Starr International Co. v. United States
275 F. Supp. 3d 228
D.D.C.2017Background
- Starr International (Swiss-domiciled) received large U.S.-source dividends (AIG) in 2007 but did not meet any automatic Article 22 Limitation-on-Benefits tests of the U.S.-Swiss tax treaty and applied under Article 22(6) for discretionary treaty benefits.
- Starr had a history of relocations (Panama → Bermuda → Ireland → Switzerland) and a corporate structure that placed most economic value in a charitable trust while voting control rested with largely U.S. individuals.
- The IRS Competent Authority conducted a multi-year review, during which Starr acknowledged it did not meet the mechanical Article 22 tests and supplied materials (including a post-hoc decision matrix) explaining motives for the Switzerland move (charitable flexibility and asset protection).
- The Competent Authority denied Starr’s Article 22(6) request, finding that one of Starr’s principal purposes for moving management/residency to Switzerland was to obtain treaty benefits, citing Starr’s relocation history, the timing of moves relative to dividend payments, the brief Ireland residency, and U.S. individual control.
- Starr sued under the Administrative Procedure Act, arguing the Competent Authority applied the wrong legal standard (insisting treaty shopping requires third-country ownership) and that the denial was arbitrary and capricious; the Court reviewed whether the Technical Explanation’s “principal purpose” test governed and whether it was reasonably applied.
Issues
| Issue | Starr's Argument | U.S. Argument | Held |
|---|---|---|---|
| Proper legal standard for Article 22(6) relief | Article 22(6) only excludes classic "treaty shopping" by third-country residents; because Starr and affiliates were on-paper Swiss (or U.S.) residents, relief was required | Article 22(6) uses a substance-over-form "principal purpose" test (per the Technical Explanation); "third-country" language targets non-bona-fide residents, not a strict on-paper ownership requirement | Court: Adopted Technical Explanation standard — relief depends on whether establishing/maintaining residency had as a principal purpose obtaining treaty benefits (no on-paper third-country precondition) |
| Proper meaning of "third-country resident" / residence | Starr read "third-country" literally (on-paper residency) so its Swiss on-paper status precludes finding treaty shopping | "Third-country" in Technical Explanation means not a bona fide resident (substance over form); on-paper residency can be disregarded for treaty purposes | Court: Rejected Starr’s formalistic test; emphasized bona fide/residence nexus inquiry rather than strict on-paper rule |
| Whether Competent Authority arbitrarily relied on stale or irrelevant facts | Starr: Competent Authority improperly relied on prior moves, decision matrix, and U.S. shareholder control — facts irrelevant or misinterpreted | Gov't: Historical moves, timing of relocations relative to dividends, and control are relevant in a totality-of-circumstances principal-purpose inquiry | Court: Competent Authority reasonably considered historical relocations, timing, and control; those factors supported finding that obtaining treaty benefits was at least one principal purpose |
| Whether Competent Authority misapplied Article 22(6) as a "near-miss" or used post-hoc rationales | Starr: Article/text lacks a "near-miss" requirement and agency relied on irrelevant/unsupported inferences | Gov't: Competent Authority applied principal-purpose test; side references to "near-miss" or contemporaneous policy did not drive decision; consideration of evolving policy is permissible | Court: Denial was not arbitrary; agency articulated rational connection between facts and conclusion and need not accept Starr’s alternate interpretations |
Key Cases Cited
- Starr Int’l Co., Inc. v. United States, 139 F. Supp. 3d 214 (D.D.C. 2015) (prior opinion addressing justiciability and standard under Article 22)
- FCC v. Fox Television Stations, Inc., 556 U.S. 502 (2009) (describing APA review as the full extent of judicial review of agency procedural correctness)
- Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29 (1983) (arbitrary-and-capricious standard requires agency to examine relevant data and offer rational connection between facts and decision)
- SEC v. Chenery Corp., 332 U.S. 194 (1947) (court must judge agency action by grounds invoked by agency, barring post-hoc rationalizations)
- Xerox Corp. v. United States, 41 F.3d 647 (Fed. Cir. 1994) (use of treaty Technical Explanations as interpretive aids analogous to legislative history)