Tax Law Blog | IRS Tax Attorneys

AIG has revealed that they are suing the IRS for $329 million, claiming a refund for back taxes and penalties. Hmm, I wonder if they’ll return some of that bailout money if they win?

Oh wait. They won’t win.

That’s because the IRS has already labeled the transactions “abusive” and penalized the company for taking tax credits associated with “cross-border financing transactions.” Though details are sketchy, the WSJ suggests that AIG was allowing its overseas subsidiaries to pay foreign taxes and then claiming a US tax credit for paying those taxes which they then split with foreign lenders. The IRS claims this means that US taxpayers are effectively subsidizing the lending through the shared tax credit.

Former IRS commish Everson testified about these deals in Congress last year, noting that they are “designed to exploit inconsistencies between U.S. and foreign laws.” And, under proposed regulations passed last year, such transactions wouldn’t be allowed.

And yet AIG is pressing on with its claims.

The years at stake are 1997 through 1999. AIG noted in securities filings that it expects the IRS to expand its investigation to later years (of course it will). The taxes and penalties attributable to the first investigation total $329 million; neither the AIG nor the IRS has indicated the additional taxes and penalties which could be assessed for any later years. My bet is that it’s huge. Huge, huge, huge.

If that were to happen, it would mean additional funds that AIG would have to pony up this year. I say additional because AIG owes between $34 million and $100 million for a tax shelter dispute that was settled this quarter. The tax shelters, called Lilo (short for lease-in/lease-out) and Silo (short for sale-in/lease-out) allowed lenders to buy assets from municipal government agencies including those in Chicago, New York and San Francisco, and then lease those assets back to the agencies, often through sophisticated “on paper only” arrangements. The lenders, like AIG, took a tax deduction on the transaction. The IRS claimed that those deductions were not allowable and were eventually successful in banning Lilo and Silo altogether.

So let’s do the math. $329 million in “cross border financing transactions” + (up to) $100 million in tax shelter disputes = $429 million in taxes and penalties, so far.

But it will be fine, just fine. Don’t worry about those poor AIG execs scrambling to find coins under the sofa cushions. We’re buying, remember? We’re handing AIG more money so that they can pay off debts that they owe… to us. This whole scenario reminds me of the time that my brother wrecked my dad’s truck, so my parents bought him a new one so that he could work to pay them back. Some guys get all the luck.

Great post from The Tax Girl