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Tax Question Stalls AIG, MetLife Deal

Source: WSJ

Posted on 17 Feb 2010

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The pending $15 billion sale of a large foreign life-insurance unit of American International Group Inc. to MetLife Inc. is being held up by a tax dispute that may require a ruling from the Internal Revenue Service, according to people familiar with the matter.

The tax issue could put the Department of the Treasury, as overseer of the Internal Revenue Service, in an awkward situation. The Treasury is supervising AIG while trying to recoup taxpayers' $120 billion-odd investment in AIG and related entities.

An AIG-MetLife deal has been viewed as the first big step for the government in recovering its massive investment in the insurer. The first $9 billion from a sale of the AIG life-insurance unit has been earmarked for the Federal Reserve Bank of New York, which largely oversaw the bailout of the troubled insurance giant in September 2008.

But people working on the transaction have run into a problem: At issue is whether the AIG subsidiary, American Life Insurance Co., or Alico, will remain exempt from a crucial 2004 IRS ruling. That ruling requires insurers to withhold U.S. taxes on income distributed to foreign clients who own their annuities and life-insurance products.

Alico is domiciled in Delaware but does virtually all its business abroad, with operations in about 50 countries. The company has considered itself exempt from the IRS ruling since it only sells policies to non-U.S. citizens who reside abroad and it earns more than 80% of its income overseas.

AIG officials don't believe a sale would stick MetLife with a big tax liability, but have so far been reluctant to indemnify MetLife for that potential risk, the people said.

The government-controlled insurer has asked the IRS for a "private letter ruling" to confirm its interpretation that Alico is exempt from the U.S. tax-withholding requirement, they added.

It isn't clear if the tax authority will make a determination in the near term or express concerns over the issue. Treasury officials have told AIG that the company won't get any special treatment from the IRS, according to a person familiar with the matter. An IRS spokesman declined to comment.

The tax issue so far hasn't derailed talks between the two companies, and AIG's sale of Alico to MetLife is expected to proceed, but a final deal has been pushed back several times as a result.

"It is a sizable, material dispute. Not a small amount," said one person working on the deal.

Such a ruling could also severely limit Alico's ability to do business overseas because its insurance products would be less attractive to its foreign clients if they are subject to U.S. taxes on the income they receive.

A deal announcement had been expected last week, but no announcement is imminent, according to several people involved in the matter. The transaction is expected to be structured with $7 billion in cash and $8 billion in MetLife stock.

"This is the final hurdle, the sticking point," said one person familiar with the matter, adding a deal could be weeks away, "unless AIG caves and takes the risk for MetLife."