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AIG, Government Reach Settlement Agreement in Refund Suit

OCT. 22, 2020

American International Group Inc. et al. v. United States

DATED OCT. 22, 2020
DOCUMENT ATTRIBUTES

American International Group Inc. et al. v. United States

[Editor's Note:

The exhibits can be viewed in the PDF version of the document.

]

AMERICAN INTERNATIONAL GROUP, INC. and Subsidiaries,
Plaintiff,
v.
UNITED STATES OF AMERICA
Defendant.

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

STIPULATION AND ORDER OF SETTLEMENT

WHEREAS, this Stipulation and Order of Settlement (the "Stipulation") is entered into between plaintiff American International Group, Inc., on behalf of itself and its consolidated subsidiaries("AIG"), by its authorized representatives, and defendant the United States of America (the "United States"), by its attorney, Audrey Strauss, Acting United States Attorney for the Southern District of New York (together, the "Parties");

WHEREAS, AIG is a corporation organized and existing under the laws of the State of Delaware and a holding company which, through its subsidiaries, is engaged in financial services
and insurance activities;

WHEREAS, AIG filed the above captioned action (the "Action") in the United States District Court for the Southern District of New York (the "Court") and the matter was assigned to United States District Judge Louis L. Stanton;

WHEREAS, AIG filed its initial complaint in the Action on or about February 26, 2009 , and filed an amended complaint on or about May 12, 2012 (the "Amended Complaint"), against the United States pursuant to the Internal Revenue Code of 1986, as amended and codified in Title 26 of the United States Code (the "Internal Revenue Code"), seeking a refund of $306,102,672 in federal income taxes, penalties, interest, and additions to tax assessed against and collected from AIG by the United States for the tax year ending December 31, 1997 (the " 1997 Tax Year" );

WHEREAS, AI G timely filed with the Internal Revenue Service (the "IRS") a consolidated federal income tax return for the 1997 Tax Year (the "1997 Tax Return") and among the subsidiaries that AIG consolidated in its 1997 Tax Return was AIG Financial Products Corp. ("AIG-FP" ), a Delaware corporation and wholly-owned subsidiary of AIG;

WHEREAS, from 1993 through 1997, AIG-FP entered into a series of cross-border transactions with foreign financial institutions described in paragraphs 8 through 154 of the Amended Complaint, namely the Laperouse, Lumagrove, Maitengrove, AIG-FP NZ Nos. 1 and 2, Palmgrove, and Vespucci Transactions (the "Borrowing Transactions"), and the Foppingadreef Investments (No. 2) N.V. transaction ("Foppingadreef 2," and together with the Borrowing Transactions, the "Disputed Transactions" );

WHEREAS, on its 1997 Tax Return with respect to the Disputed Transactions, AIG: claimed $61 ,688,007 in foreign tax credits pursuant to 26 U.S.C. § 901 et seq. (the "Disputed Transaction Foreign Tax Credits" ); claimed $74,720,142 in interest expense deductions pursuant to 26 U.S.C. § 163(a) (the "Disputed Transaction Interest Expense Deductions"); reported $19,658,959 in other income allegedly related to the Disputed Transactions (the "Disputed Transaction Other Reported Income");

WHEREAS, on or about March 20, 2008, the IRS, after concluding, among other things ,
that the Disputed Transactions lacked economic substance, issued a Statutory Notice of Deficiency to AIG disallowing the Disputed Transaction Foreign Tax Credits and asserting a 20% accuracy-related penalty of $12,632,368, i.e., a substantial underpayment penalty pursuant to 26 U.S.C. § 6662(b)(2) with respect to the Disputed Transactions and, alternatively, a negligence penalty pursuant to 26 U.S.C. § 6662(b)(l) with respect to the Foppingadreef 2 transaction; and on or about July 8, 2008, the IRS assessed the deficiency, penalty and interest against AIG;

WHEREAS, prior to commencing this action, for the 1997 Tax Year, AIG paid to the United States the taxes, penalties, and interest assessed by the IRS, and timely filed a claim with the IRS demanding a refund of the amounts paid;

WHEREAS, AIG alleges in the Amended Complaint that it is further entitled to reduce its taxable income for the 1997 Tax Year by (1) $53,523,565 on account of adjustments arising from AIG's restatement of certain financial statements (the "Restatement"); (2) $134,278,131 on account of an alleged "net non-life operating loss" from the tax year ending December 31, 2002 (the "2002 Tax Year"), that AIG contends it may carry back to the 1997 Tax Year pursuant to 26 U.S.C. § 172; (3) $270,178,069 on account of an alleged net operating loss from the 2002 Tax Year arising from Restatement-related adjustments that AIG contends it may carry back to the 1997 Tax Year pursuant to 26 U.S.C. § 172; and (4) $6,816,405 on account of an alleged capital loss at AIG's life insurance subsidiaries from the tax year ending December 31, 2000, that AIG contends it may carry back to the 1997 Tax Year pursuant to 26 U.S.C. § 1212 (collectively, the "1997 Restatement and Carryback Claims");

WHEREAS, AIG also alleges that it is entitled to additional reductions to its taxable income in tax years after the 1997 Tax Year based on the alleged facts and circumstances underlying the 1997 Restatement and Carryback Claims (the "Post-1997 Restatement and Carryback Claims");

WHEREAS, on or about July 24, 2009, at the parties request, the court entered an order severing and staying the 1997 Restatement and Carryback claims, to permit IRS and AIG to negotiate a potential resolution of those claims, as well as the Post-1997 Restatement and Carryback Claims;

WHEREAS, on July 5, 2012, AIG field suit against the United States in the United States Court of Federal Claims (Docket No. 12-437T), seeking additional statutory interest allowable on overpayments of tax for its taxable year 1991 under 26 U.S.C. § 6621(d), which action has been stayed pending, inter alia, resolution of this case and the Post-1997 Restatement and Carryback Claims, which may affect the amount of interest so allowable;

WHEREAS, AIG and the IRS intend to enter into the closing agreement attached hereto as Exhibit A resolving the Post-1997 Restatement and Carryback Claims,1 which has been executed by AIG, and that IRS intends to execute after the above-captioned lawsuit has been resolved pursuant to the terms set forth in this Stipulation (the "Closing Agreement");

WHEREAS, the United States and AIG wish to resolve the 1997 Restatement and Carryback Claims according to the same terms set forth in the Closing Agreement with respect to the Post-1997 Restatement and Carryback Claims; and

WHEREAS, the Parties have, through this Stipulation, reached a mutually agreeable resolution addressing AIG's federal income tax liability, including penalties, interest, and additions to tax, for the 1997 Tax Year ("AI G's 1997 Tax Liability");

NOW, THEREFORE, upon the Parties' agreement IT IS HEREBY ORDERED:

TERMS AND CONDITIONS

1. The Parties agree that the Court has subject matter jurisdiction over this action.

2. All of the Disputed Transaction Foreign Tax Credits that AIG claimed on its 1997 Tax Return shall be disallowed.

3. All of the Disputed Transaction Interest Expense Deductions that AIG claimed on its 1997 Tax Return shall be allowed.

4. AIG shall be allowed to reduce its taxable income for the 1997 Tax Year by the full amount of the Disputed Transaction Section 78 Gross-Up Income.

5. AIG shall not be allowed to reduce its taxable income for the 1997 Tax Year by any portion of the Disputed Transaction Subpart F Income.

6. AIG shall be allowed to reduce its taxable income for the 1997 Tax Year by $1,000,000 of the Disputed Transaction Other Reported Income, but shall not be allowed to reduce its taxable income for the 1997 Tax Year by the remaining $18,658,959 of the Disputed Transactions Other Reported Income.

7. In place of the penalties assessed by the IRS for the 1997 Tax Year, AIG shall pay the IRS a 10% substantial understatement penalty for that tax year if the terms of this Stipulation cause AIG to have a "substantial understatement of income tax" within the meaning of 26 U.S.C. § 6662(6)(2). If AIG does not have a "substantial understatement of income tax" within the meaning of26 U.S.C. § 6662(6)(2) for the 1997 Tax Year, AIG shall pay the IRS a 10% negligence penalty in connection with the Foppingadreef 2 transaction under 26 U.S.C. § 6662(6)(1).

8. AIG's tax liability with respect to the Disputed Transactions for any tax year after the 1997 Tax Year during which any of the Disputed Transactions existed shall be determined pursuant to Paragraphs 2-6 of this Stipulation. For any tax year after 1997 in which the Disputed Transactions existed, if the terms of this Stipulation, together with the terms of any other agreement between AIG and the IRS for the relevant tax year, cause AIG to have a "substantial understatement of income tax" within the meaning of 26 U.S.C. § 6662(b)(2), then AIG shall pay the IRS a 10% substantial understatement penalty on underpayments resulting from the Disputed Transactions. If AIG does not have a "substantial understatement of income tax" within the meaning of 26 U.S.C. § 6662(b)(2) in any tax year after 1997 in which the Disputed Transactions existed, then for any such tax year in which the Foppingadreef 2 transaction existed, AIG shall pay the IRS a 10% negligence penalty in connection with such transaction under 26 U.S.C. §
6662(b)(l).

9. The 1997 Restatement and Carryback Claims are hereby resolved pursuant to the terms set forth in the Closing Agreement.

10. AIG, together with its predecessors and successors, fully and finally releases the United States, its agencies, departments, officers, employees, servants, and agents from any claims (including attorneys' fees, costs, and expenses of every kind and however denominated) that AIG, together with its predecessors and successors, has asserted, could have asserted, or may assert in the future against the United States, its agencies, departments, officers, employees, servants, or agents related to AIG's 1997 Tax Liability, the Disputed Transactions, and the claims in the Amended Complaint.

11. Notwithstanding the release given in Paragraph IO above, or any other term of this Stipulation, AIG's claim in the U.S. Court of Federal Claims (Docket No.12-437T) for additional overpayment interest for its taxable year 1991 under 26 U.S.C. § 6621(d) is specifically reserved and is not released by this Stipulation.

12. Subject to the exceptions in Paragraph 13 below, and in consideration of the obligations of AIG in this Stipulation, and conditioned upon AIG's full compliance with the terms of this Stipulation, the United States releases AIG, together with its predecessors and successors, from any civil or administrative monetary claim that the United States has under the Internal Revenue Code for AIG's 1997 Tax Liability.

13. Notwithstanding the release given in Paragraph 12 above, or any other term of this Stipulation, the following claims of the United States are specifically reserved and are not released by this Stipulation:

a. any criminal liability;

b. except as explicitly stated in this Stipulation, any administrative liability;

c. any liability to the United States (or its agencies) other than AIG's 1997 Tax Liability;

d. any liability based upon obligations created by this Stipulation; and

e. any liability of individuals.

14. This Stipulation is governed by the laws of the United States. The exclusive jurisdiction and venue for any dispute relating to this Stipulation is the United States District Court for the Southern District of New York, including for any disputes regarding the calculation of interest for the 1997 tax year on the agreed amount of AI G's 1997 Tax Liability. For purposes of construing this Stipulation, this Stipulation shall be deemed to have been drafted by all Parties to this Stipulation and shall not, therefore, be construed against any Party for that reason in any subsequent dispute.

15. This Stipulation constitutes the complete agreement between the Parties with respect to the subject matter hereof. This Stipulation may not be amended except by written consent of the Parties.

16. Any failure by the United States or AIG to insist upon the strict performance of any of the provisions of this Stipulation shall not be deemed a waiver of any of the provisions hereof, and the United States or AIG, as the case may be, notwithstanding that failure, shall have the right thereafter to insist upon the strict performance of any and all of the provisions of this Stipulation.

17. The undersigned counsel and other signatories represent and warrant that they are fully authorized to execute this Stipulation on behalf of the entities indicated below.

18. This Stipulation is binding on AIG's successor entities.

19. This Stipulation may be executed in counterparts, each of which constitutes an original and all of which constitute one and the same Stipulation. E-mails that attach signatures in PDF form or facsimiles of signatures shall constitute acceptable, binding signatures for purposes of this Stipulation.

20. In the event that the Court does not sign and enter this Stipulation, or makes material changes to the Stipulation to which the Parties do not agree in writing, the entire Stipulation is null and void, with no force or effect.

21. The Amended Complaint is dismissed with prejudice pursuant to Federal Rule of Civil Procedure 41, and without costs or attorneys' fees awarded to either Party.

Dated: New York, New York

October 22, 2020

AUDREY STRAUSS
Acting United States Attorney
Southern District of New York

BY: PIERRE G. ARMAND
JENNIFER A. JUDE
TALIA KRAEMER
CHARLES JACOB
Assistant United States Attorneys
86 Chambers Street, Third Floor
New York, New York 10007
Tel: (212) 637-2800
Fax: (212) 637-2686
Counsel for the United States of America

FOOTNOTES

1AIG expressly consents to the public filing of the redacted closing agreement attached as Exhibit A, and expressly acknowledges that the filing of the is document is not a violation of 26 U.S.C. § 6103.

END FOOTNOTES

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