INCOME TAXES

12 Months Ended

Dec. 31, 2014

24. INCOME TAXES

The following table presents income (loss) from continuing operations before income tax expense (benefit) by U.S. and foreign location in which such pre-tax income (loss) was earned or incurred.

Years Ended December 31,
(in millions)		2014		2013		2012
U.S.	$	8,250	$	8,058	$	(948)
Foreign		2,251		1,310		3,839
Total	$	10,501	$	9,368	$	2,891

The following table presents the income tax expense (benefit) attributable to pre-tax income (loss) from continuing operations:

Years Ended December 31,
(in millions)		2014		2013		2012
Foreign and U.S. components of actual income tax expense:
Foreign:
Current	$	473	$	549	$	484
Deferred		154		(442)		(275)
U.S.:
Current		115		131		278
Deferred		2,185		122		(1,295)
Total	$	2,927	$	360	$	(808)

Our actual income tax (benefit) expense differs from the statutory U.S. federal amount computed by applying the federal income tax rate due to the following:

	2014						2013						2012
		Pre-Tax		Tax	Percent of			Pre-Tax		Tax	Percent of					Tax	Percent of
Years Ended December 31,		Income		Expense/	Pre-Tax			Income		Expense/	Pre-Tax			Pre-Tax		Expense/	Pre-Tax
(dollars in millions)		(Loss)		(Benefit)	Income (Loss)			(Loss)		(Benefit)	Income (Loss)			Income		(Benefit)	Income
U.S. federal income tax at statutory	$	10,524	$	3,683	35.0	%	$	9,518	$	3,331	35.0	%	$	2,891	$	1,012	35.0	%
rate adjustments:
Tax exempt interest				(236)	(2.2)					(298)	(3.1)					(302)	(10.4)
Investment in subsidiaries
and partnerships				-	-					-	-					(26)	(0.9)
Uncertain tax positions				(81)	(0.8)					632	6.6					446	15.4
Dividends received deduction				(62)	(0.6)					(75)	(0.8)					(58)	(2.0)
Effect of foreign operations				(68)	(0.6)					(5)	(0.1)					171	5.9
State income taxes				39	0.4					(21)	(0.2)					(48)	(1.7)
Other				(159)	(1.5)					13	0.1					(96)	(3.3)
Effect of discontinued operations				65	0.6					14	0.1					-	-
Valuation allowance:
Continuing operations				(181)	(1.7)					(3,165)	(33.3)					(1,907)	(65.9)
Consolidated total amounts		10,524		3,000	28.5			9,518		426	4.5			2,891		(808)	(27.9)
Amounts attributable to discontinued
operations		23		73	317.4			150		66	44.3			-		-	-
Amounts attributable to continuing
operations	$	10,501	$	2,927	27.9	%	$	9,368	$	360	3.8	%	$	2,891	$	(808)	(27.9)	%

For the year ended December 31, 2014, the effective tax rate on income from continuing operations was 27.9 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 35 percent primarily due to tax benefits of $236 million associated with tax exempt interest income, $209 million related to a decrease in the U.S. Life Insurance Companies’ capital loss carryforward valuation allowance, $182 million of income excludible from gross income related to the global resolution of certain residential mortgage-related disputes and $68 million associated with effect of foreign operations.

For the year ended December 31, 2013, the effective tax rate on income from continuing operations was 3.8 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 35 percent primarily due to tax benefits of $2.8 billion related to a decrease in the U.S. Life Insurance Companies’ capital loss carryforward valuation allowance, $396 million related to a decrease in certain other valuation allowances associated with foreign jurisdictions and $298 million associated with tax exempt interest income. These items were partially offset by charges of $632 million related to uncertain tax positions.

For the year ended December 31, 2012, the effective tax rate on income from continuing operations was (27.9) percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 35 percent primarily due to decreases in the U.S. Life Insurance Companies’ capital loss carryforward valuation allowance of $1.9 billion related to the actual and projected gains from the U.S. Life Insurance Companies’ available-for-sale securities, and tax effects associated with tax exempt interest income of $302 million. These items were partially offset by changes in uncertain tax positions of $446 million

The following table presents the components of the net deferred tax assets (liabilities):

December 31,
(in millions)		2014		2013
Deferred tax assets:
Losses and tax credit carryforwards	$	18,203	$	20,825
Basis Differences on Investments		4,114		4,843
Life Policy Reserves		629		445
Accruals not currently deductible, and other		1,804		2,935
Investments in foreign subsidiaries		(58)		1,035
Loss reserve discount		1,378		1,164
Loan loss and other reserves		152		888
Unearned premium reserve reduction		1,269		1,451
Employee benefits		1,543		1,217
Total deferred tax assets		29,034		34,803
Deferred tax liabilities:
Deferred policy acquisition costs		(3,003)		(3,396)
Flight equipment, fixed assets and intangible assets		28		(2,354)
Unrealized gains related to available for sale debt securities		(5,795)		(3,693)
Other		220		(571)
Total deferred tax liabilities		(8,550)		(10,014)
Net deferred tax assets before valuation allowance		20,484		24,789
Valuation allowance		(1,739)		(3,596)
Net deferred tax assets (liabilities)	$	18,745	$	21,193

The following table presents our U.S. consolidated income tax group tax losses and credits carryforwards as of December 31, 2014 on a tax return basis.

December 31, 2014				Tax	Expiration
(in millions)		Gross		Effected	Periods
Net operating loss carryforwards	$	33,021	$	11,557	2028 - 2031
Foreign tax credit carryforwards		-		7,109	2016 - 2023
Other carryforwards and other		-		1,034	Various
Total AIG U.S. consolidated income tax group tax losses and credits carryforwards			$	19,700

Assessment of Deferred Tax Asset Valuation Allowance

The evaluation of the recoverability of the deferred tax asset and the need for a valuation allowance requires us to weigh all positive and negative evidence to reach a conclusion that it is more likely than not that all or some portion of the deferred tax asset will not be realized. The weight given to the evidence is commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more positive evidence is necessary and the more difficult it is to support a conclusion that a valuation allowance is not needed.

Our framework for assessing the recoverability of deferred tax assets requires us to consider all available evidence, including:

the nature, frequency, and amount of cumulative financial reporting income and losses in recent years;
the sustainability of recent operating profitability of our subsidiaries;
the predictability of future operating profitability of the character necessary to realize the net deferred tax asset;
the carryforward periods for the net operating loss, capital loss and foreign tax credit carryforwards, including the effect of reversing taxable temporary differences; and,

prudent and feasible actions and tax planning strategies that would be implemented, if necessary, to protect against the loss of the deferred tax asset.

As a result of sales in the ordinary course of business to manage the investment portfolio and other transactions during the year ended December 31, 2014, remaining U.S. Life Insurance Companies capital loss carryforwards were realized prior to their expiration. This, together with the changes in market conditions, resulted in a conclusion that deferred tax assets related to unrealized tax losses in the U.S. Life Insurance Companies’ available for sale portfolio will more-likely-than-not be realized. Accordingly, the related deferred tax asset valuation allowance was released.

Therefore, for the year ended December 31, 2014, we recognized a decrease of $1.8 billion in the capital loss carryforward valuation allowance associated with the U.S. Life Insurance Companies, of which $209 million was allocated to income from continuing operations and $1.6 billion was allocated to other comprehensive income. Included in the $1.8 billion was a decrease in the capital loss carryforward valuation allowance of $314 million related to a portion of the U.S. Life Insurance Companies’ capital loss carryforward previously treated as expired that was restored and utilized in 2014.

During the year ended December 31, 2014, we also recognized a $325 million decrease in our deferred tax asset valuation allowance associated with certain state, local and foreign jurisdictions, primarily attributable to a corresponding reduction in state and local deferred tax assets.

The following table presents the net deferred tax assets (liabilities) at December 31, 2014 and 2013 on a U.S. GAAP basis:

December 31,
(in millions)		2014		2013
Net U.S. consolidated return group deferred tax assets	$	24,543	$	26,296
Net deferred tax assets (liabilities) in accumulated other comprehensive income		(5,510)		(3,337)
Valuation allowance		(129)		(1,650)
Subtotal		18,904		21,309
Net foreign, state and local deferred tax assets		2,045		2,563
Valuation allowance		(1,610)		(1,947)
Subtotal		435		616
Subtotal - Net U.S, foreign, state and local deferred tax assets		19,339		21,925
Net foreign, state and local deferred tax liabilities		(594)		(732)
Total AIG net deferred tax assets (liabilities)	$	18,745	$	21,193

Deferred Tax Asset Valuation Allowance of U.S. Consolidated Income Tax Group

At December 31, 2014, and 2013, our U.S. consolidated income tax group had net deferred tax assets after valuation allowance of $18.9 billion and $21.3 billion, respectively. At December 31, 2014, and 2013, our U.S. consolidated income tax group had valuation allowances of $129 million and $1.7 billion, respectively.

Deferred Tax Liability — Foreign, State and Local

At December 31, 2014 and 2013, we had net deferred tax liabilities of $159 million and $116 million, respectively, related to foreign subsidiaries, state and local tax jurisdictions, and certain domestic subsidiaries that file separate tax returns.

At December 31, 2014 and 2013, we had deferred tax asset valuation allowances of $1.6 billion and $2.0 billion, respectively, related to foreign subsidiaries, state and local tax jurisdictions, and certain domestic subsidiaries that file separate tax returns. We maintained these valuation allowances following our conclusion that we could not demonstrate that it was more likely than not that the related deferred tax assets will be realized. This was primarily due to factors such as cumulative losses in recent years and the inability to demonstrate profits within the specific jurisdictions over the relevant carryforward periods.

Tax Examinations and Litigation

We file a consolidated U.S. federal income tax return with our eligible U.S. subsidiaries. Several U.S. subsidiaries included in the consolidated financial statements previously filed separate U.S. federal income tax returns and were not part of our U.S. consolidated income tax group. Income earned by subsidiaries operating outside the U.S. is taxed, and income tax expense is recorded, based on applicable U.S. and foreign law.

The statute of limitations for all tax years prior to 2000 has expired for our consolidated federal income tax return. We are currently under examination for the tax years 2000 through 2006.

On March 20, 2008, we received a Statutory Notice of Deficiency (Notice) from the IRS for years 1997 to 1999. The Notice asserted that we owe additional taxes and penalties for these years primarily due to the disallowance of foreign tax credits associated with cross-border financing transactions. The transactions that are the subject of the Notice extend beyond the period covered by the Notice, and the IRS is challenging the later periods. It is also possible that the IRS will consider other transactions to be similar to these transactions. We have paid the assessed tax plus interest and penalties for 1997 to 1999. On February 26, 2009, we filed a complaint in the United States District Court for the Southern District of New York seeking a refund of approximately $306 million in taxes, interest and penalties paid with respect to its 1997 taxable year. We allege that the IRS improperly disallowed foreign tax credits and that our taxable income should be reduced as a result of the 2005 restatement of our consolidated financial statements.

We also filed an administrative refund claim on September 9, 2010 for our 1998 and 1999 tax years.

On March 29, 2011, the U.S. District Court for the Southern District of New York, ruled on a motion for partial summary judgment that we filed on July 30, 2010 related to the disallowance of foreign tax credits associated with cross-border financing transactions. The court denied our motion with leave to renew.

On August 1, 2012, we filed a motion for partial summary judgment related to the disallowance of foreign tax credits associated with cross border financing transactions. On March 29, 2013, the U.S District Court for the Southern District of New York denied our motion for partial summary judgment related to the disallowance of foreign tax credits associated with cross border financing transactions. On March 17, 2014, the U.S. Court of Appeals for the Second Circuit (the Second Circuit) granted our petition for an immediate appeal of the partial summary judgment decision. Accordingly, we are presenting our position to the Second Circuit.

We will vigorously defend our position and continue to believe that we have adequate reserves for any liability that could result from the IRS actions.

We continue to monitor legal and other developments in this area and evaluate the effect, if any, on our position, including recent decisions adverse to other taxpayers.

Accounting For Uncertainty in Income Taxes

The following table presents a reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits:

Years Ended December 31,
(in millions)		2014		2013		2012
Gross unrecognized tax benefits, beginning of year	$	4,340	$	4,385	$	4,279
Increases in tax positions for prior years		91		680		336
Decreases in tax positions for prior years		(60)		(796)		(264)
Increases in tax positions for current year		10		43		47
Lapse in statute of limitations		(6)		(20)		(8)
Settlements		-		(2)		(5)
Activity of discontinued operations		20		50		-
Gross unrecognized tax benefits, end of year	$	4,395	$	4,340	$	4,385

At December 31, 2014, 2013 and 2012, our unrecognized tax benefits, excluding interest and penalties, were $4.4 billion, $4.3 billion and $4.4 billion, respectively. At December 31, 2014, 2013 and 2012, our unrecognized tax benefits related to tax positions that, if recognized, would not affect the effective tax rate because they relate to such factors as the timing, rather than the permissibility, of the deduction were $0.3 billion, $0.1 billion and $0.2 billion, respectively. Accordingly, at December 31, 2014, 2013 and 2012, the amounts of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate were $4.1 billion, $4.2 billion and $4.2 billion, respectively.

Interest and penalties related to unrecognized tax benefits are recognized in income tax expense. At both December 31, 2014 and 2013, we had accrued liabilities of $1.1 billion for the payment of interest (net of the federal benefit) and penalties. For the years ended December 31, 2014, 2013 and 2012, we accrued expense (benefits) of $21 million, $142 million and $192 million, respectively, for the payment of interest (net of the federal benefit) and penalties.

We regularly evaluate adjustments proposed by taxing authorities. At December 31, 2014, such proposed adjustments would not have resulted in a material change to our consolidated financial condition, although it is possible that the effect could be material to our consolidated results of operations for an individual reporting period. Although it is reasonably possible that a change in the balance of unrecognized tax benefits may occur within the next 12 months, based on the information currently available, we do not expect any change to be material to our consolidated financial condition.

Listed below are the tax years that remain subject to examination by major tax jurisdictions:

At December 31, 2014	Open Tax Years
Major Tax Jurisdiction
United States	2000-2013
Australia	2010-2013
France	2012-2013
Japan	2008-2013
Korea	2009-2013
Singapore	2011-2013
United Kingdom	2013

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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