United States District Court, D. Columbia
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STARR INTERNATIONAL COMPANY, INC., Plaintiff, Counter
Defendant: Andrew Todd Wise, Thomas Edward Zehnle, LEAD
ATTORNEYS, Kevin M. Downing, MILLER & CHEVALIER, CHARTERED,
UNITED STATES OF AMERICA, Defendant, Counter Claimant: Dennis
Michael Donohue, LEAD ATTORNEY, William Edward Farrior, U.S.
DEPARTMENT OF JUSTICE, Washington, DC.
R. COOPER, United States District Judge.
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
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.
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
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. 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'
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.
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
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,
" Technical Explanation" ].
2007, Starr requested tax benefits under the discretionary
provision 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
" 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.
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. The IRS has also moved to dismiss
Starr's claims under those same defenses. 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.
Standard of Review
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).
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
'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.
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 ...