The U.S. Court of Appeals for the District of Columbia reversed and remanded the lower court’s decision in a case involving the interpretation of the US-Switzerland tax treaty. In Starr International Company, Inc. v. United States, No. 1:14-cv-01593 (D.C. Cir. Dec. 7, 2019), Starr sought a tax refund for a portion of the 30 percent withholding taxes automatically withheld from dividend payments it received attributable to its U.S. stock ownership interests. Although Starr did not fit within the mechanical tests of Article 22 of the treaty, it requested relief under Art. 22(6) which allows for discretionary relief.
The IRS consulted with the U.S. Competent Authority, but the U.S. Competent Authority failed to consult with its Swiss counterpart, and the IRS denied Starr’s request for a refund of taxes paid. Providing a tax refund requires consultation between both parties to the treaty under Article 22(6). The District Court held that ordering the IRS to pay Starr the requested refund would impinge upon the Executive Branch’s exercise of diplomacy in its consultation with the Swiss competent authority. The appellate court disagreed, and found that the District Court erred in its application of the political question doctrine, citing to Baker v. Carr, 369 U.S. 186 (1962).
In Baker, the Supreme Court set forth various standards, one of which must apply before the political question doctrine applies to allow an exception to federal court jurisdiction. Those standards include:
- A textually demonstrable constitutional commitment of the issue to a coordinate political department; or
- A lack of judicially discoverable and manageable standards for resolving the issue; or
- The impossibility of deciding the issue without an initial policy determination of a kind clearly for nonjudicial discretion; or
- The impossibility of a court’s undertaking independent resolution without expressing a lack of the respect due the coordinate branches of government; or
- An unusual need for unquestioning adherence to a political decision already made; or
- The potentiality of embarrassment from multifarious pronouncements by various departments on one question.
Baker v. Carr, 369 U.S. at 217.
The DC Circuit held that none of those criteria applied and that courts do have the authority and obligation to interpret tax treaties. The appellate court held further that: “a court cannot avoid its responsibility to enforce a specific statutory right merely because the issues have political implications.” Starr, p. 12 slip op. (citing Zivotofsky v. Clinton 566 U.S. 189, 196 (2012))
Thus, the case was remanded back to District Court for further consideration and to allow Starr to pursue its claim for a tax refund. While the Court could not order the U.S. Competent Authority to consult with the Swiss Competent Authority since that is part of the IRS’ deliberative process, it provided several paths for the Court to follow to allow the lower court jurisdiction to render a decision that would be reviewable, rather than the District Court’s position that the issue was “nonjusticiable” and that it was not able to rule on the substance of Starr’s refund claim. Thus, the D.C. Court of Appeals expanded the District Court’s perception of its jurisdiction over tax treaty issues, and confirmed a narrow application of Baker v. Carr, supra, and its progeny.
This alert is not intended to contain legal advice or to be an exhaustive review of the opinion. If you have any questions about the intricate details of this case, or the interpretation of tax treaties generally, please contact Nancy Ortmeyer Kuhn, Esq. at Jackson & Campbell, P.C.