AIG and other bailed-out companies battling IRS over taxes

By Phil Mattera, Dirt Diggers Digest

Rep. John Lewis has come out with the remarkable news that 13 corporate recipients of federal bailout money under the Troubled Asset Relief Program (TARP) are federal tax deadbeats, together owing more than $220 million to Uncle Sam. The Georgia Democrat said he cannot reveal the names of the companies, thus setting off a tantalizing guessing game as to which TARP participants apparently lied on forms requiring all recipients to certify they were not significantly in arrears on their tax payments.

Assuming Lewis is talking about companies in disputes with the Internal Revenue Service, there are some likely suspects--beginning with the country's favorite villain these days: American International Group. AIG has been battling with the IRS over the disallowance of foreign tax credits associated with cross-border financing transactions. In the notes to the financial statements in its 10-K annual report filed with the Securities and Exchange Commission earlier this month, AIG says that it received a "notice of deficiency" from the IRS for the years 1997-1999 and acknowledged it is likely that the feds will go after the credits for subsequent years as well.

AIG paid the assessed taxes and penalties, but then it turned around and demanded its money back. Last month, AIG filed suit in federal court in Manhattan (SDNY Case 09-CV-1871) against the United States of America seeking the recovery of $306,102,672 that it claims was "erroneously and illegally assessed." The fact that AIG paid the extra taxes while disputing them may not have qualified it for the list assembled by Rep. Lewis. Yet it is still quite remarkable that, after receiving a $170 billion bailout, AIG did not think there was anything wrong with hauling its rescuer into court to pursue a $300 million tax claim.

AIG is not an isolated instance. In its recent 10-K filing, Citigroup states it is "currently at IRS Appeals for the years 1999-2002. One of the issues relates to the timing of the inclusion of interchange fees received by the Company relating to credit card purchases by its cardholders. It is reasonably possible that within the next 12 months the Company can either reach agreement on this issue at Appeals or decide to litigate the issue." Here's another ward of the state that does not hesitate to sue its benefactor.

Then there's Bank of America. Like AIG, it has been at odds with the IRS over foreign tax credits. According to its recent 10-K, B of A faces an "unagreed proposed adjustment" for the years 2000-2002, which sounds like it is at an impasse with the feds. The bank doesn't mention litigation, but it does not waver from its position, insisting that "the Corporation continues to believe the crediting of these foreign taxes against U.S. income taxes was appropriate." Receiving $45 billion in TARP funds does not seem to have affected its position.

JPMorgan Chase, the recipient of $25 billion in TARP capital infusions, discloses that it has administrative appeals pending with the IRS. The same goes for some banks in the second tier of bailout recipients. SunTrust Banks ($4.9 billion from TARP) reveals that it is sparring with the IRS over its tax returns for the period from 1997 to 2004. Its 10-K states that "the Company has paid the amounts assessed by the IRS in full for tax years 1997 and 1998 and has filed refund claims with the IRS related to the disputed issues for those two years."

Capital One Financial ($3.5 billion from TARP) is still pursuing suits filed against the government in U.S. Tax Court in 2005 contesting tax assessments for the period 1995-1999. "At issue," the company says in its 10-K, "are proposed adjustments by the IRS with respect to the timing of recognition of items of income and expense derived from the Company's credit card business."

Under normal circumstances, companies are within their rights to contest IRS assessments. But it is a different story when a company is being kept afloat by the generosity of the U.S. taxpayers. If it is now unacceptable for bailed-out companies to pay lavish employee bonuses, shouldn't it also be taboo for them to pursue aggressive tax avoidance cases against the IRS? Shouldn't there be a moratorium on such actions while a company continues to dine at the public trough? AIG, at least, should have the decency to drop its lawsuit and stop biting the hand that has fed it so much.