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	2013
United Kingdom	2014
Italy	2013

As of September 30, 2017 Ambac had loss carryforwards totaling $4,259,092. This includes carryforwards of $62,947 relating to U.S. capital losses and an ordinary U.S. federal net operating tax carryforward of approximately $4,196,145, which, if not utilized, will begin expiring in 2029, and will fully expire in 2038. Ambac's capital losses will begin expiring in 2017 and fully expire in 2022.

The tax effects of temporary differences that give rise to significant portions of the deferred tax liabilities and deferred tax assets at September 30, 2017 and December 31, 2016 are presented below:



	September 30, 2017			December 31, 2016
Deferred tax liabilities:
Insurance intangible	$	307,290		$	336,728
Variable interest entities	42,232			46,343
Investments	91,231			38,656
Unearned premiums and credit fees	64,807			68,682
Unremitted foreign earnings	74,459			30,699
Other	4,173			4,276
Total deferred tax liabilities	584,192			525,384
Deferred tax assets:
Net operating loss and capital carryforward	1,490,682			1,409,565
Loss reserves	269,597			224,553
AMT Credits	31,532			31,532
Compensation	4,967			4,759
Other	8,878			11,967
Subtotal deferred tax assets	1,805,656			1,682,376
Valuation allowance	1,223,394			1,158,712
Total deferred tax assets	582,262			523,664
Net deferred tax (liability)	$	(1,930	)	$	(1,720	)

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:



	Three Months Ended September 30,					Nine Months Ended September 30,
	2017			2016		2017			2016
U.S.	$	(211,769	)	$	45,238	$	(428,264	)	$	171,137
Foreign	26,303			71,482		150,930			19,948
Total	$	(185,466	)	$	116,720	$	(277,334	)	$	191,085

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



	Three Months Ended September 30,					Nine Months Ended September 30,
	2017			2016		2017		2016
Current taxes
U. S. federal	$	(617	)	$	2,635	$	—	$	2,711
U.S. state and local	—			191		—		428
Foreign	6,056			12,456		31,902		18,852
Current taxes	5,439			15,282		31,902		21,991
Deferred taxes
Deferred taxes	—			—		—		(114		)
Provision for income taxes	$	5,439		$	15,282	$	31,902	$	21,877

NOL Usage

Pursuant to the Amended TSA (as defined in Note 1. Background and Business Description to the Consolidated Financial Statements included in Part II, Item 8 in the Company's Annual Report on Form 10-K for the year ended December 31, 2016), 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 post determination date NOLs generated by Ambac Assurance 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, 2016, generating cumulative taxable income of $1,086,124. 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 two years ended December 31, 2016, Ambac Assurance utilized all of the $479,000 Tier A NOL and $607,124 of the $1,057,000 Tier B NOL resulting in cumulative 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 nine months ended September 30, 2017, Ambac Assurance generated a new post determination date NOL of $253,843, which must be utilized by Ambac Assurance before further Tolling Payments accrue.

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, to the extent Ambac Assurance generates post-determination date income in excess of the $3,650,000 Allocated NOLs, Ambac Assurance may utilize Ambac's then remaining NOLs in exchange for a payment of 25% of the federal income tax liability that Ambac Assurance would have paid had Ambac's NOLs not been 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 September 30, 2017, the remaining balance of the $4,196,145 NOL allocated to Ambac Assurance was $2,817,719. As of September 30, 2017 Ambac's NOL was $1,378,426.