AMERICAN INTERNATIONAL GROUP INC | 2013 | FY |

23. INCOME TAXES

 

The following table presents income (loss) from continuing operations before income tax expense (benefit) by U.S. and foreign location in which such pre-tax income (loss) was earned or incurred.

The following table presents the income tax expense (benefit) attributable to pre-tax income (loss) from continuing operations:

Our actual income tax (benefit) expense differs from the statutory U.S. federal amount computed by applying the federal income tax rate due to the following:

For the year ended December 31, 2013, the effective tax rate on income from continuing operations was 3.8 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 35 percent primarily due to tax benefits of $2.8 billion related to a decrease in AIG Life and Retirement's capital loss carryforward valuation allowance, $396 million related to a decrease in certain other valuation allowances associated with foreign jurisdictions and $298 million associated with tax exempt interest income. These items were partially offset by charges of $632 million related to uncertain tax positions.

For the year ended December 31, 2012, the effective tax rate on income from continuing operations was (27.9) percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 35 percent primarily due to decreases in AIG Life and Retirement's capital loss carryforward valuation allowance of $1.9 billion related to the actual and projected gains from AIG Life and Retirement's available-for-sale securities, and tax effects associated with tax exempt interest income of $302 million. These items were partially offset by changes in uncertain tax positions of $446 million.

For the year ended December 31, 2011, the effective tax rate on loss from continuing operations was not meaningful, due to the significant effect of releasing approximately $18.4 billion of the deferred tax asset valuation allowance. Other factors that contributed to the difference from the statutory rate included tax benefits of $454 million associated with tax exempt interest income, $386 million associated with the effect of foreign operations, and $224 million related to our investment in subsidiaries and partnerships.

The following table presents the components of the net deferred tax assets (liabilities):

The following table presents our U.S. consolidated income tax group tax losses and credits carryforwards as of December 31, 2013 on a tax return basis.

 

Assessment of Deferred Tax Asset Valuation Allowance

 

The evaluation of the recoverability of the deferred tax asset and the need for a valuation allowance requires us to weigh all positive and negative evidence to reach a conclusion that it is more likely than not that all or some portion of the deferred tax asset will not be realized. The weight given to the evidence is commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more positive evidence is necessary and the more difficult it is to support a conclusion that a valuation allowance is not needed.

Our framework for assessing the recoverability of deferred tax assets requires us to consider all available evidence, including:

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the nature, frequency, and amount of cumulative financial reporting income and losses in recent years;

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the sustainability of recent operating profitability of our subsidiaries;

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the predictability of future operating profitability of the character necessary to realize the net deferred tax asset;

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the carryforward periods for the net operating loss, capital loss and foreign tax credit carryforwards, including the effect of reversing taxable temporary differences; and,

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prudent and feasible actions and tax planning strategies that would be implemented, if necessary, to protect against the loss of the deferred tax asset.

As a result of sales in the ordinary course of business to manage the investment portfolio and the implementation of prudent and feasible tax planning strategies during the year ended December 31, 2013, certain capital loss carryforwards primarily related to AIG Life and Retirement were realized prior to their expiration. Therefore, for the year ended December 31, 2013, we recognized a decrease of $3.5 billion of capital loss carryforward valuation allowance associated with AIG Life and Retirement, of which $3.3 billion was allocated to income from continuing operations and $200 million was allocated to other comprehensive income. Included in the $3.3 billion allocated to continuing operations was a decrease in deferred tax asset valuation allowance of $552 million related to a portion of AIG Life and Retirement's capital loss carryforward that expired in 2013. During the year ended December 31, 2013, we also recognized a $1.0 billion decrease to our deferred tax asset valuation allowance associated with certain state, local and foreign jurisdictions, primarily attributable to our ability to demonstrate sustainability of recent operating profitability within those jurisdictions over the relevant carryforward periods as well as routine business operations in the current year. Included in the $1.0 billion was a decrease in deferred tax asset valuation allowance of $377 million related to tax attributes that expired.

The following table presents the net deferred tax assets (liabilities) at December 31, 2013 and 2012 on a U.S. GAAP basis:

 

Deferred Tax Asset Valuation Allowance of U.S. Consolidated Income Tax Group

 

At December 31, 2013, and 2012, our U.S. consolidated income tax group had net deferred tax assets after valuation allowance of $21.3 billion and $17.3 billion, respectively. At December 31, 2013, and 2012, our U.S. consolidated income tax group had valuation allowances of $1.7 billion and $5.1 billion, respectively.

 

Deferred Tax Liability — Foreign, State and Local

 

At December 31, 2013 and 2012, we had net deferred tax liabilities of $116 million and $613 million, respectively, related to foreign subsidiaries, state and local tax jurisdictions, and certain domestic subsidiaries that file separate tax returns.

At December 31, 2013 and 2012, we had deferred tax asset valuation allowances of $2.0 billion and $2.9 billion, respectively, related to foreign subsidiaries, state and local tax jurisdictions, and certain domestic subsidiaries that file separate tax returns. We maintained these valuation allowances following our conclusion that we could not demonstrate that it was more likely than not that the related deferred tax assets will be realized. This was primarily due to factors such as cumulative losses in recent years and the inability to demonstrate profits within the specific jurisdictions over the relevant carryforward periods.

 

Tax Examinations and Litigation

 

We file a consolidated U.S. federal income tax return with our eligible U.S. subsidiaries. Several U.S. subsidiaries included in the consolidated financial statements previously filed separate U.S. federal income tax returns and were not part of our U.S. consolidated income tax group. Income earned by subsidiaries operating outside the U.S. is taxed, and income tax expense is recorded, based on applicable U.S. and foreign law.

The statute of limitations for all tax years prior to 2000 has expired for our consolidated federal income tax return. We are currently under examination for the tax years 2000 through 2006.

On March 20, 2008, we received a Statutory Notice of Deficiency (Notice) from the IRS for years 1997 to 1999. The Notice asserted that we owe additional taxes and penalties for these years primarily due to the disallowance of foreign tax credits associated with cross-border financing transactions. The transactions that are the subject of the Notice extend beyond the period covered by the Notice, and the IRS is challenging the later periods. It is also possible that the IRS will consider other transactions to be similar to these transactions. We have paid the assessed tax plus interest and penalties for 1997 to 1999. On February 26, 2009, we filed a complaint in the United States District Court for the Southern District of New York seeking a refund of approximately $306 million in taxes, interest and penalties paid with respect to its 1997 taxable year. We allege that the IRS improperly disallowed foreign tax credits and that our taxable income should be reduced as a result of the 2005 restatement of our consolidated financial statements.

We also filed an administrative refund claim on September 9, 2010 for our 1998 and 1999 tax years.

On March 29, 2011, the U.S. District Court for the Southern District of New York, ruled on a motion for partial summary judgment that we filed on July 30, 2010 related to the disallowance of foreign tax credits associated with cross-border financing transactions. The court denied our motion with leave to renew following the completion of discovery regarding certain transactions referred to in our motion, which we believe may be significant to the outcome of the action.

On August 1, 2012, we filed a motion for partial summary judgment related to the disallowance of foreign tax credits associated with cross border financing transactions. On March 29, 2013, the U.S. District Court for the Southern District of New York (the Southern District of New York) denied our motion. On April 17, 2013, we initiated a process for immediate appeal to the U.S. Court of Appeals for the Second Circuit (the Second Circuit) and on November 5, 2013, the Southern District of New York certified our request. We are presently awaiting a decision from the Second Circuit on whether to accept our immediate appeal to review the decision of the Southern District of New York.

We will vigorously defend our position and continue to believe that we have adequate reserves for any liability that could result from the IRS actions.

We continue to monitor legal and other developments in this area and evaluate the effect, if any, on our position, including recent decisions adverse to other taxpayers.

 

Accounting For Uncertainty in Income Taxes

 

The following table presents a reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits:

At December 31, 2013, 2012 and 2011, our unrecognized tax benefits, excluding interest and penalties, were $4.3 billion, $4.4 billion and $4.3 billion, respectively. The decrease from December 31, 2012 was primarily due to certain benefits realized due to the partial completion of the IRS examination covering the years 2003-2005 and foreign exchange translation, partially offset by increases related to foreign tax credits associated with cross border financing transactions. At December 31, 2013, 2012 and 2011, our unrecognized tax benefits related to tax positions that, if recognized, would not affect the effective tax rate because they relate to such factors as the timing, rather than the permissibility, of the deduction were $0.1 billion, $0.2 billion and $0.7 billion, respectively. Accordingly, at December 31, 2013, 2012 and 2011, the amounts of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate were $4.2 billion, $4.2 billion and $3.5 billion, respectively.

Interest and penalties related to unrecognized tax benefits are recognized in income tax expense. At December 31, 2013 and 2012, we had accrued liabilities of $1.1 billion and $935 million, respectively, for the payment of interest (net of the federal benefit) and penalties. For the years ended December 31, 2013, 2012 and 2011, we accrued expense (benefits) of $142 million, $192 million and $(170) million, respectively, for the payment of interest (net of the federal benefit) and penalties.

We regularly evaluate adjustments proposed by taxing authorities. At December 31, 2013, such proposed adjustments would not have resulted in a material change to our consolidated financial condition, although it is possible that the effect could be material to our consolidated results of operations for an individual reporting period. Although it is reasonably possible that a change in the balance of unrecognized tax benefits may occur within the next 12 months, based on the information currently available, we do not expect any change to be material to our consolidated financial condition.

Listed below are the tax years that remain subject to examination by major tax jurisdictions: