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.
(Note from taxgirl: The last paragraph is in jest… Sort of. I adore my brother and he knows it. His Chinese horoscope symbol is the rabbit (for luck) and mine is the rat, which may explain an awful lot.)
This is nuts. I know AIG isn’t the only company doing these kinds of things, but I am aghast that they are running nefarious tax practices, using the bailout money to pay themselves a nice salary and go on a Four Star retreat, and they STILL owe taxes? If that were me, I would be in jail.
Government protects the businessmen because they fear if they go after them, it will create instability and then a nationwide financial problem will be blamed on Congressional oversight and strict rules. Well, ladies and gentlemen of the U.S. govt., the damage has been done. We can’t be any more vulnerable than we are now. So go after those a–holes already so we can move on.
This kind of thing is exactly why most Americans opposed this bailout. While most people don’t understand the whole situation with the financial bailouts (myself included), we do understand that it is greed that got all these businesses in trouble and that giving them money would not change their greedy ways. Bailing out these greedy SOBs is like giving a murderer a gun and then expect them to behave responsibly in society.
Capitalism works if the government would let it. The badly run companies would fall apart and stronger better run companies would fill in the gaps. The government thinks it can lessen any economic impact that Wall St greed will have on the economy but all they are doing is prolonging the inevitable fall of poorly managed companies and greedy corporate executives.
Government is also guilty of bad management and greed. The government was a major player in this economic downturn. If we examine the damage that government intervention in the mortgage industry through Fannie Mae and Freddie Mac has had, it is clear. Political cronyism and greed was definitely in play here.
I am a true believer in freedom, and thus capitalism, and I believe that we must let those fail that deserve to fail so that the government can help good companies that are struggling in this economy devastated by greed. This same government needs to clean up its act and start thinking of the American people who pay for all of this.
Hold on there TaxGirl!
How do you know the IRS is right on this issue and AIG is wrong? As a tax lawyer do you often make the assumption that the government is infallible? I don’t.
Your claim that AIG schemed to use the government’s money to fund an IRS lawsuit ignores the fact that AIG filed it’s claim for refund before it was awarded the bailout funds.
AIG got the bailout money in order to keep it’s business afloat. It gets to decide how to use those funds, not the government. After all, do you really want government staffers making the business decisions of our corporate conglomerates?
By the way, what condition would you have put on AIG’s receipt of the bailout funds? Would you have required AIG to abandon it’s 329 million dollar refund claim?
As a taxpayer I, too, want to see the bailout funds put to good use, but if the IRS is wrong on the foreign tax credits and AIG is right, the use of AIG corporate funds (from whatever source) to pursue the IRS claim is not only a business but a moral imperative.
The failure of AIG’s Board to approve the use of funds for this purpose would constitute a breach of it’s fiduciary duty to AIG shareholders.
Suing the IRS to get a refund of taxes AIG believes it should not have paid is the right thing to do. If the suit is frivolous as you suggest, AIG and its attorneys should be sanctioned and required to pay the government’s costs of its defense of the suit.
Finally, I don’t have anything remotely approaching your level of certainty about the outcome of AIG’s claim. Apparently, AIG’s tax attorneys disagree with you that AIG “won’t win.”
I think it’s safe to assume that they are infinitely more informed than either you or I about the facts and law involved in the case.
Why don’t we just wait to see the outcome of the AIG claim? The IRS has been wrong before and it’s a good bet they’ll be wrong again in the future.
It’s one of the reasons you and I have jobs.
Peter,
Gosh, did you and I read the same post? Cause I didn’t once claim that AIG schemed to use government money to sue for refund… In fact, I didn’t imply that any of the legal fees were federal money at all. I did suggest that, if they lose, they might use bailout funds to pay up – but those are different things entirely.
And I do think they’ll lose. I’m allowed to say such things, despite the fact that others may disagree. It’s my *opinion*.
I’m suggesting that AIG is not going to win not because (1) the Commish testified before Congress that the transactions were abusive at a time when those types of transactions were being scrutinized and (2) the Proposed Regs – which passed – subsequently banned those transactions. Advantage, IRS.
As to the bailout, I didn’t think it was a good idea when it happened, structured they way that it was. And now, in light of the tax issues, the overspending by AIG execs and the legal issues that I’m sure will follow a la Fannie Mae and Freddie Mac, I still believe that. I do think there should be criteria for bailing out companies and it’s silly to suggest that not filing for a tax refund should be one of them (again, I never said or implied that). But a little due diligence from the feds seems to be missing here…
Kelly,
I agree with you on the due diligence part . . . but they were in such a rush to do something they didn’t stop and take a breath long enough to ask the right questions.
I am not suggesting you don’t have the right to your opinion. I am just saying that I think it’s unlikely that either one of us has enough of the facts to be able to render an reliable opinion.
Also, I think it’s irrelevant whether or not they use the bailout funds or some other funds to pay their legal fees or the additional assessments should they lose the claim. Challenging IRS assessments it believes are unwarranted is a proper use of corporate funds.
Per the constitution, businesses that make a profit, are subjected to taxes.
Those who trade their labor for earnings, are not. If you are a laborer, you are not making a profit. The amount of your labor is equal to the amount you are paid. Its unconstitutional for you to be taxed. A tax lawyer should know this. A tax lawyer should question what is taught in school and read the source: the constitution.
AIG, is a business, that makes profit. It should not try to get out of owing taxes. Their lawyer should know better.