AIG Alico deal held up by tax matter: sources

NEW YORK (Reuters) - American International Group Inc's (AIG.N) pending sale of a foreign life insurance unit to MetLife Inc (MET.N) in a $15 billion deal has been held up by a tax question, sources familiar with the matter said on Wednesday.

American Life Insurance Co, or Alico, which sells most of its insurance policies outside the United States, does not withhold U.S. taxes on distributions to foreign policy holders, the sources said.

AIG and MetLife want to make sure this practice is consistent with U.S. tax laws and are seeking a letter from the U.S. Internal Revenue Service supporting Alico's position, one of the two sources said.

The matter has been a part of discussions from the start, the source said, adding that it was a question of what would be the best way to reassure the parties involved.

Talks for a deal are still on track, the source said.

AIG, which is trying to pay back the U.S. government after being bailed out with $182.3 billion of taxpayer funds, has been in talks for months to sell Alico to MetLife, the largest publicly traded U.S. life insurer.

The sale would be the largest for AIG since its September 2008 bailout and would be a transformational deal for MetLife, expanding its presence in fast-growing international markets.

The sale would also help the Federal Reserve, which holds a $9 billion preferred interest in a special vehicle that holds Alico, recover a big chunk of its loan to AIG.

Alico, founded in 1921 and based in Wilmington, Delaware, sells life insurance and retirement products to 19 million customers in 54 countries.

The insurer sees itself as a so-called 80-20 company, the second source said. Under the 80-20 IRS standard, a company that derives more than 80 percent of its income from foreign sources is not subject to U.S. tax withholding, the source said.

AIG and MetLife are trying to make sure Alico can continue its present practice and that the IRA won't issue an adverse ruling, the first source said.

AIG and MetLife declined to comment on the matter, which was first reported by The Wall Street Journal. The sources are anonymous because the talks are not public.

AIG shares were off 42 cents, or 1.5 percent, at $27.01 during morning trading on the New York Stock Exchange. MetLife shares were up 5 cents to $35.11.

(Reporting by Paritosh Bansal; editing by John Wallace)