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	2010
New York City	2011
United Kingdom	2009
Italy	2009

As of December 31, 2014 Ambac had loss carryforwards totaling $5,401,573. This includes carryforwards of $167,004 relating to U.S. capital losses, $248,363 of Ambac UK loss carryforwards, and an ordinary U. S. federal net operating tax carryforward of approximately $4,986,206, which, if not utilized, will begin expiring in 2029, and will fully expire in 2034.

On April 30, 2013, Ambac paid to the United States Department of the Treasury $1,900 and the Segregated Account paid the United States Department of Treasury $100,000 as consideration to settle certain disputes with the Internal Revenue Service. Upon confirmation of payment, Ambac and the Internal Revenue Service entered into a closing agreement on April 30, 2013 which resolved with finality all federal income tax liability of Ambac for the 2003 through 2009 tax years and resolved with finality the federal income tax liability of Ambac for the 2010 tax year solely with respect to items of income, gain, deductions or loss related to the CDS contracts. Ambac relinquished 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 carryforward relinquishment was $1,059,988. The closing agreement does not resolve the tax treatment of CDS contracts for tax years subsequent to 2010.

Upon emergence from bankruptcy, approximately $816,380 of the Net Operating Loss (“NOL”) was reduced for cancellation of indebtedness income and reduction of interest expense pursuant to IRC Section 382(l)(5).

The tax effects of temporary differences that give rise to significant portions of the deferred tax liabilities and deferred tax assets at December 31, 2014 and 2013 are presented below:



	December 31,
	2014			2013
Deferred tax liabilities:
Insurance intangible	$	493,822		$	559,288
Variable interest entities	14,149			131,137
Investments	138,072			168,653
Unearned premiums and credit fees	104,589			38,826
Other	33,835			2,221
Total deferred tax liabilities	784,467			900,125
Deferred tax assets:
Net operating loss and capital carryforward	1,890,551			2,177,029
Loss reserves	185,881			634,692
Compensation	5,276			8,724
AMT Credits	10,359			4,269
Other	9,539			58,581
Sub total deferred tax assets	2,101,606			2,883,295
Valuation allowance	1,319,218			1,985,369
Total deferred tax assets	782,388			897,926
Net deferred tax asset (liability)	$	(2,079	)	$	(2,199	)

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.

Ambac’s provision for income taxes charged to income from continuing operations is comprised of the following:



	Successor Ambac				Predecessor Ambac
			Period from May 1		Period from January 1
	Year Ended		through		through			Year Ended
	December 31, 2014		December 31, 2013		April 30, 2013			December 31, 2012
Current taxes	$	9,463	$	6,984	$	761		$	1,263
Deferred taxes	94		530		(6		)	1,586
Total	$	9,557	$	7,514	$	755		$	2,849

The total effect of income taxes on net income and stockholders’ equity for the years ended December 31, 2014 and 2013 is as follows:



	Successor Ambac						Predecessor Ambac
				Period from May 1			Period from January 1
	Year Ended			through			through			Year Ended
	December 31, 2014			December 31, 2013			April 30, 2013			December 31, 2012
Total income taxes charged to net income	$	9,557		$	7,514		$	755		$	2,849
Income taxes charged (credited) to stockholders’ equity:
Unrealized gains (losses) on investment securities	73,306			284			(204,145		)	18,448
Valuation allowance to equity	(73,306		)	(284		)	204,145			(18,448		)
Total charged to stockholders’ equity:	—			—			—			—
Total effect of income taxes	$	9,557		$	7,514		$	755		$	2,849

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:



	Successor Ambac								Predecessor Ambac
					Period from May 1				Period from January 1
	Year Ended				through				through				Year Ended
	December 31, 2014				December 31, 2013				April 30, 2013				December 31, 2012
	$		%		$		%		$		%		$		%
Tax on income from continuing operations at statutory rate	172,639		35.0	%	179,311		35.0	%	1,171,812		35.0	%	(89,777	)	35.0	%
Changes in expected tax resulting from:
Reorganization income	—		—	%	—		—	%	(712,581	)	(21.3	)%	—		—	%
Tax bankruptcy adjustments	—		—	%	—		—	%	285,734		8.5	%	—		—	%
IRS Settlement	—		—	%	—		—	%	370,996		11.1	%	—		—	%
Tax-exempt interest	(6,811	)	(1.4	)%	(11,988	)	(2.3	)%	(4,996	)	(0.1	)%	(17,795	)	6.9	%
Valuation allowance	(159,661	)	(32.4	)%	(160,064	)	(31.2	)%	(1,110,230	)	(33.2	)%	107,502		(41.9	)%
Foreign taxes	3,472		0.7	%	—		—	%	—		—	%	—		—	%
Other, net	(82	)	—	%	255		—	%	20		—	%	2,919		(1.1	)%
Tax expense on income from continuing operations	9,557		1.9	%	7,514		1.5	%	755		—	%	2,849		(1.1	)%

A reconciliation of the beginning and ending amount of unrecognized tax benefits for 2014 and 2013 is as follows:



	Successor Ambac		Predecessor Ambac
		Period from May 1	Period from January 1
	Year Ended	through	through		Year Ended
	December 31, 2014	December 31, 2013	April 30, 2013		December 31, 2012
Balance at January 1,	—	—	96,900		96,900
Increases related to prior year tax positions	—	—	—		—
Decreases related to prior year tax positions⁽¹⁾	—	—	(96,900	)	—
Balance at December 31,	—	—	—		96,900


(1)	Amount paid in connection with IRS settlement as noted above.

Included in these balances at December 31, 2014, December 31, 2013, April 30, 2013 and December 31, 2012 are $0, $0, $0 and $96,900, respectively, of unrecognized tax benefits that, if recognized, would affect the effective tax rate. During the Successor period for the year ended December 31, 2014 and from May 1 to December 31, 2013, the Predecessor period January 1 to April 30, 2013 and the year ended December 31, 2012, Ambac recognized interest of approximately $0, $0, $0 and $0, respectively. Ambac had approximately $0, $0, $0 and $0 for the payment of interest accrued at December 31, 2014, December 31, 2013, April 30, 2013 and December 31, 2012, respectively.

Pursuant to the Amended TSA, to the extent Ambac Assurance generates taxable income after September 30, 2011, which is offset with NOLs (or the proportionate amount of AMT NOL (as defined below)), 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:

NOL Usage Table



NOL Usage Tier	Allocated NOLs⁽¹⁾			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%


(1)	A credit is available to offset the first $5 million payment due under each of the NOL usage Tiers A, B and C.

To the extent Ambac Assurance utilizes Allocated NOLs generated prior to September 30, 2011 greater than $3,650,000 it is obligated to pay Ambac 25% of the federal income tax liability that would have been paid if the NOLs were not available.

Ambac Assurance has utilized all of its current post determination date NOLs generated from September 30, 2011 through December 31, 2014 (post determination date NOLs); however, additional post determination date NOLs may be generated in the future. During this time period, Ambac Assurance's cumulative net taxable income was approximately $43,743.

Future taxable income of Ambac Assurance will be subject to payments by NOL usage tier and after certain credits and any additional post determination date NOLs, under its NOL tolling agreement with Ambac. A credit is available to offset the first $5,000 of payments due under each of the NOL usage Tiers A, B, and C. Ambac Assurance used approximately $2,297 of its Tier A credit.

The NOL allocable to AFG as of December 31, 2014 is $1,379,082.