United States District Court, District of Columbia
CHRISTOPHER R. COOPER UNITED STATES DISTRICT JUDGE
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.
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,
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,
see also Starr Int'l Co. v. United States, 2017
WL 3491802, at *8 (D.D.C. Aug. 14, 2017).
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.
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).
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.
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.
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.
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).
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.