11. 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 March 31, 2018 Ambac had U.S. federal ordinary net loss carryforwards totaling approximately $3,279,491, which, if not utilized, will begin expiring in 2029, and will fully expire in 2032.

The tax effects of temporary differences that give rise to significant portions of the deferred tax liabilities and deferred tax assets at March 31, 2018 and December 31, 2017 are presented below:



	March 31, 2018			December 31, 2017
Deferred tax liabilities:
Insurance intangible	$	174,938		$	177,864
Debentures	53,274			28,387
Unearned premiums and credit fees	50,569			51,485
Variable interest entities	23,221			22,817
Investments	19,003			28,798
Other	11,722			9,402
Total deferred tax liabilities	332,727			318,753
Deferred tax assets:
Net operating loss and capital carryforward	688,693			775,917
Loss reserves	298,888			264,624
Compensation	6,819			5,585
Other	1,819			2,140
Subtotal deferred tax assets	996,219			1,048,266
Valuation allowance	698,296			763,172
Total deferred tax assets	297,923			285,094
Net deferred tax (liability)	$	(34,804	)	$	(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. 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 taxable income to recover the deferred tax operating asset and therefore has a full valuation allowance.

In accordance with SEC issued guidance (SAB 118), which provides a one-year measurement period for companies to finalize the accounting for the impact of the TCJA, Ambac continues to record the income tax effect of provisions related to international and executive compensation as estimates.

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



	Three Months Ended March 31,
	2018		2017
U.S.	$	297,741	$	(191,872	)
Foreign	10,568		86,012
Total	$	308,309	$	(105,860	)

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



	Three Months Ended March 31,
	2018			2017
Current taxes
U. S. federal	$	—		$	—
U.S. state and local	1,037			320
Foreign	(39		)	19,261
Current taxes	998			19,581
Deferred taxes
Foreign	1,607			—
Provision for income taxes	$	2,605		$	19,581

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%

For the three months ended March 31, 2018, Ambac Assurance generated $406,232 of taxable income, utilizing the remaining $168,205 balance of the $1,057,000 allocated Tier B NOL, and resulting in additional accrued Tolling Payments, net of applicable credits, of $14,129, which, assuming Ambac Assurance's cumulative full year 2018 taxable income does not fall below $168,205, will be paid to Ambac before the end of May of 2019. In addition, Ambac Assurance utilized $238,026 of Tier C NOL, which was applied against the $5,000 Tier C credit. Ambac Assurance will need to generate additional taxable income of $69 to offset the remaining balance of the $5,000 Tier C credit, at which point additional cumulative income will begin to accrue additional tolling payments to Ambac until all the of $3,650,000 Allocated Ambac Assurance NOLs have been utilized, expire, or otherwise become unavailable.

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 March 31, 2018, the remaining balance of the $3,279,491 NOL allocated to Ambac Assurance was $1,875,973. As of March 31, 2018 Ambac's NOL was $1,403,518.