and issuing $2,000,000 face amount of surplus notes that have a stated interest rate of 5.1% per annum. Contemporaneously with issuing the notes, AAC entered into call option agreements with several CDS counterparties giving Ambac Assurance the right for a limited time to repurchase Surplus Notes with an aggregate face amount of $940,000 for an aggregate price of $232,000 plus accrued and unpaid interest. Ambac Assurance concluded that the issue price on these notes was equal to the call strike price and that they were properly classified as applicable high interest discount obligations, subject to IRC Section 163(e)(5) restrictions on the deductibility of interest.