Income Taxes

9 Months Ended

Sep. 30, 2019

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 subsidiaries operate and the earliest tax years subject to examination:



Jurisdiction	Tax Year
United States	2010
New York State	2013
New York City	2015
United Kingdom	2015
Italy	2014

As of September 30, 2019 Ambac estimates it had U.S. federal ordinary net loss carryforwards totaling approximately $3,373,689, which, if not utilized, will begin expiring in 2029, and will fully expire in 2032.

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.

Consolidated Pretax Income (Loss)

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



	Three Months Ended September 30,					Nine Months Ended September 30,
	2019		2018			2019			2018
U.S.	$	59,608	$	(39,832	)	$	(61,204	)	$	271,014
Foreign	9,447		19,884			(11,058		)	23,655
Total	$	69,055	$	(19,948	)	$	(72,262	)	$	294,669

Provision (Benefit) for Income Taxes

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



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Current taxes
U. S. federal	$	—		$	—		$	—		$	—
U.S. state and local	358			424			(2,884		)	2,106
Foreign	3,951			6,164			38,290			8,669
Current taxes	4,309			6,588			35,406			10,775
Deferred taxes
Foreign	(1,370		)	(4,377		)	(2,154		)	(3,964		)
Deferred taxes	(1,370		)	(4,377		)	(2,154		)	(3,964		)
Provision for income taxes	$	2,939		$	2,211		$	33,252		$	6,811

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 income at Ambac Assurance in 2017, Ambac accrued $27,868 of 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 the 2017 tax tolling payment by June 1, 2018. Ambac also agreed to continue to defer receipt of the 2017 tax tolling payment

from Ambac Assurance until such time as OCI consents to the payment. While OCI has not defined the conditions under which it will consent to the 2017 tax tolling payment, OCI has indicated that it will consider a number of factors, including asset quality and loss and reserve trends. We can provide no assurance as to whether, or when, OCI will consent to the 2017 tax tolling payment.

As a result of positive income at Ambac Assurance in 2018, Ambac accrued approximately $16,513 of tax tolling payments, which were paid in July 2019.

For the nine months ended September 30, 2019, Ambac Assurance generated $42,613 of taxable income resulting in additional accrued Tolling Payments of $3,579 which, assuming Ambac Assurance's full year 2019 taxable income does not change, will be paid to Ambac in 2020.

Ambac'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, 2019, the remaining balance of the $3,650,000 NOL allocated to Ambac Assurance was approximately $2,120,508. As of September 30, 2019 Ambac's NOL was approximately$1,253,181.