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 affiliates operate and the earliest tax years subject to examination:


Jurisdiction	Tax Year
United States		2010
New York State		2008
New York City		2011
United Kingdom		2006
Italy		2007

Effective as of April 30, 2013, Ambac, the Creditors’ Committee, Ambac Assurance, the Segregated Account, OCI, and the Rehabilitator concluded a settlement with the United States Internal Revenue Service (“IRS”) and the Department of Justice of Ambac’s dispute with the IRS and related proceedings which included the following terms: (i) a payment by the Segregated Account of $100,000; (ii) a payment by Ambac of $1,900; (iii) the Ambac consolidated tax group relinquished its claim to all loss carry-forwards resulting from losses on credit default swap contracts and arising on or before December 31, 2010 to the extent such loss carry-forwards exceed $3,400,000 (the amount of the loss carry-forward relinquishment is $1,059,988); and (iv) paying the IRS 12.5% and 17.5% of certain payments to Ambac by Ambac Assurance under the intercompany tax sharing agreement (the “IRS Settlement”). Upon emergence from bankruptcy, approximately $816,380 of the NOL was reduced for cancellation of indebtedness income and reduction of interest expense pursuant to IRC Section 382 (l)(5).

As of June 30, 2013 Ambac has an ordinary U. S. federal net operating tax carryforward of approximately $5,151,410, which if not utilized, will begin expiring in 2029 and will fully expire in 2034.

The tax effects of temporary differences that give rise to significant portions of the deferred tax liabilities and deferred tax assets at June 30, 2013 and December 31, 2012 are presented below:


	Successor Ambac – June 30, 2013			Predecessor Ambac – December 31, 2012
Deferred tax liabilities:
Insurance intangible	$	567,564		$	—
Variable interest entities		—			22,015
Deferred acquisition costs		—			57,262
Unearned premiums and credit fees		6,165			22,714
Unrealized gains on investments		4,041			—
Other		1,907			17,251

Total deferred tax liabilities		579,677			119,242

Deferred tax assets:
Variable interest entities		59,710			—
Unrealized losses & impairments on investments		—			12,605
Net operating loss and capital carryforward		2,137,334			2,857,926
Loss reserves		833,823			490,677
Compensation		7,876			7,184
Other		3,012			5,687

Sub-total deferred tax assets		3,041,755			3,374,079
Valuation allowance		2,463,642			3,256,423

Total deferred tax assets		578,113			117,656

Net deferred tax liability	$	(1,564	)	$	(1,586	)

As a result of the potential development of additional losses and the related impact on the Company’s cash flows, 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 had a full valuation allowance.