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Income Taxes | 12 Months Ended
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Dec. 31, 2011
Income Taxes [Abstract] |
Income Taxes | 14 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 |  |  | 2006 |
Italy |  |  | 2007 |
As described in Note 17, on February 24, 2012, Ambac, the Creditors' Committee, Ambac Assurance, the Segregated Account, OCI, and the Rehabilitator submitted to the Department of Justice, Tax Division a proposal (the "Offer Letter") 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; (ii) a payment by Ambac of approximately $1,900; (iii) Ambac's consolidated tax group will relinquish its claim to all loss carry-forwards resulting from losses on credit default swap contracts and arising on or before December 31, 2010 to the extent such loss carry-forwards exceed $3,400,000; and (iv) the IRS will be paid 12.5% of any payment to Ambac by Ambac Assurance associated with NOL Usage Tier C and the IRS will be paid 17.5% of any payment to Ambac by Ambac Assurance associated with NOL Usage Tier D. See Note 1 to the Consolidated Financial Statements for a description of NOL usage payments and NOL usage tiers. Finality of the settlement will require the satisfaction of certain conditions and the approval of the United States, the Bankruptcy Court and the Rehabilitation Court. There can be no assurance that the IRS Settlement will be finalized 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 year ending December 31, 2011 in accordance with ASC Topic 740, Income Taxes. In 2011, Ambac settled tax years 2000 through 2010 with New York City for a cash payment of $2,000 and forfeiture of a $1,234 over payment, which was being applied to future tax years. Ambac's provision for income taxes charged to income from continuing operations is comprised of the following:
|  | 2011 |  |  | 2010 |
Current taxes |  | $ | 77,422 |  |  | $ | 135 |
Deferred taxes |  |  | — |  |  |  | — |
|  | $ | 77,422 |  |  | $ | 135 |
The total effect of income taxes on net income and stockholders' equity for the years ended December 31, 2011 and 2010 is as follows:
|  | 2011 |  |  | 2010 |
Total income taxes charged to net income |  | $ | 77,422 |  |  | $ | 135 |
Income taxes charged (credited) to stockholders' equity: |  |  |  |  |  |  |  |
Unrealized gains (losses) on investment securities |  |  | 58,597 |  |  |  | 121,769 |
Valuation Allowance to Equity |  |  | (58,597 | ) |  |  | (119,116 | )
Adoption of new consolidation accounting guidance for VIEs |  |  | — |  |  |  | 245,715 |
Other |  |  | — |  |  |  | 8,597 |
Total charged to stockholders' equity: |  |  | — |  |  |  | 256,965 |
Total effect of income taxes |  | $ | 77,422 |  |  | $ | 257,100 |
The tax provisions in the accompanying Consolidated Statements of Operations reflect effective tax rates differing from prevailing Federal corporate income tax rates. The following is a reconciliation of these differences:
|  | 2011 |  |  | % |  |  | 2010 |  |  | % |
Tax on income from continuing operations at statutory rate |  | ($ | 659,032 | ) |  |  | 35.0 | % |  | ($ | 263,551 | ) |  |  | 35.0 | %
Reductions in expected tax resulting from: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Tax-exempt interest |  |  | (19,872 | ) |  |  | 1.1 | % |  |  | (24,700 | ) |  |  | 3.3 | %
Valuation allowance |  |  | 685,787 |  |  |  | (36.4 | )% |  |  | 288,195 |  |  |  | (38.3 | )%
Net addition to (release of) tax reserves |  |  | 73,850 |  |  |  | (3.9 | )% |  |  | — |  |  |  | — |
Other, net |  |  | (3,311 | ) |  |  | 0.2 | % |  |  | 191 |  |  |  | — |
Tax expense on income from continuing operations |  | $ | 77,422 |  |  |  | (4.1 | )% |  | $ | 135 |  |  |  | 0.0 | %
The tax effects of temporary differences that give rise to significant portions of the deferred tax liabilities and deferred tax assets at December 31, 2011 and 2010 are presented below:
|  | 2011 |  |  | 2010 |
Deferred tax liabilities: |  |  |  |  |  |  |  |
Variable interest entities |  | $ | 28,773 |  |  | $ | 50,324 |
Deferred acquisition costs |  |  | 65,238 |  |  |  | 92,784 |
Unearned premiums and credit fees |  |  | 41,342 |  |  |  | 33,638 |
Other |  |  | 22,481 |  |  |  | 23,902 |
Total deferred tax liabilities |  |  | 157,834 |  |  |  | 200,648 |
Deferred tax assets: |  |  |  |  |  |  |  |
Unrealized losses & impairments on investments |  |  | 47,919 |  |  |  | 148,728 |
Net operating loss carryforward |  |  | 2,751,802 |  |  |  | 2,450,724 |
Loss reserves |  |  | 514,150 |  |  |  | 18,106 |
Compensation |  |  | 6,693 |  |  |  | 10,733 |
Other |  |  | 6,672 |  |  |  | 9,195 |
Sub-total deferred tax assets |  |  | 3,327,236 |  |  |  | 2,637,486 |
Valuation allowance |  |  | 3,169,402 |  |  |  | 2,436,838 |
Total deferred tax assets |  |  | 157,384 |  |  |  | 200,648 |
Net deferred tax assets |  | $ | — |  |  | $ | — |
A reconciliation of the beginning and ending amount of unrecognized tax benefits for 2011 and 2010 is as follows:
|  | 2011 |  |  | 2010 |
Balance at January 1, |  | $ | 23,050 |  |  | $ | 22,850 |
Increases related to prior year tax positions |  |  | 73,850 |  |  |  | 200 |
Decreases related to prior year tax positions |  |  | — |  |  |  | — |
Balance at December 31, |  | $ | 96,900 |  |  | $ | 23,050 |
Included in these balances at December 31, 2011 and 2010 are $96,900 and $23,050, respectively, of unrecognized tax benefits that, if recognized, would affect the effective tax rate. During 2011 and 2010, Ambac recognized interest of approximately $0 and $200, respectively. Ambac had approximately $0 and $15,220 for the payment of interest accrued at December 31, 2011 and 2010, respectively. 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 December 31, 2011, the company had a valuation allowance of $3,169,402. In June 2010, Ambac Assurance 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, Ambac Assurance 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. As of December 31, 2011 Ambac has an ordinary U. S. federal net operating tax carryforward of approximately $7,150,893, which if not utilized will begin expiring in 2028 and will fully expire in 2031. As disclosed above, to settle the IRS Dispute Ambac has proposed to relinquish its claim to all net operating loss carry-forwards resulting from losses on credit default swap contracts arising on or before December 31, 2010 to the extent such net operating loss carry-forwards exceed $3,400,000. The exact amount of the loss carry-forward relinquishment will be determined upon the execution of a closing agreement.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32537-109319 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 109 -Paragraph 136, 172 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 109 -Paragraph 43, 44, 45, 46, 47, 48, 49 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 08 -Paragraph h -Article 4 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32559-109319 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 9 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32639-109319 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 15 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32718-109319 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(h)) -URI http://asc.fasb.org/extlink&oid=6881521&loc=d3e23780-122690 + Details
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