Note 8 - Income Taxes

The components of income tax expense (benefit) are as follows:

(in thousands)	Year Ended December 31, 2019			Year Ended December 31, 2018
Federal - current	$	(30	)	$	-
State - current		1			5
Total current		(29	)		5

Federal - deferred		(869	)		312
State - deferred		(816	)		(7,755	)
Change in valuation allowance		1,685			6,052
Total deferred		-			(1,391	)
Income tax expense (benefit)	$	(29	)	$	(1,386	)

The components of pretax income (loss) and the difference between income taxes computed at the statutory federal rate and the provision for income taxes are as follows:

(in thousands)	Year Ended December 31, 2019			Year Ended December 31, 2018

Income (loss) before income taxes	$	(4,955	)	$	(1,051	)
Tax expense (benefit) :
Tax at statutory federal rate	$	(1,041	)	$	(221	)
State income taxes		(643	)		(59	)
Rate change		-			(5,759	)
Permanent items, tax credits and other adjustments		(30	)		118
AMT – Sequestration Reversal (change in law)		-			(1,391	)
Deferred true-ups		-			(126	)
Change in valuation allowance		1,685			6,052
Income tax expense (benefit)	$	(29	)	$	(1,386	)

A reconciliation of the United States federal statutory rate to the Company’s effective income tax rate is as follows:

	Year Ended December 31, 2019			Year Ended December 31, 2018
Tax at statutory federal rate		21.0	%		21.0	%
State income taxes		13.0			5.6
Rate change		-			548.0
Permanent difference, tax credits and other adjustments		0.6			(11.2	)
AMT – Sequestration Reversal (change in law)		-			132.4
Deferred true-ups		-			12.0
Change in valuation allowance		(34.0	)		(575.9	)
Effective income tax rate		0.6	%		131.9	%

For the year ended December 31, 2019, the Company recorded an income tax benefit of $29,000. This amount includes an additional refund of $30,000 received in March 2019 relating to the AMT credit carryforwards partially offset by a $1,000 state tax expense, attributable to a provision for a tax on capital imposed by the state jurisdictions.

For the year ended December 31, 2018, the Company recorded an income tax benefit of $1,386,000. This amount reflects an income tax benefit of $1,391,000 attributable to a release of a valuation allowance in relation to additional AMT credit carryforwards available for refund under the 2017 Tax Act, due to the elimination of reductions for the effect of sequestration amounts. This amount is partially offset by a $5,000 state tax expense, attributable to a provision for a tax on capital imposed by the state jurisdictions.

The Company has not been notified of any potential tax audits by any federal, state or local tax authorities. As such, the Company believes the statutes of limitations for the assessment of additional federal and state tax liabilities are generally closed for tax years prior to 2016. Interest and/or penalties related to uncertain tax positions, if applicable, would be included as a component of income tax expense (benefit). The accompanying financial statements do not include any amounts for interest and/or penalties.

The utilization of net operating loss (“NOL”) carryforwards are subject to limitations under U.S. federal income tax and various state tax laws. Based on the Company’s federal tax returns as filed, the Company estimates it has approximately $114 million of federal NOL carryforwards available to reduce future federal taxable income which if not utilized will begin to expire in 2026 and continue to expire at various dates thereafter. Additionally, based on the Company’s state tax returns as filed and to be filed, the Company estimates that it has approximately $89 million of state NOL carryforwards to reduce future state taxable income which if not utilized will begin to expire in 2031 and continue to expire at various dates thereafter.

AMT credit carryforwards available, which can be used to offset income generated in future years which are not subject to expiration, are as follows:

		Amount
AMT Credits carryforwards		$	5,370,000

As noted above the Company has AMT credit carryforwards from prior tax years. In accordance with the 2017 Tax Act, AMT credit carryforwards are expected to be claimed by the Company as refundable on tax returns filed and/or to be filed in future tax years and at various percentages as noted below.

The Company’s AMT credit carryforward amount(s) projected to be claimed as refundable for each tax year are as follows:

Tax Year (a)	Declining balance of the AMT credit carryforward amount(s) available for each tax year (a)(b)		% of AMT credit carryforward amount(s) available to be claimed as refundable for each tax year			AMT credit carryforward amount(s) projected to be claimed as refundable for each tax year (a)(b)
2020	$	5,370,000		50	%	$	2,685,000
2021		2,685,000		100	%		2,685,000
						$	5,370,000

(a)

Assumes no regular federal income tax liability in tax years presented above which would reduce any AMT credit carryforward amount(s) ultimately refunded.

(b)

See herein with regard the filing of the Company’s 2019 federal income tax return and the March 2020 federal tax refund received.

In January 2020, the Company filed its 2019 federal income tax return seeking a refund of AMT credit carryforwards as provided for in the 2017 Tax Act, which was received by the Company in March 2020. This amount was reflected as a federal tax receivable at December 31, 2019. The remaining AMT credit carryforward amounts, are reflected as a deferred tax asset at December 31, 2019, based on tax returns to be filed in future years. In March 2019, the Company received a federal tax refund based on the Company’s 2018 federal income tax return as filed.

The Company’s management is continuing to work closely with outside advisors on the Company’s tax matters as they relate to the 2017 Tax Act and on the various federal tax return matters for the numerous interrelated tax years, including the provisions and application of the 2017 Tax Act along with the amounts and timing of any AMT credit carryforward refunds. The IRS typically has broad discretion to examine taxpayer tax returns, even after refunds have been paid to taxpayers, which could result in adjustments to AMT credit carryforward amounts refunded and/or claimed as refundable and/or AMT credit carryforward amounts ultimately received. The AMT credit carryforward amounts from prior tax years and related refund(s) received and/or to be received could potentially be subject to IRS or other tax authority audits, including possible IRS Joint Committee review and/or approval. The Company cannot predict whether or not the IRS and/or other tax authorities will review the Company’s tax returns filed, to be filed and/or as filed in prior years, and/or if they will seek repayment from the Company of any amounts already refunded as a result of an IRS review, if any. Moreover, applicable provisions of the Code and IRS regulations permit the IRS to challenge Company tax positions and filed returns and seek recovery of refunded amounts or of additional taxes for an extended period of time after such returns are filed.

The 2017 Tax Act makes broad and complex changes to the Code, including, among other changes, significant changes to the U.S. corporate tax rate and certain other changes to the Code that impact the taxation of corporations. The U.S. Treasury Department, the IRS, and other standard-setting bodies could interpret or issue additional guidance in the future on how provisions of the 2017 Tax Act will be applied or otherwise administered that differs from our interpretation. As we complete our analysis of the 2017 Tax Act, and IRS regulations and guidance issued in respect thereof and collect and prepare necessary data, and interpret any additional guidance, we may make adjustments to provisional amounts that we have recorded that may materially impact our provision for income taxes in the period in which the adjustments are made. Additionally, there is risk relating to assumptions regarding the outcome of tax matters, based in whole or in part upon consultation with outside advisors; risk relating to potential unfavorable decisions in tax proceedings; and risks regarding changes in, and/or interpretations of federal and state income tax laws. The Company can give no assurances as to the final outcome of any IRS review of the AMT credit carryforward refunds already received or the final amount of any future AMT credit carryforward refunds, if any, or when they might be received.

The Company was a plaintiff in a legal proceeding seeking recovery of damages from the United States Government for the loss of the Company’s wholly-owned subsidiary, Carteret Savings Bank, F.A. (the “SGW Legal Proceedings”). A settlement agreement in the SGW Legal Proceedings between the Company, the Federal Deposit Insurance Corporation-Receiver (“FDIC-R”) and the Department of Justice (“DOJ”) on behalf of the United States of America (the “United States”), was executed (the “SGW 2012 Settlement Agreement”) which was approved by the United States Court of Federal Claims (the “Court of Federal Claims”) in October 2012.

As part of the SGW 2012 Settlement Agreement, the Company is entitled to a tax gross-up when any federal taxes are imposed on the settlement amount. Based on the Company’s 2012 federal income tax return as filed, in March 2013, the Company paid $501,000 of federal income taxes attributable to AMT rate calculations (the “2012 Tax Amount”, i.e. $501,000) resulting from the SGW 2012 Settlement Agreement. In May 2013, the Company filed a motion with the Court of Federal Claims seeking a tax gross-up from the United States for the 2012 Tax Amount, plus applicable tax consequences relative to the reimbursement of this amount. Subsequently, Senior Judge Smith filed an order directing the United States to pay AmBase reimbursement for 2012 Tax Amount as provided for in the Settlement Agreement. In September 2013, the Company received reimbursement for the 2012 Tax Amount.

On August 6, 2013, Senior Judge Smith issued an opinion which addressed the relief sought by AmBase. In summary, the court held that the Settlement Agreement is a contract and that it entitles the Company to receive both “(1) the amount of the tax consequences resulting from taxation of the damages award plus (2) the tax consequences of receiving the first component.” But the court did not award additional damages for the second component of the damages at that time given the remaining uncertainty surrounding the ultimate tax treatment of the settlement proceeds and the gross-up, as well as uncertainty relating to the Company’s future income. The Court indicated that either the Company or the government is entitled to seek further relief “if, and when, the facts justify.”

In July 2019, the Company received a letter from the Federal Deposit Insurance Corporation (“FDIC”), requesting the Company reimburse the FDIC for the 2012 Tax Amount that the FDIC had previously reimbursed the Company. The FDIC requested the amount be reimbursed on a pro-rata basis in accordance with the same percentages that the AMT credits are refundable to the Company in accordance with the 2017 Tax Act and as further set forth herein above. The Company is currently reviewing the FDIC request, along with the SGW 2012 Settlement Agreement and Court of Federal Claims August 2013 ruling, with its outside legal and tax advisors. The Company is unable to predict at this time whether the 2012 Tax Amount is refundable back to the FDIC in current and/or future years.

The Company has a deferred tax asset arising primarily from NOL carryforwards and AMT credit carryforwards as follows:

	December 31, 2019			December 31, 2018
Deferred tax asset	$	40,815,000		$	44,501,000
Valuation allowance		(35,445,000	)		(33,760,000	)
Net deferred tax asset recognized	$	5,370,000		$	10,741,000

At December 31, 2017, a valuation allowance was released in relation to the AMT credit carryforwards which are projected to be refundable as part of the 2017 Tax Act enacted in December 2017. In 2018, the Company released its valuation allowance in relation to additional AMT credit carryforwards available for refund (under the 2017 Tax Act), due to the elimination of reductions for the effect of sequestration amounts. A full valuation allowance remains on the remaining deferred tax asset amounts, as management has no basis to conclude that realization is more likely than not. Management does not believe that any significant changes in unrecognized income tax benefits are expected to occur over the next year.