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Starr International Co., Inc. v. United States

United States District Court, D. Columbia

September 18, 2015


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          For STARR INTERNATIONAL COMPANY, INC., Plaintiff, Counter Defendant: Andrew Todd Wise, Thomas Edward Zehnle, LEAD ATTORNEYS, Kevin M. Downing, MILLER & CHEVALIER, CHARTERED, Washington, DC.

         For UNITED STATES OF AMERICA, Defendant, Counter Claimant: Dennis Michael Donohue, LEAD ATTORNEY, William Edward Farrior, U.S. DEPARTMENT OF JUSTICE, Washington, DC.

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         CHRISTOPHER R. COOPER, United States District Judge.

         Foreign corporations owe U.S. federal income tax on dividend income received from sources within the United States. If that income is insufficiently connected to a foreign corporation's business activity in the United States, by statute it is taxed at a rate of 30%. 26 U.S.C. § 881(a). The United States maintains tax treaties with many countries, including Switzerland, which reduce this 30% statutory rate for foreign corporations that satisfy certain requirements set forth in the treaty. Our tax treaty with Switzerland also gives the Secretary of the Treasury or his designee discretion to grant Swiss companies benefits under the treaty even if they fail to meet the enumerated criteria. The central question presently before the Court is whether the Secretary's denial of discretionary treaty benefits in the form of a lower dividend tax rate is subject to judicial review.

         Swiss-domiciled Starr International Company (" Starr" ) was once the largest shareholder of American International Group, Inc. (" AIG" ). In 2007, Starr petitioned the Internal Revenue Service (" IRS" ) for discretionary benefits under the U.S.-Swiss tax treaty. After its request was denied, Starr filed this tax-refund suit to recover some $38 million that AIG had paid to the Treasury on its behalf in 2007--or, approximately half of Starr's withholdings on AIG dividends for that year. The Government has moved to dismiss the suit, asserting that the IRS's decision to deny Starr treaty benefits is not judicially reviewable because it is committed exclusively to the agency's discretion by the treaty and involves a nonjusticiable political question. The Government also asserts defenses based on the same grounds. Starr opposes the Government's motion to dismiss and moves to strike its defenses.

         The Court finds that the Government has not met its burden to present clear and convincing evidence to overcome the presumption of judicial review of federal agency action. Because the treaty does not reflect an unambiguous intent to foreclose judicial review, and the Technical Explanation of the treaty--which the IRS followed here--supplies a meaningful standard for determining whether a Swiss company qualifies for treaty benefits, the Court may review whether the Secretary abused his discretion in not extending those benefits to Starr. The Court will, accordingly, deny the United States' motion to dismiss and grant Starr's motion to strike the Government's justiciability defenses.

         I. Background

         This dispute traces its roots to the heralded falling out between AIG and its then-CEO, Maurice R. Greenberg. See, e.g., Gretchen Morgenson, Chief Is Leaving Insurance Giant; Inquiries Mount, N.Y. Times (Mar. 15, 2005), Starr and AIG both originated from the restructuring of American Asiatic Underwriters, a multinational insurance company formed in 1919 by Cornelius Vander Starr. Compl. ¶ ¶ 10-14.[1] In the 1970s, Starr transferred its insurance business to AIG and became the largest holder of AIG common shares. Id. ¶ 17. At that time, Greenberg was the chairman of both companies'

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boards of directors and the CEO of AIG. Id. ¶ 16. For the next several decades, Starr used its massive holding of AIG common stock to fund discretionary compensation plans for AIG executives. Id. ¶ 28. Starr also received dividends on those shares, which were, and continue to be, subject to a 30% federal withholding tax. Id. ¶ 18.

         In 2004, Starr moved its headquarters from Bermuda to Ireland and began to take advantage of the 1997 U.S.-Ireland tax treaty, which automatically reduced Starr's withholding rate on AIG dividends by half. Id. ¶ ¶ 20-25. No similar treaty benefit existed for companies headquartered in Bermuda. Am. Answer & Countercl. (" Counterclaim" ) ¶ 14. The next year, amidst an investigation by New York's Attorney General, Greenberg stepped down as CEO of AIG, and Starr ceased funding AIG's executive-compensation plan. Compl. ¶ ¶ 26-29. Starr would have continued to receive benefits under the U.S.-Ireland tax treaty had it not then relocated its headquarters to Switzerland, allegedly to protect its assets from an AIG lawsuit claiming that Starr was contractually obligated to fund the plan. Id. ¶ 31-33; see also Starr Int'l Co., v. AIG, 648 F.Supp.2d 546 (S.D.N.Y. 2009).

         Under the Convention Between the United States of America and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income, Oct. 2, 1996, S. Treaty Doc. No. 105-8 (1998) [hereinafter " the Convention" or " the treaty" ], a Swiss company receiving dividends from a U.S. company is automatically entitled to halve its withholdings under certain enumerated circumstances, as when the Swiss company does significant business in Switzerland or is listed on a recognized stock exchange. Id. arts. X, XXII. If a company is not automatically entitled to benefits under the treaty, it " 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." Id. art. XXII(6). The Department of the Treasury has analyzed the Convention in a so-called Technical Explanation, which explains that this limitation on treaty benefits was designed to prevent " treaty shopping" --the practice of moving, for example, to Switzerland specifically to benefit from the lower U.S. tax rate offered by the U.S.-Swiss tax treaty. 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 62-63, [hereinafter " Technical Explanation" ].

         In 2007, Starr requested tax benefits under the discretionary provision[2] of the Convention via a letter to the U.S. Competent Authority, the IRS Deputy Commissioner (International) of the Large and Mid-Size Business Division. Countercl. ¶ ¶ 16-17, 19. In doing so, Starr acknowledged that it was not entitled to treaty benefits under any of the enumerated, mandatory categories. Id. ¶ ¶ 17, 19. In March 2010, not having received a response to its letter but wishing to reserve its right to a refund, Starr sent a 2007 tax-return form to the IRS Service Center in Ogden, Utah, contending that it had overpaid $38,181,246 in taxes--half of its withholdings on AIG dividends. Id. ¶ 20. Starr did not mark the " protective return" box provided on the form, but it wrote

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" Protective Refund Claim" on the header. Id. Starr forwarded the form to the IRS analyst working on its benefits request, who contacted the Utah Service Center to ensure that the refund was not paid before Starr's treaty benefits had been determined. Id. ¶ 21. In October 2010, the U.S. Competent Authority denied Starr's request to apply the Convention to reduce Starr's 2007 withholding tax. Id. ¶ 22. Starr was, however, later issued a Convention-based refund for its 2008 taxes. Id. ¶ ¶ 45-46.

         Starr brought suit in September 2014, claiming that the IRS had erroneously denied its request for benefits under the Convention. Starr contends that the IRS abused its discretion because (1) Starr was not treaty shopping when it relocated to Switzerland, (2) the IRS failed to consult with the Swiss Competent Authority before denying Starr's request, and (3) the IRS had no legal basis for issuing Starr a 2008 refund while denying its 2007 request based on the same material facts. Compl. ¶ ¶ 36-50. The IRS has raised two main defenses to Starr's claims: that the U.S. Competent Authority's decision is committed to agency discretion by law and, alternatively, that the Court lacks jurisdiction under the political-question doctrine.[3] The IRS has also moved to dismiss Starr's claims under those same defenses.[4] Starr has moved to strike the IRS's justiciability defenses, contending that the committed-to-agency-discretion exception to judicial review does not apply to tax-refund suits and that Starr's challenge does not raise an unreviewable political question. The Court held a hearing on the motions on May 12, 2015.

         II. Standard of Review

         The Court may strike insufficient defenses or " any redundant, immaterial, impertinent, or scandalous matter." Fed.R.Civ.P. 12(f). " 'The decision to grant or deny a motion to strike is vested in the trial judge's sound discretion.' . . . However, a motion to strike is a drastic remedy that courts disfavor." Gates v. District of Columbia, 825 F.Supp.2d 168, 169 (D.D.C. 2011) (quoting Naegele v. Albers, 355 F.Supp.2d 129, 142 (D.D.C. 2005)). Such motions are granted " where it is clear that the affirmative defense is irrelevant and frivolous and its removal from the case would avoid wasting unnecessary time and money litigating the invalid defense." United States ex rel. Head v. Kane Co., 668 F.Supp.2d 146, 150 (D.D.C. 2009) (quoting SEC v. Gulf & Western Indus., Inc., 502 F.Supp. 343, 344 (D.D.C. 1980)) (internal quotation marks omitted).

         In response to a motion to dismiss a complaint for lack of subject-matter jurisdiction under Federal Rule of Civil Procedure 12(b)(1), the plaintiff must prove by a preponderance of the evidence that the court has jurisdiction. E.g., Biton v. Palestinian Interim Self-Gov't Auth., 310 F.Supp.2d 172, 176 (D.D.C. 2004). A court " assume[s] the truth of all material factual allegations in the complaint and

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'construe[s] the complaint liberally, granting [the] plaintiff the benefit of all inferences that can be derived from the facts alleged.'" Am. Nat'l Ins. Co. v. FDIC, 642 F.3d 1137, 1139, 395 U.S.App.D.C. 316 (D.C. Cir. 2011) (quoting Thomas v. Principi, 394 F.3d 970, 972, 364 U.S.App.D.C. 326 (D.C. Cir. 2005)). But a " court must give [the] plaintiff's factual allegations closer scrutiny when resolving a Rule 12(b)(1) motion than would be required for a Rule 12(b)(6) motion for failure to state a claim." Byrum v. Winter, 783 F.Supp.2d 117, 122 (D.D.C. 2011) (citing Macharia v. United States, 334 F.3d 61, 64, 69, 357 U.S.App.D.C. 223 (D.C. Cir. 2003)). In determining whether it has jurisdiction, a court " may consider materials outside of the pleadings." Jerome Stevens Pharms., Inc. v. FDA, 402 F.3d 1249, 1253, 365 U.S.App.D.C. 270 (D.C. Cir. 2005).

         To survive a motion to dismiss for failure to state a claim under Rule 12(b)(6), " a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal,556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell A. Corp. v. Twombly,550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). While the court must " assume [the] veracity" of any " well-pleaded factual allegations" in the ...

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