15. 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 affiliates operate and the earliest tax years subject to examination:



Jurisdiction	Tax Year
United States	2010
New York State	2012
New York City	2012
United Kingdom	2012
Italy	2011

As of December 31, 2016 Ambac had loss carryforwards totaling $4,027,329. This includes carryforwards of $74,094 relating to U.S. capital losses and $3,953,235 relating to U.S. federal net operating losses, which, if not utilized, will begin expiring in 2029, and will fully expire in 2033.

The tax effects of temporary differences that give rise to significant portions of the deferred tax liabilities and deferred tax assets at December 31, 2016 and 2015 are presented below:



December 31,	2016			2015
Deferred tax liabilities:
Insurance intangible	$	336,728		$	424,239
Variable interest entities	46,343			10,053
Investments	38,656			66,278
Unearned premiums and credit fees	68,682			98,945
Unremitted foreign earnings	30,699			—
Other	4,276			34,025
Total deferred tax liabilities	525,384			633,540
Deferred tax assets:
Net operating loss and capital carryforward	1,409,565			1,504,569
Loss reserves	224,553			122,635
AMT Credits	31,532			27,252
Other	16,726			12,752
Sub total deferred tax assets	1,682,376			1,667,208
Valuation allowance	1,158,712			1,035,873
Total deferred tax assets	523,664			631,335
Net deferred tax asset (liability)	$	(1,720	)	$	(2,205	)

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 taxable income to recover the deferred tax operating asset and therefore has a full valuation allowance.

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



Year Ended December 31,	2016		2015		2014
U.S.	$	77,161	$	337,753	$	444,653
Foreign	27,865		172,305		48,600
Total	$	105,026	$	510,058	$	493,253

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



Year Ended December 31,	2016			2015		2014
Current taxes
U. S. federal	$	3,934		$	16,893	$	6,085
U.S. state and local	707			182		—
Foreign	26,088			2		3,378
Current taxes	30,729			17,077		9,463
Deferred taxes
Deferred taxes	(20		)	287		94
Provision for income taxes	$	30,709		$	17,364	$	9,557

The total effect of income taxes on net income and stockholders’ equity for the years ended December 31, 2016, 2015 and 2014 is as follows:



Year Ended December 31,	2016			2015			2014
Total income taxes charged to net income	$	30,709		$	17,364		$	9,557
Income taxes charged (credited) to stockholders’ equity:
Unrealized gains (losses) on investment securities	41,602			(55,906		)	88,411
Unrealized gains (losses) on foreign currency translations	(58,527		)	(15,628		)	(15,108		)
Change in retirement benefits	3,278			(240		)	(285		)
Valuation allowance to equity	13,647			71,774			(73,018		)
Total effect of income taxes	$	30,709		$	17,364		$	9,557

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:



	2016					2015					2014
Year Ended December 31,	Amount			%		Amount			%		Amount			%
Tax on income from continuing operations at statutory rate	$	36,759		35.0	%	$	178,521		35.0	%	$	172,639		35.0	%
Changes in expected tax resulting from:
Tax-exempt interest	(1,561		)	(1.5	)%	(1,454		)	(0.3	)%	(6,811		)	(1.4	)%
Goodwill impairment	—			—	%	180,079			35.3	%	—			—	%
Foreign taxes	26,183			24.9	%	288			0.1	%	3,472			0.7	%
Deferred tax substantiation adjustment	(171,687		)	(163.5	)%	—			—	%	—			—	%
Valuation allowance	139,584			132.9	%	(340,133		)	(66.7	)%	(159,661		)	(32.4	)%
Other, net	1,431			1.4	%	63			—	%	(82		)	—	%
Tax expense on income from continuing operations	$	30,709		29.2	%	$	17,364		3.4	%	$	9,557		1.9	%

A reconciliation of the beginning and ending amount of unrecognized tax benefits for 2016, 2015 and 2014is as follows:



Year Ended December 31,	2016		2015		2014
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, 2016, 2015 and 2014 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, 2016, 2015 and 2014, 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, 2016, 2015 and 2014, respectively.

NOL Usage

Pursuant to the Amended TSA, 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.

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)	Bankruptcy-related credits offset the first $5 million payment due under each of the NOL usage Tiers A, B and C. Pursuant to the Internal Revenue Service closing agreement the United States Department of Treasury receives 12.5% of Tier C and 17.5% of Tier D Tolling Payments.

Any post determination date NOLs generated by Ambac Assurance are utilized prior to any Allocated NOLs for which Tolling Payments will be due. Ambac Assurance has utilized all of its current post determination date NOLs generated from September 30, 2011 through December 31, 2015 and December 31, 2016, generating cumulative taxable income of $877,313 and $1,086,124, respectively. Additional post determination date NOLs may be generated (and utilized prior to any Allocated NOLs for which Tolling Payments will be due) in the future. 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. For the year ended December 31, 2015, Ambac Assurance utilized all of the $479,000 Tier A NOL and $402,192 of the $1,057,000 Tier B NOL resulting in a Tolling Payment, net of applicable credits, of $71,454 that was paid to Ambac in 2016. For the year ended December 31, 2016 , Ambac Assurance's utilization of $204,932, of the $1,057,000 allocated Tier B NOL resulted in additional accrued Tolling Payments, net of applicable credits, of $28,691. Tolling Payments due as a result of 2016 taxable income will be paid to Ambac in May 2017 (subject to review by the Rehabilitator).

To the extent Ambac Assurance utilizes Allocated NOLs generated prior to September 30, 2011 greater than $3,650,000, beginning on the fifth anniversary date subsequent to Ambac's May 1, 2013 emergence from bankruptcy, and subject to Ambac's consent, not to be unreasonably withheld, Ambac Assurance may utilize Ambac's NOL in exchange for a payment to Ambac of 25% of the federal income tax liability that Ambac Assurance would have been paid if the NOLs were not available.

After Ambac fully utilizes its Allocated NOLs it may utilize Ambac Assurance's then remaining Allocated NOLs in exchange for a payment of 50% of the federal income tax liability that Ambac would have paid had Ambac Assurance's NOL not been available.

As of December 31, 2016, the remaining balance of the $3,650,000 NOL allocated to Ambac Assurance was $2,563,876. As of December 31, 2016 Ambac's NOL was $1,389,359.