Note 13. Income Taxes

12 Months Ended

Dec. 31, 2012

Notes

Note 13. Income Taxes

13.  Income Taxes

As of December 31, 2012, the Company and its subsidiaries filed a consolidated Federal income tax return on a September 30 fiscal year.  Effective January 15, 2013, the Company will be included in the consolidated Federal income tax returns of IHC on a June 30 fiscal year as a result of the increase in IHC’s ownership interest in AMIC to over 80%.  Accordingly, the Company will change from a September 30 fiscal tax year to a June 30 fiscal tax year in 2013.  The provision for income taxes for the periods ended December 31, 2012, 2011 and 2010 are as follows (in thousands):

		Year Ended
		December 31,
		2012		2011		2010
CURRENT:
U.S. Federal	$	61	$	-	$	36
State and local		14		(82)		(99)
		75		(82)		(63)
DEFERRED:
U.S. Federal		(4,032)		1,258		1,023
State and local		67		131		131
		(3,965)		1,389		1,154
	$	(3,890)	$	1,307	$	1,091

            Taxes computed at the federal statutory rate of 35% for the years ended December 31, 2012, 2011 and 2010 are reconciled to the Company's actual income tax expense as follows (in thousands):

		2012		2011		2010
Tax computed at the statutory rate	$	1,996	$	1,330	$	1,117
Dividends received deduction and tax exempt interest		(53)		(59)		(55)
State and local income taxes, net of federal effect		53		32		21
Valuation allowance		(5,900)		-		-
Other, net		14		4		8
Income tax	$	(3,890)	$	1,307	$	1,091

The current federal income tax provision for the periods ending December 31, 2012, 2011 and 2010 represents only federal alternative minimum tax due to the Company’s federal net operating loss carryforwards.  

The tax effect of temporary differences that give rise to significant portions of the net deferred tax assets at December 31, 2012 and 2011 are as follows (in thousands):

		2012		2011
DEFERRED TAX ASSETS:
Investments	$	194	$	216
Compensation accruals		1,068		1,032
Insurance reserves		267		119
Net operating loss carryforwards		97,169		98,067
Total gross deferred tax assets		98,698		99,434
Less valuation allowance		(78,572)		(84,665)
Net deferred tax assets		20,126		14,769
DEFERRED TAX LIABILITIES:
Goodwill		(988)		(750)
MGU partnership income		(5,198)		(4,400)
Unrealized securities gains		(646)		(447)
Other		(270)		(180)
State taxes		(506)		(442)
Total gross deferred tax liabilities		(7,608)		(6,219)
Net deferred tax asset	$	12,518	$	8,550

During the year ended December 31, 2012 and 2011 the Company decreased its valuation allowance by $6,093,000 and $1,394,000, respectively.  The December 31, 2012 valuation allowance decrease included $5,900,000 for the projected utilization of federal net operating losses which was allocated to operations.  The valuation allowance at December 31, 2012 and 2011 was primarily related to net operating loss carryforwards that, in the judgment of management, were not considered realizable.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Management believes that it is more likely than not that the Company will realize the benefits of these net deferred tax assets recorded at December 31, 2012.

At December 31, 2012, the Company had federal NOL carryforwards of approximately $271,770,000 expiring in varying amounts through the year 2031 with a significant portion expiring in 2021.

At December 31, 2012, the Company also had NOL carryforwards of approximately $25,814,000 for state income tax purposes, in the State of California.  Management believes that it is more likely than not that the state tax benefit of these net operating loss carryforwards will not be realized and has provided a valuation allowance against the full amount.

The Internal Revenue Service has previously audited the Company’s 2003, 2004 and 2009 consolidated income tax returns and made no changes to the reported tax for those periods.  Management believes that it has made adequate provision for all income tax uncertainties, such that the outcome of any unresolved issues or claims will not result in a material change to our financial position or results of operations.

Interest expense and penalties related to unrecognized tax benefits for the years ended December 31, 2012, 2011 and 2010 are insignificant.

AMIC's ability to utilize its federal NOL carrryforwards would be substantially reduced if AMIC were to undergo an "ownership change" within the meaning of Section 382(g)(1) of the Internal Revenue Code. AMIC will be treated as having had an "ownership change" if there is more than a 50% increase in stock ownership during a three year '"testing period" by "5% stockholders."  In order to reduce the risk of an ownership change, in November 2002, AMIC's stockholders approved an amendment to its certificate of incorporation restricting transfers of shares of its common stock that could result in the imposition of limitations on the use, for federal, state and city income tax purposes, of AMIC's NOL carryforwards and certain federal income tax credits.  The certificate of incorporation generally restricts any person from attempting to sell, transfer or dispose, or purchase or acquire any AMIC stock, if such transfer would affect the percentage of AMIC stock owned by a 5% stockholder.  Any person attempting such a transfer will be required, prior to the date of any proposed transfer, to request in writing that the board of directors review the proposed transfer and authorize or not authorize such proposed transfer.  Any transfer attempted to be made in violation of the stock transfer restrictions will be null and void.  In the event of an attempted or purported transfer involving a sale or disposition of capital stock in violation of stock transfer restrictions, the transferor will remain the owner of such shares.  Notwithstanding such transfer restrictions, there could be circumstances under which an issuance by AMIC of a significant number of new shares of common stock or other new class of equity security having certain characteristics (for example, the right to vote or convert into Common Stock) might result in an ownership change under the Code.

As of December 31, 2012, AMIC believes there were no material uncertain tax positions that would require disclosure under GAAP.