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Financial Planning > Tax Planning > Tax Loss Harvesting

AIG is Still Costing Taxpayers

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Elizabeth Warren helped establish the Consumer Financial Protection Bureau and is a U.S. Senate candidate in Massachusetts. Damon Silvers is director of policy and special counsel to the AFL-CIO. Mark McWatters teaches taxation and directs the graduate programs at the Southern Methodist University Dedman School of Law. Kenneth Troske is chair of the economics department at the University of Kentucky. They served on the Congressional Oversight Panel established by the Emergency Economic Stabilization Act of 2008.

When the U.S. economy was in crisis in October 2008, Congress passed a $700 billion bailout of our financial system. The Troubled Assets Relief Program (TARP) was heavily scrutinized in the media and passionately debated on Wall Street and Main Street. Congress created a bipartisan committee — on which we served — to oversee the funds distributed through TARP. The committee conducted dozens of public hearings and produced 30oversight reports.

Compare that experience with a recent event. AIG, a massive insurance company that received $182 billion in TARP and Federal Reserve bailouts during the financial crisis, reported in February that it had earned $19.8 billion in the fourth quarter of 2011. Its profits increased a staggering $17.7 billion — from a loss of $2.2 billion a year earlier — because of special tax breaks from the Treasury Department.

Yet there was no congressional debate, no front-page story, no special oversight committee. What happened?

When filing tax returns, companies must report whether they have turned a profit or lost money. If they have made a profit, they must pay the appropriate taxes. On the other hand, if they have suffered a loss, they may “carry forward” that loss to reduce future tax bills.

A company that loses $100 million in one year and profits $500 million the following year will pay taxes on only $400 million of the profit, thanks to the reserved tax loss. That $100 million tax loss “carry forward” has clear monetary value: At today’s corporate tax rate of 35 percent, a company could reduce its tax bill by $35 million.

The basic concept of carrying forward past losses is an important feature of U.S. tax law, but it opens a potential loophole. A business that wishes to lower its taxes might acquire companies with enormous past losses just to minimize its tax burden. To prevent this, U.S. tax law since 1986 has limited carry-forward losses when a company changes ownership.

To be sure, the American International Group suffered huge losses. The company hemorrhaged billions of dollars in late 2008, and it was rushing toward bankruptcy. AIG survived only because U.S. taxpayers pumped in funds and acquired majority ownership of the company. Absent this assistance, it is highly likely that AIG would have been broken into parts and sold to the highest private-sector bidders — and had that happened, it is highly unlikely that the company’s losses would have been permitted to carry forward.

By any reasonable definition, the company changed ownership: A controlling stake passed from its stockholders to the federal government. As such, AIG should have been limited in rolling over past losses. Beginning in 2008, however, the U.S. Treasury jumped in with a special ruling that the financial rescue did not constitute a change in ownership. AIG was thus permitted to preserve its pre-bailout losses on its books, and now the company is using those losses to show enormous profits and dodge the taxes it owes on the billions it is earning today.

This is wrong. At first glance, it may appear that the federal government comes out even because it owns AIG stock and benefits as a stakeholder. But the government owns onlyabout 70 percent of the company, while the deal subsidizes all shareholders, including the private parties that own the remainder. Creditors also benefit because a more profitable company is less likely to default on its loans.

In addition, the special tax deal permits AIG executives to collect more. Chief executive Robert Benmosche owns millions of dollars in AIG stock options and receives an enormous direct benefit from this deal. This special tax deal also masks the true cost of TARP by increasing the value of the government’s AIG stock at the expense of future tax revenue.

The Congressional Budget Office estimated in December that even without the special break, taxpayers will lose $25 billion on AIG. That’s more than the cost of two new-generation aircraft carriers (at $11.5 billion each). It is time for our country to put this chapter behind us — and past time for AIG to compete on a level playing field.

When a company accepts a taxpayer bailout to stay in business, it ought to follow the same tax laws followed by companies that aren’t bailed out. In its ongoing efforts to reform corporate tax law, Congress should close this egregious loophole and prevent AIG from continuing to receive a stealth bailout every time it files its taxes. This amounts to a bailout without oversight, without accountability and, quite likely, without most Americans even noticing. 

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