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AIG Sues IRS for Refund While Accepting New Federal Bailout Funds

Posted on March 3, 2009 by Amy S. Elliott
Document originally published in Tax Notes Today
on March 3, 2009.


Just days after struggling insurance giant American International Group Inc. sued the government for more than $306 million over a tax dispute, the Treasury Department announced that it would make another $30 billion available to AIG.

On February 26 AIG filed a complaint with the U.S. District Court for the Southern District of New York seeking a refund of taxes, penalties, and interest it paid in connection with its 1997 return.

Although the suit involves several issues, the most controversial is AIG's allegation that the IRS improperly disallowed some claimed for eign tax credits. Attorneys for AIG released a statement in connection with the suit, saying "AIG is taking this action to insure that it is not required to pay more than its fair share of taxes."


Foreign Tax Credit Generators


The United States' FTC regime was created to prevent double taxation of foreign income. According to the Service, FTC generators exploit this regime by enabling taxpayers to get the U.S. credit while incurring no foreign tax.

FTC generators are one of only nine active high-risk Tier I issues identified by the Service. (The IRS recently revised its issue directive for FTC Generators. See Doc 2009-4001or 2009 TNT 34-14. For prior coverage, see Doc 2009-4475 or 2009 TNT 38-3.)

AIG's complaint outlines seven different cross-border transactions for which AIG claims it is entitled to FTCs. Only a small portion — $61 million — of the total claim constitutes the amount of FTCs disallowed by the IRS. Although the complaint states that AIG subsidiaries paid some $61 million in foreign taxes entitling them to the claimed FTCs, in a typical FTC generator transaction the subsidiary would find a way to claim an exemption from the foreign tax while keeping the FTC.

The suit was not unexpected. AIG filed a deficiency-related refund claim for its 1997 tax year at the end of August 2008, but the IRS has not yet rendered a decision on the issue, according to the complaint. In a November Securities and Exchange Commission filing, AIG announced its intention to challenge the IRS's decision to disallow claimed FTCs for its 1997, 1998, and 1999 tax years.


AIG's Financial Troubles


The day after filing the suit, AIG reported a $61.7 billion quarterly corporate loss — the biggest corporate quarterly loss ever reported by a U.S. company. On March 2 Treasury announced plans to make available another $30 billion to AIG and relax the terms of financial assistance provided under previous AIG bailouts. This marks the fourth time the government has provided assistance to what the Treasury views as a "systemically important company."

This latest bailout brings the total Troubled Asset Relief Program assistance provided to AIG to $70 billion — not to mention the $150 billion worth of government loans extended to the company. The government first stepped in to help AIG in September 2008.

In a March 2 release, AIG Chairman and CEO Edward M. Liddy said, "We have concluded, along with Treasury and the Federal Reserve, that additional tools are needed to enable success. The measures announced today provide the necessary U.S. government support for a plan to establish separate capital structures, including outside ownership, for certain AIG companies."