AIG Investors Face Deferred Tax After IRS Rules on Warrants

American International Group Inc. (AIG)’s shareholders face deferred taxes on warrants issued in January after a ruling by the Internal Revenue Service.

The IRS finding will require investors to write down the value of their current stock holdings in the insurer by $8.70 a share, increasing the potential capital-gains tax when the stock is eventually sold, said Robert Willens, a tax consultant in New York. The ruling, which spares most shareholders an immediate IRS bill, denied the transaction tax-free status because AIG issued the warrants only to private investors and not its majority stake holder, the U.S. government, he said.

“The tax you’re avoiding today you’re really going to pay later on,” Willens said. “When a company distributes warrants it’s ordinarily a tax-free distribution, he said.

AIG Chief Executive Officer Robert Benmosche is seeking to reduce the U.S. government’s ownership by selling shares and courting private investors. The 75 million warrants, issued (AIG/WS) on Jan. 19, give shareholders the right to buy stock at $45 a share. AIG said today some investors may sidestep taxes resulting from the 10-year warrants.

“AIG expects that the distribution of the warrants will not be taxable, except to the extent that a holder’s adjusted tax basis in each common share on which the warrants were distributed is less than $8.70,” the New York-based company said in a statement.

‘Taxable Distribution’

Mark Herr, a spokesman for AIG, said the company wouldn’t comment beyond the release and a separate statement on the firm’s website which affirmed the requirement for an $8.70 a share writedown. AIG said in January that the warrants “may be treated as a taxable distribution.”

AIG, once the world’s biggest insurer, has declined 52 percent this year. The shares rose (AIG) 1.2 percent to $23.24 in New York. Investors received the warrants as part of transactions designed to recapitalize the company, according to AIG’s website.

The U.S. Treasury Department holds a 77 percent stake in AIG after a taxpayer-funded bailout of the insurer. The Treasury needs to get about $28.72 a share to recoup its investment of more than $40 billion. The government cut its holding from 92 percent in a public offering in May by selling shares for $29 apiece.

AIG was rescued in 2008 after bets tied to the housing market soured. Its bailout was revised at least four times and swelled to $182.3 billion. The insurer paid back the remaining $21 billion on a Federal Reserve credit line in January.

The warrants rose (AIG/WS) less than 1 percent to $5.65 today. AIG said for tax purposes, the warrants had a fair market value of $16.29 each when distributed.

To contact the reporter on this story: Andrew Frye in New York at afrye@bloomberg.net

To contact the editor responsible for this story: Dan Reichl at dreichl@bloomberg.net

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