American International Group, Inc. v. United States of America

Filing 124

OPINION AND ORDER re: 109 MOTION for Partial Summary Judgment. filed by American International Group, Inc. AIG's motion for partial summary jdugment, Dkt. No. 109, is therefore denied. (Signed by Judge Louis L. Stanton on 3/29/2013) (tro)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

- X
AMERICAN INTERNATIONAL GROUP,
and its subsidiaries,

INC.,

Plaintiff,
09 Civ. 1871

(LLS)

- against ­
OPINION AND ORDER
UNITED STATES OF AMERICA,
Defendant.

- X
Plaintiff
renews
that

its
it

July

is

30,

2010

motion

to

credits

entitled

affiliates

("Special

effect

transactions

six

("AIG-FP,"

a

International

American

Purpose

overseas

financial

("IRS" )

disallowed

for
for

AIG

credits

The
on

Inc. ,

("AIG")

summary

judgment

foreign
or

taxes

"SPVs")

Financial

subsidiary

institutions. 1
the

partial

Vehicles"

between

wholly-owned

Group,

of

AIG's

claimed additional amounts due in taxes,

1997

by

used

to

Products

AIG)

Internal

it

paid

and

Corp.

certain

Revenue Service
tax

return

and

interest and penal ties

1 In a
March 29, 2011 Memorandum Endorsement (Dkt. No. 85) and in response to
the Government's request for additional discovery, I denied AIG's earlier
motion "without prejudice and with leave to renew, on these or other papers,
following the completion of discovery concerning the domestic transactions,"
i. e., a series of transactions AIG claimed to be the same, in all material
respects, to the six at issue on this motion but for their use of domestic
rather than foreign affiliates of AIG.
It eventually became clear that
resolution of the disputes concerning the domestic transactions would not
provide a ground for decision of this motion and would necessitate a complete
analysis
and ruling on the appropriate tax treatment of
the domestic
transactions.
Thus, with the consent of AIG and over an obj ection by the
Government, I directed the parties to limit their discussion in the renewed
motion papers to the foreign transactions only.
See Tr. of July 20, 2012
Conf. (Dkt. No. 112).

1

#

in

a

March

20,

2008

notice

iency.

f

of

AIG

paid

those

an appropriate refund.

amounts and now

lowance was proper because

The Government claims the
the transactions 1

economic

tance.

reasons whi

For

follow, the motion is denied.
BACKGROUND

From 1993

to

law

governing
Reply at

preferred stock.

the Government
that

agree

7.

each

into

six

as

transaction,
S

In

a

Vehicle u

or

to

sell

tax credit
follows,

as

transact

tween U. S.

II

and

AIG describes t

ial for re

preferred
Purpose

s

proceeded

structure
In

entered

"advantage of the mismatch

structured to t
tax

AIG FP

1997,

transact

as

generators.
th

variat

in

of this motion.
AIG-FP

fore

"SPVII)

sold

AIG-FP

a

ign

affiliate

commit

to

shares after a term of years for the

lender
(the

"

repurchase

those

price pa

lender bank.
Capit

l

primarily

from

the

sale

purchased investments which generated a st

of

shares,

SPV

income.

It paid

2
The names and dates of, and counterparties to, the disputed transactions
are as follows:

"Laperouse," entered on or about September 30, 1993 with Credit
cole.

"Vespucci," on or about December 18, 1995 with Banca Commerciale Italiana.

"NZ Issuer" or "New Zealand," December 11-19, 1996, with Bank of New Zealand.

"Maitengrove," on or about
28, 1997, with Bank of Ireland.

"Lumagrove,1I on or about August 27, 1997, with Bank of Ireland.

"Palmgrove,1I on or about October 20, 1997, with Irish Permanent.

2

taxes on the investment income to its overseas tax authority
distributed much of the net proceeds to the 1
The

r

1

paid

( "dividend" )

Its

little,
tax

if

any,

aut

tax

on

distribution

considered

lender's

purchase of preferred stock to be an equity investment
SPY,

despite AIG-FP's obligation to

there

On

its

credi ts

for

whi

1997

the

to

apply portions

amount

return,
of

AIG

fore

of

the

credits

other transact

and

claimed
tax

d

ign
by

its

tax

ferred st

tax
SPY,

allowing
1

lity on
tax

was a loan to

ned AIG's corporate subsidiary, because of

repurchase obI
investment

but

ed

, AIG

ion.

di vidend paid to
tax

to

ary to

AIG claims that under U.S.

the lender's purchase of

SPY, and the spy

U.S.

tax

U.S.

1

distribution from subsi

exceeded AIG's U.S. tax owed on the transact

income
law,

shares,

treated the Spy as the lender's corporate subsidiary,

and the dividend as a tax-

it

se

in the

deducted

lender.
on

AIG's

as

The
1997

transactions.

3

ed all of the SPY's
an

t

erest
e

return

expense

the

below summarizes

the

as

the

a

result

u.s.

Tax Reported on These Transactions on AIG's 1997
(in u.s. Do11ars)3

I otal
T

I

Interest ----rNet
Expense
I Taxable
. Income
19,480,447

Gross

Income

-~.~---

.....

--~.~

Laperouse

I Foreign

Tax Owed

. Tax Credit
6,818,156

17,769,336

89,000

42,646,064

Vespucci

Tax Return

2,551,150

6,582,571

,566,888

6,498,411

14,278,596

1,903,075

4,784,663

15,798,043

NZ Issuer

,701,584

. Mai tengrove

13,205,250

7,767,892

5,437,358

I Lumagrove

10,641,511

6,125,265

4,516,246
1,024,492

Palmgrove
!

2,626,417

1

1,601,925

Total

128,185,757

!

71,871,326

Thus,

as

a

result

of

!

1

1 ,580,686

!

3,830,944

.358,572
I 945,510
I
56,314,431 ! 19,710,050 ! 48,191}620

those

tax

effects,

the

ies'

combined tax burden on the investment income was minimal.

The

foreign

tax

tax

igat

credits
of

the

SPV i

u. S .

and AlG

claimed

taxes

by

AlG

offset

lender' s

on only

contends

the

a

transactions

ion of

investments to

were

All f

the

investment

merely

instances

of

AlG FP borrowed funds

purchased investments,
the lender a suit

tax exempt i

erest expense.

highly profitable spread banking activi
1

ign

dividend was

income, having deducted much of it as an
AlG

the

used

e interest,

return on
and

it

, except those appearing in column 4 ("Tax Owed"), are drawn from
1 of AIG's 2010 Rep
brief, at page 12.
The numbers in column 4 are
35% of the corresponding Net Taxable Income amounts appearing in column 3,
and are based on AlG's statement that it "was required to
and did
pay
U.S. tax on that taxable income at the standard U.S. corporate income tax
rate, which was 35%."
ld.

4

return on the

erest and t

difference between the

from

stments.
Government

claims

it.

According

"effective

shif

the SPV,

Opp.

II

return as a
ts
tax

to

the

tax

at

5,

tax

benefits

Government,

liability

dend,

tax exempt

SPV.

by

iate

a

AIG

Those

dividend

rate

lender

lower

i . e.,

they

substance,

consequences,

"can

or util

Lee v.

II

(quotation marks
doct

fore

tax
fore

permitted

the

AIG

return

on

to
the

Id.

the Government argues the transactions lack economic

tance,
purpose,

its

of

savings
than

bank to

to receive

fset

tax

lender

fore

investments, creating AIG's profitable spread.
Thus,

the

and AIG to cIa
to

spread

t

and

"from t

which allowed the

and interest deduct

pa

generated

not

th

reason

be

apart from

Comm'r,

omitted).

said

to

have

ir anticipated tax

155 F.3d 584,

586

AIG claims

(2d Ciy.

economic

1998)

substance

does not apply, and that the transactions have economic

substance

because

it

the

over

million."

Rep

they

1 fe

were

of

the

ted

to

transactions

generate
of

"at

a

pre-tax

least

$168.8

at 12.
DISCUSSION

Under

Federal

Rule

of

Civil

56 (a),

Proc

"the

shall grant summary judgment if the movant shows
no genuine dispute
entitled

to

as

judgment

to any material

fact

as

law.

a

matter
5

of

court

there is

and the movant
II

"

s

is

standard

requires
factual

that

courts

resolve

all

ambi

tall

inferences that could rational

the party opposing summary judgment.
York,

ties,

579 F. 3d 160, 166

(2d

in favor of
inelli v.

/I

r. 2009)

Ci

of New

ernal quotation marks

omitted) .
"Anyone may so arrange his a fairs
as low as possible; he is not

is not even a patriotic duty

to increase one's taxes.
(2d Cir.

1934),

55 S. Ct. 266

69

/I

aff'd,

(1935)

them,

doubted.

/I)

by

d be his taxes,

se
which

definit

definition'

of

term

of

t

tax

284

2011)

tion for

from the tax mot
~~~~,

I

v.

in

does

a transaction'
Inc.

Altria

(2d Cir.

"the

permits,

used

'it

Congress meant to cover
benefit./I

law

the

or altogether
cannot

be

"However, even if a transaction's form matches 'the

•

dictionary

465,

of a taxpayer to decrease

I

means

F.2d 809,

293 U.S.

the amount of what
avoid

that pattern which

to

will best pay the

810

his taxes shall be

not

statutory

follow

that

and allow it a tax

United States,

Helvering,

the

658

69 F.2d at

F.3d 276,

810.

ermination is whether what was
was the thing which the statute int

293 U.S. at 469, 55 S. Ct. at 267.
1.

6

II

The part
apart

s dispute how to

from the tax motive,

established

termine

was what

her what was done,

Congress

intended when it

ign tax credit.
transactions had

The Government argues AIG must prove
economic
ign

substance,
tax

substance.
1994)

because

credits

Congress did not

to

transactions
v.

See

Comm'r,

intend

economic

101

(2d Cir.

F.3d 98,

the basis

("An activity will not

deduct

cit

it lacks economic substance.")

confer

lack

which

29

to

if

293 U.S. at 469,

55 S. Ct at 267.
AIG

argues

proof

of

economic

double

taxation,

disallowance of t
taxation."

and

"the

economic

omitted)
tax

the

motives,"

substance

rly be
is

statute

and

intended
v.

tax

"as

that

not

Comm'r,

rements

ived from the terms
at

issue."

(emphasis

Id.

permi t s proper
to

many

relief

skewed the neutrality of

transactions
of

irrespective

281 F.2d 326,329,
the

tern"

to

7

.... ---~--~~----~~--~------------

Congress
the

has

parties'

or has "purposely

induce act i vi

would otherwise result in an economic loss,

.~-~----

spute

doct

"The opinion in

avoidance,"

clearly

no

it only applies when the

it would impose can f
of

is

s case is to

Reply at 10.

every context

purpose

there

immaterial

credits at issue would subject AIG to double

As AIG states,
apply

is

statute involved In t

because "The purpose of t
eliminate

substance

Sacks v.

which

Comm'r,

69

F.3d

982,

991

substance
purpose"

Cir.

doctrine
and

benefits,"
Cir.

(9th

1995).
a

does,

To

require,

taxpayer

to

as

prove

"reasonable possibility of profit"

Nicole

2003),

Rose

would

Corp.

subvert

v.

the

Comm'r,

purpose

320

of

the
a

economic
"business

"apart

F.3d

from tax

282,

284

with

respect

Congress

(2d

to such transactions.
But
the

those

requirements

foreign tax credit,

facilitate

are

consonant

because Congress

purposive business

wi th

the

purpose

of

intended the credit to

transactions,

not

by subsidy,

but

by restoring the neutrality of the tax system.
The

United

residents
earned

States

regardless

abroad

is

taxes

of

often

the

where
also

the

foreign

tax credit

of

income

by

of

income

subj ect

passed the
foreign

income

to

the

is

citizens

Congress

tax.

such double

taxpayer

to

and

Income

earned.

foreign

to mitigate

permitting

its

taxation

subtract

the

amount he pays or accrues in foreign tax from his U.S.

tax bill.

See,

e.g.,

Fin.,

U.S.

71,

"was

originally

Kraft
73,

Gen.

112

S.

Foods
Ct.

designed

v.

Iowa Dep't

2365,
to

2367

produce

among United States taxpayers,

(1992)

of

Rev.
Thus,

uni formi ty

of

&

505

the

credit

tax

burden

irrespective of whether they were

engaged in business in the United States or engaged in business
abroad,"

H.R.

"neutralize

the

Rep.
effect

No.

83-1337

of U. S.

at

76

(1954) ,

tax on the business

to
decision of

where to conduct business activities most productively," Bank of

8

New York Mellon

v.

Comm' r,

------------------------~-------------

26683 09,

2013 WL 499873,

at

*18 (U.S. Tax Ct. Feb. 11, 2013).
Motivating
H.R.

Rep.

need

to

No.

Congress
65-767,

facilitate

at

"the

to
11

reI ieve
(1918),

on fore

extension

their business abroad,H Burnet v.
1,

7 -1 0 ,

52

S.

Ct .

275,

severe

"ve

277 78

corporations

Portrait Co.,
and

American foreign trade," Comm'r v. Am. Metal Co.,
137

(2d Cir.

1955).

of 1918, which first

As stated

If

income was the

domestic

(1932).

burden,

to

of

285 U.S.

"encourage

221 F.2d 134,

debate of the Revenue Act
credit:

l

Suppose we had a meat
over in Montreal and
they would
to St.
s
Canadian citizen from
Montreal and pay him $50,000 a year i this Government
would tax
on $50.000,
though he would be a
British subject
an citizen.
Canada would
tax him.
so.
no doubt, will do as we are
doing by
s
11
pass a law that will permit its
citizen
here to deduct from
s tax
levied by
amount of tax paid by him to
United States.
is not only a just provision, but
a very wise one.
It is wise from the standpoint of
the commerce 0
the United States, of the expansion of
business of
United States.
There are thousands of
citizens of
ted States now going to South
America, and
have been going for years, and we
of citizens in Canada.
We would
discourage men from going out after commerce
iness
fferent countries or residing for such
purposes in
fferent countries if we maint ned this
double taxation.
They would take their corporations
can corporations and reorganize t
t
ir charters in such foreign countries, if
we did not do this, and we might not be able to tax
their income and profits at all.
Another th
If we
did not do that. a man would become a citizen of
another country instead of retaining
s citi
order to escape the large and double taxation

9

56 Congo Rec. App. 677 (1918)
Because

Congress

taxpayer

"who

Goldstein

V.

sought

only

iness
appears

Comm'r,

transactions

to

364

to

by

Thus,
exclude

in

734,

disadvantage

the

the

t

transactions

caused

of

F.3d

ll

ted States,
LLC

(same)
Ct .

V.

i

1966),
his

and

foreign

income,
avai

it

e

to

would not

taxpayer

778

to

pay

Bank of New
. 11, 2013)

"economic

utility"

See

Cir.

(5

AIG cannot

from the tax benefits,
. v.

2001 )

im for forei

253 F.3d 350

United States,

taxation,

transactions'

by Congress.

tance doctrine to c

I,

the

claim to avoid double

is what was intended

v.

be

"

. at 741.
in its

277

Cir.
to

the

act

worldwide

must show that "what was

....

(2d

for

t

purposive

742

taxation

c

system of taxes imposed by Congress"

consideration

Comm'r,
_ _­

tax

"that have no economic utili ty and t

because

ign tax.

engage

intended

be engaged in but for
simply

foreign

the

U.S.

have

the

F.2d

eliminate

imposed
not

creat

desires

to

(statement of Rep. Kitchin)

tax

(8th Cir.

816 F.

(applying
ts)

2001)

2d 693

2013 WL 499873,

at

i

(same)
(S.D.
*16 19

economic
IES Indus.
i

Priti

Iowa 2011)
(U.S.

Tax

(same)
2.

Under the economic substance doctrine,
disallowed if a transaction "has no bus

tax benefits will be
s purpose or economic

10

'--------------------------------------------,~=,,--

effect other than the creation of tax"

benefits.

Nicole Rose,

320 F.3d at 284.
"The business purpose inquiry

'concerns the motives of the

taxpayer ln entering the transaction.'"
United States,

694 F. Supp.

Rice's Toyota World,
1985)), aff'd,
"The

Inc.

2d 259,
v.

economic

283

effect

(S.D.N.Y.

92

Inc.

2010)

752 F.2d 89,

Comm'r,

658 F.3d 276, 281

Altria Group,

v.

(quoting
(4th Cir.

(2d Cir. 2011).

inquiry

requires

an

objective

determination of whether a reasonable possibility of profit from
the

transaction

(internal

existed

quotation

F.2d 143, 148
AIG

marks

from

tax

id.

at

283

see

omitted)

benefits,"
Gilman

Comm' r,

933

v.

(2d Cir. 1991).

claims

the

transact ions'

$168.8

million

pre-tax

through

spread

banking.

proves

correct,

transact ion

apart

has

profit
If

AIG would be
economic

purpose

they
the

and

were

expected

computation

entitled to

substance

ef fect

be

the

to

obtain

that

of

judgment,

and wi 11

was

figure

because

recogni zed

"a
for

tax purposes" if it was expected to result in a significant pre­
tax profit, Gilman,
to

objective

facts

933 F.2d at 147, as "greater weight is given
than

to

the

taxpayer's

mere

statement

of

intent," Lee, 155 F.3d at 586.
Thus,

the function of the economic substance doctrine is to

distinguish the transaction "which is compelled or encouraged by
business or regulatory realities,
considerations,

and

is

not

is imbued with tax-independent

shaped
11

solely

by

tax-avoidance,"

Frank

Co.

1303

(1978),

said

to

v.

U.S.,

from

have

435 U.S.

561,

91

purpose,

(2d Cir.

AlG

merely

profitable

stance,

to

or,

or

minimize

its

cost

existed

because

performed

by

its
the

of

its
of

the

re

t,

s
expenses,

AlG's
its

its

expected

return

on

obligations

tax

tax

to

the

otherwise

on

spread

investment

consequences,

AlG modifies
the

borrowed
Michael

tax pa

the

703 F.3d

the

Dr.

takes

its

rent tax benefits.

s

Government's

figure

return

Ilion f

$168.8

SPV's
lender

and

the

funds,

as

Cragg, 4

by

by the SPV.
stment

and disregards the following:

SPV on its investment income,
AlG on

from

on

whether

transactions'

adding toward AlG's profit the fore
a

apart

burden

or

including its negotiated division of

computation of

1291,

to determine

tax

activi

between AlG's

at

utility

in this case,

spread

To arrive

Ct.

States v. Coplan,

2012),

sought

only

98 S.

transaction which "can not with reason

anticipated tax cons
46,

583-84,

its

As

income,
operating

tax paid by
tax paid by

the u.S.

SPV's investment income, and the value of the foreign
ts to which AlG claims it is el

e.

The borrowed funds are the funds AIG-FP received from the lender in exchange
for its
stock in the SPV.
Those funds provided much of the SPV's
; the rest was provided by AlG's own contribution.
AlG asserts that
its pre tax
it would be greater if the return on its own contribution
were included in its computation, but "has adopted for purposes of this
motion the computations of the government's economist, Dr. Cragg."
at
3.

12

AIG's calculation

s not, however, exclude the ef

the tax-exempt status of the lender's dividend.
AIG- FP

repurchased

s)

the

Because

lender bank was

s of
(until

considered

the parent of the SPV,

the SPV's transfer of funds to

was t ax exempt

3

(see p.

above).

bank

The lender bank shared

benefit with AIG-FP by giving AIG-FP a more favorable
rate.

As Mauro Gabriele,

Banque

AIG

lender

testifi

BCl)

and

dend

then chief executive of AlG affiliate

regarding

Laperouse

Vespucci

(involving

( involving

foreign

lender

19n

Credit

Agricole)
Q:
r enough.
So to what extent did t
fact that
BCI was receiving a dividend taximpact t
price
that FP was going to pay?

which
ce? The price - what do you mean by
we were willing to pay?

A:

Q:

ce

The dividend.

Well,
again,
that
was
the
benefit
in
the
transaction that
lowed us to raise money at a very
ficant
sub-LIBOR
spread,
because
by
BCI
t
ly receiving what were interest flows on a
tax-free basis created value and that's what we were
splitting between us, ourselves.

A:

Q:

litt

s

what, I'm sorry?

by the
That value that was being gene rat
were getting tax-exempt income for what is
that
va
of the
normally taxable income, that was
transaction.

A:

Q:

So you would talk about

A:

Yes, defi

s tax value presumably?

tely.

Okay.
How would those discuss
how you determine how to split it up?

Q:

13

go in terms of

A: Well, what we would say i s , "
you're
ng to
get tax-exempt
So if you keep all of the
value, this is go
be t
return for you in pre
tax equivalent terms.
Pre-tax
ent terms.
"However, we want to
fit in t
transaction,
we want to
borrowing at an attractive 1
so
you're not going to
t to keep
1 of
val ue,
we're
to
some of it."
That is what the
discussion was
II

Q: All right.
A: It

So how much of the benefit did you get?
from transaction to transaction.

Q: Start with

don't remember the
A: Laperouse, I actual
split, to
honest.
I know that I think for us it
nly in excess of 100 basis
was LIBOR minus
points.
I don't remember the actual number.
Q:

How about

't mean to cut you off.

sorry, I

A: I don't remember what
lent
return was.
I don't know the
In
case
i, I
because it was one that I
d
myself, Bel's return was in excess of 'LIBOR plus 500'
for us
borrowing was in excess of 'LIBOR minus
300. '

. Tr. at 98 102, att

Gabriele

as Ex. 22 of Decl. of John

D. Cl

's analysis that

His testimony corroborates Dr.
FP's ability to
"transaction
counterpart
Oct.
of

25,

'borrow'

a

2010 at

borrowing

included

AIG-FP

tax-af

cted dividend rate.

/I

~

Dr.

whi

terms
S

at sub-market rates" was the re

would

44.

have

concludes
y

14

equaled

"AIG
t

ng
Decl.

of
the
of

AIG-FP's cost
its

return

on

the

investment

income

if

the
AIG.

"netting no ga

SPV's

distribution had been taxable,

Id. at ~ 45.

For the purpose of this mot ion only,

AIG does not contest

Dr.

Cragg's calculation.

It asserts t

the

tax-exempt

the lender' s

ef

t to be isolated and removed from the transactions in order

status

to determine

of

as a matter of law,
dividend

is

not

a

tax

their non-tax purpose and effect:

extent

The "solution," according to the Government, is
to rewrite the terms of
transaction to "remov [e]
the effect of taxes on the terms and structure of
transaction."
The Government's expert, Dr. Cragg, is
even more explicit.
He says: "An economical
correct
profitability analysis absent taxes
usts all the
transact
terms and returns for the impact of baked
in tax benefits."
Government ci tes no case to
support this entirely novel method of determining pre­
tax profit, which would be
sed not on the actual
terms
of
transactions
but
tead
on
a
fictionalized version where "all the transaction terms
and returns" have been "adjusted U supposedly to remove
latent effects of taxes.
This position
tly assumes that the point
to
of
the pre-tax profit analysis
is
create a
fictionalized "world
thout taxes." That is simply
not correct.
2010 Reply at 26

In

(citations omitted)

other

cases,

transaction might "f
in

sease,

the

exempt was not a
transactions.

removal
ionalize u

SPV's
tri vi

(alterations in or

of

tax

impacts

at

to

t

bank

factor:

it

ing

a

But
tax-

shaped

AIG and its lenders considered the tax savings on

the "dividend" to be "the benefit in the transaction"
p. 13 above),

on

it beyond useful analysis.

distribution
or spe

the

inal).

(Gabriele,

structured the transactions to get those savings,
15

and negotiated how to

them.

According to Dr.

disregarding AIG's own contribution to the SPV)
would have enjoyed no profit
dist

from t

Cragg

(and

AIG FP and AIG

transact ions

if

the

SPV

butions had been taxable.
Accordingly, AIG's motion for summary judgment in its favor

cannot be granted on this record.
CONCLUSION

AIG's motion for partial summary judgment, Dkt. No. 109, is
therefore deni

So ordered.

Dated: New York, NY
March 29, 2013
Louis L. Stanton
U.S.D.J.

16