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Starr International Co., Inc. v. United States

United States Court of Appeals, District of Columbia Circuit

December 7, 2018

Starr International Company, Inc., Appellant
United States of America, et al., Appellees

          Argued September 13, 2018

          Appeal from the United States District Court for the District of Columbia (No. 1:14-cv-01593)

          Rajiv Madan argued the cause for appellant. With him on the briefs were Christopher P. Bowers, Nathan P. Wacker, and Caroline Van Zile.

          Richard Caldarone, Attorney, U.S. Department of Justice, argued the cause for appellees. With him on the brief were Travis A. Greaves, Deputy Assistant Attorney General, and Gilbert S. Rothenberg and Richard Farber, Attorneys. Judith A. Hagley, Attorney, entered an appearance.

          Before: Henderson and Millett, Circuit Judges, and Edwards, Senior Circuit Judge.



         Dividends paid by U.S. corporations and received by foreign shareholders are generally subject to a 30 percent withholding tax. See 26 U.S.C. §§ 881(a)(1), 1442(a). Bilateral tax treaties between the United States and other nations reduce this tax rate to encourage cross-border investments and allow taxpayers to avoid double taxation. This case concerns an attempt by Swiss-domiciled Starr International Company, Inc. ("Starr") to avail itself of a bilateral tax treaty between the United States and Switzerland to reduce its tax rate on U.S. source dividend income. See generally Convention Between the United States of America and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income, Switz. U.S., Oct. 2, 1996, S. Treaty Doc. No. 105-8 (1997) ("U.S.-Swiss Treaty" or "Treaty").

         Starr is a privately held parent company to various international insurance and financial businesses. After establishing residence in Switzerland in 2006, Starr sought to pay a reduced tax rate under the U.S. Swiss Treaty. Because Starr did not automatically qualify for treaty benefits, it relied on Article 22(6) of the Treaty, a provision that allows for discretionary tax relief. Article 22(6) states:

A person that is not [otherwise] entitled to the benefits of this Convention . . . may, nevertheless, be granted the benefits of the Convention if the competent authority of the State in which the income arises so determines after consultation with the competent authority of the other Contracting State.

U.S.-Swiss Treaty art. 22(6). A Swiss taxpayer will be denied relief under Article 22(6) if the U.S. Competent Authority determines that obtaining benefits under the Treaty was one of the taxpayer's "principal purposes" in establishing itself in Switzerland. Dep't of the Treasury, Technical Explanation of the Convention Between the United States of America and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income ("Technical Explanation") 72.

         Starr sought discretionary relief from the U.S. Competent Authority - the Internal Revenue Service ("IRS") Deputy Commissioner for the Large Business and International Division - for the 2007 tax year. The IRS denied Starr's request after concluding that obtaining treaty benefits was a principal purpose of Starr's move to Switzerland. Objecting to this determination, Starr filed a claim for a refund of approximately $38 million in taxes improperly withheld. Starr then brought suit for a tax refund in the District Court, alleging that the IRS erred in denying Starr benefits under the U.S. Swiss Treaty.

         The District Court dismissed Starr's tax refund claim on the ground that it raised a nonjusticiable political question. See Starr Int'l Co., Inc. v. United States ("Starr II"), No. 14-cv-01593 (CRC), 2016 WL 410989, at *2 (D.D.C. Feb. 2, 2016). Starr then amended its complaint to bring a claim under the Administrative Procedure Act ("APA"), challenging the IRS's denial of treaty benefits as arbitrary and capricious. The District Court granted the Government's motion for summary judgment on Starr's APA claim. Starr Int'l Co., Inc. v. United States ("Starr III"), 275 F.Supp.3d 228, 251 (D.D.C. 2017). It held that the IRS had reasonably interpreted and applied the U.S.-Swiss Treaty in denying Starr's request. Id.

         Starr now appeals both decisions of the District Court. It claims the IRS misinterpreted and misapplied Article 22(6) and the Technical Explanation's "principal purpose" test. Starr therefore asks this court to issue a judgment granting the requested tax refund, which it maintains does not raise a political question.

         For the reasons stated below, we reverse the decision of the District Court dismissing Starr's tax refund claim as raising a nonjusticiable political question and remand for further proceedings. Because we hold that Starr can proceed with its tax refund claim, we also hold that Starr does not have a cause of action under the APA. We therefore vacate the District Court's decision granting summary judgment against Starr on its APA claim, and remand with instructions to dismiss that claim.

         I. Background

         A. The U.S.-Swiss Treaty

         Section 881(a) of the Internal Revenue Code imposes a 30 percent tax on the U.S.-source income, such as dividend income, of foreign corporations. 26 U.S.C. § 881(a)(1). To collect this tax, the IRS requires U.S. corporations issuing dividends to withhold the tax from the foreign taxpayers and remit it directly to the IRS. See 26 U.S.C. § 1442(a). Dividend income may be subject to a lower tax rate if the taxpayer is a resident of a country with which the United States has an income tax treaty. As relevant here, the U.S.-Swiss Treaty reduces the tax on U.S.-source dividend income for Swiss residents from 30 percent to either 5 or 15 percent, depending on the Swiss entity's percentage of ownership in the U.S. corporation. See U.S. Swiss Treaty art. 10.

         By reducing tax rates, bilateral tax agreements like the U.S. Swiss Treaty serve several purposes, including removing impediments to trade and cross-border investment. See Tax Convention with Switzerland, S. Exec. Rep. No. 105-10, at 1 (1997). They mitigate double taxation of income earned by residents of one country from sources within the other country, in addition to preventing tax evasion by facilitating information sharing between the tax authorities of the treaty countries. See id. at 1-2. Treaty "Limitation on Benefits" provisions establish the criteria taxpayers must meet in order to obtain benefits. These provisions are designed to filter out "treaty shoppers," or residents of third states who use legal entities established in a contracting state in order to obtain the benefits of a tax treaty. Technical Explanation 59.

         Article 22 is the "Limitation on Benefits" section of the U.S. Swiss Treaty. It begins with a series of objective, mechanical tests designed to identify those treaty-country residents who merit benefits because of legitimate, non-tax motives for their claimed state of residency. See U.S. Swiss Treaty art. 22(1)-(3); see also Technical Explanation 59. For example, individuals residing in Switzerland, certain Swiss family foundations, and companies engaged in business in Switzerland that meet specified criteria are automatically eligible for benefits. U.S. Swiss Treaty art. 22(1)(a), (c), (g). The "assumption" underlying these tests is that a taxpayer who satisfies them "probably has a real business purpose for the structure it has adopted, or has a sufficiently strong nexus to the ...

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