2nd UPDATE: AIG Tax Benefit Is 'Stealth Bailout' -Warren

Former members of a congressional panel that oversaw federal bailout spending on Monday decried a years-old Treasury Department determination that allows American International Group Inc. (AIG) and other companies to avoid paying billions in taxes.

Four members of the now-disbanded Congressional Oversight Panel, led by former chairwoman Elizabeth Warren, said the Treasury ruling amounted to a "stealth bailout" and called on Congress to act to prevent AIG from taking advantage of it.

The Treasury's decision at the height of the financial crisis "wasn't necessary to protect the economy," Warren said. "We think it's time for Congress to end the special tax break."

The criticism of the Treasury decision comes weeks after AIG reported a $19.8 billion fourth-quarter profit that was fueled by a $17.7 billion accounting gain from the tax benefits. The benefits were accrued by AIG as it amassed record losses amid the financial crisis; the U.S. tax code allows businesses to "carry forward" such net operating losses to offset future tax obligations, in effect saving on future tax bills.

But those carry-forwards can vanish if a company is taken over or sold, an exception that prevents healthy companies from avoiding taxes by buying firms with significant losses.

The criticism from the former members of the congressional panel stems from a series of Treasury determinations beginning in late 2008 that said the federal government's bailout of AIG, General Motors and other firms didn't constitute a sale. At one point, the Treasury owned more than 90% of AIG. That has since fallen to about 70%, and the government plans to sell the rest of its stake over time to recoup roughly $37 billion in federal aid.

The Treasury earlier this month said the tax provision "originally was intended to prevent trafficking in tax losses" by private companies, and didn't apply to companies in which the government ended up owning a majority stake as a result of a bailout.

"It would have been counterproductive--and perhaps irresponsible--to undermine the stability of those same institutions, at the height of the financial crisis, by imposing a tax code provision that was never intended to apply in this context," the Treasury said. The federal government "is not a taxpayer and has no interest in sheltering taxable income."

Another former member of the committee, Damon Silvers, said on a conference call with reporters Monday that the tax rule causes "substantial amounts of money--billions of dollars--[to leak] out to the benefit of private parties who really should not be benefiting from public policy in this way." It also can cause "an artificial inflation of executive compensation," since companies can tie the pay of top employees to profits, Silvers said.

AIG spokesman Mark Herr said the company "is adhering to well-settled tax law that a company can use losses to offset its income.

"More important, AIG has repaid the American taxpayer more than $45 billion to date and is committed to taking all possible steps so that American taxpayers can continue to recoup their investment in AIG at a profit," Herr said.

The Congressional Oversight Panel was formed in 2008 to monitor the government's Troubled Asset Relief Program. It disbanded last year, and Warren was picked by President Barack Obama to help create the new Consumer Financial Protection Bureau.

Warren is now running for a U.S. Senate seat in Massachusetts.

-By Erik Holm, Dow Jones Newswires; 212-416-2892; erik.holm@dowjones.com

--Serena Ng contributed to this article.