INCOME TAXES

12 Months Ended

Dec. 31, 2015

22. 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)		2015		2014		2013
U.S.	$	1,950	$	8,250	$	8,058
Foreign		1,331		2,251		1,310
Total	$	3,281	$	10,501	$	9,368

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

Years Ended December 31,
(in millions)		2015		2014		2013
Foreign and U.S. components of actual income tax expense:
Foreign:
Current	$	391	$	473	$	549
Deferred		(95)		154		(442)
U.S.:
Current		429		115		131
Deferred		334		2,185		122
Total	$	1,059	$	2,927	$	360

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:

	2015						2014							2013
		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 rate	$	3,281	$	1,148	35.0	%	$	10,524	$	3,683		35.0	%	$	9,518	$	3,331	35.0	%
Adjustments:
Tax exempt interest				(195)	(5.9)					(236)		(2.2)					(298)	(3.1)
Uncertain tax positions				195	5.9					(81)		(0.8)					632	6.6
Reclassifications from accumulated
other comprehensive income				(127)	(3.9)					(61)		(0.6)					-	-
Non-deductible transfer pricing
charges				97	3.0					86		0.8					-	-
Dividends received deduction				(72)	(2.2)					(62)		(0.6)					(75)	(0.8)
Effect of foreign operations				(58)	(1.8)					(68)		(0.6)					(5)	(0.1)
State income taxes				34	1.0					39		0.4					(21)	(0.2)
Other				(73)	(2.2)					(184)		(1.7)					13	0.1
Effect of discontinued operations				-	-					65		0.6					14	0.1
Valuation allowance:
Continuing operations				110	3.4					(181)		(1.7)					(3,165)	(33.3)
Consolidated total amounts		3,281		1,059	32.3			10,524		3,000		28.5			9,518		426	4.5
Amounts attributable to discontinued
operations		-		-	-			23		73		317.4			150		66	44.3
Amounts attributable to continuing
operations	$	3,281	$	1,059	32.3	%	$	10,501	$	2,927		27.9	%	$	9,368	$	360	3.8	%

For the year ended December 31, 2015, the effective tax rate on income from continuing operations was 32.3 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 $195 million associated with tax exempt interest income, $127 million related to reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities, $58 million associated with the effect of foreign operations, and $109 million related to the partial completion of the Internal Revenue Service examination covering tax year 2006, partially offset by $324 million of tax charges and related interest associated with increases in uncertain tax positions related to cross border financing transactions, and $110 million related to increases in the deferred tax asset valuation allowances associated with certain foreign jurisdictions.

For the year ended December 31, 2015, our repatriation assumptions related to certain European operations changed, and related foreign earnings are now considered to be indefinitely reinvested. These earnings relate to ongoing operations and have been reinvested in active non-U.S. business operations. Further, we do not intend to repatriate these earnings to fund U.S. operations. As a result, U.S. deferred taxes have not been provided on $1.8 billion of accumulated earnings, including accumulated other comprehensive income, of these non-U.S. affiliates. Potential U.S. income tax liabilities related to such earnings would be offset, in whole or in part, by allowable foreign tax credits resulting from foreign taxes paid to foreign jurisdictions in which such operations are located. As a result, we currently believe that any incremental U.S. income tax liabilities relating to indefinitely reinvested foreign earnings would not be significant. Deferred taxes have been provided on earnings of non-U.S. affiliates whose earnings are not indefinitely reinvested.

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 the 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.

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

December 31,
(in millions)		2015		2014
Deferred tax assets:
Losses and tax credit carryforwards	$	18,680	$	18,203
Basis differences on investments		4,886		4,114
Life policy reserves		353		629
Accruals not currently deductible, and other		1,003		1,804
Loss reserve discount		1,021		1,378
Loan loss and other reserves		8		152
Unearned premium reserve reduction		1,603		1,269
Flight equipment, fixed assets and intangible assets		129		28
Other		577		220
Employee benefits		1,286		1,543
Total deferred tax assets		29,546		29,340
Deferred tax liabilities:
Investments in foreign subsidiaries		(33)		(58)
Deferred policy acquisition costs		(3,467)		(3,003)
Unrealized gains related to available for sale debt securities		(3,077)		(5,795)
Total deferred tax liabilities		(6,577)		(8,856)
Net deferred tax assets before valuation allowance		22,969		20,484
Valuation allowance		(3,012)		(1,739)
Net deferred tax assets (liabilities)	$	19,957	$	18,745

The following table presents our U.S. consolidated income tax group tax losses and credits carryforwards as of December 31, 2015.

December 31, 2015				Tax	Expiration
(in millions)		Gross		Effected	Periods
Net operating loss carryforwards	$	34,883	$	12,209	2028 - 2035
Foreign tax credit carryforwards				6,853	2016 - 2024
Other carryforwards				538	Various
Total AIG U.S. consolidated income tax group tax losses and credits
carryforwards on a tax return basis				19,600
Unrecognized tax benefit				(2,523)
Total AIG U.S. consolidated income tax group tax losses and credits
carryforwards on a U.S. GAAP basis^*			$	17,077

* Includes other carryforwards, e.g. general business credits, of $326 million on a U.S. GAAP basis.

We have U.S. federal consolidated net operating loss and tax credit carryforwards of approximately $17.1 billion, including $266 million of the foreign tax credit carryforward originated in tax years 2006 and 2007. The carryforward periods for 2006 and 2007 foreign tax credits expire in 2016 and 2017, respectively. As detailed in the Assessment of Deferred Tax Asset Valuation Allowance section of this footnote, we determined that it is more likely than not that our U.S. federal consolidated tax attribute carryforwards will be realized prior to their expiration.

Assessment of Deferred Tax Asset Valuation Allowance

The evaluation of the recoverability of our 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 the deferred tax asset 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 period 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.

In performing our assessment of the recoverability of the deferred tax asset under this framework, we consider tax laws governing the utilization of the net operating loss, capital loss and foreign tax credit carryforwards in each applicable jurisdiction. Under U.S. tax law, a company generally must use its net operating loss carryforwards before it can use its foreign tax credit carryforwards, even though the carryforward period for the foreign tax credit is shorter than for the net operating loss. Our U.S. federal consolidated income tax group includes both life companies and non-life companies. While the U.S. taxable income of our non-life companies can be offset by the net operating loss carryforwards, only a portion (no more than 35 percent) of the U.S. taxable income of our life companies can be offset by those net operating loss carryforwards. The remaining tax liability of our life companies can be offset by the foreign tax credit carryforwards. Accordingly, we utilize both the net operating loss and foreign tax credit carryforwards concurrently which enables us to realize our tax attributes prior to expiration. As of December 31, 2015, based on all available evidence, it is more likely than not that the U.S. net operating loss and foreign tax credit carryforwards will be utilized prior to expiration and, thus, no valuation allowance has been established.

Estimates of future taxable income, including income generated from prudent and feasible actions and tax planning strategies could change in the near term, perhaps materially, which may require us to consider any potential impact to our assessment of the recoverability of the deferred tax asset. Such potential impact could be material to our consolidated financial condition or results of operations for an individual reporting period.

For the three months ended December 31, 2015, recent changes in market conditions, including rising interest rates, impacted the unrealized tax losses in the U.S. Life Insurance Companies’ available for sale portfolio, resulting in an increase to the related deferred tax asset. The deferred tax asset relates to the unrealized losses for which the carryforward period has not yet begun, and as such, when assessing its recoverability, we consider our ability and intent to hold the underlying securities to recovery. As of December 31, 2015, based on all available evidence, we concluded that a valuation allowance should be established on a portion of the deferred tax asset related to unrealized losses that are not more-likely-than-not to be realized.

For the year ended December 31, 2015, we established $1.2 billion of valuation allowance associated with the unrealized tax losses in the U.S. Life Insurance Companies, all of which was allocated to other comprehensive income.

During the year ended December 31, 2015, we recognized an increase of $110 million in our deferred tax asset valuation allowance associated with certain foreign jurisdictions, primarily attributable to factors such as cumulative losses in recent years and the inability to demonstrate profits within the specific jurisdictions over the relevant carryforward periods.

The following table presents the net deferred tax assets (liabilities) at December 31, 2015 and 2014 on a U.S. GAAP basis:

December 31,
(in millions)		2015		2014
Net U.S. consolidated return group deferred tax assets	$	24,134	$	24,543
Net deferred tax assets (liabilities) in accumulated other comprehensive income		(2,806)		(5,510)
Valuation allowance		(1,281)		(129)
Subtotal		20,047		18,904
Net foreign, state and local deferred tax assets		2,078		2,045
Valuation allowance		(1,731)		(1,610)
Subtotal		347		435
Subtotal - Net U.S, foreign, state and local deferred tax assets		20,394		19,339
Net foreign, state and local deferred tax liabilities		(437)		(594)
Total AIG net deferred tax assets (liabilities)	$	19,957	$	18,745

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

At December 31, 2015 and 2014, our U.S. consolidated income tax group had net deferred tax assets after valuation allowance of $20.0 billion and $18.9 billion, respectively. At December 31, 2015 and 2014, our U.S. consolidated income tax group had valuation allowances of $1.3 billion and $129 million, respectively.

Deferred Tax Liability — Foreign, State and Local

At December 31, 2015 and 2014, we had net deferred tax liabilities of $90 million and $159 million, respectively, related to foreign subsidiaries, state and local tax jurisdictions, and certain domestic subsidiaries that file separate tax returns.

At December 31, 2015 and 2014, we had deferred tax asset valuation allowances of $1.7 billion and $1.6 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. 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 2010.

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 has administratively challenged the later periods. The IRS has also administratively challenged other cross-border transactions in later years. 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 (Southern District) seeking a refund of approximately $306 million in taxes, interest and penalties paid with respect to the 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 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 Southern District denied our motion. 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. On September 9, 2015, the Second Circuit affirmed the decision of the Southern District. On October 13, 2015, we filed a petition for a writ of certiorari to the U.S Supreme Court. If the U.S. Supreme Court does not grant certiorari the case will be remanded back to the Southern District for trial.

We will vigorously defend our position and continue to believe that we have adequate reserves for any liability that could result from these government actions. We continue to monitor legal and other developments in this area and evaluate the effect, if any, on our position, including recent decisions affecting 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)		2015		2014		2013
Gross unrecognized tax benefits, beginning of year	$	4,395	$	4,340	$	4,385
Increases in tax positions for prior years		162		91		680
Decreases in tax positions for prior years		(209)		(60)		(796)
Increases in tax positions for current year		-		10		43
Lapse in statute of limitations		(4)		(6)		(20)
Settlements		(13)		-		(2)
Activity of discontinued operations		-		20		50
Gross unrecognized tax benefits, end of year	$	4,331	$	4,395	$	4,340

At December 31, 2015, 2014 and 2013, our unrecognized tax benefits, excluding interest and penalties, were $4.3 billion, $4.4 billion and $4.3 billion, respectively. The activity includes increases for amounts associated with cross border financing transactions partially offset by certain benefits realized due to the partial completion of the Internal Revenue Service examination covering tax year 2006. At December 31, 2015, 2014 and 2013, 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 $0.1 billion, $0.3 billion and $0.1 billion, respectively. Accordingly, at December 31, 2015, 2014 and 2013, the amounts of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate were $4.2 billion, $4.1 billion and $4.2 billion, respectively.

Interest and penalties related to unrecognized tax benefits are recognized in income tax expense. At December 31, 2015 and 2014, we had accrued liabilities of $1.2 billion and $1.1 billion, respectively for the payment of interest (net of the federal benefit) and penalties. For the years ended December 31, 2015, 2014 and 2013, we accrued expense of $156 million, $21 million and $142 million, respectively, for the payment of interest (net of the federal benefit) and penalties. The interest increase from December 31, 2014 was primarily due to increases in amounts associated with cross border financing transactions.

We regularly evaluate adjustments proposed by taxing authorities. At December 31, 2015, 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, 2015	Open Tax Years
Major Tax Jurisdiction
United States	2000-2014
Australia	2011-2014
France	2013-2014
Japan	2009-2014
Korea	2010-2014
Singapore	2011-2014
United Kingdom	2013-2014