Income Taxes

9 Months Ended

Sep. 30, 2018

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 subsidiaries operate and the earliest tax years subject to examination:



Jurisdiction	Tax Year
United States	2010
New York State	2013
New York City	2013
United Kingdom	2015
Italy	2013

As of September 30, 2018 Ambac had U.S. federal ordinary net loss carryforwards totaling approximately $3,549,614, which, if not utilized, will begin expiring in 2029, and will fully expire in 2032.

The tax effects of temporary differences that give rise to significant portions of the deferred tax liabilities and deferred tax assets at September 30, 2018 and December 31, 2017 are presented below:



	September 30, 2018			December 31, 2017
Deferred tax liabilities:
Insurance intangible	$	158,704		$	177,864
Debentures	—			28,387
Unearned premiums and credit fees	50,386			51,485
Variable interest entities	17,265			22,817
Investments	51,704			28,798
Other	9,507			9,402
Total deferred tax liabilities	287,566			318,753
Deferred tax assets:
Net operating loss and capital carryforward	745,419			775,917
Loss reserves	230,768			264,624
Debentures	24,219			—
Compensation	7,935			5,585
Other	1,819			2,140
Subtotal deferred tax assets	1,010,160			1,048,266
Valuation allowance	750,131			763,172
Total deferred tax assets	260,029			285,094
Net deferred tax (liability)	$	(27,537	)	$	(33,659	)

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. As a result of the risks and uncertainties associated with future operating results, management believes it is more likely than not that the Company will not generate sufficient U.S. federal, state and/or local taxable income to recover the deferred tax operating assets and therefore maintains a full valuation allowance.

In accordance with SEC issued guidance (SAB 118), which provides a one-year measurement period for companies to finalize the accounting for the impact of the TCJA, during the three months ended September 30, 2018, Ambac concluded that the tax effect related to limitations on executive compensation resulted in a reduction of the deferred tax asset for Compensation of $423. Ambac continues to record the income tax effect of provisions related to the TCJA's repatriation of Ambac UK's earnings and profits as an estimate.

U.S. and foreign components of pre-tax income (loss) were as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018		2017
U.S.	$	(39,832	)	$	(211,769	)	$	271,014	$	(428,263	)
Foreign	19,884			26,303			23,655		150,929
Total	$	(19,948	)	$	(185,466	)	$	294,669	$	(277,334	)

The components of the provision for income taxes were as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Current taxes
U. S. federal	$	—		$	(617	)	$	—		$	—
U.S. state and local	424			—			2,106			—
Foreign	6,164			6,056			8,669			31,902
Current taxes	6,588			5,439			10,775			31,902
Deferred taxes
Foreign	(4,377		)	—			(3,964		)	—
Deferred taxes	(4,377		)	—			(3,964		)	—
Provision for income taxes	$	2,211		$	5,439		$	6,811		$	31,902

NOL Usage

Pursuant to the intercompany tax sharing agreement, to the extent Ambac Assurance generates taxable income after September 30, 2011, which is offset with "Allocated NOLs" of $3,650,000, it is obligated to make payments (“Tolling Payments”), subject to certain credits, to Ambac in accordance with the following NOL usage table, where the “Applicable Percentage” is applied to the aggregate amount of federal income tax liability that would have been paid if the Allocated NOLs were not available. Pursuant to the Closing Agreement between Ambac and the Internal Revenue Service ("IRS"), the IRS will receive 12.5% of Tier C and 17.5% of Tier D payments, if made.

NOL Usage Table



NOL Usage Tier	Allocated NOLs			Applicable Percentage
A	The first	$479,000		15%
B	The next	$1,057,000	after Tier A	40%
C	The next	$1,057,000	after Tier B	10%
D	The next	$1,057,000	after Tier C	15%

As a result of positive taxable income at Ambac Assurance in 2017, Ambac has accrued approximately $30,496 in tax tolling payments. In May 2018, Ambac executed a waiver under the intercompany tax sharing agreement pursuant to which Ambac Assurance was relieved of the requirement to make this payment by June 1, 2018. Ambac has also agreed to continue to defer the tolling payment for the use of net operating losses by Ambac Assurance until such time as OCI consents to the payment.

For the nine months ended September 30, 2018, Ambac Assurance generated $131,201 of taxable income, resulting in additional accrued Tolling Payments, net of applicable credits, of $11,021, which, assuming Ambac Assurance's full year 2018 taxable income does not change, will be paid to Ambac in 2019. Ambac Assurance's tax positions are subject to review by the OCI, which may lead to the adoption of positions that reduce the amount of tolling payments otherwise available to Ambac.

As of September 30, 2018, the remaining balance of the $3,549,614 NOL allocated to Ambac Assurance was $2,151,004. As of September 30, 2018 Ambac's NOL was $1,398,610.