24. 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)	2012		2011			2010

U.S.	$	5,515	$	(566	)	$	15,749
Foreign		3,807		682			4,498

Total	$	9,322	$	116		$	20,247

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




Years Ended December 31, (in millions)	2012			2011			2010

Foreign and U.S. components of actual income tax expense:
Foreign:
Current	$	484		$	302		$	823
Deferred		(275	)		(20	)		270
U.S.:
Current		311			(284	)		(243	)
Deferred		1,050			(19,422	)		6,143

Total	$	1,570		$	(19,424	)	$	6,993

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:




	2012									2011								2010
Years Ended December 31, (dollars in millions)	Pre-Tax Income (Loss)			Tax Expense/ (Benefit)			Percent of Pre-Tax Income (Loss)			Pre-Tax Income (Loss)		Tax Expense/ (Benefit)			Percent of Pre-Tax Income (Loss)			Pre-Tax Income		Tax Expense/ (Benefit)			Percent of Pre-Tax Income

U.S. federal income tax at statutory rate adjustments:	$	2,893		$	1,013			35.0	%	$	2,604	$	911			35.0	%	$	22,877	$	8,007			35.0	%
Tax exempt interest					(302	)		(10.4	)				(454	)		(17.4	)				(587	)		(2.6	)
Investment in subsidiaries and partnerships					(26	)		(0.9	)				(224	)		(8.6	)				(1,319	)		(5.8	)
Variable interest entities					32			1.1					(43	)		(1.7	)				(2	)		–
Uncertain tax positions					586			20.3					(29	)		(1.1	)				(36	)		(0.2	)
Dividends received deduction					(58	)		(2.0	)				(52	)		(2.0	)				(108	)		(0.5	)
Effect of foreign operations					172			5.9					(386	)		(14.8	)				602			2.6
Bargain purchase gain					–			–					–			–					(116	)		(0.5	)
State income taxes					(83	)		(2.9	)				(85	)		(3.3	)				(104	)		(0.5	)
Other					(107	)		(3.7	)				116			4.5					215			1.0
Effect of discontinued operations					(127	)		(4.4	)				(173	)		(6.6	)				119			0.5
Effect of discontinued operations – goodwill					–			–					–			–					1,268			5.5
Valuation allowance:
Continuing operations					(1,907	)		(65.9	)				(18,307	)		NM					1,361			6.0
Discontinued operations					–			–					–			–					1,292			5.7

Consolidated total amounts		2,893			(807	)		(27.9	)		2,604		(18,726	)		NM			22,877		10,592			46.2
Amounts attributable to discontinued operations		(6,429	)		(2,377	)		37.0			2,488		698			28.1			2,630		3,599			136.8

Amounts attributable to continuing operations	$	9,322		$	1,570			16.8	%	$	116	$	(19,424	)		NM	%	$	20,247	$	6,993			34.5	%

For the year ended December 31, 2012, the effective tax rate on pre-tax income from continuing operations was 16.8 percent. The effective tax rate for the year ended December 31, 2012, attributable to continuing operations differs from the statutory rate primarily due to tax benefits of $1.9 billion related to a decrease in the life-insurance-business capital loss carryforward valuation allowance and $302 million associated with tax exempt interest income. These items were partially offset by charges of $586 million related to uncertain tax positions and $172 million associated with the effect of foreign operations.

For the year ended December 31, 2011, the effective tax rate on pre-tax income from continuing operations was not meaningful, due to the significant effect of releasing approximately $18.4 billion of the deferred tax asset valuation allowance. Other factors that contributed to the difference from the statutory rate included tax benefits of $454 million associated with tax exempt interest income, $386 million associated with the effect of foreign operations, and $224 million related to our investment in subsidiaries and partnerships

For the year ended December 31, 2010, the effective tax rate on pre-tax income from continuing operations was 34.5 percent. The effective tax rate for the year ended December 31, 2010, attributable to continuing operations differs from the statutory rate primarily due to tax benefits of $1.3 billion associated with our investment in subsidiaries and partnerships, principally the AIA SPV which is treated as a partnership for U.S. tax purposes, and $587 million associated with tax exempt interest, partially offset by an increase in the valuation allowance attributable to continuing operations of $1.4 billion.

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




December 31, (in millions)	2012			2011

Deferred tax assets:
Losses and tax credit carryforwards	$	25,359		$	28,223
Unrealized loss on investments		3,365			2,436
Accruals not currently deductible, and other		4,499			6,431
Investments in foreign subsidiaries and joint ventures		1,435			1,432
Loss reserve discount		1,235			1,260
Loan loss and other reserves		547			877
Unearned premium reserve reduction		1,145			1,696
Employee benefits		1,483			1,217

Total deferred tax assets		39,068			43,572

Deferred tax liabilities:
Adjustment to life policy reserves		(1,817	)		(1,978	)
Deferred policy acquisition costs		(2,816	)		(3,340	)
Flight equipment, fixed assets and intangible assets		(2,015	)		(4,530	)
Unrealized gains related to available for sale debt securities		(7,464	)		(4,010	)
Other		(225	)		(378	)

Total deferred tax liabilities		(14,337	)		(14,236	)

Net deferred tax assets before valuation allowance		24,731			29,336
Valuation allowance		(8,036	)		(11,047	)

Net deferred tax assets (liabilities)	$	16,695		$	18,289

The following table presents our U.S. consolidated income tax group tax losses and credits carryforwards as of December 31, 2012 on a tax return basis.

December 31, 2012 (in millions)	Gross		Tax Effected		Expiration Periods



Net operating loss carryforwards	$	40,872	$	14,305	2025 - 2031
Capital loss carryforwards – Life		17,249		6,037	2013 - 2014
Capital loss carryforwards – Non-Life		88		31	2013
Foreign tax credit carryforwards		–		5,549	2015 - 2022
Other carryforwards and other		–		515	Various

Total AIG U.S. consolidated income tax group tax losses and credits carryforwards			$	26,437

Assessment of Deferred Tax Asset Valuation Allowance

The evaluation of the recoverability of the 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 deferred tax assets weighs the sustainability of recent operating profitability, the predictability of future operating profitability of the character necessary to realize the deferred tax assets, and our emergence from cumulative losses in recent years. The framework requires us to consider all available evidence, including:

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

As a result of sales in the ordinary course of business to manage the investment portfolio and the application of prudent and feasible tax planning strategies during the year ended December 31, 2012, AIG determined that an additional portion of the life insurance business capital loss carryforwards will more-likely-than-not be realized prior to their expiration.

For the year ended December 31, 2012, AIG released $2.1 billion of its deferred tax asset valuation allowance associated with the life insurance business capital loss carryforwards, of which $1.9 billion was allocated to income from continuing operations. Additional life insurance business capital loss carryforwards may be realized in the future if and when other prudent and feasible tax planning strategies are identified. Changes in market conditions, including rising interest rates above AIG's projections, may result in a reduction in projected taxable gains and reestablishment of a valuation allowance.

The following table presents the net deferred tax assets (liabilities) for December 31, 2012, and December 31, 2011, respectively, on a U.S. GAAP basis:




December 31, (in millions)	2012			2011

Net U.S. consolidated return group deferred tax assets	$	29,550		$	29,442
Net deferred tax assets (liabilities) in Other comprehensive income		(7,174	)		(3,041	)
Valuation allowance		(5,068	)		(7,240	)

Subtotal		17,308			19,161

Net foreign, state & local deferred tax assets		3,126			4,261
Valuation allowance		(2,968	)		(3,807	)

Subtotal		158			454

Subtotal – Net U.S, foreign, state & local deferred tax assets		17,466			19,615
Net foreign, state & local deferred tax liabilities		(771	)		(1,326	)

Total AIG net deferred tax assets (liabilities)	$	16,695		$	18,289

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

At December 31, 2012, and December 31, 2011, our U.S. consolidated income tax group had net deferred tax assets (liabilities) after valuation allowance of $17.3 billion and $19.2 billion, respectively. At December 31, 2012, and December 31, 2011, our U.S. consolidated income tax group had valuation allowances of $5.1 billion and $7.2 billion, respectively.

For the year ended December 31, 2011, the decrease in the U.S. consolidated income tax group deferred tax asset valuation allowance was $18.4 billion. The entire decrease in the deferred tax asset valuation allowance was allocated to continuing operations. The amount allocated to continuing operations also included the decrease in the deferred tax asset valuation allowance attributable to the anticipated inclusion of the ALICO SPV within the 2011 U.S. consolidated federal income tax return.

Deferred Tax Liability – Foreign, State and Local

At December 31, 2012 and December 31, 2011, we had net deferred tax liabilities of $613 million and $872 million, respectively, related to foreign subsidiaries, state and local tax jurisdictions, and certain domestic subsidiaries that file separate tax returns.

At December 31, 2012 and December 31, 2011, we had deferred tax asset valuation allowances of $2.9 billion and $3.8 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. Several U.S. subsidiaries included in the consolidated financial statements previously filed separate U.S. federal income tax returns and were not part of our U.S. consolidated income tax group. Subsidiaries operating outside the U.S. are 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 2006.

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 is challenging the later periods. It is also possible that the IRS will consider other transactions to be similar to these transactions. 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 seeking a refund of approximately $306 million in taxes, interest and penalties paid with respect to its 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 our 2005 restatement of its consolidated financial statements.

On March 29, 2011, the U.S. District Court, Southern District of New York, ruled on a motion for partial summary judgment that we filed on July 30, 2010 related to the disallowance of foreign tax credits associated with cross border financing transactions. The court denied our motion with leave to renew following the completion of discovery regarding certain transactions referred to in our motion, which we believe may be significant to the outcome of the action.

On August 1, 2012, we filed a motion for partial summary judgment. The parties completed submission of briefs in support of their respective positions on November 12, 2012. As of February 21, 2013 the motion remains pending. We will vigorously defend our position, and continue to believe that we have adequate reserves for any liability that could result from the IRS actions.

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

We continue to monitor legal and other developments in this area and evaluate the effect, if any, on our position, including recent decisions adverse to other taxpayers.

Accounting For Uncertainty in Income Taxes

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




Years Ended December 31, (in millions)	2012			2011			2010

Gross unrecognized tax benefits, beginning of year	$	4,279		$	5,296		$	4,843
Increases in tax positions for prior years		322			239			888
Decreases in tax positions for prior years		(253	)		(1,046	)		(470	)
Increases in tax positions for current year		–			48			49
Lapse in statute of limitations		(8	)		(7	)		(6	)
Settlements		(5	)		(259	)		(12	)
Activity of discontinued operations		50			8			–
Less: Unrecognized tax benefits of held for sale entities		–			–			4

Gross unrecognized tax benefits, end of year	$	4,385		$	4,279		$	5,296

At December 31, 2012, 2011 and 2010, our unrecognized tax benefits related to tax positions that if recognized would not affect the effective tax rate as they relate to such factors as the timing, rather than the permissibility, of the deduction were $0.2 billion, $0.7 billion and $1.7 billion, respectively. Accordingly, at December 31, 2012, 2011 and 2010, the amounts of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate were $4.2 billion, $3.5 billion and $3.6 billion, respectively.

The decrease in the gross unrecognized tax benefits for 2012 was primarily related to tax positions that did not affect the effective tax rate because they relate to timing.

Interest and penalties related to unrecognized tax benefits are recognized in income tax expense. At December 31, 2012 and 2011, we had accrued liabilities of $935 million and $744 million, respectively, for the payment of interest (net of the federal benefit) and penalties. For the years ended December 31, 2012, 2011 and 2010, we accrued expense (benefits) of $189 million, $(174) million and $149 million, respectively, for the payment of interest (net of the federal benefit) and penalties.

We regularly evaluate adjustments proposed by taxing authorities. At December 31, 2012, 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, 2012		Open Tax Years



Major Tax Jurisdiction
United States		2000 - 2011
Australia		2008 - 2011
France		2008 - 2011
Japan		2007 - 2011
Korea		2007 - 2011
Singapore		2011
United Kingdom		2010 - 2011