United States District Court, District of Columbia
CHRISTOPHER R. COOPER United States District Judge.
In a one-count complaint, Swiss-domiciled Starr International Company (“Starr”) seeks a refund of approximately $38 million in taxes that were withheld from dividends it earned during the 2007 tax year. The refund is due, Starr claims, because the Internal Revenue Service (“IRS”) erroneously determined that Starr was not entitled to a fifty-percent reduction of its dividends tax rate under the U.S.-Swiss tax treaty. The United States previously moved to dismiss Starr’s complaint, arguing that the IRS’s decision to deny Starr treaty benefits was not subject to judicial review because it fell within the agency’s exclusive discretion and involves a non-justiciable political question. The Court denied the government’s motion in a September 18, 2015 memorandum opinion. See Starr Int’l Co., Inc., No. 14-cv-01593, 2015 WL 5542545 (D.D.C. Sept. 18, 2015). In it, the Court concluded that the IRS’s decision, while in a sense “discretionary, ” was nonetheless reviewable because the treaty, read in conjunction with its accompanying technical explanation, provided a manageable standard for determining whether the IRS abused its discretion in denying Starr benefits. The Court further held that simply interpreting the terms of the treaty would not implicate the political-question doctrine by requiring it to wade into diplomatic affairs properly left to the executive branch.
The government now asks the Court to reconsider its prior ruling. It suggests that the Court misapprehended a key aspect of the treaty provision at issue: the requirement that the IRS “consult” with its Swiss counterparts prior to any final decision to grant treaty benefits. The government argues that separation-of-powers principles prevent the Court from forcing the IRS to consult with the Swiss authorities or dictating the outcome of any consultation because doing so would impinge on the Executive’s authority to conduct foreign relations. And because consultation is a prerequisite for awarding treaty benefits, the government asserts, the Court is powerless to grant Starr the $38 million refund it seeks, or indeed any specific monetary relief in this case. The government thus asks the Court to vacate its prior ruling and dismiss Starr’s complaint with prejudice.
After careful consideration of the government’s motion and further oral argument on the issue, the Court will revisit certain aspects of its prior ruling. The Court’s earlier decision focused primarily on whether the treaty and surrounding materials supplied a manageable standard for assessing whether Starr met certain criteria required to obtain treaty benefits. The Court reaffirms its holding that such a standard exists and that, therefore, the IRS’s determination that Starr did not meet the applicable criteria is subject to judicial review. The Court also stands by its ruling that interpreting the terms of the treaty in a manner necessary to determine whether Starr met the applicable criteria would not offend the political-question doctrine.
As for the consultation requirement, the Court previously found that it was not “presently implicated” because consultation is required only before a decision to grant treaty benefits, whereas here the IRS denied benefits to Starr. Starr Int’l Co., 2015 WL 5542545, at *10. With the benefit of additional briefing and argument on what treaty consultation typically entails, the Court concludes that justice requires it to revise this finding. The Court is not particularly swayed by the government’s argument-which it views as somewhat of a red herring-that the Court cannot force the IRS to consult with its Swiss counterparts. Notably, the government has never represented that the IRS would refuse to consult were the Court to determine that it abused its discretion in denying Starr treaty benefits. As government counsel finally acknowledged at oral argument, “that is not going to happen.” Hr’g Tr., ECF No. 34, 42:18. So the scope of the Court’s power in that regard is beside the point. More persuasive is the government’s contention that the Court lacks the power to dictate the outcome of the consultation process. As the Court now understands it, the treaty consultation process is a diplomatic exercise that can affect the ultimate outcome of the decision whether to award benefits, and the extent of those benefits, in numerous ways. As such, it would impinge upon the Executive’s prerogative to engage in that process if the Court were to render consultation meaningless or dictate its outcome. Yet ordering the IRS to issue Starr a specific monetary refund-prior to any consultation having taken place- would do precisely that.
Starr is not left without a potential remedy, however. Anticipating that it might reach today’s result, the Court sought supplemental briefing on whether Starr could pursue a claim to set aside the IRS’s decision to deny treaty benefits under the judicial-review provision of the Administrative Procedure Act (“APA”). The Court now finds that Starr may bring such a claim. Accordingly, and as explained more fully below, the Court will grant in part the government’s motion for reconsideration; vacate its order granting Starr’s motion to strike the government’s defenses and denying the government’s motion to dismiss the complaint; and dismiss Starr’s complaint without prejudice. Although the Court now holds that Starr may not pursue monetary relief in this case, it will allow Starr to amend its complaint to seek to have the IRS’s decision set aside under the APA. In the interest of efficiency, the Court will also grant in part the government’s motion for a scheduling order on its counterclaim against Starr, which alleges that the IRS erroneously issued Starr a refund for the 2008 tax year on the basis of an improperly submitted return. Countercl. ¶ 1.
I. Standard of Review
Rule 54(b) of the Federal Rules of Civil Procedure, under which the government seeks review of the Court’s prior order, “allows a litigant to move for reconsideration or modification of [such] order[s] . . . ‘at any time’ before the court’s entry of final judgment.” Cobell v. Jewell, 802 F.3d 12, 19 (D.C. Cir. 2015) (quoting Fed.R.Civ.P. 54(b)). Although Rule 54(b) does not specify the standard of review applicable to motions for reconsideration of interlocutory orders, a district court may grant such motions “as justice requires.” United States v. Slough, 61 F.Supp.3d 103, 107 (D.D.C. 2014) (quoting United States v. Coughlin, 821 F.Supp.2d 8, 18 (D.D.C. 2011)). Justice may require revision when the Court has “patently misunderstood a party, has made a decision outside the adversarial issues presented to the Court by the parties, has made an error not of reasoning but of apprehension, or where a controlling or significant change in the law or facts [has occurred] since the submission of the issue to the Court.” Singh v. George Washington Univ., 383 F.Supp.2d 99, 101 (D.D.C. 2005) (quoting Cobell v. Norton, 224 F.R.D. 266, 272 (D.D.C. 2004)).
The Court reaffirms its earlier holding that, properly presented, “whether the IRS misinterpreted federal law in denying [Starr] a tax refund under the Convention . . . is a justiciable issue.” Starr Int’l Co., 2015 WL 5542545, at *11. It also stands by its analysis that the U.S.Swiss treaty, read in concert with its accompanying technical explanation, supplies a manageable standard for reviewing the IRS’s decision. Id. The Court agrees with the government, however, that it cannot preordain the result of the consultation process between the United States and Switzerland, which functions as a prerequisite to the granting of treaty benefits. Therefore, even if Starr demonstrates that “[t]he IRS abused its discretion when it denied [Starr] benefits under the 1996 U.S.-Swiss Tax Treaty and failed to allow [Starr’s] refund claim for the 2007 Tax Year” and that “[t]he IRS acted arbitrarily and capriciously, and without sound basis in law or fact, ” Compl. ¶ 53, Starr will not have shown that it is entitled to treaty benefits-let alone the full $38 million it seeks. Rather, all Starr will have shown is that it is entitled to a remand to the IRS to reconsider its decision in light of this Court’s ruling. Accordingly, the Court will grant in part the government’s motion for reconsideration and dismiss Starr’s complaint without prejudice.
A. Reconsideration of the Treaty Consultation Process
As noted above, the Court’s prior opinion was based on an incomplete picture of what the treaty consultation process entailed and thus lacked a full appreciation of the IRS’s argument “that judicial review under the discretionary provision’s consultation requirement would impinge on the Executive’s . . . exclusive authority to ‘formulate and implement foreign policy.’” Starr Int’l Co., 2015 WL 5542545, at *10 (quoting Def.’s Mot. Dismiss 32). In fact, consultation is not simply a formality; rather, it involves substantive policy and diplomatic value judgments that may affect what amount of benefits (if any) an applicant is granted. As the government now explains:
In these consultations, the U.S. Competent Authority will give substantial weight to discussions of consistency and reciprocity so as to avoid potential damage to the treaty relationship. The competent authorities may also discuss their respective approaches in reviewing discretionary requests from similarly situated taxpayers and in some circumstances may agree on a common approach. Specific policy concerns can also arise in these consultations, especially where the U.S. Competent Authority seeks to achieve the goal of avoiding double non-taxation . . . .
Def.’s Reply Mot. Reconsideration 5. Consultation also provides the IRS the opportunity “to verify facts that are in the application of [a] Swiss applicant” like Starr and to reach a common understanding with the Swiss as to other relevant treaty provisions. Hr’g Tr., ECF No. 34, 8:14- 9:20. Starr ...