Tax Lawyer's Blog

AIG wants to sell one if it’s subsidiaries, the American Life Insurance Company (“ALICO”), to MetLife but will first have to get a private letter ruling from the IRS.

Here’s the New York Times’ Mary Williams Walsh and Michael J. de la Merced:

AIG announced almost a year ago that it would sell… ALICO, to raise about $9 billion for the Federal Reserve Bank of New York. If ALICO fetches more than that, some of the additional proceeds would go to the United States Treasury, which also helped keep AIG from collapsing in the fall of 2008.

MetLife has offered about $15 billion for ALICO, people familiar with the talks have said. About $7 billion of that would be in cash and the rest in MetLife stock.

At one point, the deal was expected to be announced last week, according to a person briefed on the negotiations. While it was no longer clear when a deal would be reached, it is still expected to happen, the people briefed on the matter said.

 Here’s the tax glitch:

The current problem in the talks stems from a 2004 ruling by the IRS that ALICO never implemented. The ruling said that all United States insurers that sell annuities and life insurance policies to customers outside the United States must withhold income taxes from their contractual payments to those customers.

The IRS wanted the withholdings taken at the 30 percent marginal rate. ALICO is an unusual company because, while its domicile is the state of Delaware, it does all of its insurance business in other countries.

Other American life insurance companies protested the IRS ruling at first, but then started withholding the taxes. But ALICO argued that it should not have to, citing a so-called 80-20 rule, which it interpreted to mean that companies getting more than 80 percent of their revenue from outside the United States did not have to withhold taxes.

AIG has asked the IRS to affirm that its interpretation of the 2004 ruling is correct.

The refusal to withhold the taxes gives ALICO an important competitive advantage on lines of business for which it has been paying offshore policyholders roughly $10 billion a year.

If the government forced ALICO to produce six years’ worth of uncollected withholdings now, the amount could run into the hundreds of millions of dollars.

In the event that the IRS rules against AIG, MetLife has asked AIG to agree to cover the payments….

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