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Starr International Co., Inc. v. United States

United States District Court, District of Columbia

January 31, 2018

STARR INTERNATIONAL COMPANY, INC., Plaintiff,
v.
UNITED STATES OF AMERICA, Defendant. UNITED STATES OF AMERICA, Counterclaim-Plaintiff,
v.
STARR INTERNATIONAL COMPANY, INC., Counterclaim-Defendant.

          MEMORANDUM OPINION

          CHRISTOPHER R. COOPER UNITED STATES DISTRICT JUDGE

         In 2013, the IRS erroneously issued a $21 million refund to Starr International Company, Inc. for the 2008 tax year. Under the applicable statute of limitations, the Government had two years to file suit to reclaim that refund, but it failed to do so. Instead, four years after issuing the refund, the Government filed a counterclaim in this case, which Starr originally brought to recover taxes withheld for the 2007 tax year. The IRS contends that it is entitled to an extended limitations period because it was induced to issue the refund by Starr's misrepresentations of material fact. Because the Court finds that Starr made no such misrepresentations in its refund claim, it will apply the two-year statute of limitations and grant Starr's motion for summary judgment on the Government's counterclaim.

         I. Background

         A. Legal Background

         Starr International Company, Inc. (“Starr”) is a privately held Swiss-based company. As with all foreign companies, Starr owes U.S. federal income taxes on dividend income attributable to stock held in U.S. corporations. Counterclaim ¶ 13. These taxes are typically withheld at a rate of 30 percent and remitted directly to the IRS. 26 U.S.C. § 1442. A tax treaty between the United States and Switzerland, however, entitles certain Swiss-resident corporations to a significant reduction in the tax rate applied to U.S.-source dividends-from 30 percent to either 5 or 15 percent. See Convention Between the United States of America and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income art. 10(2), Oct. 2, 1996, S. Treaty Doc. No. 105-8, https://www.irs.gov/pub/irs-trty/swiss.pdf [hereinafter “Treaty”].

         A Swiss corporation automatically benefits from the Treaty if it meets one of a dozen or so enumerated criteria-for example, if it does significant business in Switzerland. See id. art. XXII. If a corporation does not qualify for an automatic reduction, it may nevertheless be granted benefits on a discretionary basis by “the competent authority of the State in which the income arises . . . after consultation with the competent authority of the other Contracting State.” Id. art. XXII(6). In the case of a Swiss corporation like Starr, this means that the Office of the United States Competent Authority (“USCA”) will review its request for discretionary benefits and, after mandatory consultation with the Swiss competent authority, make a final determination. An analysis of the Treaty issued by the U.S. Treasury Department-the so-called “Technical Explanation”-instructs the USCA, when reviewing requests for discretionary benefits, to consider whether the corporation acted with a “principal purpose” of obtaining treaty benefits. See 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 72, http://www.irs.gov/pub/irs-trty/swistech.pdf; see also Starr Int'l Co. v. United States, 2017 WL 3491802, at *8 (D.D.C. Aug. 14, 2017).

         A taxpayer claiming a refund based on treaty benefits seeks those funds using a Form 1120-F-the general income tax return for foreign corporations. Treas. Reg. § 301.6402-3(a)(1). All Form 1120-Fs must be filed with the IRS Service Center in Ogden, Utah. See Starr's Mot. Summ. J. on Counterclaim Ex. 11, at 4 (ECF No. 80) (2008 Instructions to Form 1120-F). If the IRS denies or fails to act on the refund claim then-and only then-may the taxpayer bring suit seeking a refund in federal court. See 26 U.S.C. § 7422(a). In other words, filing a refund claim with the IRS is a jurisdictional prerequisite to seeking a refund in federal court.

         Sometimes the IRS grants a refund claim but does so erroneously. When this happens, the Government generally has two years to realize its error and initiate a lawsuit to recover the refund. 26 U.S.C. § 6532(b). The statute of limitations is extended to five years, however, “if it appears that any part of the refund was induced by fraud or misrepresentation of a material fact.” Id. The Government bears the burden of proving a misrepresentation of material fact in order for the five-year statute of limitations to apply. See Lane v. United States, 286 F.3d 723, 730 (4th Cir. 2002).

         B. Factual Background

         In December 2007, Starr filed a request with the USCA seeking discretionary benefits- specifically, a reduced rate of withholding paid on dividends it received from AIG stock-under the U.S.-Swiss Treaty. Counterclaim ¶ 16. While that request was pending, Starr filed a refund claim with the Ogden Service Center for the 2007 tax year, seeking a refund in the amount it would be entitled to receive if it were eligible for the treaty benefits. Starr indicated on the front page of its Form 1120-F that the refund request was a “Protective Refund Claim” and informed the USCA that it was filing this claim. Counterclaim ¶ 20. The USCA representative who was reviewing Starr's treaty benefits eligibility request, David Kosterlitz, contacted the Ogden Service Center and instructed it not to issue a refund. Counterclaim ¶ 21.

         In October 2010, the USCA issued a final determination letter denying Starr its requested treaty benefits for the 2007 tax year. Counterclaim ¶ 22. Starr then filed a refund request with the IRS for $21 million for the 2008 tax year and an amended claim for the 2007 tax year. On the first page of its 2008 Form 1120-F, next to the line indicating the amount to which Starr claimed it was owed, Starr wrote “See Statement 1, ” referring to an attached 5-page statement with several attachments. Starr's Mot. Summ. J. on Counterclaim Ex. 1, at 12. In the first paragraph of this statement, Starr disclosed that it had not been granted benefits by the USCA. Id. at 19. The statement went on to detail Starr's legal arguments about why it believed the USCA's determination was incorrect. Id. at 19-23. Starr also attached about 90 pages of correspondence between Starr and the USCA, including the determination letter that set forth the USCA's basis for deciding that Starr did not qualify for the benefits. Id. at 41-130.

         In 2011, the IRS granted Starr's 2008 refund request and issued a refund for $21, 151, 745.75. Counterclaim ¶ 29. It did not act on Starr's 2007 amended claim.

         In 2014, Starr filed suit in this Court seeking a refund of taxes paid for the 2007 tax year on the basis that the USCA erroneously denied its request for treaty benefits. See 26 U.S.C. § 7422; 28 U.S.C. § 1346(a)(1) (providing cause of action against United States for recovery of taxes “erroneously or illegally assessed”). The Court held that Starr's refund claim was not subject to judicial review because, in order to grant Starr its requested refund, the Court would need to “dictate the outcome” of the Treaty's mandatory consultation with the Swiss competent authority and would thereby “impinge upon the Executive's prerogative to engage in that [consultation] process.” Starr Int'l Co. v. United States, 2016 WL 410989, at *2 (D.D.C. Feb. 2, 2016). The Court nonetheless permitted Starr to amend its complaint with a claim that the USCA's determination was arbitrary and capricious under the Administrative Procedure Act (“APA”). Id. The Court ultimately ruled that the USCA's determination did not violate the APA, and Starr has appealed that ruling. Starr Int'l Co. v. United States, 2017 WL 3491802, at *17 (D.D.C. Aug. 14, 2017).

         Meanwhile, in 2015, the Government amended its answer to Starr's complaint before this Court by adding a counterclaim seeking to recover the 2008 refund as erroneously issued. Citing IRS regulations, the Government contended that the USCA's denial of benefits was not administratively reviewable by the Ogden Service Center, see Rev. Proc. 2006-54 § 12.04, 2006-2 C.B. 1035, and so the Ogden Service Center did not have jurisdiction to issue the refund in the first place. As the Government recognizes, because it brought suit to recover the erroneous refund almost four years after it was issued, its counterclaim would be untimely under the default two-year statute of limitations set forth in 26 U.S.C. § 6532(b). Thus, for the Government's counterclaim to succeed, it must prove that Starr induced the IRS to issue the refund “by fraud or misrepresentation of a material fact”-only then does § 6532(b)'s extended five-year limitations period apply. Id. The parties have accordingly filed cross-motions for summary judgment on the issue of whether the Government's claim is timely.

         II. ...


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