INCOME TAXES

12 Months Ended

Dec. 31, 2016

23. INCOME TAXES

The following table presents income (loss) from continuing operations before income tax expense (benefit) by U.S. and foreign location in which such pre-tax income (loss) was earned or incurred

Years Ended December 31,
(in millions)		2016		2015		2014
U.S.	$	1,041	$	1,950	$	8,250
Foreign		(1,115)		1,331		2,251
Total	$	(74)	$	3,281	$	10,501

The following table presents the income tax expense (benefit) attributable to pre-tax income (loss) from continuing operations:

Years Ended December 31,
(in millions)		2016		2015		2014
Foreign and U.S. components of actual income tax expense:
Foreign:
Current	$	436	$	391	$	473
Deferred		(121)		(95)		154
U.S.:
Current		140		429		115
Deferred		(270)		334		2,185
Total	$	185	$	1,059	$	2,927

Our actual income tax (benefit) expense differs from the statutory U.S. federal amount computed by applying the federal income tax rate due to the following:

	2016						2015							2014
		Pre-Tax		Tax	Percent of			Pre-Tax		Tax		Percent of					Tax	Percent of
Years Ended December 31,		Income		Expense/	Pre-Tax			Income		Expense/		Pre-Tax			Pre-Tax		Expense/	Pre-Tax
(dollars in millions)		(Loss)		(Benefit)	Income (Loss)			(Loss)		(Benefit)	Income (Loss)				Income		(Benefit)	Income
U.S. federal income tax at statutory rate	$	(159)	$	(56)	35.0	%	$	3,281	$	1,148		35.0	%	$	10,524	$	3,683	35.0	%
Adjustments:
Tax exempt interest				(178)	111.9					(195)		(5.9)					(236)	(2.2)
Uncertain tax positions				268	(168.6)					195		5.9					(81)	(0.8)
Reclassifications from accumulated
other comprehensive income				(132)	83.0					(127)		(3.9)					(61)	(0.6)
Dispositions of Subsidiaries				118	(74.2)					-		-					-	-
Tax Attribute Restoration				(164)	103.1					-		-					(182)	(1.7)
Non-controlling Interest				(81)	50.9					-		-					-	-
Non-deductible transfer pricing
charges				102	(64.2)					97		3.0					86	0.8
Dividends received deduction				(75)	47.2					(72)		(2.2)					(62)	(0.6)
Effect of foreign operations				234	(147.2)					(58)		(1.8)					(68)	(0.6)
State income taxes				23	(14.5)					34		1.0					39	0.4
Other				13	(8.2)					(73)		(2.2)					(2)	-
Effect of discontinued operations				35	(22.0)					-		-					65	0.6
Valuation allowance:
Continuing operations				83	(52.2)					110		3.4					(181)	(1.7)
Consolidated total amounts		(159)		190	(119.5)			3,281		1,059		32.3			10,524		3,000	28.5
Amounts attributable to discontinued
operations		(85)		5	(5.9)			-		-		-			23		73	317.4
Amounts attributable to continuing
operations	$	(74)	$	185	(250.0)	%	$	3,281	$	1,059		32.3	%	$	10,501	$	2,927	27.9	%

For the year ended December 31, 2016, the effective tax rate on loss from continuing operations was not meaningful. The effective tax rate on loss from continuing operations differs from the statutory tax rate of 35 percent primarily due to tax charges of $234 million associated with effect of foreign operations, $216 million of tax charges and related interest associated with increases in uncertain tax positions related to cross border financing transactions, $118 million related to disposition of subsidiaries, $102 million related to non-deductible transfer pricing charges, and $83 million related to increases in the deferred tax asset valuation allowances associated with U.S. federal and certain foreign jurisdictions, partially offset by tax benefits of $253 million of tax exempt income, $164 million associated with a portion of the U.S. Life Insurance Companies capital loss carryforwards previously treated as expired that was restored and utilized, $116 million related to the impact of an agreement reached with the Internal Revenue Service (IRS) related to certain tax issues under audit, and $132 million of reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities. Effect of foreign operations is primarily related to foreign exchange losses incurred by our foreign subsidiaries related to the weakening of the British pound following the Brexit vote taxed at a statutory tax rate lower than 35 percent.

For the year ended December 31, 2016, our repatriation assumptions with respect to certain European operations remain unchanged and related foreign earnings continue to be indefinitely reinvested. Our repatriation assumptions related to certain operations in Canada, South Africa and Asia Pacific region have changed and related foreign earnings are now considered to be indefinitely reinvested. These earnings relate to ongoing operations and have been reinvested in active non-U.S. business operations. Further, we do not intend to repatriate these earnings to fund U.S. operations. As a result, U.S. deferred taxes have not been provided on $2 billion of accumulated earnings, including accumulated other comprehensive income, of these non-U.S. affiliates. Potential U.S. income tax liabilities related to such earnings would be offset, in whole or in part, by allowable foreign tax credits resulting from foreign taxes paid to foreign jurisdictions in which such operations are located. As a result, we currently believe that any incremental U.S. income tax liabilities relating to indefinitely reinvested foreign earnings would not be significant. Deferred taxes have been provided on earnings of non-U.S. affiliates whose earnings are not indefinitely reinvested.

For the year ended December 31, 2015, the effective tax rate on income from continuing operations was 32.3 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 35 percent primarily due to tax benefits of $195 million associated with tax exempt interest income, $127 million related to reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities, $58 million associated with the effect of foreign operations, and $109 million related to the partial completion of the IRS examination covering tax year 2006, partially offset by $324 million of tax charges and related interest associated with increases in uncertain tax positions related to cross border financing transactions, and $110 million related to increases in the deferred tax asset valuation allowances associated with certain foreign jurisdictions.

For the year ended December 31, 2014, the effective tax rate on income from continuing operations was 27.9 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 35 percent primarily due to tax benefits of $236 million associated with tax exempt interest income, $209 million related to a decrease in the U.S. Life Insurance Companies’ capital loss carryforward valuation allowance, $182 million of income excludible from gross income related to the global resolution of certain residential mortgage-related disputes and $68 million associated with the effect of foreign operations.

The following table presents the components of the net deferred tax assets (liabilities):

December 31,
(in millions)		2016		2015
Deferred tax assets:
Losses and tax credit carryforwards	$	16,448	$	18,680
Basis differences on investments		4,985		4,886
Life policy reserves		3,040		353
Accruals not currently deductible, and other		1,128		1,003
Investments in foreign subsidiaries		103		-
Loss reserve discount		1,151		1,021
Loan loss and other reserves		39		8
Unearned premium reserve reduction		924		1,603
Flight equipment, fixed assets and intangible assets		478		129
Other		710		577
Employee benefits		1,171		1,286
Total deferred tax assets		30,177		29,546
Deferred tax liabilities:
Investments in foreign subsidiaries		-		(33)
Deferred policy acquisition costs		(3,790)		(3,467)
Unrealized gains related to available for sale debt securities		(2,844)		(3,077)
Total deferred tax liabilities		(6,634)		(6,577)
Net deferred tax assets before valuation allowance		23,543		22,969
Valuation allowance		(2,831)		(3,012)
Net deferred tax assets (liabilities)	$	20,712	$	19,957

The following table presents our U.S. consolidated income tax group tax losses and credits carryforwards as of December 31, 2016.

December 31, 2016				Tax	Expiration
(in millions)		Gross		Effected	Periods
Net operating loss carryforwards	$	34,618	$	12,116	2028 - 2035
Foreign tax credit carryforwards				4,917	2018 - 2023
Other carryforwards				737	Various
Total AIG U.S. consolidated income tax group tax losses and credits
carryforwards on a tax return basis				17,770
Unrecognized tax benefit				(2,903)
Total AIG U.S. consolidated income tax group tax losses and credits
carryforwards on a U.S. GAAP basis^*			$	14,867

* Includes other carryforwards, e.g. general business credits, of $96 million on a U.S. GAAP basis.

We have U.S. federal consolidated net operating loss and tax credit carryforwards of approximately $14.9 billion. The carryforward periods for our foreign tax credits begin to expire in 2019. As detailed in the Assessment of Deferred Tax Asset Valuation Allowance section of this footnote, we determined that it is more likely than not that our U.S. federal consolidated tax attribute carryforwards will be realized prior to their expiration.

Assessment of Deferred Tax Asset Valuation Allowance

The evaluation of the recoverability of our deferred tax asset and the need for a valuation allowance requires us to weigh all positive and negative evidence to reach a conclusion that it is more likely than not that all or some portion of the deferred tax asset will not be realized. The weight given to the evidence is commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more positive evidence is necessary and the more difficult it is to support a conclusion that a valuation allowance is not needed.

Our framework for assessing the recoverability of the deferred tax asset requires us to consider all available evidence, including:

the nature, frequency, and amount of cumulative financial reporting income and losses in recent years;
the sustainability of recent operating profitability of our subsidiaries;
the predictability of future operating profitability of the character necessary to realize the net deferred tax asset;
the carryforward period for the net operating loss, capital loss and foreign tax credit carryforwards, including the effect of reversing taxable temporary differences; and
prudent and feasible actions and tax planning strategies that would be implemented, if necessary, to protect against the loss of the deferred tax asset.

In performing our assessment of the recoverability of the deferred tax asset under this framework, we consider tax laws governing the utilization of the net operating loss, capital loss and foreign tax credit carryforwards in each applicable jurisdiction. Under U.S. tax law, a company generally must use its net operating loss carryforwards before it can use its foreign tax credit carryforwards, even though the carryforward period for the foreign tax credit is shorter than for the net operating loss. Our U.S. federal consolidated income tax group includes both life companies and non-life companies. While the U.S. taxable income of our non-life companies can be offset by the net operating loss carryforwards, only a portion (no more than 35 percent) of the U.S. taxable income of our life companies can be offset by those net operating loss carryforwards. The remaining tax liability of our life companies can be offset by the foreign tax credit carryforwards. Accordingly, we utilize both the net operating loss and foreign tax credit carryforwards concurrently which enables us to realize our tax attributes prior to expiration. As of December 31, 2016, based on all available evidence, it is more likely than not that the U.S. net operating loss and foreign tax credit carryforwards will be utilized prior to expiration and, thus, no valuation allowance has been established.

Estimates of future taxable income, including income generated from prudent and feasible actions and tax planning strategies could change in the near term, perhaps materially, which may require us to consider any potential impact to our assessment of the recoverability of the deferred tax asset. Such potential impact could be material to our consolidated financial condition or results of operations for an individual reporting period.

For the year ended December 31, 2016, recent changes in market conditions, including interest rate fluctuations, impacted the unrealized tax gains and losses in the U.S. Life Insurance Companies’ available for sale securities portfolio, resulting in a decrease to the net deferred tax asset related to net unrealized tax capital losses. As a result, for the year ended December 31, 2016, we released $682 million of valuation allowance associated with the unrealized tax losses in the U.S. Life Insurance Companies, all of which was allocated to other comprehensive income.

For both the three-month period and the year ended December 31, 2016, recent changes in market conditions and sales of securities that resulted in the reclassification of gains into continuing operations, impacted the unrealized tax gains and losses in the non-life companies’ available for sale securities portfolio, resulting in an increase to the net deferred tax asset related to net unrealized tax capital losses. As a result, we established $260 million of valuation allowance associated with the unrealized tax losses in the non-life companies’ available for sale securities portfolio, all of which was recognized in other comprehensive income.

As of December 31, 2016, based on all available evidence, we concluded that a valuation allowance of $728 million should remain on a portion of the deferred tax asset related to unrealized losses that are not more-likely-than-not to be realized.

During the year ended December 31, 2016, we recognized a net increase of $69 million in our deferred tax asset valuation allowance associated with certain foreign jurisdictions, primarily attributable to current year losses, changes in projections of taxable income and changes in tax law.

During the year ended December 31, 2016, we recognized a net increase of $170 million in our deferred tax asset valuation allowance associated with certain state jurisdictions, primarily attributable to current year losses, legislative state tax law changes and changes to state effective tax rates.

The following table presents the net deferred tax assets (liabilities) at December 31, 2016 and 2015 on a U.S. GAAP basis:

December 31,
(in millions)		2016		2015
Net U.S. consolidated return group deferred tax assets	$	24,134	$	24,134
Net deferred tax assets (liabilities) in accumulated other comprehensive income		(2,384)		(2,806)
Valuation allowance		(874)		(1,281)
Subtotal		20,876		20,047
Net foreign, state and local deferred tax assets		2,413		2,078
Valuation allowance		(1,957)		(1,731)
Subtotal		456		347
Subtotal - Net U.S., foreign, state and local deferred tax assets		21,332		20,394
Net foreign, state and local deferred tax liabilities		(620)		(437)
Total AIG net deferred tax assets (liabilities)	$	20,712	$	19,957

Deferred Tax Asset Valuation Allowance of U.S. Consolidated FEDERAL Income Tax Group

At December 31, 2016 and 2015, our U.S. consolidated income tax group had net deferred tax assets after valuation allowance of $20.9 billion and $20.0 billion, respectively. At December 31, 2016 and 2015, our U.S. consolidated income tax group had valuation allowances of $874 million and $1.3 billion, respectively.

Deferred Tax Liability — Foreign, State and Local

At December 31, 2016 and 2015, we had net deferred tax liabilities of $164 million and $90 million, respectively, related to foreign subsidiaries, state and local tax jurisdictions, and certain domestic subsidiaries that file separate tax returns.

At December 31, 2016 and 2015, we had deferred tax asset valuation allowances of $2 billion and $1.7 billion, respectively, related to foreign subsidiaries, state and local tax jurisdictions, and certain domestic subsidiaries that file separate tax returns. We maintained these valuation allowances following our conclusion that we could not demonstrate that it was more likely than not that the related deferred tax assets will be realized. This was primarily due to factors such as cumulative losses in recent years and the inability to demonstrate profits within the specific jurisdictions over the relevant carryforward periods.

Tax Examinations and Litigation

We file a consolidated U.S. federal income tax return with our eligible U.S. subsidiaries. Income earned by subsidiaries operating outside the U.S. is taxed, and income tax expense is recorded, based on applicable U.S. and foreign law.

The statute of limitations for all tax years prior to 2000 has expired for our consolidated federal income tax return. We are currently under examination for the tax years 2000 through 2010.

On March 20, 2008, we received a Statutory Notice of Deficiency (Notice) from the IRS for years 1997 to 1999. The Notice asserted that we owe additional taxes and penalties for these years primarily due to the disallowance of foreign tax credits associated with cross-border financing transactions. The transactions that are the subject of the Notice extend beyond the period covered by the Notice, and the IRS has administratively challenged the later periods. The IRS has also administratively challenged other cross-border transactions in later years. We have paid the assessed tax plus interest and penalties for 1997 to 1999. On February 26, 2009, we filed a complaint in the United States District Court for the Southern District of New York (Southern District) seeking a refund of approximately $306 million in taxes, interest and penalties paid with respect to the 1997 taxable year. We allege that the IRS improperly disallowed foreign tax credits and that our taxable income should be reduced as a result of the 2005 restatement of our consolidated financial statements.

We also filed an administrative refund claim on September 9, 2010 for our 1998 and 1999 tax years.

On August 1, 2012, we filed a motion for partial summary judgment related to the disallowance of foreign tax credits associated with cross border financing transactions in the Southern District of New York. The Southern District of New York denied our summary judgment motion and upon AIG’s appeal, the U.S. Court of Appeals for the Second Circuit (the Second Circuit) affirmed the denial. AIG’s petition for certiorari to the U.S. Supreme Court from the decision of the Second Circuit was denied on March 7, 2016. As a result, the case has been remanded back to the Southern District of New York for a jury trial.

We will vigorously defend our position and continue to believe that we have adequate reserves for any liability that could result from these government actions. We continue to monitor legal and other developments in this area, including recent decisions affecting other taxpayers, and evaluate their effect, if any, on our position.

Accounting For Uncertainty in Income Taxes

The following table presents a reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits:

Years Ended December 31,
(in millions)		2016		2015		2014
Gross unrecognized tax benefits, beginning of year	$	4,331	$	4,395	$	4,340
Increases in tax positions for prior years		235		162		91
Decreases in tax positions for prior years		(39)		(209)		(60)
Increases in tax positions for current year		3		-		10
Lapse in statute of limitations		-		(4)		(6)
Settlements		-		(13)		-
Activity of discontinued operations		-		-		20
Gross unrecognized tax benefits, end of year	$	4,530	$	4,331	$	4,395

At December 31, 2016, 2015 and 2014, our unrecognized tax benefits, excluding interest and penalties, were $4.5 billion, $4.3 billion and $4.4 billion, respectively. The activity includes increases for amounts associated with cross border financing transactions partially offset by certain benefits realized due to an agreement reached with the Internal Revenue Service (IRS) related to certain tax issues under audit. At December 31, 2016, 2015 and 2014, our unrecognized tax benefits related to tax positions that, if recognized, would not affect the effective tax rate because they relate to such factors as the timing, rather than the permissibility, of the deduction were $0.1 billion, $0.1 billion and $0.3 billion, respectively. Accordingly, at December 31, 2016, 2015 and 2014, the amounts of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate were $4.4 billion, $4.2 billion and $4.1 billion, respectively.

Interest and penalties related to unrecognized tax benefits are recognized in income tax expense. At December 31, 2016, 2015, and 2014, we had accrued liabilities of $1.2 billion, $1.2 billion, and $1.1 billion, respectively, for the payment of interest (net of the federal benefit) and penalties. For the years ended December 31, 2016, 2015, and 2014, we accrued expense of $26 million, $156 million and $21 million, respectively, for the payment of interest (net of the federal benefit) and penalties. The reduction in interest accrued during 2016 as compared to 2015 is primarily related to benefits associated with an agreement reached with the IRS related to certain tax issues under audit, partially offset by an increase associated with cross border financing transactions.

We regularly evaluate adjustments proposed by taxing authorities. At December 31, 2016, such proposed adjustments would not have resulted in a material change to our consolidated financial condition, although it is possible that the effect could be material to our consolidated results of operations for an individual reporting period. Although it is reasonably possible that a change in the balance of unrecognized tax benefits may occur within the next 12 months, based on the information currently available, we do not expect any change to be material to our consolidated financial condition.

Listed below are the tax years that remain subject to examination by major tax jurisdictions:

At December 31, 2016	Open Tax Years
Major Tax Jurisdiction
United States	2000-2015
Australia	2012-2015
France	2014-2015
Japan	2010-2015
Korea	2011-2015
Singapore	2012-2015
United Kingdom	2013-2015