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.)
Imagine this scenario: I am a voracious spender, some would say reckless. I rack up tons of debt buying Jimmy Choo shoes (a good investment, I’d say), new furnishings for my house and iTunes. When I reach my limit, I panic. My friends panic. My family panics. But all is well when I get a phone call from the feds promising to give me the money to pay off my debts if they can occasionally borrow the shoes.
Sounds a little ridiculous right?
Not so much. The Federal Reserve yesterday agreed to give ailing insurance company American International Group, Inc. an $85 billion boost to help it climb out of trouble. In exchange, the government now owns a piece (though no one is saying how much) of the company.
Must be nice.
Yeah, I get that there are some differences between my hypo and AIG… For one, I don’t think the company owns any Jimmy Choos. And I realize that I don’t hire thousands of people that rely on me to remain economically stable (just a handful) nor do large companies look to me to provide an economic benefit (except maybe Apple because we spend far too much money with them). Tens of thousands of investors don’t stand to lose money when I make bad decisions – not even tens of investors, just my husband. But you get my point.
The escalation of the housing crisis – brought on, many argue by an unrealistic and irresponsible borrowing spree to purchase real estate in high growth areas – has resulted in a series of events that are shaking down the US economy in a big way. While in a pure capitalist society, this would result in a “wait and see” pattern, we don’t live in a pure capitalist society (really, don’t ever believe that we do for second). Our government regularly steps in to avert crisis or regulate financial markets. And lately, it’s being stepping in a lot.
How much is all of this economic protection costing taxpayers? A lot. Try $800 billion a lot. Exactly where is all of that cash pouring from the feds to the private sector going? Here you go:
- As reported earlier, $200 billion has been pledged to save Freddie Mac and Fannie Mae.
- As reported above, $85 billion will be doled out to AIG.
- The Federal Housing Administration has guaranteed an additional $102 billion in mortgages for 2007.
- The Federal Reserve’s “special” lending facilities have loaned an additional $400 billion to struggling banks.
- A whopping $29 billion was used as a guarantee to insure JP Morgan Chase’s purchase of Bear Stearns.
A bit sobering, isn’t it? In an economy already operating at a deficit, the government continues to hand out tax dollars as if they are candy: Here, take some, we’ll make more.
Don’t get me wrong. I’m actually not opposed to the government stepping in to avert a bigger financial crisis. I do, however, wonder about the economics of these transactions. Did the CEOs and other board members of these struggling companies make any sacrifices? Did they take any pay cuts? Were any real efforts made to save these companies before asking for corporate welfare? I don’t know. What I do know is that in 2006, the CEO of AIG was paid $26 million in salary and bonus; in 2007, he received an additional $14 (source) – $40 million in two years that I am fairly certain he won’t offer to return to the company after apparently running it into the ground. The CEOs of Bear Stearns, Lehman and Countrywide also sit atop the leader boards in pay, earning hundreds of millions of dollars (source). In the meantime, many Americans are working to meet their own existing obligations with no assistance from the government. Maybe it’s not so much bail out that’s needed as for these companies as accountability…
