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American International Group settles tax shelter lawsuit

American International Group Inc. 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, as informed by the U.S Department of Justice.

Acting U.S. Attorney Audrey Strauss stated that the settlement associated with seven cross-border transactions between the insurer’s AIG Financial Products unit and foreign banks dating from the mid-1990s. She said there was “overwhelming evidence” that the seven transactions had no economic substance, and were designed to come up with bogus foreign tax credits to scale back AIG’s U.S. tax liabilities for the 1997 tax year.

AIG had filed a lawsuit in 2009 challenging an Internal Revenue Service decision from the prior year to disallow the tax credits and impose a 20% tax penalty.

But the government said the seven transactions enabled the New York-based insurer to “game” the legal system by exploiting differences between foreign and U.S. tax laws, and “sucked hundreds of millions of dollars” from the U.S. Treasury.

Ms. Strauss said in a statement that, “AIG 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.”

Under terms of the settlement agreement, which was approved by the U.S. District Judge Louis Stanton in Manhattan, 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.

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