Form 906     (Rev. August 1994) Department of the Treasury — Internal Revenue
Service  

 

Closing Agreement on Final Determination

Covering Specific Matters

_________________

 

Under section 7121 of the Internal Revenue Code:
___________________________________________________

 

Ambac Financial Group, Inc., EIN: 13-3621676, One State Street Plaza, New York,
NY 10004, (the “Taxpayer”), on behalf of itself and as agent for the members of
the Ambac Financial Group, Inc. and Subsidiaries consolidated group,

 (Taxpayer’s name, address, and identifying number)

 

 

 

 

and the Commissioner of Internal Revenue (“Commissioner”) make the following
agreement (the “Closing Agreement”):

 

WHEREAS, Ambac Financial Group, Inc. (“AFGI”) is entering into this Closing
Agreement on behalf of itself and as agent of all the members of the Ambac
Financial Group, Inc. and Subsidiaries consolidated group with which it filed
consolidated federal income tax returns, as their common parent, for the taxable
years ended December 31, 2003, December 31, 2004, December 31, 2005, December
31, 2006, December 31, 2007, December 31, 2008, and December 31, 2009
(collectively, the “2003 through 2009 Tax Years”), and the taxable year ended
December 31, 2010 (the “2010 Tax Year,” and together with the 2003 through 2009
Tax Years, the “Applicable Tax Years”);

 

WHEREAS, Ambac Assurance Corporation (“AAC”) is a subsidiary of AFGI, and AAC,
through its wholly owned limited liability company, Ambac Credit Products LLC
(“ACP”), entered into certain credit default swaps (the “CDS Contracts”)1 with
third parties;

 

WHEREAS, the Taxpayer claimed operating losses attributable to the CDS Contracts
for certain of the Applicable Tax Years (“Disputed CDS Losses”) as set forth in
Table 1 below, and claimed net operating loss carry-forwards attributable to the
CDS Contracts (after taking into account premiums received on the CDS Contracts)
in certain of the Applicable Tax Years (“Disputed Carry-Forward NOLs”) as set
forth in Table 2 below, and the Commissioner disputes the Disputed CDS Losses
and Disputed Carry-Forward NOLs claimed by the Taxpayer;

 

Table 1

 

Tax Year  Disputed CDS Losses ($)  2007   756,713,558  2008   3,413,450,726 
2009   2,881,788,012  2010   417,637,425  Total   7,469,589,721 

 

 

1 The terms “CDS Contracts,” “Bank Settlement Notes” and “June 9, 2010 Event”
are defined in the Settlement Letter dated February 24, 2012 (the “Settlement
Letter”). See Attachment 1.  

 

 

 

  

Table 2

 

Tax Year  Disputed Carry-Forward NOLs ($)  2007   0  2008   1,286,490,389  2009 
 2,844,867,442  2010   328,629,729  Total   4,459,987,560 

  

WHEREAS, the Taxpayer reported the following amounts attributable to the CDS
Contracts for the 2010 Tax Year: Ordinary Premium Income of $89,007,679;
Ordinary Loss of $417,637,425; and Capital Gain of $379,900,391 (which the
Taxpayer offset with capital loss unrelated to the CDS Contracts);

 

WHEREAS, during 2008, 2009, and 2010, AAC commuted all of the CDS Contracts from
which the Disputed CDS Losses and the Disputed Carry-Forward NOLs arose, in
return for an aggregate payment by AAC of approximately $7,000,000,000.00,
including approximately $5,700,000,000.00 in cash and approximately
$1,300,000,000.00 in Bank Settlement Notes, issued by AAC in 2010, with a par
value of $2,000,000,000.00;

 

WHEREAS, as a result of the Disputed CDS Losses the Taxpayer filed applications
for tentative refunds and received tentative refunds as set forth in Table 3
below, the allowance of which is disputed by the Commissioner (the “Disputed
Refunds”);

 

Table 3

 

Tax Year  Disputed Refunds ($)  2007   38,142,748  2006   236,529,966  2005 
 210,799,742  2004   144,929,795  2003   77,713,584  TOTAL   708,115,835 

 

WHEREAS, on November 8, 2010, the Taxpayer commenced a voluntary case under
Chapter 11 of Title 11 of the U.S. Code in the United States Bankruptcy Court
for the Southern District of New York, In re Ambac Financial Group, Inc. Chap.
11 Case No. 10-15973 (the “Bankruptcy Case”);

 

WHEREAS, on November 9, 2010, the Taxpayer commenced an adversary proceeding
against the United States in the United States Bankruptcy Court for the Southern
District of New York, Ambac Financial Group, Inc. v. United States, Adv. Proc.
Case No. 10-4210 (the “Adversary Proceeding”);

 

 

 

  

WHEREAS, on May 4, 2011, the Commissioner proposed adjustments disallowing
certain of the Disputed CDS Losses claimed by the Taxpayer (“Disputed Proposed
Adjustments”) and on May 5, 2011 filed a Proof of Claim in the Bankruptcy Case
for tax due in the amount of $760,749,586.00 and interest to petition date due
in the amount of $46,492,441.91, for a total of $807,242,027.91 (the “Proof of
Claim”).

 

WHEREAS, the Settlement Letter was presented by the Taxpayer and others to the
United States on February 24, 2012, and supplemented by letter dated April 3,
2013 (the “Supplemental Letter”, see Attachment 2) (together the two letters
constitute the “Offer”), and the Offer was accepted by the United States on
April 4, 2013 (see Attachment 3);

 

WHEREAS, the Commissioner does not challenge that the Bank Settlement Notes
issued by AAC in 2010 to commute certain CDS Contracts were characterized as
debt for federal income tax purposes, and that the issuance of the Bank
Settlement Notes did not cause AAC to fail to be a member of the “affiliated
group” (as defined in section 1504(a) of the Internal Revenue Code (the “Code”))
of which Taxpayer was the common parent, and did not result in an “ownership
change” with respect to AAC for purposes of section 382 of the Code;

 

WHEREAS, the Commissioner has determined that the June 9, 2010 Event did not
cause AAC to fail to be a member of the “affiliated group” (as defined in
section 1504(a) of the Code) of which Taxpayer was the common parent, and did
not result in an “ownership change” with respect to AAC for purposes of section
382 of the Code;

 

WHEREAS, this Closing Agreement resolves with finality all federal income tax
liability of the Taxpayer for the 2003 through 2009 Tax Years, including the
Disputed Proposed Adjustments and the Disputed Refunds; and it resolves with
finality the federal income tax liability of the Taxpayer for the 2010 Tax Year
solely with respect to items of income, gain, deduction or loss related to the
CDS Contracts.

 

IT IS NOW HEREBY DETERMINED AND AGREED FOR FEDERAL INCOME TAX PURPOSES THAT:

 

(1)The Taxpayer is entitled to claim the portion of the Disputed Carry-Forward
NOLs for the Applicable Tax Years up to three billion, four hundred million
dollars ($3,400,000,000). The $3,400,000,000 of Disputed Carry-Forward NOLs
shall be available as ordinary loss carry-forwards.

 

(2)The Taxpayer is not entitled to claim any portion of the Disputed
Carry-Forward NOLs for the Applicable Tax Years to the extent it exceeds three
billion, four hundred million dollars ($3,400,000,000); and the Taxpayer
relinquishes all claim to the Disputed Carry-Forward NOLs in excess of three
billion, four hundred million dollars ($3,400,000,000), whether characterized as
capital or ordinary, which might otherwise be available or claimed by the
Taxpayer (or any member of its affiliated group) to offset future taxable income
of the Taxpayer (or any member of its affiliated group). Disputed Carry-Forward
NOLs relinquished by Taxpayer shall be treated as having arisen in the 2008 tax
year.

 

(3)The Taxpayer is liable for: (i) payment of one hundred one million, nine
hundred thousand dollars ($101,900,000), which liability shall be paid in
accordance with the terms in paragraph 4 below in full and final satisfaction of
the Taxpayer’s federal income tax liability for the 2003 through 2009 Tax Years,
and the Taxpayer’s federal income tax liability for the 2010 Tax Year but only
with regard to items of income, gain, deduction or loss related to the CDS
Contracts; and, (ii) certain toll payments defined in the Settlement Letter.

 

(4)Prior to the execution of this Closing Agreement, Taxpayer has satisfied all
other conditions set forth in paragraphs 1 and 2 of the Settlement Letter, as
amended by the Supplemental Letter, and AFGI has made a payment to the United
States Department of the Treasury of one million nine hundred thousand dollars
($1,900,000) and AAC and/or the Segregated Account (as defined in the Settlement
Letter) has made a payment to the United States Department of the Treasury of
one hundred million dollars ($100,000,000).

 

(5)No portion of the payments described in paragraph 4 above and no portion of
the toll payments defined in the Settlement Letter will be attributable to
additions to tax or other penalties under chapter 68 of the Code.

 

 

 

 

(6)This Closing Agreement finally and conclusively resolves the federal income
tax liability (and any liabilities in respect of interest under section 6601 of
the Code and additions to tax and penalties that may be imposed under the Code)
of the Taxpayer for the 2003 through 2009 Tax Years.

 

(7)This Closing Agreement also finally and conclusively resolves the federal
income tax liability (and any liabilities in respect of interest under section
6601 of the Code and additions to tax and penalties that may be imposed under
the Code) of the Taxpayer for the 2010 Tax Year but only with regard to items of
income, gain, deduction or loss related to the CDS Contracts, including the
Disputed CDS Losses and Disputed Carry-Forward NOLs.

 

(8)Neither the issuance of the Bank Settlement Notes nor the June 9, 2010 Event
caused AAC to fail to be a member of the “affiliated group” (as defined in
section 1504(a) of the Code) of which Taxpayer was the common parent or resulted
in an “ownership change” with respect to AAC for purposes of section 382 of the
Code.

 

(9)No inference shall be made from the execution of this Closing Agreement by
the Commissioner regarding the appropriate treatment of credit default swaps for
federal income tax purposes, and nothing contained in this Closing Agreement
shall be considered an acceptance by the United States of Taxpayer’s tax
accounting methodology with respect to the CDS Contracts nor an admission by the
Taxpayer that there were faults in its tax accounting methodology with respect
to the CDS Contracts.

 

(10)Nothing in this Closing Agreement shall be construed as a limitation on the
Commissioner’s ability to adjust the tax liabilities of Taxpayer except as
expressly provided for in this Closing Agreement.

 

(11)The Taxpayer will include a copy of this Closing Agreement and all
attachments with all of its federal income tax returns filed for a period of 20
years from the date of execution.

 

(12)This agreement is final and conclusive except:

 

a.The matter it relates to may be reopened in the event of fraud, malfeasance,
or misrepresentation of material fact;

 

b.It is subject to the I.R.C. provisions (including any stated exception for
I.R.C. §7122) notwithstanding any other law or rule of law; and

 

c.If it relates to a tax period ending after the date of this agreement, it is
subject to any law enacted after the agreement date that applies to the tax
period.

 

By signing, the above parties certify that they have read and agreed to the
terms of this document.

 

TAXPAYER:       AMBAC FINANCIAL GROUP, INC.

ON BEHALF OF ITSELF AND THE AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED GROUP

 

  By:                           Title:     Date Signed:                  
Commissioner of Internal Revenue                         By:                    
      Title:     Date Signed:    

 

 

 

 

 

 

 

ATTACHMENT 1

 

 

 

 

 

 

Description: LOGO [tlogo1.jpg]

Dewey & LeBoeuf LLP

1301 Avenue of the Americas

New York, NY 10019-6092

 

T +1 212 259 8330

F +1 212 259 6333

lhill@dl.com

 

SUBMITTED PURSUANT TO FRE 408 AND

WISCONSIN STATUTE SECTION 904.08

FOR SETTLEMENT PURPOSES

 

February 24, 2012

Preet Bharara, Esq.

United States Attorney

Southern District of New York

U.S. Department of Justice

86 Chambers Street

New York, NY 10007

 

John A. DiCicco, Esq.

Principal Deputy Assistant Attorney General

Tax Division

United States Department of Justice

Washington, D.C. 20530

 

Re:Ambac Financial Group, Inc. v. United States, Adv. Proc. No. 10-4210

(Bankr. S.D.N.Y., filed Nov. 9, 2010);

In the Matter of the Rehabilitation of Segregated Account of Ambac Assurance
Corp., No. 2010CV1576 (Wis. Cir. Ct. for Dane Cnty. Jan. 24, 2011), petition for
review granted, No. 2011AP987 (Wis. Aug. 31, 2011);

In the Matter of the Rehabilitation of Segregated Account of Ambac Assurance

Corporation, 782 F. Supp. 2d 743 (W.D. Wis. 2011), appeal docketed,
No. 11-1158 (7th Cir. Jan. 19, 2011); and

United States v. Wisconsin State Circuit Court for Dane County, et al.,
767 F. Supp. 2d 980 (W.D. Wis. 2011), appeal docketed, No. 11-1419
(7th Cir. Feb. 22, 2011).

 

Dewey & LeBoeuf LLP is a New York limited liability partnership.

 

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Messrs. Bharara and DiCicco

February 24, 2012

Page 2

 

Dear Messrs Bharara and DiCicco:

 

This letter constitutes an offer to settle the above-referenced proceedings on
the terms described below. The settlement would be between the United States, on
the one hand, and Ambac Financial Group, Inc. (“Debtor” or “AFGI”), Ambac
Assurance Corporation (“AAC”), the Official Committee of Unsecured Creditors of
AFGI (“Official Creditors Committee”), the Segregated Account of Ambac Assurance
Corporation (the “Segregated Account”)1, the court-appointed Rehabilitator of
the Segregated Account (the “Rehabilitator”) and the Wisconsin Office of the
Commissioner of Insurance (“OCI”), on the other hand (collectively, the United
States, AFGI, AAC, Official Creditors Committee, Segregated Account,
Rehabilitator and OCI are referred herein as the “Parties”).2

 

 

1              On March 24, 2010, the Wisconsin Office of the Commissioner of
Insurance (“OCI”) approved the establishment of a segregated account of AAC,
pursuant to Wis. Stat. section 611.24(2), to segregate certain non-performing
segments of AAC’s liabilities. All policy obligations of AAC not allocated to
the Segregated Account remain in the general account of AAC; and, in addition,
the Segregated Account contains a secured note issued by the general account
(the “Secured Note”). Further, on March 24, 2010, OCI commenced rehabilitation
proceedings with respect to the Segregated Account in the District Court of Dane
County, Wisconsin to facilitate an orderly run-off and/or settlement of the
liabilities in the Segregated Account.

 

2              In this letter, the term “IRS” means the Internal Revenue
Service; the term “Code” means the Internal Revenue Code of 1986, as amended;
the term “Group” means the “affiliated group” (as defined in Section 1504(a) of
the Code) of which AFGI is the common parent, and AAC (including the Segregated
Account) is one of the members and the term “CDS Contracts” means all the CDS
contracts identified in Attachment A as the pay-as-you-go credit default swap
contracts and other CDS contracts with respect to which items of income, gain,
deductions, or loss were reflected in any of the federal income tax returns
filed by the Group for the tax years ending December 31, 2005, December 31,
2006, December 31, 2007, December 31, 2008, December 31, 2009 or December 31,
2010; the term “CDS Contracts” does not include the CDS contracts identified in
Attachment B as CDS contracts with respect to which items of income, gain,
deductions, or loss were not reflected in any of the federal income tax returns
filed by the Group for the tax years ending December 31, 2005, December 31,
2006, December 31, 2007, December 31, 2008, December 31, 2009 or December 31,
2010; the term “Confirmation Order” means the plan of rehabilitation
confirmation order; the term “Bank Settlement Notes” means the surplus notes
issued by AAC on June 7, 2010 pursuant to the Settlement Agreement, dated June
7, 2010, among AAC and certain financial institutions as well as the issuance by
the Segregated Account of $50 million in surplus notes on July 29, 2010 in
connection with a separate settlement, and the term “Plan of Reorganization”
means AFGI’s reorganization plan submitted to the United States Bankruptcy Court
for the Southern District of New York as finally amended and confirmed.

 

 

 

 

Messrs. Bharara and DiCicco

February 24, 2012

Page 3

 

On November 8, 2010, AFGI filed a voluntary case under Chapter 11 of Title 11 of
the United States Code seeking bankruptcy protection (“Bankruptcy Case”). On
November 9, 2010, AFGI commenced an adversary proceeding in connection with the
Bankruptcy Case against the United States (“Adversary Proceeding”), seeking, in
part, to obtain an injunction and a declaration that the Debtor applied the
proper accounting method with respect to losses on the CDS Contracts. The
Adversary Proceeding is captioned Ambac Financial Group, Inc. and The Official
Committee of Unsecured Creditors v. United States of America, Adv. Pro. No.
10-4210 (SCC). On May 5, 2011, the United States filed its proofs of claim in
the Bankruptcy Case against AFGI, thereby asserting a priority claim against the
Debtor of $807,242,021.91 (“IRS Claims”). The IRS Claims seek the return of the
tentative tax refunds received by the Group resulting from the claimed
recognition of losses in 2007 and 2008 with respect to the CDS Contracts. The
Debtor filed its objection to the IRS Claims on June 5, 2011.

 

 

 

 

Messrs. Bharara and DiCicco

February 24, 2012

Page 4

 

The United States has also sought to assert legal rights against AAC, under
Treas. Reg §§ 1.1502-6(a) and 1.1502-78(b)(2), with respect to any deficiency or
underpayment of federal taxes against the Group. As authorized by statute, OCI
approved the creation of the Segregated Account, which OCI then placed into
rehabilitation in the Wisconsin Circuit Court of Dane County (the
“Rehabilitation Court”) on March 24, 2010, with the Wisconsin Commissioner of
Insurance appointed as Rehabilitator.  By order dated November 7, 2010, the
Rehabilitation Court approved the allocation of AAC’s federal tax liability for
all prior tax years, including any liability it may have with respect to the IRS
Claims to the Segregated Account.3 On December 8, 2010, the United States
removed the Wisconsin rehabilitation proceeding involving the Segregated Account
to the United States District Court for the Western District of Wisconsin (the
“District Court”). The Rehabilitator moved to remand the proceeding to the
Rehabilitation Court, and on January 14, 2011, that motion was granted by the
District Court. The United States appealed that decision to the United States
Court of Appeals for the Seventh Circuit. On February 9, 2011, the United States
filed a complaint and a motion for a preliminary injunction in the District
Court seeking, inter alia, to enjoin enforcement of the injunction issued by the
Rehabilitation Court and the Confirmation Order against the United States in a
case captioned United States of America v. Wisconsin State Circuit Court for
Dane County, Case No. 11-cv-099. The District Court dismissed that suit for lack
of subject matter jurisdiction on February 18, 2011, and the United States filed
a notice of appeal on February 22, 2011. The appeals at the Seventh Circuit are
pending as Appeal Nos. 11-1158 and 11-1419.

 

On March 9, 2011, the United States appealed the Order of Confirmation entered
by the Rehabilitation Court on January 24, 2011. That appeal, No. 2011-AP-987,
was dismissed by the Wisconsin Court of Appeals. The Wisconsin Supreme Court
subsequently granted the United States’ Petition for Review. The matter has been
briefed, argued before, and submitted for decision to the Wisconsin Supreme
Court.

 

 

 3              It is acknowledged that the United States disputes that this
allocation was effective as to it.

 

 

 

 

Messrs. Bharara and DiCicco

February 24, 2012

Page 5

 

AFGI, AAC, the Official Creditors Committee, the Segregated Account, the
Rehabilitator, and OCI offer to resolve and settle the disputes described above
to avoid the burden, expense and uncertainty of litigation. The terms of this
offer (the "Offer") are as follows:

 

1.       The proposed settlement shall not be effective until this offer has
been accepted by the United States, such acceptance including having received a
response of “no adverse criticism” from the Congressional Joint Committee on
Taxation to effectuate the transactions contemplated in this letter, and the
conditions in 28 C.F.R. § 0.163 relating to the settlement of appeals authorized
by the Solicitor General shall also have been satisfied, and each of the other
conditions below in this paragraph 1 have been satisfied.

 

a.The Rehabilitation Court shall have entered an order approving the
transactions contemplated in this letter.

 

b.The United States Bankruptcy Court for the Southern District of New York (the
“Bankruptcy Court”) shall have entered an order approving the stipulated
dismissal with prejudice of the Adversary Proceeding and approving the other
transactions contemplated in this letter, including the Plan of Reorganization.

 

c.AFGI (on behalf of itself, AAC, and the other members of the Group) and the
IRS shall have entered into a closing agreement under section 7121 of the Code
that provides as follows:

 

(1)The closing agreement finally and conclusively resolves the federal income
tax liability (and any liabilities in respect of interest under section 6601 of
the Code and additions to tax and penalties that may be imposed under the Code
with respect to this income tax liability) of the Group for the tax years ending
December 31, 2003 through and including December 31, 2009.

 

 

 

 

Messrs. Bharara and DiCicco

February 24, 2012

Page 6

 

(2)The closing agreement also finally and conclusively resolves the federal
income tax liability (and any liabilities in respect of interest under section
6601 of the Code and additions to tax and penalties that may be imposed under
the Code with respect to this income tax liability) of the Group for the tax
year ending December 31, 2010, but only with regard to any income, gain,
deduction, or loss on the Group’s CDS Contracts.

 

(3)The Group (and each of its members) will relinquish all claim to all loss
carry-forwards, whether characterized as capital or ordinary, resulting from
losses on the CDS Contracts arising on or before December 31, 2010, which might
otherwise be available to the Group (or any of its members) to offset future
taxable income of the Group (or any of its members) to the extent that these
carry-forwards exceed $3,400,000,000. The $3,400,000,000 of losses shall be
ordinary loss carry-forwards. The Group has also claimed losses that have arisen
separate and apart from its CDS Contracts (the “non-CDS NOLs”), but the closing
agreement will not address the non-CDS NOLs, to which the IRS reserves all of
its rights.

 

 

 

 

Messrs. Bharara and DiCicco

February 24, 2012

Page 7

 

(4)Nothing contained in the closing agreement or settlement shall be considered
an acceptance by the United States of AFGI’s tax accounting methodology with
respect to the CDS contracts nor an admission by AFGI that there were faults in
its tax accounting methodology with respect to the CDS contracts. No inference
shall be made from the execution of the closing agreement or settlement by the
United States regarding the appropriate treatment of credit default swaps for
federal income tax purposes.

 

(5)The parties to the closing agreement acknowledge that such agreement is the
product of arm’s length negotiations and supersedes all prior communications,
written or oral, with respect thereto. In connection with the negotiations to
enter into a closing agreement that satisfies the conditions described in this
paragraph 1(c), the Parties agree that no payment shall be required to be made
by any members of the Group other than as described in paragraphs 2-4.

 

 

 

 

Messrs. Bharara and DiCicco

February 24, 2012

Page 8

 

d.Additional conditions precedent to the effectiveness of the proposed
settlement are (i) AFGI (on behalf of itself, AAC, and the other members of the
Group, whose written consent shall be obtained) and the IRS shall have entered
into a closing agreement under section 7121 of the Code providing that neither
the issuance of the Bank Settlement Notes4 nor the June 9, 2010 Event5 (A)
caused AAC to fail to be a member of the “affiliated group” (as defined in
section 1504(a) of the Code) of which AFGI was the common parent, or (B)
resulted in an “ownership change” with respect to AAC for purposes of section
382 of the Code, and (ii) the Internal Revenue Service shall have issued a
favorable private letter ruling (“PLR”) providing that upon emergence from
bankruptcy AFGI would qualify for the Code section 382(l)(5) exception, without
regard to section 382(l)(5)(D); the PLR will be based solely on the information
and representations included in the private letter ruling request that shall be
submitted by AFGI to the IRS within 60 days of the date of this Offer (the
“Original PLR Request”). The condition precedent described in this subparagraph
1(d)(ii) will be satisfied upon the IRS’s issuance of such a PLR based upon the
Original PLR Request. In connection with the negotiations relating to (i) and
(ii) of this paragraph 1(d), the Parties agree that no payment shall be required
to be made by any members of the Group other than as described in paragraphs 2 -
4.

 

e.Another condition precedent to the effectiveness of the proposed settlement is
that the United States and the Segregated Account shall enter into a separate
and independent agreement to create and maintain an escrow account holding a
balance of not less than $100 million in cash or Qualifying Investments as
defined in the Escrow Agreement -(the “Escrow Account”). The terms and
conditions of the Escrow Account are set forth in the form of Escrow Agreement
attached hereto as Appendix A.

 

 

4 The IRS reserves its right to request a written opinion to be provided by KPMG
relating to issues regarding the $50 million in surplus notes issued on July
29,2010, and to withhold a final conclusion on the issues set out above prior to
receiving such written opinion.

 

5 The “June 9, 2010 Event” refers to AAC's nonpayment of dividends in full to
the holders of the auction market preferred shares (AMPS) for six consecutive
dividend payment dates thereby entitling the holders of the AMPS, subject to
OCI's approval, to elect two members of the board of directors of AAC.

 

 

 

 

Messrs. Bharara and DiCicco

February 24, 2012

Page 9

 

f.Approval of the terms of the proposed settlement agreement as set forth herein
by the AFGI and AAC Boards of Directors (the "Boards"). Written notice will be
provided to the United States within five (5) days of the Boards' vote whether
to accept or reject the terms of the Offer, and, after May 31, 2012, approval
shall be deemed to have occurred unless notice to the contrary is provided to
the United States.

 

2.            Within ten (10) business days following satisfaction of all
conditions set forth in paragraph 1: (i) AFGI will pay the United States
Department of the Treasury one million nine hundred thousand dollars
($1,900,000); and (ii) AAC and/or the Segregated Account will pay the United
States Department of the Treasury one hundred million dollars ($100,000,000).
The manner in which AAC and/or the Segregated Account effectuates the payment to
the IRS will not be construed as a concession of any legal issue by any of the
Parties. The payments that are described in the first sentence of this Paragraph
2 and the payments described in paragraphs 3 and 4 will be in full and final
satisfaction of the federal income tax liability (and any liabilities in respect
of interest under section 6601 of the Code and additions to tax and penalties
that may be imposed under the Code with respect to this income tax liability) of
the Group to the IRS for (i) the tax years ending December 31, 2003 through
December 31, 2009; and (ii) the tax year ending December 31, 2010, but only with
regard to items of income, gain, deduction, or loss on the Group’s CDS
Contracts. Effective at the time of the payment described in the first sentence
of this paragraph 2, the Group (and all of its members, including AAC) shall
waive forever any right to claim any overpayment of any federal income tax,
liability (and any overpayment of interest, additions to tax, or penalties with
respect to this income tax liability) of the Group for any tax period ended
prior to January 1, 2010 and any right to claim any overpayment of any federal
income tax liability (and any overpayment of interest, additions to tax, or
penalties with respect to this income tax liability), of the Group with regard
to items of income, gain, deduction, or loss on the CDS Contracts for the tax
year ended December 31, 2010. No portion of the AFGI and AAC payments will be
attributable to additions to tax or other penalties under chapter 68 of the
Code. No portion of the AFGI and AAC payments, and no portion of the Tier C and
Tier D IRS Payments described in paragraphs 3 and 4 below, shall be claimed as a
deduction or other tax benefit on any federal tax return for the year of this
settlement or any future year.

 

 

 

 

Messrs. Bharara and DiCicco

February 24, 2012

Page 10

 

3.          Following the effectiveness of the Tax Sharing Agreement between
AFGI and AAC, which is attached as Exhibit A to the Plan of Reorganization (the
“TSA”), and the satisfaction of all conditions set forth in paragraph 1, AFGI
will pay the IRS an amount equal to twelve and a half percent (12.5%) of any
payment made to AFGI by AAC associated with the net operating loss (“NOL”) Usage
Tier C as defined in the TSA (the “Tier C IRS Payment”). The Tier C IRS Payment,
if any, shall be made within five (5) business days following AFGI’s receipt of
the Tier C payment, if any, made by AAC to AFGI.

 

4.          Following the effectiveness of the TSA and the satisfaction of all
conditions set forth in paragraph 1, AFGI will pay the IRS an amount equal to
seventeen and a half percent (17.5%) of any payment made to AFGI by AAC
associated with the NOL Usage Tier D as defined in the TSA (the “Tier D IRS
Payment”). The Tier D IRS Payment, if any, shall be made within five (5)
business days following AFGI’s receipt of the Tier D payment, if any, made by
AAC to AFGI.

 

 

 

 

Messrs. Bharara and DiCicco

February 24, 2012

Page 11

 

5.          With respect to the Tier C and Tier D payments made by AAC to AFGI,
AFGI will disclose in its annual federal tax return the amount of such payments
received from AAC for the applicable year. The right of the IRS to receive the
Tier C IRS and Tier D IRS Payments shall not be treated for federal income tax
purposes or any other purpose as an equity interest in AFGI or in AAC, and
AFGI’s failure to make Tier C IRS and Tier D IRS Payments will not give the IRS
a claim against the Segregated Account, the general account of AAC, or any
subsidiary of AAC.

 

6.          Following the satisfaction of all conditions set forth in paragraphs
1 and 2, OCI, the Segregated Account, the Rehabilitator, and AAC will, upon the
request of the United States, state in writing to the court that they support
any motion brought by the United States seeking to vacate (i) the Opinion and
Order entered on January 14, 2011 by the United States District Court for the
Western District of Wisconsin in the proceeding captioned Theodore Nickel v.
United States of America, Case No. 10-cv-778 and (ii) the Opinion and Order
entered on February 18, 2011 by the United States District Court for the Western
District of Wisconsin in the proceeding captioned United States of America v.
Wisconsin State Circuit Court for Dane County, Case No. 11-cv-099.

 

 

 

 

Messrs. Bharara and DiCicco

February 24, 2012

Page 12

 

7.          Following the satisfaction of all conditions set forth in paragraphs
1 and 2, upon stipulation, the United States, the Rehabilitator, OCI, AAC and
the Segregated Account, shall dismiss with prejudice the two cases that are
currently pending before the U.S. Court of Appeals for the Seventh Circuit and
captioned as Theodore Nickel v. United States of America, Case No. 11-1158 and
United States of America v. Wisconsin State Circuit Court for Dane County, et.
al., Case No. 11-1419.

 

8.          Following the satisfaction of all conditions set forth in paragraphs
1 and 2, the IRS Claims filed in AFGI’s Chapter 11 Bankruptcy Case, presently
pending before the United States Bankruptcy Court for the Southern District of
New York, shall be deemed allowed in the amount of $120,000,000.00 which will be
fully satisfied upon receipt by the United States Department of the Treasury of
the payments described in paragraph 2 and the payment, if any, described in
paragraphs 3 and 4 above, and the IRS Claims will be deemed disallowed in any
greater amount. The $120,000,000.00 offer is for settlement purposes only and
the Segregated Account and AAC shall have no liability for any unpaid portion of
this claim following satisfaction of the conditions in paragraphs 1 and 2,
supra. Furthermore, no cancellation of debt income shall arise with respect to
the Group should no payments be made pursuant to paragraphs 3 and 4 above, or
should such payments fail to bring the aggregate of payments, including those
described in paragraph 2 above, to an amount equal or exceeding $120,000,000.

 

9.          Following the satisfaction of all conditions set forth in paragraphs
1 and 2, by stipulation, the United States and AFGI shall dismiss with prejudice
the Adversary Proceeding, presently pending before the United States Bankruptcy
Court for the Southern District of New York (Case No. 10-4210) and the motion to
withdraw the reference, presently pending before the United States District
Court for the Southern District of New York.

 

 

 

 

Messrs. Bharara and DiCicco

February 24, 2012

Page 13

 

10.         This Offer shall be conditioned upon the satisfaction of each of the
following conditions:

 

a.The Seventh Circuit Court shall hold off rescheduling oral argument and not
issue any dispositive order, judgment or other ruling on the merits with respect
to appeal No. 11-1158 or Appeal No. 11-1419.

 

b.Between the time the Offer is submitted to the United States and such time as
the parties either (1) satisfy all the conditions for the settlement to be
effective set forth in paragraphs 1 and 2 above or (2) determine that said
conditions will not be satisfied, the United States will not submit any claim in
the Rehabilitation Court or Bankruptcy Case or take any other collection action
(whether by assessment, levy, or by asserting the existence of a lien, or
otherwise) with respect to any federal income tax liability presently being
asserted by the United States as to AFGI, AAC or any other member of the Group
for the 2010 tax year or any prior tax year, and will not seek to remove the
rehabilitation proceeding from the Rehabilitation Court or object to any motion
of the Rehabilitator (except as to any motion that is inconsistent with the
settlement terms set forth herein). The United States, nevertheless, retains the
right to submit a claim in the Rehabilitation Court or in the Bankruptcy Case if
such is necessary to satisfy a claims deadline established by the Rehabilitation
Court or the Bankruptcy Court.

 

 

 

 

Messrs. Bharara and DiCicco

February 24, 2012

Page 14

 

11.          The Segregated Account, OCI, AAC and the United States shall each
be free to write the Wisconsin Supreme Court (and to respond to representations
made in contacts by other parties) with respect to the United States’ appeal to
that court, No. 2011-AP-987, if the Supreme Court has not before then issued its
final decision with respect to that appeal. In those written submissions, no
party shall request a stay or dismissal of the proceedings before the Wisconsin
Supreme Court.

 

If, prior to the consummation of this proposed settlement, the Wisconsin Supreme
Court issues a ruling that is favorable to the United States and that results in
a remand to either the Wisconsin Court of Appeals or the Rehabilitation Court,
the United States will promptly move to stay proceedings in the court to which
proceedings have been remanded and will later dismiss with prejudice its case
then pending before the Wisconsin Court of Appeals or the Rehabilitation Court,
and any objection to the Rehabilitation Court’s orders, upon satisfaction of the
conditions set forth in paragraphs 1 and 2.

 

12.          The Offer is valid unless and until withdrawn in writing by the
Debtor, AAC, OCI, the Segregated Account or the Official Creditors Committee.

 

13.          Except as to the terms contained herein in paragraph 1.e, no term
contained within this Offer will have any force or effect if settlement is not
consummated.

 

  Respectfully submitted,       Dewey & LeBoeuf LLP       By:     Lawrence M.
Hill   Counsel for Debtor and AAC

 

 

 

 

Messrs. Bharara and DiCicco

February 24, 2012

Page 15

 

  Foley & Lardner LLP       By:     Kevin G. Fitzgerald   Counsel for the
Segregated Account, the Rehabilitator, and OCI       Morrison & Foerster LLP    
  By:     Anthony Princi   Counsel for the Official Creditors Committee

 

cc:Jeannette A. Vargas

Daniel P. Filor

Ellen London

Carina H. Schoenberger

Anthony T. Sheehan

Roger A. Peterson

Michael B. Van Sicklen

Edward Froelich

Robert Kovacev

Sashka Koleva

   

 

 

 

 

 

 

ATTACHMENT 2

 

 

 

 

 

 

SUBMITTED PURSUANT TO FRE 408 AND
WISCONSIN STATUTE SECTION 904.8
FOR SETTLEMENT PURPOSES

 

April 3, 2013

 

Preet Bharara, Esq.

United States Attorney
Southern District of New York

U.S. Department of Justice

86 Chambers Street
New York, NY 10007

 

John A. DiCicco, Esq.
Principal Deputy Assistant Attorney General
Tax Division
United States Department of Justice
Washington, DC 10530

 

Ambac Financial Group, Inc. v. United States, Adv. Proc.No. 10-4210 (Bankr.
S.D.N.Y., filed Nov. 9, 2010);

In the Matter of the Rehabilitation of Segregated Account of Ambac Assurance
Corp.,
No. 2010CV1576 (Wis. Cir. Ct. for Dane Cnty. Jan. 24, 2011) petition for review
granted, No. 2011AP987 (Wis. Aug. 31, 2011);

In the Matter of the Rehabilitation of Segregated Account of Ambac Assurance
Corporation, 782 F. Supp. 2d 743 (W.D. Wis. 2011), appeal docketed,
No. 11-1158 (7th Cir. Jan. 19, 2011); and
United States v. Wisconsin State Circuit Court for Dane County, et al.,

767 F. Supp. 2d 980 (W.D. Wis. 2011), appeal docketed, No. 11-1419

(7th Cir. Feb. 22, 2011)

 

Dear Messrs. Bharara and DiCicco:

 

On February 24, 2012, Ambac Financial Group, Inc. (“Debtor” or AFGI”), Ambac
Assurance Corporation (“AAC”), the Official Committee of Unsecured Credits of
AFGI (“Official Creditors Committee”), the Segregated Account of Ambac Assurance
Corporation (the “Segregated Account”), the court-appointed Rehabilitator of the
Segregated Account (the “Rehabilitator”) and the Wisconsin Office of the
Commissioner of Insurance (“OCI”), presented a settlement offer (“Settlement
Letter”) to settle the above-referenced proceedings. This letter modifies and
supplements the terms of the Settlement Letter, as follows:

 

 

 

 

Preet Bharara, Esq. Page 2

 

(i)Paragraph 1(b) of the Settlement Letter is modified by deleting reference to
the dismissal of the Adversary Proceeding. As modified, paragraph 1(b) shall
read: “The United States Bankruptcy Court for the Southern District of New York
(the “Bankruptcy Court”) shall have entered an order approving the proposed
settlement of the transactions contemplated in this letter, including the Plan
of Reorganization.

 

(ii)Paragraph 1(c)(6) shall be added to the Settlement Letter to state: “The
closing agreement shall be executed only upon the satisfaction of all other
conditions set forth in paragraphs 1 and 2 of the Settlement Letter and the
entry of an order of the United States Bankruptcy Court for the Southern
District of New York, in the Chapter 11 bankruptcy proceeding of In re Ambac
Financial Group, Inc. Chap 11 Case No. 10-15973, approving the terms of this
settlement between AFGI, on behalf of itself and as agent for the members of
AFGI and Subsidiaries consolidated group, and the United States.”

 

(iii)Paragraph 2 of the Settlement Letter is modified by deleting the first
sentence “Within ten (10) business days following satisfaction of all conditions
set forth in paragraph 1: (i) AFGI will pay the United States Department of the
Treasury one million nine hundred thousand dollars ($1,900,000); and (ii) AAC
and/or the Segregated Account will pay the United States Department of the
Treasury one hundred million dollars ($100,000,000).” The first sentence in
paragraph 2 shall read: “Following satisfaction of all conditions set forth in
paragraph 1, except the reference to a closing agreement within paragraphs 1(c)
and (d), AFGI and the United States shall meet at which time the United States
will deliver to AFGI an executed closing agreement in accordance with the
Settlement Letter upon confirmation that: (i) AFGI has paid the United States
Department of the Treasury one million nine hundred thousand dollars
($1,900,000); and (ii) AAC and/or the Segregated Account has paid the United
States Department of the Treasury one hundred million dollars ($100,000,000).”

 

 

 

 

Preet Bharara, Esq. Page 3

 

The remainder of paragraph (2) in the Settlement Letter will remain unchanged.
The amount to be paid by AAC and/or the Segregated Account pursuant to paragraph
2 of the Settlement Letter may be funded in accordance with paragraph 3 of the
Escrow Agreement, dated as of March 8, 2012 (the “Escrow Agreement”), between
the Segregated Account, the United States of America and The Bank of New York
Mellon, as escrow agent, in which case the Segregated Account and the United
States of America shall take such actions as are required by the Escrow
Agreement to effect such funding. Alternatively, the amount to be paid by AAC
and/or the Segregated Account pursuant to paragraph 2 of the Settlement Letter
may be funded in cash, in which case the Segregated Account and the United
States of America shall take such actions as may be necessary to terminate the
arrangements effected by the Escrow Agreement and return all Escrow Property (as
defined in the Escrow Agreement) to the Segregated Account.

 

It is further agreed that paragraph 9 shall be modified by removing from that
paragraph reference to the satisfaction of all conditions set forth in
paragraphs 1 and 2. As modified, paragraph 9 shall read: “Following receipt by
the Taxpayer of the executed closing agreement in accordance with the terms of
the Settlement Letter, as modified by this letter, by stipulation, the United
States and AFGI shall dismiss with prejudice the Adversary Proceeding, presently
pending before the United States Bankruptcy Court for the Southern District of
New York (Case No. 10-4210) and the motion to withdraw the reference, presently
pending before the United States District Court for the Southern District of New
York.”

 

 

 

 

Preet Bharara, Esq. Page 4

 

It is further agreed that the private letter ruling dated October 25, 2012
issued by the Internal Revenue Service (PLR-117798-12) to Ambac Financial Group.
Inc. satisfies the requirements set forth in paragraph 1(d)(ii) of the
Settlement Letter.

 

All terms and conditions of the Settlement Letter will remain unchanged except
as expressly provided for in this letter.

 

  Respectfully submitted,       Shearman & Sterling LLP       By:     Lawrence
M. Hill   Counsel for debtor and AAC       Foley & Lardner LLP         By:    
Kevin G. Fitzgerald   Counsel for the Segregated
Account, the Rehabilitator,
and OCI         Morrison & Foerster LLP         By:     Anthony Princi   Counsel
for the Official
Creditors Committee

 

 

 

 

Preet Bharara, Esq. Page 5

 

  Acknowledged and Agreed:           UNITED STATES OF AMERICA             By:  
          Cc:   Daniel P. Filor       Ellen London       Carina H. Schoenberger
      Anthony T. Sheehan       Roger A. Peterson       Michael B. Van Sicklen  
    Edward Froelich       Robert Kovacev       Sashka Koleva       Jeanette A.
Vargas  

 

 

 

 

 

 ATTACHMENT 3

 

 

 

 

[tlogo2.jpg] U.S. Department of Justice   Tax Division     Please reply to:
Office of Review   Post Office Box 310   Ben Franklin Station     Washington.
D.C. 20044

 

KK:AR:ETPerelmuter

CMN 2011100390

 

April 4, 2013

 

By Telecopier and Regular Mail Lawrence M. Hill, Esquire SHEARMAN & STERLING,
LLP 599 Lexington Avenue New York, NY 10022-6069

 

Re: Ambac Financial Group, Inc. v. United States, Adv. Proc. No. 10-4210 (Bankr.
S.D.N.Y.); In the Matter of the Rehabilitation of Segregated Account of Ambac
Assurance Corp., No. 10 CV 1576 (Wis. Circuit Court for Dane County); Theodore
K. Nickel v. United States (7th Cir. - No. 1158); United States v. Wisconsin
State Circuit Court for Dane County, et al. (7th Cir. - No. 11-1419)

 

Dear Mr. Hill:

 

This refers to your offer dated February 24, 2012, as supplemented and modified
by letter dated April 3, 2013, submitted on behalf of Ambac Financial Group,
Inc. and Ambac Assurance Corporation. This offer has been accepted on behalf of
the Attorney General on the terms set forth therein. The Internal Revenue
Service is being informed of this action.

 

 

 

 

    Sincerely yours,           Kathryn Keneally     Assistant Attorney General  
      By: [tsig.jpg]     Ann Reid     Acting Chief, Office of Review

 

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