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Income Taxes | 12 Months Ended
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Dec. 31, 2018
Income Tax Disclosure [Abstract] |
Income Taxes | 14. INCOME TAXES Ambac files a consolidated U.S. 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 | 2014
United Kingdom | 2015
Italy | 2014
U.S. Tax Reform On December 22, 2017, H.R. 1. (commonly referred to as the Tax Cut and Jobs Act or "TCJA") was enacted and significantly changed the tax code effective January 1, 2018. Given the complexity of the TCJA and the limited time between its enactment and the filing of the 2017 financial statements, the SEC issued guidance (SAB 118), which provided a one-year measurement period for companies to finalize the accounting for the impact of the TCJA. In connection with our preliminary analysis of the TCJA, during 2017 Ambac recorded an estimated discrete current benefit of $29,581 related to the repeal of the Alternative Minimum Tax ("AMT") and a deferred tax expense of $31,418 attributable to Ambac UK, resulting in an estimated net cost of $1,886. Ambac completed its accounting of the TCJA during 2018, including the mandatory repatriation of Ambac UK's historical earnings and the limitations on executive compensation, which had previously been disclosed as estimates. A discrete benefit for the TCJA of $1,902 was recorded during 2018 related to the repeal of AMT. Upon the filing of its 2018 through 2021 federal income tax returns, Ambac will receive a total $37,019 of AMT refunds, inclusive of $5,536 of payments relating to the filing of its 2017 tax return. Consolidated Pretax Income (Loss) U.S. and foreign components of pre-tax income (loss) were as follows:
Year Ended December 31, | 2018 |  | 2017 |  | 2016
U.S. | $ | 264,089 |  |  | $ | (450,978 | ) |  | $ | 77,161 |
Foreign | 8,444 |  |  | 166,727 |  |  | 27,865 |
Total | $ | 272,533 |  |  | $ | (284,251 | ) |  | $ | 105,026 |
Provision (Benefit) for Income Taxes The components of the provision (benefit) for income taxes were as follows:
Year Ended December 31, | 2018 |  | 2017 |  | 2016
Current taxes |  |  |  |  |
U. S. federal | $ | (1,902 | ) |  | $ | (29,581 | ) |  | $ | 3,934 |
U.S. state and local | 2,480 |  |  | 2,013 |  |  | 707 |
Foreign | (835 | ) |  | 40,613 |  |  | 26,088 |
Total current taxes | (257 | ) |  | 13,045 |  |  | 30,729 |
Deferred taxes |  |  |  |  |
Foreign | 5,391 |  |  | 31,419 |  |  | (20 | )
Total deferred taxes | $ | 5,391 |  |  | $ | 31,419 |  |  | $ | (20 | )
Provision for income taxes | $ | 5,134 |  |  | $ | 44,464 |  |  | $ | 30,709 |
The total effect of income taxes on net income and stockholders’ equity for the years ended December 31, 2018, 2017 and 2016 is as follows:
Year Ended December 31, | 2018 |  | 2017 |  | 2016
Total income taxes charged to net income | $ | 5,134 |  |  | $ | 44,464 |  |  | $ | 30,709 |
Income taxes charged (credited) to stockholders’ equity: |  |  |  |  |
Unrealized gains (losses) on investment securities | 11,832 |  |  | (30,838 | ) |  | 41,602 |
Unrealized gains (losses) on foreign currency translations | — |  |  | 25,776 |  |  | (58,527 | )
Change in retirement benefits | (371 | ) |  | 446 |  |  | 3,278 |
Credit Risk Changes to Fair Value Options | 161 |  |  | — |  |  | — |
Valuation allowance to equity | (9,095 | ) |  | 4,616 |  |  | 13,647 |
Total charged to stockholders’ equity: | 2,527 |  |  | — |  |  | — |
Total effect of income taxes | $ | 7,661 |  |  | $ | 44,464 |  |  | $ | 30,709 |
Reconciliation of U.S. Federal Statutory Income Tax Rate to Actual Income Tax Rate The tax provisions in the accompanying Consolidated Statements of Total Comprehensive Loss reflect effective tax rates differing from prevailing Federal corporate income tax rates. The following is a reconciliation of these differences:
| 2018 |  | 2017 |  | 2016
Year Ended December 31, | Amount |  | % |  | Amount |  | % |  | Amount |  | %
Tax on income from continuing operations at statutory rate | $ | 57,232 |  |  | 21.0 | % |  | $ | (99,488 | ) |  | 35.0 | % |  | $ | 36,759 |  |  | 35.0 | %
Changes in expected tax resulting from: |  |  |  |  |  |  |  |  |  |  |
Tax-exempt interest | (6,850 | ) |  | (2.5 | )% |  | (6,004 | ) |  | 2.1 | % |  | (1,561 | ) |  | (1.5 | )%
Foreign taxes | 10,494 |  |  | 3.9 | % |  | (17,742 | ) |  | 6.2 | % |  | 26,183 |  |  | 24.9 | %
Substantiation adjustment | (60,077 | ) |  | (22.0 | )% |  | 36,124 |  |  | (12.7 | )% |  | (171,687 | ) |  | (163.5 | )%
Valuation allowance | 5,278 |  |  | 1.9 | % |  | 127,675 |  |  | (44.9 | )% |  | 139,584 |  |  | 132.9 | %
Change in Tax Law | (1,902 | ) |  | (0.7 | )% |  | 1,886 |  |  | (0.7 | )% |  | — |  |  | — | %
Other, net | 959 |  |  | 0.4 | % |  | 2,013 |  |  | (0.7 | )% |  | 1,431 |  |  | 1.4 | %
Tax expense on income from continuing operations | $ | 5,134 |  |  | 1.9 | % |  | $ | 44,464 |  |  | (15.7 | )% |  | $ | 30,709 |  |  | 29.2 | %
Unrecognized Tax Positions A reconciliation of the beginning and ending amount of unrecognized tax benefits for 2018, 2017 and 2016 is as follows:
Year Ended December 31, | 2018 |  | 2017 |  | 2016
Balance, beginning of period | $ | — |  |  | $ | — |  |  | $ | — |
Increases related to prior year tax positions | — |  |  | — |  |  | — |
Decreases related to prior year tax positions | — |  |  | — |  |  | — |
Balance, end of period | $ | — |  |  | $ | — |  |  | $ | — |
Included in these balances at December 31, 2018, 2017 and 2016 are $0, $0 and $0, respectively, of unrecognized tax benefits that, if recognized, would affect the effective tax rate. During the years ended December 31, 2018, 2017 and 2016, Ambac recognized interest of approximately $0, $0 and $0, respectively. Ambac had approximately $0, $0 and $0, for the payment of interest accrued at December 31, 2018, 2017 and 2016, respectively. Deferred Income Taxes The tax effects of temporary differences that give rise to significant portions of the deferred tax liabilities and deferred tax assets at December 31, 2018 and 2017 are presented below:
December 31, | 2018 |  | 2017
Deferred tax liabilities: |  |  |
Insurance intangible | $ | 150,975 |  |  | $ | 177,864 |
Debentures | — |  |  | 28,387 |
Variable interest entities | 19,051 |  |  | 22,817 |
Investments | 26,145 |  |  | 28,798 |
Unearned premiums and credit fees | 48,121 |  |  | 51,485 |
Other | 7,649 |  |  | 9,402 |
Total deferred tax liabilities | 251,941 |  |  | 318,753 |
Deferred tax assets: |  |  |
Net operating loss and capital carryforward | 718,978 |  |  | 775,917 |
Loss reserves | 227,401 |  |  | 264,624 |
Debentures | 22,564 |  |  | — |
Compensation | 9,500 |  |  | 5,585 |
Other | 1,818 |  |  | 2,140 |
Subtotal deferred tax assets | 980,261 |  |  | 1,048,266 |
Valuation allowance | 768,450 |  |  | 763,172 |
Total deferred tax assets | 211,811 |  |  | 285,094 |
Net deferred tax liability | $ | 40,130 |  |  | $ | 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. With respect to Ambac's domestic subsidiaries subject to U.S. tax, 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 taxable income to recover the deferred tax asset and therefore maintains a full valuation allowance. The remaining net deferred tax liability of $40,130 is attributable to Ambac U.K. 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%
Any net operating loss carryforwards ("NOLs") generated by Ambac Assurance after September 30, 2011 are utilized prior to any Allocated NOLs for which Tolling Payments will be due. Ambac Assurance utilized all of its current post determination date NOLs generated from September 30, 2011 through December 31, 2018, generating cumulative taxable income of $1,486,879. Of the bankruptcy related credits available to offset the first $5,000 of payments due under each of the NOL usage Tiers A, B, and C, Ambac Assurance has fully utilized the combined $10,000 of Tier A and Tier B credits. Through December 31, 2018, Ambac Assurance utilized all of the $479,000 Tier A NOL and $1,007,879 of the $1,057,000 Tier B NOL resulting in Tolling Payments, net of applicable credits, of $100,145, of which $71,454 was paid to Ambac in 2016. and $28,691 was paid in 2017. For the tax years ended December 31, 2017 and 2018, Ambac Assurance recorded additional estimated Tolling Payments of $30,496, and $13,885, respectively. 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 $30,496 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 consent to the payment. The 2018 accrued tolling payment of $13,885 is also subject to OCI's review and consent. As of December 31, 2018 Ambac had U.S. federal net operating loss tax carryforwards of approximately $3,423,704, which, if not utilized, will begin expiring in 2029, and will fully expire in 2032. The remaining balance of the NOL allocated to Ambac Assurance was $2,163,121 and Ambac was $1,260,583.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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