Report: AIG's Bonus Unit Under Review by IRS

Some of the same banks that got government-funded payouts to settle contracts with American International Group Inc. also turned to the insurer for help cutting their income taxes in the U.S. and Europe, according to court records and people familiar with the business, the Wall Street Journal reported.

The Internal Revenue Service is challenging some of the tax deals structured by AIG Financial Products Corp., the same unit of the New York company that has caused political ire over $165 million in employee bonuses.

The company paid $61 million last year in disputed taxes stemming from the deals but sued the U.S. government last month in federal court in New York, seeking a refund, according to filings in the case.

Banks that worked with AIG on tax deals include Credit Agricole SA of France, Bank of Ireland and Bank of America Corp., according to AIG's lawsuit. The banks declined to comment.

In general, AIG's tax deals permitted U.S. companies and foreign banks to effectively claim credit in their home country for a single tax payment, partly through the use of an offshore AIG subsidiary. In its lawsuit against the government, the insurer said it was told by the IRS that AIG hadn't shown that the transactions "had sufficient economic substance and business purpose" to justify tax benefits. The IRS declined to comment.

The tax-structuring operation started by AIG in the 1990s was even bigger than AIG's credit-default-swaps business, according to a person familiar with the matter.

An AIG spokesman declined to discuss the tax-cutting transactions in detail but asserted that the tax benefits were proper and justified. AIG wants to "ensure that it is not required to pay more than its fair share of taxes," a company spokeswoman said.

AIG Workers to Return $50 Million of BonusesSoros: Credit Default Swaps Need Stricter RegulationDefenders of these arrangements say that taking advantage of differences between tax laws in the U.S. and overseas is simply smart business, arguing that the deals weren't explicitly prohibited by IRS regulations at the time.

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