Boost to Tax-Recovery Suit by AIG Shareholder

     WASHINGTON (CN) – AIG’s major Swiss shareholder received a boost from a federal judge in its fight to recover $38 million in taxes it paid the U.S. government.
     The dispute stems from a statute that taxes a foreign corporation’s dividend income at a rate of 30 percent, by statute, if the income is deemed sufficiently connected to business activity in the United States.
     Treaties that the United States maintains with various countries, including Switzerland, could lower this rate, but the secretary of the U.S. Treasury refused to grant such benefits to Swiss-domiciled Starr International Co., which was once AIG’s largest shareholder.
     Starr filed its $38 million tax-refund suit – amounting to half of its withholdings on AIG dividends in 2007 – after the Internal Revenue Service denied its petition for discretionary benefits under the U.S.-Swiss tax treaty.
     The government moved to dismiss, but U.S. District Judge Christopher Cooper refused Friday, finding “that the government has not met its burden to present clear and convincing evidence to overcome the presumption of judicial review of federal agency action.”
     “Because the treaty does not reflect an unambiguous intent to foreclose judicial review, and the Technical Explanation of the treaty – which the IRS followed here – supplies a meaningful standard for determining whether a Swiss company qualifies for treaty benefits, the court may review whether the secretary abused his discretion in not extending those benefits to Starr,” the 22-page decision states. “The court will, accordingly, deny the United States’ motion to dismiss and grant Starr’s motion to strike the government’s justiciability defenses.”
     When the Federal Reserve bailed out American International Group in 2008, it took 79.9 percent of the company’s equity in exchange for a loan of $85 billion to prevent the company’s collapse.
     AIG had entered into credit default swaps to insure $441 billion worth of securities originally rated AAA. But $57.8 billion of these swaps were back by subprime loans that were unmasked as worthless in the 2008 financial crisis.
     As a result, AIG’s credit rating was downgraded, and it faced a liquidity crisis that would have doomed the company if the Federal Reserve had not acted to save the insurance giant.
     Over the next three years, AIG required more funds from the government to stay afloat as its losses widened. The government loaned a total of $182.3 billion to the company, which paid back a total of $205 billion by the end of 2012.Former AIG chief executive Maurice Greenberg, who remains major shareholder of the company through his company Starr International, filed a shareholder class action claiming that the Federal Reserve overstepped its authority when it demanded equity as a condition for the bailout, and effectively became its majority owner.
     This past June, U.S. District Judge Thomas Wheeler found that the Fed’s actions constituted an “illegal exaction under the Fifth Amendment.”

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