AIG Joins Citigroup, GM in Deferred Tax Asset ‘Hall of Fame’

American International Group Inc. (AIG), Citigroup Inc. (C) and General Motors Co. (GM), once the largest insurer, bank and automaker, hold a new distinction after losses forced them to take bailouts. The firms accumulated some of the biggest deferred tax assets that may lower obligations to the government that rescued them.
Losses at New York-based AIG and its subsidiaries helped rack up more than $25 billion in the assets. That’s worth more to AIG’s share price than its plane-leasing business with 933 aircraft, according to Bank of America Corp.
“They’re in the same class of GM and Citigroup in terms of the largest I’ve ever seen,” Robert Willens, an independent tax consultant in New York, said of AIG. “Any one of them is in the hall of fame of large deferred tax assets.”
The firms were able to hold the assets through their bailouts as a result of government rulings that started in 2008, around the time that taxpayers began propping up private companies. Normally, the benefits are cut when a firm changes hands. The tax assets provided an impetus for investors to purchase shares in the companies as the U.S. Treasury Department sold stakes.
“If they didn’t get these benefits, then the government would have gotten much less” from selling stock, said Charles Mulford, an accounting professor at Georgia Institute of Technology in Atlanta. “Taxpayers would have been paying it anyway” through lower sale proceeds.
Citigroup and Detroit-based GM each have more than $20 billion of so-called carry-forwards among their deferred tax assets, according to regulatory filings.

‘Source of Funds’

AIG Chief Executive Officer Robert Benmosche, 67, touted tax benefits before a share sale in May that raised $8.7 billion and reduced the Treasury’s stake to 77 percent. The assets are a “source of funds” for when AIG is prepared to repurchase stock, he said on a May 6 conference call.
The assets may be worth $6 a share for AIG, compared with $3 for the International Lease Finance Corp. plane unit, said Jay Cohen, a Bank of America analyst, in a June 9 note, when he advised investors to buy the stock. Analysts at JPMorgan Chase & Co. and Barclays Plc have said the tax benefit may be worth at least $5 a share. The insurer closed at $30.21 yesterday on the New York Stock Exchange, down 37 percent from Dec. 31.
“For AIG, a dollar of profit is essentially more than a dollar of profit for another company,” said Paul Newsome, an analyst at Sandler O’Neill & Partners LP. He advises investors to buy the company’s stock. Joe Norton, an AIG spokesman, declined to comment.

Carry-Forwards

Citigroup’s $23.2 billion of carry-forwards as of Dec. 31 include benefits from net operating losses and foreign tax credits. The New York-based bank expects to use its entire U.S. federal net operating loss carry-forward this year, according to a regulatory filing. The company valued that asset at about $3.9 billion at the end of last year. Jon Diat, a spokesman for Citigroup, declined to comment.
GM reported $20.1 billion in tax carry-forwards. The automaker amassed tax assets as it posted losses from 2005 to its bankruptcy in 2009, and in some regions outside the U.S. last year. GM is poised to become the No. 1 automaker by sales this year after being passed in 2008 by Toyota Motor Corp.
The sum means the company may not pay taxes to the U.S. until 2018, Adam Jonas, a Morgan Stanley analyst, said in a July 6 research note. Jonas, who swapped GM for Ford Motor Co. as his top U.S. auto pick in the report, said the assets are worth about $9 per share, more than the value of the company’s joint ventures in China. Jim Cain, a spokesman for GM, declined to comment.

Chartis Losses

AIG must post profits at units such as property-casualty insurer Chartis to use the biggest portion of the tax asset, $11.3 billion in net operating loss carry-forwards, which expire 2028 through 2030. Chartis, AIG’s largest unit by revenue, was unprofitable in the six months ended March 31 on Japan earthquake claims and charges tied to reserves.
AIG also had $9.7 billion in assets that can be used to lower taxes on capital gains through 2015, according to a presentation by the insurer. An additional $4.6 billion is tied to results outside the U.S.
The insurer trails rivals such as Germany’s Allianz SE and France’s Axa SA in terms of assets after losses and unit sales shrunk AIG.
The carry-forwards are shaping AIG’s investment strategy. Chartis has been reducing its municipal-bond holdings as the company has less need for the tax advantages from the securities. AIG had about $43.8 billion in municipal bonds as of March 31.

‘Conservative Stance’

AIG must demonstrate that it can earn enough taxable income to use the assets before getting credit on its balance sheet, said Mulford. The firm has a full valuation allowance against the deferred tax assets and has said in filings that it can’t say whether they’ll be used.
“AIG has taken a fairly conservative stance,” said Mulford. “Their ability in recent years to generate taxable income has been very much in doubt.”
GM also has a full valuation allowance against its U.S. deferred tax assets. Citigroup uses about $13 billion of its deferred tax asset toward satisfying capital levels set by regulators.
Citigroup fell 9.9 percent percent this year through yesterday, compared with the 7.6 percent advance of the Standard & Poor’s 500 Index. GM dropped 14 percent.
The government gave itself an exemption in the tax code as it began rescuing companies, said Edward Kleinbard, a law professor at the University of Southern California. Normally, the benefits are limited after a change in ownership, triggered when shareholders who hold 5 percent or more of the company increase their combined stake by 50 percent over a three-year period, he said.

‘Meaningless Concept’

The law is intended to prevent trafficking in so-called loss corporations, said Kleinbard, who previously served as the chief of staff of the congressional Joint Committee on Taxation. Without the law, a profitable company could shield earnings from taxes by buying such firms.
“The government can’t traffic in” net operating losses, said Kleinbard. “The government’s not a taxpayer. It’s a meaningless concept.” Mark Paustenbach, a spokesman for the Treasury, declined to comment.
AIG was rescued in 2008 in a bailout that swelled to $182.3 billion. Citigroup received $45 billion from the Treasury’s Troubled Asset Relief Program and $301 billion in guarantees on its riskiest assets. The government sold its remaining stake in the bank in December.
GM was bailed out with $49.5 billion in taxpayer funds as the government backed its bankruptcy in 2009. The Treasury reduced its stake to 33 percent last year in a share sale.
To contact the reporter on this story: Noah Buhayar in New York at nbuhayar@bloomberg.net
To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net

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