AIG Giveth Back, and Taketh Away, from U.S. Taxpayers

AIG's sale of its American International Assurance Ltd. (AIA) unit to Prudential UK for $35.5 billion will enable it to pay back $25 billion to the Federal Reserve. And the sale of its American Life Insurance (Alico) unit to MetLife for $15.5 billion will pay back $9 billion of the $60-plus billion AIG owes taxpayers. But the beleaguered American taxpayer should not be celebrating too much. The way the deals are structured will allow AIG to avoid a large chunk of U.S. taxes.

The dollar figure is yet unknown. What is known is that, at least since 2004 and possibly earlier, Alico helped its competitive position with foreign clients by not taking out the 30 percent withholding tax it was supposed to withdraw from the payments made to them. Alico says it wasn't required to do so because those clients weren't U.S. citizens. The IRS counters that since the company was incorporated in Delaware, it was required to pay withholding taxes.

The tax avoidance strategy came back to haunt AIG when it tried to sell Alico because the IRS had to approve the deal. Fortunately for AIG, both the company and the Treasury Department are clamoring to get out from under that $60 billion obligation. Treasury Secretary Tim Geithner wants out because he's hammered each time an AIG executive gets a bonus, and AIG wants out because it doesn't relish the government owning 80 percent of it.

So it comes as no surprise that the IRS, a unit of the Treasury, will give Alico a free pass on its IRS obligations to foster the sale, according to the Wall Street Journal. As for AIA, it is based in Bermuda, the land of tax avoidance for insurers.

An old adage says that if you owe the bank a million dollars, the bank owns you. And when you are bailed out to the tune of tens of billions, well, then you have a piece of the U.S. Treasury.