11. 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		2010
New York State		2008
New York City		2011
United Kingdom		2006
Italy		2007

As of September 30, 2013 Ambac had loss carryforwards totaling $6,031,251. This includes carryforwards of $623,446 relating to U.S. capital losses, $311,031 of Ambac UK loss carryforwards, and an ordinary U. S. federal net operating tax carryforward of approximately $5,096,774, which, if not utilized, will begin expiring in 2029, and will fully expire in 2034.

The tax effects of temporary differences that give rise to significant portions of the deferred tax liabilities and deferred tax assets at September 30, 2013 and December 31, 2012 are presented below:


	Successor Ambac – September 30, 2013			Predecessor Ambac – December 31, 2012
Deferred tax liabilities:
Insurance intangible	$	567,333		$	—
Variable interest entities		21,755			22,015
Deferred acquisition costs		—			57,262
Unearned premiums and credit fees		8,453			22,714
Unrealized gains on investments		12,823			—
Other		1,955			17,251

Total deferred tax liabilities		612,319			119,242

Deferred tax assets:
Unrealized losses & impairments on investments		—			12,605
Net operating loss and capital carryforward		2,110,938			2,857,926
Loss reserves		777,991			490,677
Compensation		8,030			7,184
Other		3,422			5,687

Sub-total deferred tax assets		2,900,381			3,374,079
Valuation allowance		2,289,673			3,256,423

Total deferred tax assets		610,708			117,656

Net deferred tax liability	$	(1,611	)	$	(1,586	)

In accordance with the Income Tax Topic of the ASC, a valuation allowance is recognized if, based on the weight of available evidence, it is more-likely-than-not that some or all of the deferred tax asset will not be realized. Recent cumulative losses are a significant piece of negative evidence in assessing whether a valuation allowance is required. As a result of Ambac’s history of operating losses as well as the risks and uncertainties associated with future operating results, management believes it is more likely than not that the Company will not generate sufficient taxable income to recover the deferred tax operating asset and therefore has a full valuation allowance.