IRS Warns MetLife on AIG Purchase: Not So Fast

All MetLife wanted to do was to buy American International Group's Alico unit. But completing the $15 billion deal was never going to be easy, and it has recently become much more difficult.

According to the New York Times, the latest stumbling block has to do with taxes. While Alico is incorporated in the U.S., the bulk of its business is conducted in Asia. As far back as 2004, U.S. insurers were supposed to withhold taxes on insurance payouts to foreign customers at a 30 percent rate; Alico thought a 20 percent withholding rate was sufficient because it did most of its business outside the U.S. Now the IRS wants Alico to pay the difference, which could be in the hundreds of millions.

Here's the Catch-22: The Treasury stands to realize at least $9 billion from the sale, which would be lost if the deal fell through because the IRS wants its money. If a deal isn't struck with the IRS then MetLife would be liable for the money owed the IRS and will deduct it from the $15 billion it would pay AIG, the Times says.

Can it get more complicated? Yes. Rating agency Standard & Poor's is threatening to downgrade the MetLife, nation's largest life insurer, if it pays $15 billion in cash to AIG. So MetLife worked out a deal to pay $7 billion in cash and $8 billion in MetLife stock. This means that taxpayers could now own not only 80 percent of AIG, but a piece of MetLife as well. And there's still Neil Barofsky, the Special Inspector of the TARP program, who will be watching over the Treasury Secretary Tim Geithner's shoulder on any deal he approves. If, in fact, one gets done.