AIG settles federal tax shelter lawsuit

American International Group Inc., in settling a tax shelter lawsuit, has agreed to disallow more than $400 million in tax credits and to the imposition of a 10% tax penalty for allegedly entering into sham transactions designed to generate bogus foreign tax credits, the U.S. Attorney’s office for the Southern District of New York said Friday.

Acting U.S. Attorney Audrey Strauss said in a statement that the settlement involves seven cross-border financial transactions U.S. prosecutors asserted were abusive tax shelters designed to generate bogus tax credits that AIG improperly attempted to use to reduce its U.S. tax liabilities.

The U.S. attorney’s office said AIG had filed a tax refund lawsuit in 2009, seeking to recover disallowed foreign tax credits and other taxes related to the 1997 tax year.

However, the U.S. “obtained overwhelming evidence that these transactions lacked any meaningful economic substance, were devoid of any legitimate business purpose, and instead were designed solely to manufacture hundreds of millions of dollars of tax benefits to which It was not entitled,” the statement said.

Under terms of the settlement agreement, which was approved by the U.S. District Court in New York Thursday, AIG agreed all foreign tax credits it had claimed for the 1997 tax year and all later tax years for the same transactions, which total more than $400 million, would be disallowed in their entirety. It also agreed to pay a 10% tax penalty, according to the statement.

Ms. Strauss said in the statement that AIG had “created an elaborate series of sham transactions that were designed to do nothing – and in fact did nothing – other than generate hundreds of millions of dollars in ill-gotten tax benefits for AIG.”

An AIG spokesman said in a statement, “After already reaching and disclosing our January 2018 agreement in principle regarding these transactions that date to the 1990s, we are pleased to put this longstanding matter behind us.”