INCOME TAXES

12 Months Ended

Dec. 31, 2018

23. Income Taxes

U.S. Tax Reform Overview

On December 22, 2017, the U.S. enacted Public Law 115-97, known informally as the Tax Cuts and Jobs Act (the Tax Act). The Tax Act reduced the statutory rate of U.S. federal corporate income tax to 21 percent and enacted numerous other changes impacting AIG and the insurance industry.

During December 2017, the SEC staff issued Staff Accounting Bulletin 118 (SAB 118), which provided guidance on accounting for the tax effects of the Tax Act. SAB 118 addressed situations where accounting for certain income tax effects of the Tax Act under ASC 740 may be incomplete upon issuance of an entity’s financial statements and provides a one-year measurement period from the enactment date to complete the accounting under ASC 740. In accordance with SAB 118, a company was required to reflect the following:

Income tax effects of those aspects of the Tax Act for which accounting under ASC 740 is complete
Provisional estimate of income tax effects of the Tax Act to the extent accounting is incomplete but a reasonable estimate is determinable
If a provisional estimate cannot be determined, ASC 740 should still be applied on the basis of tax law provisions that were in effect immediately before the enactment of the Tax Act.

At December 31, 2017, we originally recorded a provisional estimate of income tax effects of the Tax Act of $6.7 billion, including a tax charge of $6.7 billion attributable to the reduction in the U.S. corporate income tax rate and tax benefit of $38 million related to the deemed repatriation tax. Our provisional estimate of $6.7 billion was based in part on a reasonable estimate of the effects of the statutory income tax rate reduction on existing deferred tax balances and of certain provisions of the Tax Act. We filed our 2017 consolidated U.S. income tax return and have completed our review of the primary impact of the Tax Act provisions on our deferred taxes. As a result, we consider the accounting for the effects of the rate change on deferred tax balances to be complete and no material measurement period changes were recorded for this item. As further guidance is issued by the U.S. tax authority, any resulting changes in our estimates will be treated in accordance with the relevant accounting guidance.

The Tax Act includes provisions for Global Intangible Low-Taxed Income (GILTI) under which taxes on foreign income are imposed on the excess of a deemed return on tangible assets of certain foreign subsidiaries and for Base Erosion and Anti-Abuse Tax (BEAT) under which taxes are imposed on certain base eroding payments to affiliated foreign companies. There are substantial uncertainties in the interpretation of BEAT and GILTI and while certain formal guidance was issued by the U.S. tax authority, there are still aspects of the Tax Act that remain unclear and additional guidance is expected in 2019. Such guidance may result in changes to the interpretations and assumptions we made and actions we may take, which may impact amounts recorded with respect to international provisions of the Tax Act, possibly materially. Consistent with accounting guidance, we treat BEAT as a period tax charge in the period the tax is incurred and have made an accounting policy election to treat GILTI taxes in a similar manner.

Tax effects for which a reasonable estimate can be determined

Deemed Repatriation Tax

The Tax Act requires companies to pay a one-time transition tax, net of tax credits, related to applicable foreign taxes paid, on previously untaxed current and accumulated earnings and profits of certain of our foreign subsidiaries. We were able to reasonably estimate the deemed repatriation tax and originally recorded a provisional estimated tax benefit of $38 million at December 31, 2017. We have completed our review of post-1986 earnings and profits of our foreign affiliates. Incorporating additional IRS guidance issued with respect to the deemed repatriation tax, as well as the relevant basis adjustments, we recognized a measurement period tax charge of $62 million. The effect of the deemed repatriation tax, which has been determined to be complete, resulted in a liability of $24 million.

Other Provisions

The Tax Act modified computations of insurance reserves for both life and general insurance companies. For life insurance companies, tax reserves are now computed with reference to NAIC reserves. For general insurance companies, the Tax Act extends the discount period for certain long-tail lines of business from 10 years to 24 years and increases the discount rate, replacing the applicable federal rate for a higher-yield corporate bond rate, and eliminates the election allowing companies to use their historical loss payment patterns for loss reserve discounting. Adjustments related to the differences in insurance reserves balances computed under the old tax law versus the Tax Act have to be taken into income over eight years by both life and general insurance companies. Accordingly, these changes give rise to new deferred tax liabilities. At December 31, 2017, we recorded a provisional estimate of $1.9 billion with respect to such deferred tax liabilities. This increase in deferred tax liabilities was offset by an increase in the deferred tax asset related to insurance reserves as a result of applying the new provisions of the Tax Act.

As of December 31, 2018, we have completed our review of the tax reserve computations for both life and general insurance companies, and recorded offsetting decreases of $1.4 billion to both our deferred tax liabilities and deferred tax assets.

Provisions Impacting Projections of Taxable Income and Valuation Allowance Considerations

During 2018, we completed our review of the impact of the Tax Act on our forecasts of taxable income, made certain assumptions related to interpretation of relevant new rules, and incorporated guidance issued by the U.S. tax authority. While the prescribed SAB 118 measurement period has ended, there are still certain aspects of the Tax Act that remain unclear, including the complex interplay of the new tax rules with the rules governing the utilization of our tax attributes, and formal guidance from the U.S. tax authority is still pending. We will continue to review the impact of any additional guidance issued by the U.S. tax authority on our valuation allowance analysis in accordance with the relevant accounting guidance. Accordingly, as of December 31, 2018, we consider the determination of the need for a valuation allowance related to the Tax Act to be complete based on our analysis of existing tax law and relevant tax guidance, and no measurement period adjustment was recorded.

Tax effects for which no estimate can be determined

At December 31, 2017, our accounting for the following elements of the Tax Act was incomplete and we continued accounting for them in accordance with ASC 740 on the basis of the tax laws in effect before enactment of the Tax Act.

The Tax Act may affect the results in certain investments and partnerships in which we are a non-controlling interest owner. At December 31, 2017, the information needed to determine a provisional estimate was not available (such as for interest deduction limitations in those entities and the changed definition of a U.S. Shareholder), and accordingly, no provisional estimates were recorded. We have since completed our review of these investments and partnerships. We consider the accounting for this item to be complete and no measurement period change was recorded.

At December 31, 2017, due to minimal formal guidance issued by state and local jurisdictions, provisional estimates were not recorded for the impact of any state and local corporate income tax implications of the Tax Act. Guidance from state and local jurisdictions has varied and most have not formally passed law specific to the treatment of the Tax Act. While we have not identified any material impact at this point in time, we continue to review any guidance issued by those states that have passed tax legislation related to the Tax Act and continue to work through the state and local corporate income tax implications of the Tax Act. We expect further guidance throughout 2019, and the impact, if any, will be recorded when the related guidance is issued. We consider the accounting for this item to be complete and no measurement period adjustment was recorded.

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

In February 2018, the FASB issued an accounting standard that allows the optional reclassification of stranded tax effects within Accumulated Other Comprehensive Income (AOCI) that arise due to the enactment of the Tax Act to retained earnings. We elected to early adopt the standard for the three-month period ended March 31, 2018. As a result of adopting this standard, we reclassified $248 million from AOCI to retained earnings. The amount reclassified includes stranded effects related to the change in the U.S. federal corporate income tax rate on the gross temporary differences and related valuation allowances.

We use an item-by-item approach to release the stranded or disproportionate income tax effects in AOCI related to our available-for-sale securities. Under this approach, a portion of the disproportionate tax effects is assigned to each individual security lot at the date the amount becomes lodged. When the individual securities are sold, mature, or are otherwise impaired on an other-than-temporary basis, the assigned portion of the disproportionate tax effect is reclassified from AOCI to income from continuing operations.

U.S. Tax Reform – SAB 118 Measurement Period Completion

As of December 31, 2018, we have completed our accounting for the tax effects of the Tax Act. Although the prescribed measurement period has ended, there are aspects of the Tax Act that remain unclear and additional guidance from the U.S. tax authority is pending. As further guidance is issued by the U.S. tax authority, any resulting changes in our estimates will be treated in accordance with the relevant accounting guidance.

EFFECTIVE TAX RATE

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)		2018		2017		2016
U.S.	$	(12)	$	1,940	$	1,041
Foreign		269		(474)		(1,115)
Total	$	257	$	1,466	$	(74)

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

Years Ended December 31,
(in millions)		2018		2017		2016
Foreign and U.S. components of actual income tax expense:
U.S.:
Current	$	134	$	427	$	140
Deferred		(175)		6,865		(270)
Foreign:
Current		202		209		436
Deferred		(7)		25		(121)
Total	$	154	$	7,526	$	185

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:

	2018						2017							2016
		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	$	255	$	54	21.0	%	$	1,476	$	517		35.0	%	$	(159)	$	(56)	35.0	%
Adjustments:
Tax exempt interest				(37)	(14.5)					(111)		(7.5)					(178)	111.9
Uncertain tax positions				176	69.0					660		44.7					268	(168.6)
Reclassifications from accumulated
other comprehensive income				(72)	(28.2)					(184)		(12.5)					(132)	83.0
Dispositions of Subsidiaries				-	-					17		1.2					118	(74.2)
Tax Attribute Restoration				-	-					-		-					(164)	103.1
Non-controlling Interest				(1)	(0.4)					(7)		(0.5)					(81)	50.9
Non-deductible transfer pricing
charges				29	11.4					35		2.4					102	(64.2)
Dividends received deduction				(38)	(14.8)					(90)		(6.1)					(75)	47.2
Effect of foreign operations				44	17.3					69		4.7					234	(147.2)
Share-based compensation
payments excess tax deduction				(13)	(5.1)					(40)		(2.7)					-	-
State income taxes				10	3.9					(9)		(0.6)					23	(14.5)
Impact of Tax Act				62	24.3					6,687		453.0					-	-
Global intangible low-taxed income				21	8.2					-		-					-	-
Other				(102)	(40.0)					(58)		(3.9)					13	(8.2)
Effect of discontinued operations				40	15.7					3		0.2					35	(22.0)
Valuation allowance:
Continuing operations				21	8.2					43		2.9					83	(52.2)
Consolidated total amounts		255		194	76.0			1,476		7,532		510.3			(159)		190	(119.5)
Amounts attributable to discontinued
operations		(2)		40	NM			10		6		60.0			(85)		5	(5.9)
Amounts attributable to continuing
operations	$	257	$	154	59.9	%	$	1,466	$	7,526		513.4	%	$	(74)	$	185	(250.0)	%

For the year ended December 31, 2018, the effective tax rate on income from continuing operations was 59.9 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 21 percent primarily due to a $62 million measurement period adjustment related to the deemed repatriation tax, $48 million net charge primarily related to the accrual of IRS interest (including interest related to uncertain tax positions), $44 million associated with the effect of foreign operations, $29 million of non-deductible transfer pricing charges, $21 million of additional U.S. taxes imposed on income of our foreign subsidiaries under international provisions of the Tax Act, and $21 million of valuation allowance activity related to certain foreign subsidiaries and state jurisdictions, partially offset by tax benefits of $75 million associated with tax exempt income, and $72 million of reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities. Effect of foreign operations is primarily related to income and losses in our foreign operations taxed at statutory tax rates different than 21 percent and foreign income subject to U.S. taxation.

For the year ended December 31, 2017, the effective tax rate on income from continuing operations was not meaningful. The effective tax rate differs from the 2017 statutory tax rate of 35 percent primarily due to tax charges of $6.7 billion associated with the enactment of the Tax Act discussed above, $660 million of tax charges and related interest associated with increases in uncertain tax positions primarily related to cross border financing transactions and other open tax issues, $69 million associated with the effect of foreign operations, and $35 million of non-deductible transfer pricing charges, partially offset by tax benefits of $201 million of tax exempt income, $184 million of reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities, and $40 million of excess tax deductions related to share based compensation payments recorded through the income statement in accordance with relevant accounting literature. Effect of foreign operations is primarily related to losses incurred in our European operations taxed at a statutory tax rate lower than 35 percent and other foreign taxes.

For the year ended December 31, 2016, the effective tax rate on loss from continuing operations was not meaningful. The effective tax rate on loss from continuing operations differs from the statutory tax rate of 35 percent primarily due to tax charges of $234 million associated with effect of foreign operations, $216 million of tax charges and related interest associated with increases in uncertain tax positions related to cross border financing transactions, $118 million related to disposition of subsidiaries, $102 million related to non-deductible transfer pricing charges, and $83 million related to increases in the deferred tax asset valuation allowances associated with U.S. federal and certain foreign jurisdictions, partially offset by tax benefits of $253 million of tax exempt income, $164 million associated with a portion of the U.S. Life Insurance companies capital loss carryforwards previously treated as expired that was restored and utilized, $116 million related to the impact of an agreement reached with the Internal Revenue Service (IRS) related to certain tax issues under audit, and $132 million of reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities. Effect of foreign operations is primarily related to foreign exchange losses incurred by our foreign subsidiaries related to the weakening of the British pound following the Brexit vote taxed at a statutory tax rate lower than 35 percent.

As a result of the Tax Act, the majority of accumulated foreign earnings that were previously untaxed were subject to a one-time deemed repatriation tax. Going forward, certain foreign earnings of our foreign affiliates will be exempt from U.S. tax upon repatriation. Notwithstanding the changes, U.S. tax on foreign exchange gain or loss and certain non-U.S. withholding taxes will continue to be applicable upon future repatriations of foreign earnings.

For the year ended December 31, 2018, we consider our foreign earnings with respect to certain operations in Canada, South Africa, the Far East, Latin America, Bermuda as well as the European, Asia Pacific and Middle East regions to be indefinitely reinvested. These earnings relate to ongoing operations and have been reinvested in active business operations. While, following the enactment of the Tax Act, distributions from foreign affiliates are, generally, not subject to U.S. income tax, such distributions may be subject to non-U.S. withholding taxes. A deferred tax liability of approximately $100 million to $150 million related to such withholding taxes has not been recorded for those foreign subsidiaries whose earnings are considered to be indefinitely reinvested. Deferred taxes, if necessary, have been provided on earnings of non-U.S. affiliates whose earnings are not indefinitely reinvested.

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

December 31,
(in millions)		2018		2017
Deferred tax assets:
Losses and tax credit carryforwards	$	11,792	$	11,931
Basis differences on investments		2,038		2,133
Life policy reserves		2,200		1,996
Accruals not currently deductible, and other		608		532
Investments in foreign subsidiaries		173		159
Loss reserve discount		272		526
Loan loss and other reserves		-		34
Unearned premium reserve reduction		504		566
Fixed assets and intangible assets		531		442
Other		962		731
Employee benefits		604		601
Total deferred tax assets		19,684		19,651
Deferred tax liabilities:
Deferred policy acquisition costs		(2,342)		(2,313)
Unrealized gains related to available for sale debt securities		(490)		(2,151)
Loan loss and other reserves		(20)		-
Total deferred tax liabilities		(2,852)		(4,464)
Net deferred tax assets before valuation allowance		16,832		15,187
Valuation allowance		(1,780)		(1,374)
Net deferred tax assets (liabilities)	$	15,052	$	13,813

The following table presents our U.S. consolidated income tax group tax losses and credits carryforwards as of December 31, 2018.

December 31, 2018				Tax	Expiration
(in millions)		Gross		Effected	Periods
Net operating loss carryforwards	$	36,268	$	7,616	2028 - 2037
Capital loss carryforwards		82		17	2023
Foreign tax credit carryforwards				3,516	2019 - 2023
Other carryforwards				814	Various
Total AIG U.S. consolidated income tax group tax losses and credits
carryforwards on a tax return basis				11,963
Unrecognized tax benefit				(1,733)
Total AIG U.S. consolidated income tax group tax losses and credits
carryforwards on a U.S. GAAP basis^*			$	10,230

* Includes other carryforwards, i.e. general business credits of $30 million and refundable Alternative Minimum Tax Credits of $39 million on a U.S. GAAP basis.

We have U.S. federal consolidated net operating loss and tax credit carryforwards of approximately $10.2 billion. The carryforward periods for our foreign tax credits begin to expire in 2019. 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 our 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, 2018, 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 and any changes to interpretations and assumptions related to the impact of the Tax Act 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 year ended December 31, 2018, recent changes in market conditions, including rising interest rates, impacted the unrealized tax gains and losses in the U.S. Life Insurance Companies’ available for sale securities portfolio, resulting in a deferred tax asset related to net unrealized tax capital losses. 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, 2018, 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, 2018, we established $290 million of valuation allowance associated with the unrealized tax losses in the U.S. Life Insurance Companies’ available for sale securities portfolio, all of which was allocated to other comprehensive income.

For the year ended December 31, 2018, recent changes in market conditions, including rising interest rates, impacted the unrealized tax gains and losses in the U.S. Non-Life Companies’ available for sale securities portfolio, resulting in a decrease to the deferred tax liability related to net unrealized tax capital gains. As of December 31, 2018, we continue to be in an overall unrealized tax gain position with respect to the U.S. Non-Life Companies’ available for sale securities portfolio and thus concluded no valuation allowance is necessary in the U.S. Non-Life Companies’ available for sale securities portfolio.

For the year ended December 31, 2018, we recognized a net increase of $21 million in our deferred tax asset valuation allowance associated with certain foreign subsidiaries and state jurisdictions, primarily attributable to current year activity.

The following table presents the net deferred tax assets (liabilities) at December 31, 2018 and 2017 on a U.S. GAAP basis:

December 31,
(in millions)		2018		2017
Net U.S. consolidated return group deferred tax assets	$	15,479	$	15,603
Net deferred tax assets (liabilities) in accumulated other comprehensive income		(510)		(2,070)
Valuation allowance		(405)		(86)
Subtotal		14,564		13,447
Net foreign, state and local deferred tax assets		2,031		1,874
Valuation allowance		(1,374)		(1,288)
Subtotal		657		586
Subtotal - Net U.S., foreign, state and local deferred tax assets		15,221		14,033
Net foreign, state and local deferred tax liabilities		(169)		(220)
Total AIG net deferred tax assets (liabilities)	$	15,052	$	13,813

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

At December 31, 2018 and 2017, our U.S. consolidated income tax group had net deferred tax assets after valuation allowance of $14.6 billion and $13.4 billion, respectively. At December 31, 2018 and 2017, our U.S. consolidated income tax group had valuation allowances of $405 million and $86 million, respectively.

Deferred Tax ASSET — Foreign, State and Local

At December 31, 2018 and 2017, we had net deferred tax assets (liabilities) of $488 million and $366 million, respectively, related to foreign subsidiaries, state and local tax jurisdictions, and certain domestic subsidiaries that file separate tax returns.

At December 31, 2018 and 2017, we had deferred tax asset valuation allowances of $1.4 billion and $1.3 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 2013.

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 in the Southern District of New York. The Southern District of New York denied our summary judgment motion and upon AIG’s appeal, the U.S. Court of Appeals for the Second Circuit (the Second Circuit) affirmed the denial. AIG’s petition for certiorari to the U.S. Supreme Court from the decision of the Second Circuit was denied on March 7, 2016. As a result, the case has been remanded back to the Southern District of New York for a jury trial.

In January 2018, the parties reached non-binding agreements in principle on issues presented in the dispute and are currently reviewing the computations reflecting the settlement terms. The resolution is not final and is subject to various reviews. The litigation has been stayed pending the outcome of the review process. We can provide no assurance regarding the outcome of any such litigation or whether binding compromised settlements with the parties will ultimately be reached. We currently believe that we have adequate reserves for the potential liabilities that may result from these matters.

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)		2018		2017		2016
Gross unrecognized tax benefits, beginning of year	$	4,707	$	4,530	$	4,331
Increases in tax positions for prior years		14		210		235
Decreases in tax positions for prior years		(6)		(33)		(39)
Increases in tax positions for current year		-		-		3
Lapse in statute of limitations		-		-		-
Settlements		(6)		-		-
Activity of discontinued operations		-		-		-
Gross unrecognized tax benefits, end of year	$	4,709	$	4,707	$	4,530

At December 31, 2018, 2017 and 2016, our unrecognized tax benefits, excluding interest and penalties, were $4.7 billion, $4.7 billion and $4.5 billion, respectively. The activity for the year ended December 31, 2018 is not material. The activity for the years ended December 31, 2017 and 2016, includes increases for amounts associated with cross border financing transactions and the impact of settlement discussions with the IRS related to certain other open tax issues unrelated to the cross border financing transactions. With respect to cross border financing transactions, the increases are the result of consideration of court decisions upholding the disallowance of foreign tax credits claimed by other corporate entities not affiliated with AIG. In addition, the year ended December 31, 2017 reflects the agreement reached in the fourth quarter of 2017 by the parties in the cross border financing dispute to pursue a potential settlement.

At December 31, 2018, 2017 and 2016, 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 $38 million, $28 million and $66 million, respectively. Accordingly, at December 31, 2018, 2017 and 2016, the amounts of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate were $4.7 billion, $4.7 billion and $4.4 billion, respectively.

Interest and penalties related to unrecognized tax benefits are recognized in income tax expense. At December 31, 2018, 2017, and 2016, we had accrued liabilities of $2.2 billion, $2.0 billion, and $1.2 billion, respectively, for the payment of interest (net of the federal benefit) and penalties. For the years ended December 31, 2018, 2017, and 2016, we accrued expense of $190 million, $776 million and $26 million, respectively, for the payment of interest and penalties. The activity for the period ended December 31, 2017, is primarily related to a decrease in the expected federal benefit of interest due to the U.S. corporate tax rate reduction and to an increase in interest and penalties associated with cross border financing transactions.

We believe it is reasonably possible that our unrecognized tax benefits could decrease within the next 12 months by as much as $3.9 billion, principally as a result of potential resolutions or settlements of prior years’ tax items. The prior years’ tax items include unrecognized tax benefits related to the deductibility of certain expenses and matters related to cross border financing transactions.

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

At December 31, 2018	Open Tax Years
Major Tax Jurisdiction
United States	2000-2017
Australia	2014-2017
France	2017-2018
Japan	2012-2017
Korea	2013-2017
Singapore	2014-2017
United Kingdom	2017-2018