AIG 2008 Annual Report Download - page 319

On March 2, 2009, AIG, the NY Fed and the United States Department of the Treasury announced agreements
in principle to modify the terms of the Fed Facility and the Series D Preferred Stock and provide a $30 billion equity
capital commitment facility. The parties also announced their intention to take a number of other actions intended to
strengthen AIG’s capital position, enhance its liquidity, reduce its borrowing costs and facilitate AIG’s asset
disposition program. See Note 23 herein.
These transactions executed in the fourth quarter of 2008 and expected to be executed in 2009 were considered
significant positive evidence that allowed management to conclude that a portion of AIG’s deferred tax assets is
more likely than not to be realizable. AIG also considered future income in the near term, tax gains from
dispositions, and tax-planning strategies AIG would implement, if necessary, to realize the net deferred tax asset.
In view of the announcement on March 2, 2009 regarding agreements in principle with the United States
Department of the Treasury and the NY Fed and other proposed arrangements with the NY Fed, as well as AIG’s
projections of income, gain, and loss, AIG’s Management has concluded that $11.0 billion of net deferred tax assets
are recoverable at December 31, 2008 and accordingly established a valuation allowance of $20.9 billion as of
December 31, 2008 in order to reduce AIG’s deferred tax assets to an amount that is more likely than not to be
realized.
In evaluating the realizability of the loss carryforwards, AIG considered the relief provided by IRS Notice
2008-84 which provides that the limitation on loss carryforwards that can arise as a result of one or more
acquisitions of stock of a loss company will not apply to such stock acquisitions for any period during which the
United States becomes a direct or indirect owner of more than 50 percent interest in the loss company.
At December 31, 2008, AIG has recorded deferred tax assets related to stock compensation of $239 million.
Due to the significant decline in AIG’s stock price, these deferred tax assets may not be realizable in the future. FAS
123(R) precludes AIG from recognizing an impairment charge on these assets until the related stock awards are
either exercised, vested or expired. Any charge associated with the deferred tax asset would likely be reflected in
additional paid-in capital rather than income tax expense.
Undistributed Earnings
During 2008, AIG recorded $3.9 billion of deferred tax expense attributable to the undistributed earnings of its
non-U.S. subsidiaries and $0.7 billion attributable to its U.S. subsidiaries. Deferred tax expense for its non-U.S. sub-
sidiaries recorded in 2008 is related to current year activity as well as deferred taxes that previously were not
provided because the earnings were considered to be reinvested indefinitely. At December 31, 2008, AIG has
provided deferred taxes related to all the undistributed earnings of its non-U.S. subsidiaries.
Tax Filings and Examinations
AIG and its eligible U.S. subsidiaries file a consolidated U.S. federal income tax return. Several U.S. sub-
sidiaries included in the consolidated financial statements file separate U.S. federal income tax returns and are not
part of the AIG U.S. consolidated income tax group. Subsidiaries operating outside the U.S. are 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 now expired for AIG’s consolidated federal income
tax return. AIG is currently under examination for the tax years 2000 through 2002.
In April 2008, AIG filed a refund claim for years 1997 through 2006. A refund claim filed in June 2007 for
years 1991 through 1996 is still pending. These refund claims relate to the tax effects of the restatements of AIG’s
2004 and prior financial statements.
On March 20, 2008, AIG received a Statutory Notice of Deficiency (Notice) from the IRS for years 1997 to
1999. The Notice asserted that AIG owes 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 it is likely that the IRS will seek to
challenge these later periods. It is also possible that the IRS will consider other transactions to be similar to these
AIG 2008 Form 10-K 313
American International Group, Inc., and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)