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Ambac agrees on possible settlement with IRS

NEW YORK (AP) -- Ambac Financial Group Inc. says it has reached an agreement with the federal government that could potentially settle accusations of improper accounting at the bond insurer.

Its dispute with the Internal Revenue Service centers on how Ambac accounted for certain operating losses in order to reduce tax liability. Companies are generally allowed to apply the current year's operating losses to future years' profits, within one to seven years, to mitigate the tax impact in the future years.

Ambac said late Monday that after extended negotiations, it has reached an agreement with the federal government and has filed a motion with the U.S. Bankruptcy Court for the Southern District of New York seeking approval of the terms of the settlement.

The bond insurer filed for bankruptcy protection in 2010 after getting pummeled by the impact of the housing market collapse and has yet to emerge from the process.

If approved, Ambac will pay the federal government $1.9 million, along with a $100 million payment by its subsidiary Ambac Assurance Corp. The company could also make additional payments based on tax sharing agreements between the two companies. It also will limit the company's tax benefits reaped from past accounting measures.

Ambac CEO and President Diana Adams said the terms of the settlement are fair, equitable and in the best interest of the company and its creditors. She said it puts the company in a favorable position to emerge from bankruptcy and move forward with its existing business.

The bankruptcy court is scheduled to hold a hearing on the matter on April 29.

Bond insurers were once considered among the most stable companies, because they backed mostly government agencies selling debt to pay for municipal projects like road construction and school building — creditors that rarely default. That changed in the late 1990s, when the companies started guaranteeing financial instruments backed by risky home and commercial loans. When the housing market began deteriorating, it soon became clear that companies like Ambac had provided coverage for more than they could handle.

The company said it still does not have an expected timeline for when it might emerge from bankruptcy protection.