US Court Rules IRS Lawfully Denied Discretionary Tax Treaty Benefits

On August 14, the United States District Court for the District of Columbia ruled in Starr International Company, Inc. v. United States case that the Internal Revenue Service (IRS) was not arbitrary or capricious in finding at least one of the taxpayer’s principal purposes for moving its residency to Switzerland was to obtain tax benefits under the US-Swiss Treaty.

Background: Starr Case

Swiss-domiciled Starr International Company, Inc. (“Starr”) did not meet any of the treaty’s objective criteria for benefits, petitioned the IRS for a discretionary reduction in the rate applied to some $191 million in dividends that Starr received from AIG during the 2007 tax year. The IRS ultimately denied Starr’s request for treaty benefits on the ground that Starr’s historical selection of domiciles and its then-recent relocation to Switzerland were motivated as much by tax reasons as by independent business 3 purposes. A “primary purpose” of the move, the IRS thus concluded, was to obtain treaty benefits.

Starr Challenged The IRS’s Denial

Under the Administrative Procedure Act. Starr’s primary contention is that the treaty’s primary purpose test is designed to prevent the practice of “treaty shopping” and that the IRS applied an erroneous definition of that term in concluding that the company’s relocation to Switzerland was largely tax-driven. Starr argues that “treaty shopping” is a precise legal term, covering only those instances where an on-paper resident of a country not party to the relevant tax treaty uses an entity that is an on-paper resident of a treaty country in order to obtain treaty benefits.

Source: Case No. 14-cv-01593

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