10. 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

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 outstanding disputes with the IRS 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 (as described in the Amended TSA) and the IRS will be paid 17.5% of any payment to Ambac by Ambac Assurance associated with NOL Usage Tier D (as described in the Amended TSA). 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 has been provided for 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:


	For the three month period ended March 31,
	2012		2011
Current taxes	$	300	$	2,350
Deferred taxes		—		—

	$	300	$	2,350

The total effect of income taxes on net income and stockholders' equity for the three month period ended March 31, 2012 and the year ended December 31, 2011 is as follows:


	2012			2011
Total income taxes charged to net income	$	300		$	77,422

Income taxes charged (credited) to stockholders' equity:
Unrealized gains (losses) on investment securities		(18,217	)		58,597
Valuation Allowance to Equity		18,217			(58,597	)

Total charged to stockholders' equity:		—			—

Total effect of income taxes	$	300		$	77,422

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 March 31, 2012, the company had a valuation allowance of $3,103,614.

As of March 31, 2012 Ambac has an ordinary U. S. federal net operating tax carryforward of approximately $7,348,824, which if not utilized will begin expiring in 2028 and will fully expire in 2032. As disclosed above, to settle outstanding disputes with the IRS 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.