United States Court of Appeals, District of Columbia Circuit
September 13, 2018
from the United States District Court for the District of
Columbia (No. 1:14-cv-01593)
Madan argued the cause for appellant. With him on the briefs
were Christopher P. Bowers, Nathan P. Wacker, and Caroline
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.
EDWARDS, SENIOR CIRCUIT JUDGE.
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").
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
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.
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.
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.
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.
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.
The U.S.-Swiss Treaty
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.
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
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