Income Taxes

6 Months Ended

Jun. 30, 2020

10. INCOME TAXES

AFG files a consolidated Federal income tax return with its subsidiaries. AFG 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	2016
Italy	2015

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 June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
U.S.	$	(50	)	$	(57	)	$	(306	)	$	(121	)
Foreign	17			(43		)	(13		)	(21		)
Total	$	(33	)	$	(100	)	$	(320	)	$	(141	)

Provision (Benefit) for Income Taxes

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



	Three Months Ended June 30,					Six Months Ended June 30,
	2020			2019		2020			2019
Current taxes
U. S. federal	$	—		$	—	$	—		$	—
U.S. state and local	—			—		—			(3		)
Foreign	3			28		1			34
Current taxes	3			28		1			31
Deferred taxes
Foreign	(1		)	—		(6		)	(1		)
Deferred taxes	(1		)	—		(6		)	(1		)
Provision for income taxes	$	2		$	28	$	(4	)	$	30

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, it is obligated to make payments (“Tolling Payments”), subject to certain credits, to AFG 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		15%
B	The next	$1,057	after Tier A	40%
C	The next	$1,057	after Tier B	10%
D	The next	$1,057	after Tier C	15%

As of December 31, 2018, Ambac Assurance generated cumulative taxable income of $1,508, leaving $2,142 of the $3,650 Allocated NOLs subject to Tolling Payments. For the year ended December 31, 2019, and six months ended June 30, 2020, Ambac Assurance generated NOLs of approximately $143 and $137, respectively, which will need to be utilized before any new Tolling Payments will be generated.

If not utilized, the NOLs will begin expiring in 2029, and will fully expire in 2040, with the exception of the tax loss generated during the six months ended June 30, 2020, of approximately $138, which if Ambac remains in a loss position at year end 2020, will expire in 2041.

As a result of positive income at Ambac Assurance in 2017, Ambac accrued $28 of tax tolling payments. In May 2018, AFG 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. AFG 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. OCI has indicated that it will consider a number of factors, including asset quality and loss and reserve trends when considering whether or not to consent to the 2017 tax tolling payment. We can provide no assurance as to whether, or when, OCI will consent to the 2017 tax tolling payment.

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 June 30, 2020, the remaining balance of the $3,650 NOL allocated to Ambac Assurance, and new NOLs accrued during 2019 and 2020, totaled approximately $2,423. As of June 30, 2020, the consolidated group's NOL was approximately $3,674, of which Ambac's NOL was approximately $1,251.