[00:00:01] Speaker 03:
Case number 17-5238, Star International Company, Inc.

[00:00:05] Speaker 03:
Appellate versus United States of America at Elle.

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Mr. Madden for the appellate, Mr. Calaroni for the appellee.

[00:00:13] Speaker 04:
Mr. Madden, good morning.

[00:00:14] Speaker 04:
Good morning.

[00:00:25] Speaker 01:
Good morning, Your Honors.

[00:00:27] Speaker 01:
May I reserve two minutes for rebuttal?

[00:00:31] Speaker 01:
Raj Madden, Skadden Arbs for the Appellant.

[00:00:35] Speaker 01:
May I proceed?

[00:00:39] Speaker 01:
Your Honours, this case is about a review of an IRS decision in which it denied the Appellant Treaty benefits.

[00:00:49] Speaker 01:
The treaty at issue is the U.S.

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Swiss Treaty, and the specific provision at issue is a common provision among U.S.

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tax treaties, referred to as the limitation on benefits provision.

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And in the U.S.

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Swiss Treaty, it's in Article 22.

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STAR requested discretionary relief under this treaty when it relocated from Ireland

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to Switzerland and made this application in 2007.

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After approximately two and a half years of the IRS competent authorities review of this determination, excuse me, this application, they denied the request.

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The specific relief that STAR was seeking was a reduced withholding tax rate on dividends it received from AIG for which it held a large interest.

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It sought a refund for 2007.

[00:01:49] Speaker 01:
That's correct, Your Honor.

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And would – it wasn't clear on this – would it – does the determination apply prospectively?

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Would that also have put STAR in the position going forward for as long as, I guess, this is in Switzerland, that it would be entitled to the same special tax treatment, or is it done on an annual basis?

[00:02:08] Speaker 01:
That's a good question.

[00:02:09] Speaker 01:
It would be prospective.

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The reality of it is that the most significant aspects of the dividend, excuse me, of the taxes at issue are in the 2007 year.

[00:02:20] Speaker 01:
The 2008 year has been resolved, and then the financial crisis hit where AIG hasn't been paying substantial dividends.

[00:02:27] Speaker 01:
However, there are dividends, and if the court were to determine that the competent authority was arbitrary and capricious and reversed, and Starr was entitled to the treaty benefits, yes, that would be an ongoing benefit.

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And given that Starr has not relocated from Switzerland, they would continue to be eligible.

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But the first bottom line purpose of this lawsuit is to get the refund for 2007.

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That's correct, Your Honor.

[00:02:54] Speaker 00:
Yes.

[00:02:55] Speaker 03:
All right.

[00:02:55] Speaker 03:
And did you ask for, or maybe you're just saying this is just how it works, that that would also apply?

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You didn't specifically ask for a declaration that it would, you'd have that status going forward?

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Maybe you don't need to.

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I'm not sure exactly how this works.

[00:03:10] Speaker 01:
No, it's a very good question.

[00:03:12] Speaker 01:
It can be contentious in this case We requested a ruling the effect of the application is a ruling that would then establish our position as a qualified resident of Switzerland for purposes of the treaty and therefore we would be entitled to the 15% benefit So after two and a half years of the competent authorities review and

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several dozens of questions, the competent authority flip-flopping at first preliminarily adverse and then preliminarily in favor.

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They ultimately determined that STAR was not entitled to these treaty benefits.

[00:03:54] Speaker 03:
I just have some questions about our procedural postures.

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So you started with a refund action under 26 USC 7422, and then the district court said there's a political question problem with that, but bring an APA action to challenge the IRS determination.

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But the goals of the two, both the 7422 and APA suit, are the same as to get

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money refund for twenty two thousand seven that's the goal of the action that's correct your honor how I don't understand how your litigation isn't barred then under the APA I get that you could bring the refund action and and you're saying maybe you don't get it either you didn't agree in the district court putting you into the APA box but I'm just not aware of any situation where someone

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wasn't able to bring a refund action for, there was something about the merits of their refund action here.

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I guess you disagree, but the district court said political question.

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And then someone said, go bring an APA action, which will have the end result, as you said, of giving you money, the 2007 tax refund.

[00:05:04] Speaker 03:
Are you of any case where the APA has been used like that?

[00:05:10] Speaker 01:
I'm not sure whether it's been used that way, but there's no reason under both the APA statute and the refund statute why this would be a problem.

[00:05:18] Speaker 01:
In fact, just so I make sure I'm answering your question, the way the APA statute works, as I'm sure you're aware, is that the only time the taxpayer can actually bring an APA action is if they've exhausted all their other remedies, including a refund proceeding.

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And so the fact that the district court ruled

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But APA actions give you equitable relief, either declaratory judgment or an injunction, neither of which is available either to compel tax payments out of the Treasury or to establish taxpayer status in a forward-going basis.

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Those aren't available under the APA.

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You have to do it through a refund action.

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Now, I understand that that's how you started, and this may be a shift the district court prompted, but I just don't understand how we're

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we have an APA action here at all, and why we don't have to look at everything through the lens of a 7422 action.

[00:06:16] Speaker 01:
Well, we should talk about the 7422 action, but we think there is a path, a very clear path for us to get a refund that would not be barred under the APA action.

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And it should be fairly straightforward in this sense.

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If the court agrees that the competent authority should be reversed and the issue remanded to the agency,

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with specific instructions on the application of the applicable standard, if the competent authority were to correctly adhere to these standards, they would determine, we believe based on the facts in the record, that we were not treaty shopping, that we did not have as a principal purpose obtaining treaty benefits, in which case they would grant our application

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And in terms of statute of limitations bar, that has been extended by virtue of our amended tax return, which has the effect of tolling the statute.

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So the way that we get our money, so to speak, is by having the competent authority, like any agency, where a court has determined that they were arbitrary capricious,

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make an opposite decision granting the benefits, in which case we would have both.

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We would have the permanent qualified treatment as a Swiss resident and we would have our money because the statute of limitations is open and we would be entitled to our refund.

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If we would determine that the agency was not arbitrary and capricious on the purpose determination, that ends this case, right?

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We don't need to go through all the gymnastics that the district court seemed to think it had to go through.

[00:08:04] Speaker 02:
I shrug my shoulders on the political question.

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I'm not sure how that's getting in there, but in any event, forget all of that.

[00:08:12] Speaker 02:
If we determine that either

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by virtue of a determination that could be made under 7422 and or the APA, the agency was not arbitrary and capricious in its determination that was an improper purpose, the case is over, right?

[00:08:33] Speaker 02:
I understand you don't agree, but is that right?

[00:08:36] Speaker 01:
Yeah, you're asking me a procedural question.

[00:08:38] Speaker 02:
I'm asking you if we were to decide the agency was not arbitrary and capricious in that determination, the case is over.

[00:08:45] Speaker 01:
I generally agree, Your Honor.

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The one qualification I have is because in order to determine this case as an APA action, you have to first determine that it's not a proper refund case.

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If it's a proper refund case, you'd have to ask whether there's any gap there in terms of that point you just made and a refund action.

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In other words, is that dispositive to the refund action?

[00:09:14] Speaker 02:
Is what dispositive?

[00:09:15] Speaker 01:
A determination by this Court that they were not arbitrary and capricious.

[00:09:19] Speaker 02:
Well, you can't get a refund unless you have a determination with respect to purpose.

[00:09:24] Speaker 02:
That's correct.

[00:09:25] Speaker 02:
Okay, so whether you have the APA or not, you still have to have that determination.

[00:09:30] Speaker 02:
I agree with that.

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So I mean, I don't even know that you need an APA action.

[00:09:34] Speaker 02:
If you read the statute and treaties together, you can't get a refund unless you have a determination with respect to purpose that's favorable to you.

[00:09:43] Speaker 02:
That's correct.

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Because the treaty is an overlay on the 7422.

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It's there to be looked at.

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You can't get the refund without that determination, right?

[00:09:54] Speaker 02:
That's correct, Your Honor.

[00:09:55] Speaker 02:
Okay, so that's why I say if we agree, whether it's under the APA standard or just judicial review, we looked at it and we find no infirmity in the agency's determination with respect to purpose, you lose.

[00:10:11] Speaker 02:
We don't have to go through all of these political questions, standing, reject.

[00:10:16] Speaker 02:
It's a straightforward determination.

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If the agency was okay in that determination, you lose.

[00:10:22] Speaker 02:
You cannot possibly get a refund.

[00:10:24] Speaker 02:
The reason I'm pausing your honor is because under a refund action the evidentiary rules would be slightly different Yeah, but I understand take whatever evidentiary rules you want to take and Hypothetically we agree with the agency you lose on purpose

[00:10:42] Speaker 01:
But we would have the right to introduce new evidence in the refund action.

[00:10:46] Speaker 01:
It wouldn't just be limited to the administrative record, which is why there's a gap there.

[00:10:50] Speaker 02:
Well, haven't you effectively done that by putting the APA action in play?

[00:10:54] Speaker 02:
All of that evidence is in.

[00:10:56] Speaker 01:
The APA action is limited solely to the administrative record.

[00:10:59] Speaker 02:
But I mean, as an effective matter, what more is there for court to look at all the evidence is in?

[00:11:06] Speaker 01:
Well, there was never any witness testimony.

[00:11:11] Speaker 01:
In every APA case, the four corners of the administrative record is what was presented to that agency.

[00:11:18] Speaker 01:
When you're in a de novo proceeding in front of the court, you can introduce testimony, new documents.

[00:11:25] Speaker 01:
It is a de novo proceeding, which is why the gap could exist between your question.

[00:11:30] Speaker 01:
In other words, if it's a refund action and the evidentiary rules are different,

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we would be entitled to introduce new evidence that might not.

[00:11:42] Speaker 03:
So the threshold, you were dismissed at the threshold in your 7422 action, and your point is that had that not happened, you would have had the opportunity to bring more evidence in beyond the agency's record to challenge the IRS determination about a primary or a principal purpose here.

[00:12:03] Speaker 01:
That's right.

[00:12:04] Speaker 01:
In a refund action, the proceeding is de novo.

[00:12:08] Speaker 01:
We would be entitled to discovery A and B, introduce new evidence beyond the administrative record.

[00:12:14] Speaker 03:
Does the administrative record include everything that you gave them for the two or I forget how many years that were back and forth here?

[00:12:20] Speaker 03:
Or is it all we have is this determination letter?

[00:12:23] Speaker 01:
No, no, no.

[00:12:23] Speaker 01:
It's the entire back and forth for the two and a half year period.

[00:12:26] Speaker 03:
And yet you still have more that you would want to put in?

[00:12:29] Speaker 01:
We would, yes, and probably much more importantly than what we want to put in, because we believe the decision is arbitrary and capricious, we want to get behind the decision.

[00:12:40] Speaker 01:
Without violating deliberative process, we believe that the decision was conclusory and was not well reasoned where discovery might reveal the intentions of the IRS.

[00:12:53] Speaker 03:
I guess it's the opposite of conclusory because they didn't actually conclude anything in that decision.

[00:12:57] Speaker 01:
We completely agree.

[00:12:59] Speaker 02:
Now, are you talking about something with respect to the consultation procedure when you say you want to get behind something?

[00:13:06] Speaker 01:
We do not want to get behind the consultation, Your Honor, but we want to get behind the analysis that was performed here that caused them to conclude without drawing any conclusion, having an equivocal response.

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and applying these factors where the factors have no relationship to the principal purpose test.

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They have no relationship to the notion that this entity, STAR, had already satisfied the principal purpose test.

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All you could win doing it your way was a court order for the agency to consult.

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Because you can't win without consultation.

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So all you could win was a court saying, well, they've called in to question, legitimately, your decision.

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You haven't put in enough to win on purpose yet.

[00:14:01] Speaker 02:
Therefore, the court is now going to order the agency to consult.

[00:14:06] Speaker 02:
Now, you agree, a court, after consultation, we can't look behind that, but they can come back with another decision.

[00:14:15] Speaker 02:
and better justify what they've done and you'll lose, right?

[00:14:19] Speaker 01:
Your Honor, I do not agree with that respectfully.

[00:14:21] Speaker 01:
Which part?

[00:14:24] Speaker 01:
I don't agree with the notion that all the court could do was order the IRS to consult.

[00:14:31] Speaker 02:
At this point, you can't win without consultation, right?

[00:14:35] Speaker 01:
I'm sorry, please.

[00:14:35] Speaker 02:
Right?

[00:14:36] Speaker 02:
Isn't that right?

[00:14:37] Speaker 01:
You are right that I can't win without consultation, but I think we have a different interpretation of what consultation involves.

[00:14:44] Speaker 01:
And when I say we have a different interpretation, if you look at the course of conduct, in this particular case, meaning the interaction that this competent authority had with the Swiss authorities with respect to our proceeding, they treat it as a ministerial notification.

[00:15:04] Speaker 02:
They haven't claimed consultation yet.

[00:15:07] Speaker 01:
May I, Your Honor?

[00:15:08] Speaker 01:
Yeah, go ahead.

[00:15:10] Speaker 01:
So if I could have, oh, by the way, I'm way over time.

[00:15:13] Speaker 01:
Is that OK?

[00:15:13] Speaker 01:
Go ahead, go ahead.

[00:15:16] Speaker 01:
If you have your joint appendix, I'm at joint appendix 255, 256.

[00:15:23] Speaker 01:
That is the determination letter, correct?

[00:15:29] Speaker 01:
There's two things I want to point out to you on this, and then we're going to flip the page.

[00:15:33] Speaker 01:
This letter is dated October 13, 2010.

[00:15:36] Speaker 01:
If you look at the second to last sentence on 256, it reads, we are in the process of notifying the Swiss competent authority of our determination as required under the U.S.

[00:15:50] Speaker 01:
Swiss Treaty, okay?

[00:15:53] Speaker 01:
So A,

[00:15:55] Speaker 01:
They believe that they have a notification requirement, not consultation, as reflected by their citation to the U.S.

[00:16:04] Speaker 01:
Swiss Treaty, which has no reference to notification.

[00:16:06] Speaker 01:
It's only consultation.

[00:16:07] Speaker 02:
I don't know where that gets you off my path.

[00:16:10] Speaker 01:
Let's look at the next page.

[00:16:13] Speaker 01:
So two days later, after the final determination has been made,

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And the final determination has not only been made, but it has been presented to the taxpayer, the applicant, STAR.

[00:16:27] Speaker 01:
The Department of Treasury, the IRS, then sends a letter on Joint Appendix 257, and the last sentence of the first paragraph reads, in accordance with the consultation provision of Article 226,

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We provide you with a description of the facts relevant to this request and our conclusion regarding its proper disposition.

[00:16:50] Speaker 03:
But they don't have to consult with Switzerland to deny benefits.

[00:16:55] Speaker 03:
The provision says that someone may be granted benefits

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after consultation, what they're doing here is just notifying them of a denial.

[00:17:07] Speaker 03:
That would be, there's nothing in the treaty about notifying them of denial.

[00:17:11] Speaker 03:
We only require Switzerland consultation with Switzerland to grant benefits.

[00:17:15] Speaker 03:
So I'm not sure how that letter provision helps you.

[00:17:19] Speaker 01:
And it's because the language in the treaty seems to suggest that it's a one-way street, that the... That seems to suggest is what it says.

[00:17:29] Speaker 01:
It says after determination.

[00:17:32] Speaker 01:
The question is whether after determination followed by grant is making an exclusive requirement on grant or it means after determination.

[00:17:42] Speaker 01:
I will tell you that the technical explanation very clearly indicates that the competent authority has to consult both for denials and for grants.

[00:17:57] Speaker 01:
I'm at AD

[00:18:00] Speaker 01:
ADD 26, which is paragraph 6 of Article 22.

[00:18:10] Speaker 03:
Which paragraph is it?

[00:18:11] Speaker 01:
Sorry.

[00:18:12] Speaker 01:
It is the paragraph that starts, it is assumed.

[00:18:17] Speaker 01:
You see that?

[00:18:18] Speaker 01:
The last sentence.

[00:18:20] Speaker 01:
The competent authority of the source country, excuse me, the source state will consult with the competent authority of the other state before making a determination.

[00:18:31] Speaker 01:
And so the point is, so now you have three points of reference here.

[00:18:35] Speaker 02:
Oh, wait.

[00:18:35] Speaker 02:
That's my point.

[00:18:36] Speaker 02:
So then using your scenario and my scenario, the most you could win initially is the court order to consult before you make a final determination.

[00:18:47] Speaker 00:
But, Your Honor, my son.

[00:18:48] Speaker 02:
You're saying they didn't really consult.

[00:18:50] Speaker 02:
OK, fine.

[00:18:51] Speaker 02:
So all you could come away with is you have to consult before you make a final determination.

[00:18:56] Speaker 02:
Then they could come back and make the same determination against you with better reasoning.

[00:19:02] Speaker 01:
I would be better off in that circumstance than I am today.

[00:19:06] Speaker 01:
A, and B, this is... Tell me if I'm right or wrong.

[00:19:09] Speaker 02:
I'm trying to understand your legal theory.

[00:19:11] Speaker 02:
Isn't that right?

[00:19:12] Speaker 02:
Taking your reading of Article 22, the most you can win here is a court order for the agency to engage in consultation.

[00:19:24] Speaker 02:
And then it's kind of, we'll see what happens.

[00:19:26] Speaker 02:
After they engage in consultation, then they'll come back with another decision.

[00:19:30] Speaker 02:
likely to be adverse to you, but in any event, you're saying, well, you're better off.

[00:19:35] Speaker 02:
At least you have something.

[00:19:37] Speaker 02:
They'll come back with a fuller decision post-consultation.

[00:19:41] Speaker 02:
And that's it.

[00:19:42] Speaker 02:
Then you have to come back to court.

[00:19:43] Speaker 01:
Well, Your Honor, I have three answers to that if I can do that.

[00:19:47] Speaker 01:
Number one, and probably most importantly, I do not think that they can come back adverse to us because we think if the standard is correctly applied, we cannot have as a principal purpose obtaining treaty benefits when we are going from a jurisdiction... Well, that's on the merits.

[00:20:05] Speaker 01:
But if this court were to establish the correct standard and to instruct the agency to apply the standard, they would be required to adhere to that standard.

[00:20:18] Speaker 01:
If they then make a decision to grant, I am confident that the Swiss are not going to say you should deny because the Swiss are protecting their own residents.

[00:20:29] Speaker 01:
No, no, no, wait.

[00:20:31] Speaker 01:
We don't really care what the Swiss say.

[00:20:33] Speaker 01:
That was my next point.

[00:20:35] Speaker 02:
On the consultation request, we don't care what the Swiss say.

[00:20:38] Speaker 02:
They're just required to talk to the Swiss.

[00:20:40] Speaker 02:
It may or may not be beneficial, but we don't really care what the Swiss say.

[00:20:44] Speaker 02:
That's not going to be dispositive, right?

[00:20:47] Speaker 01:
That's right, which is why my second point is I don't think that this court is limited in its order to just say, go consult with the Swiss.

[00:20:57] Speaker 01:
Because what the course of conduct here reveals

[00:21:02] Speaker 01:
In the more controversial scenario for the Swiss where a denial has been rendered, that's controversial because they want to protect their residents, all the United States did, all the IRS did was send them a letter saying, here's what we did.

[00:21:16] Speaker 01:
And the point is, that tells you that they're treating it as a notification requirement, which means it's ministerial.

[00:21:22] Speaker 01:
And this court can then order a refund.

[00:21:25] Speaker 01:
Alternatively, as we present in our briefs, the court can order a refund and hold jurisdiction.

[00:21:31] Speaker 01:
and and and and and see what the consultation reveals.

[00:21:35] Speaker 01:
If the consultation, I have a lot of respect for you.

[00:21:37] Speaker 02:
No, no, no.

[00:21:39] Speaker 02:
See what the agency says post-consultation.

[00:21:43] Speaker 02:
That's different from seeing what the consultation reveals.

[00:21:46] Speaker 02:
That's true.

[00:21:47] Speaker 02:
Because you agree we can't get behind the consultation.

[00:21:50] Speaker 01:
Well, my view is that you absolutely can just order a refund because the consultation requirement is not, first of all, seeking an agreement from the Swiss.

[00:22:00] Speaker 01:
Right.

[00:22:00] Speaker 01:
And second of all, the course of conduct reveals that it's ministerial.

[00:22:04] Speaker 02:
I mean, you just, you don't want any more delay.

[00:22:06] Speaker 02:
I understand you want money in hand.

[00:22:08] Speaker 02:
And what I'm suggesting to you is it looks to me like the statute and treaties require consultation first.

[00:22:15] Speaker 02:
And we don't have it yet, even on your theory.

[00:22:17] Speaker 02:
You're saying there hasn't been any consultation, they just gave notice.

[00:22:20] Speaker 02:
So I don't know how you're left with anything other than a request from this court to tell the district court to order consultation, and then we'll see what happens.

[00:22:30] Speaker 01:
But with the instructions that the standard be applied this way, I have confidence that the agency is going to do it the right way.

[00:22:37] Speaker 03:
I thought, sorry, now I'm looking because I thought you were showing us that in fact notification consultation the same thing because the consultation happens while they were deciding and in fact it's already occurred in this case.

[00:22:50] Speaker 03:
Yes, that is my... So we've already passed that and we're just looking at the agency decision to see if it's

[00:22:57] Speaker 03:
sufficiently reasoned.

[00:22:58] Speaker 01:
You just switched.

[00:23:00] Speaker 01:
You told me there was no consultation.

[00:23:04] Speaker 01:
Yeah, I'm forum shopping here.

[00:23:06] Speaker 01:
No.

[00:23:08] Speaker 01:
I know.

[00:23:08] Speaker 01:
I want you to know I noticed.

[00:23:09] Speaker 00:
That's right.

[00:23:10] Speaker 01:
Thank you.

[00:23:11] Speaker 01:
Thanks for calling me out on that.

[00:23:12] Speaker 01:
No, I honestly have both points, which is A, I believe this course of conduct reveals that it is a ministerial act.

[00:23:20] Speaker 01:
And therefore, it is not significant.

[00:23:23] Speaker 03:
But secondly... The notification consultation is the same thing, not form shopping, same thing.

[00:23:28] Speaker 01:
Same thing.

[00:23:29] Speaker 01:
And I'm not so sure I'm saying that they've already undertaken their requirement, because if they come to a new conclusion, I can't say that it's been satisfied by this exchange.

[00:23:43] Speaker 04:
Can I ask you something?

[00:23:45] Speaker 04:
You said several minutes ago that what was wrong with this determination letter is its conclusory.

[00:23:51] Speaker 04:
I thought your main point was that it was inadequate.

[00:23:55] Speaker 04:
that they did not consider the charitable regulations that were either stronger according to your matrix or lax or according to your brief and the litigation threat that was smaller in Switzerland.

[00:24:15] Speaker 04:
And they say nothing in the letter about the fact that you're moving from

[00:24:20] Speaker 04:
a country that has given you the benefit to a country that may or may not give it to you.

[00:24:28] Speaker 04:
So I saw this case as if it's inadequate and they haven't considered some evidence you put before and we send it back to consider it.

[00:24:38] Speaker 04:
We do that because it may be a fiction, but they could change their mind.

[00:24:43] Speaker 04:
I mean they may not have they vacillated in those two and a half years and they may say we never thought about the fact that you were moving from Ireland to Switzerland from an automatic to a maybe and so the whole consultation point is after if we send it back after

[00:25:07] Speaker 04:
the agency says, no, we stay right where we are.

[00:25:11] Speaker 01:
Yeah.

[00:25:11] Speaker 01:
So again, three points, but I'll be quick.

[00:25:14] Speaker 01:
One is, I shouldn't have said conclusory.

[00:25:16] Speaker 01:
I meant result-oriented.

[00:25:19] Speaker 01:
They were result-oriented, and that's what's reflected here, because there is no evidence to support a principal purpose when you have the circumstances you just described.

[00:25:30] Speaker 04:
All right.

[00:25:30] Speaker 04:
But I thought you also argued they ignored your other points.

[00:25:35] Speaker 01:
They did, because they were driving to a result they wanted.

[00:25:39] Speaker 01:
They didn't take into account key facts, many of which you just identified, and identified facts that were frankly irrelevant.

[00:25:48] Speaker 01:
The most significant element here that I just want to point out, and then I know I'm way over it, I'll stop, is that if you just think about it this way for a moment.

[00:25:57] Speaker 01:
At the time when the competent authority was considering Starr's application,

[00:26:05] Speaker 01:
STAR had been a qualified resident of Ireland.

[00:26:10] Speaker 01:
It was receiving automatic treaty benefits.

[00:26:13] Speaker 01:
The consequence of that is that it had passed.

[00:26:16] Speaker 01:
It had satisfied the principal purpose test at that moment.

[00:26:21] Speaker 04:
In Ireland?

[00:26:22] Speaker 01:
In Ireland.

[00:26:22] Speaker 01:
I'm residing in Ireland.

[00:26:23] Speaker 01:
In Ireland, under the mechanical tests which are a surrogate for the discretionary tests, which are intended to achieve the same objective of rooting out principal purpose treaty shoppers.

[00:26:36] Speaker 01:
And so it had already satisfied all of the four criteria, meaning that all of the four criteria were present when Starr moved from Bermuda to Ireland in 2004.

[00:26:52] Speaker 01:
And nevertheless, it qualified automatically, mechanically, to that treaty.

[00:26:58] Speaker 01:
And despite that fact, this competent authority

[00:27:03] Speaker 01:
is using the same facts that start satisfied in an automatic provision to say that it violates the principal purpose doctrine.

[00:27:14] Speaker 01:
When the two are supposed to be co-equal, the mechanical tests are supposed to be co-equal with discretionary.

[00:27:20] Speaker 01:
They're supposed to be surrogates.

[00:27:22] Speaker 01:
And you might say, well, they're different.

[00:27:24] Speaker 01:
One is with Ireland, one's with Switzerland.

[00:27:27] Speaker 01:
They were executed two days apart.

[00:27:30] Speaker 01:
And the only reason STAR doesn't qualify- I'm not sure that helps you.

[00:27:33] Speaker 03:
If you've got things executed two days apart that are written differently, we usually, our assumption would be they meant to write them differently.

[00:27:39] Speaker 01:
They meant to write them differently.

[00:27:41] Speaker 01:
That's right.

[00:27:42] Speaker 01:
The difference between the two, if that was a justification, is that one treats both, excuse me, both treat non-profit entities as qualified entities.

[00:27:56] Speaker 01:
In other words, if you're a non-profit entity, you can qualify for these treaty benefits.

[00:28:01] Speaker 01:
And so does the model treaty and all the other five treaties that we've identified.

[00:28:06] Speaker 01:
The difference is that the Swiss treaty doesn't make a cross-reference like the other treaties do so that owners of the profitable entity can also qualify.

[00:28:19] Speaker 01:
And the significance of that, first of all, we think it's a glitch, but you don't have to make that conclusion.

[00:28:23] Speaker 01:
The significance of it to this conversation is it has nothing to do with any of those four factors.

[00:28:29] Speaker 01:
It doesn't have to do with the notion that STAR started out in Panama 75 years ago.

[00:28:35] Speaker 01:
It doesn't have to do with the fact that STAR was going to receive a dividend at some quarter end, which it would fail no matter when it left.

[00:28:42] Speaker 01:
It doesn't have to do with anything with the fact that it was only in Ireland for two and a half years.

[00:28:47] Speaker 01:
And it doesn't have anything to do with the fact that they had U.S.

[00:28:49] Speaker 01:
shareholders.

[00:28:51] Speaker 01:
None of those factors are relevant to the distinction between the Irish Treaty and the Swiss Treaty that caused STAR not to qualify for the Swiss Treaty automatically, but did allow it to qualify for the Irish Treaty, which establishes, when they're negotiated at the same time, that there is no policy reason

[00:29:14] Speaker 01:
for denying star treaty benefits, A, and B, it also establishes that the principal purpose test shouldn't be discriminatory in that manner, which means that the fact that the competent authority didn't even try to reconcile any of this, didn't try to explain why it is that under the mechanical provisions in Ireland for a treaty that's negotiated contemporaneously, you do qualify.

[00:29:40] Speaker 01:
And yet we're going to use the same factors that were present in that case and not allow you treaty benefits in the Swiss treaty.

[00:29:48] Speaker 03:
I just want to ask one thing to get back where I started on procedure, and that is all your arguments about process, what the court could have done, should have done, all of that could have been done through this, is it your position, could have been done through the 7422 action.

[00:30:07] Speaker 03:
You didn't need the APA action.

[00:30:11] Speaker 01:
That's correct.

[00:30:12] Speaker 03:
And do you know how the IRS decision is, the decision in this case of termination would be reviewed in a 7422 action?

[00:30:22] Speaker 03:
Do you have the same arbitrary and capricious analysis or?

[00:30:25] Speaker 03:
No, I just don't know.

[00:30:27] Speaker 01:
That's a great question.

[00:30:30] Speaker 01:
You start out with the same

[00:30:33] Speaker 01:
initial presumption of arbitrary and capricious.

[00:30:35] Speaker 01:
The difference is... A presumption of non-arbitrary and capricious.

[00:30:39] Speaker 01:
Not arbitrary and capricious.

[00:30:40] Speaker 01:
But the difference is it's a de novo proceeding.

[00:30:43] Speaker 01:
You're not limited to the evidence from the administrative record.

[00:30:45] Speaker 03:
Again, there's new factual evidence, but it's better... But the burden is the same.

[00:30:48] Speaker 03:
Your burden is the same, to show that it's arbitrary and capricious unreasoned.

[00:30:51] Speaker 01:
Yes.

[00:30:52] Speaker 03:
Okay.

[00:30:52] Speaker 03:
All right.

[00:30:53] Speaker 04:
Thank you.

[00:30:54] Speaker 04:
All right.

[00:30:55] Speaker 04:
We'll give you some time in reply.

[00:30:56] Speaker 01:
Thank you.

[00:30:58] Speaker 04:
Mr. Calderon.

[00:31:09] Speaker 06:
Good morning, Your Honors, and may it please the Court.

[00:31:11] Speaker 06:
I'm Richard Calderoni on behalf of the United States.

[00:31:14] Speaker 06:
To start with the procedural issues that have come up, Judge Edwards is correct that Starr cannot receive an outright award of a refund at this time because of the consultation requirement in the treaty.

[00:31:28] Speaker 06:
What that means is that Starr does not have a refund claim because, as this Court held in its en banc opinion in the Cohen case,

[00:31:34] Speaker 06:
Money judgments are the only relief available in refund suits under 7422.

[00:31:39] Speaker 06:
There is no equitable relief available.

[00:31:40] Speaker 03:
That's what they want.

[00:31:41] Speaker 03:
I was quite surprised to see that the IRS was willing to allow people to bring APA actions to have a declaration concerning

[00:31:54] Speaker 03:
their status, their legal tax-paying status, which is always, the IRS position is always that it has to be through 7422.

[00:32:03] Speaker 03:
That's like Bob Jones' case and all of these others.

[00:32:06] Speaker 03:
Come was completely different.

[00:32:08] Speaker 03:
That was about a pure challenge to procedures that the IRS had.

[00:32:13] Speaker 03:
It was not an individual taxpayer saying, here's what my tax-paying status should be.

[00:32:18] Speaker 03:
That's what you have here.

[00:32:19] Speaker 03:
That's never done under the APA.

[00:32:20] Speaker 03:
And they said, they want a refund.

[00:32:22] Speaker 03:
That's the end game here.

[00:32:24] Speaker 03:
You can't do that under the APA.

[00:32:26] Speaker 06:
That is the end game, Honor, and it's true.

[00:32:27] Speaker 06:
You can't order a refund under the APA.

[00:32:29] Speaker 06:
They simply cannot get a court order ordering a refund.

[00:32:31] Speaker 03:
And we can't declare their legal taxpaying status under the APA.

[00:32:35] Speaker 03:
The Declaratory Judgment Act won't allow that.

[00:32:37] Speaker 06:
No, but what you can do is issue an order vacating and remanding for further proceedings before the agency, just as in review of any other agency document.

[00:32:44] Speaker 03:
But we have this APA action where we can never actually do the end thing.

[00:32:47] Speaker 03:
We just keep focusing on the reasoning here, but somehow there's some APA action where everyone says, but you can't ever actually get to what the litigation is about.

[00:32:54] Speaker 03:
That makes no sense to me.

[00:32:55] Speaker 03:
Why wouldn't this just all be done under a 7422 action?

[00:33:00] Speaker 06:
Your Honor, but for the consultation requirement in the treaty, it would be.

[00:33:03] Speaker 06:
But the treaty, as Judge Edwards said, as the district court held, makes clear that this consultation has to occur before any grant of benefits.

[00:33:12] Speaker 03:
Well, I thought your position would be then, if you're right on political question, then they lose on the merits of their refund action.

[00:33:21] Speaker 03:
Not that you go get to have a declaratory judgment or injunctive relief pertaining to a taxpayer's legal status, taxpaying status.

[00:33:30] Speaker 03:
Can you say it out under the APA?

[00:33:33] Speaker 06:
Your Honor, I'm not aware of any, but it wasn't brought up in the briefs.

[00:33:36] Speaker 06:
We can certainly look.

[00:33:37] Speaker 03:
It's jurisdictional.

[00:33:39] Speaker 06:
Well, the political question doctrine is jurisdictional, yes, but... No, no, no.

[00:33:43] Speaker 03:
Whether you can have an APA suit, like this is jurisdictional, as opposed to 7422.

[00:33:48] Speaker 02:
I don't see why everything can't be subsumed under 7422.

[00:33:52] Speaker 02:
I mean, any of the questions that are related to you, the tax, the availability of a tax refund is...

[00:34:00] Speaker 02:
in part, affected by what Article 22 means.

[00:34:04] Speaker 06:
Your Honor, but, you know, the consultation can affect the ultimate outcome.

[00:34:10] Speaker 06:
It's not a notification requirement.

[00:34:11] Speaker 06:
Article... No, I understand.

[00:34:12] Speaker 02:
Let's assume that's all right.

[00:34:14] Speaker 02:
All I'm saying is, why isn't 7422?

[00:34:19] Speaker 02:
All that we're really looking at is, I'm asking for a refund, and the agency's entitled to say,

[00:34:25] Speaker 02:
Yeah, well, you have an additional – you, this taxpayer, and they're not disputing who they are and what the requirements are.

[00:34:32] Speaker 02:
You have an Article 22 requirement, and we have to make a determination.

[00:34:38] Speaker 02:
There has to be a determination pursuant to Article 22, then go into Paragraph 6.

[00:34:44] Speaker 02:
And we're not making that determination.

[00:34:46] Speaker 02:
It's adverse to you, so you lose.

[00:34:49] Speaker 02:
If they're right that what you've offered under purpose

[00:34:54] Speaker 02:
is inadequate, then it seems to me the court is in a position in saying to the agency, what you've done is inadequate and you need to do what is necessary, which is consult, and then you can make a determination as you see fit and we'll see what happens.

[00:35:12] Speaker 06:
That's exactly the relief that would be available under an APA suit.

[00:35:17] Speaker 02:
That's beside the point.

[00:35:19] Speaker 02:
The question is why is it not available under 7422?

[00:35:23] Speaker 02:
It's a refund provision and that's all they're seeking is a refund and your answer is you can't get a refund unless we go through these requirements and everyone agrees on that.

[00:35:35] Speaker 02:
You have to give a reason, and they're saying you haven't given the reason, and within that is a, I don't see how the consultation has anything to do with political question.

[00:35:44] Speaker 02:
It's just the agency has to go consult.

[00:35:47] Speaker 02:
No one is going behind the consultation.

[00:35:49] Speaker 02:
They're not seeking to do that.

[00:35:51] Speaker 02:
So that to me seems bogus.

[00:35:53] Speaker 02:
But I don't see what, I'm not understanding your concern.

[00:35:57] Speaker 06:
Our concern, Your Honor, is where I started, which is that in the Cohen case, this court held, and as I read Cohen, it doesn't hinge on the particular nature of the claim said, that equitable relief is simply categorically unavailable in suits under 7422.

[00:36:12] Speaker 06:
And therefore, this intermediate step of saying, you know, IRS go back and do more isn't available in a refund suit.

[00:36:19] Speaker 06:
It's a money judgment or nothing.

[00:36:21] Speaker 03:
Okay, so then you lose.

[00:36:22] Speaker 03:
Is that how it works in a refund suit?

[00:36:24] Speaker 03:
If a court, you know, I've talked about this particular case, if someone brought a suit and a judge looked at the IRS's reasoning and said, that's arbitrary and capricious.

[00:36:39] Speaker 03:
The IRS loses the refund action.

[00:36:41] Speaker 06:
Your Honor, except that, as opposing counsel stated, the standards that govern refund actions, the evidence that come in are different.

[00:36:48] Speaker 03:
In addition, there's... I guess factual evidence may come in.

[00:36:51] Speaker 03:
I'm talking about how all the facts are in.

[00:36:54] Speaker 03:
Yes, Your Honor.

[00:36:54] Speaker 03:
And we've got this piece of paper.

[00:36:57] Speaker 03:
If we had a decision that just didn't deal with any of the facts, and they just said, we just can't come to a decision, we can't decide quite where you should be, golly gee, it's hard, there's a lot of evidence, so we're not gonna give you a tax refund.

[00:37:11] Speaker 03:
And what would a court do?

[00:37:13] Speaker 03:
Would it just say you lose, or would it have the ability to say, that was entirely unreasoned, try again?

[00:37:20] Speaker 06:
I think, Your Honor, it would depend because the refund action is coming up from the district courts just as any other action.

[00:37:26] Speaker 03:
Not talking about how the district court would do this.

[00:37:27] Speaker 06:
In the district court level.

[00:37:29] Speaker 06:
My belief, and I haven't given this a great deal of thought, but my belief as I stand here is if the IRS loses a refund action, the taxes are funded.

[00:37:38] Speaker 03:
So that's why you want the APA action.

[00:37:40] Speaker 03:
You get another bite of the apple on reasoning.

[00:37:43] Speaker 06:
And by the converse, Your Honor, the reason that Starr wants a refund action is that the IRS wouldn't get another bite at the end.

[00:37:50] Speaker 03:
No, I think they want a refund action because they want a refund.

[00:37:53] Speaker 06:
Well, yes, exactly.

[00:37:54] Speaker 06:
And they want a refund without giving the IRS another chance to go through the consultation requirement, write another letter, things like that.

[00:38:00] Speaker 03:
That's how it's supposed to work.

[00:38:01] Speaker 03:
I mean, what I also can't quite figure out is how, as Judge Emmerich has been saying, you could have a political question

[00:38:12] Speaker 03:
as the answer to a taxpayer's refund action.

[00:38:16] Speaker 03:
If taxpayer, this is my property, you've got it, you've got no legal entitlement to it.

[00:38:22] Speaker 03:
The government can do that, they can take people's money, and then when they try to get it back, say sorry, political question.

[00:38:27] Speaker 06:
Your Honor, this is a very narrow circumstance in which the taxpayers' ability... Has it ever been applied?

[00:38:31] Speaker 03:
Has political questioning ever been applied in a tax refund case?

[00:38:35] Speaker 06:
I'm not aware of any case in which it has, Your Honor, but this is the first case in which a determination under a tax treaty has ever made its way to federal court.

[00:38:43] Speaker 06:
And so it's not surprising that this particular situation hasn't arisen before.

[00:38:47] Speaker 03:
Can you explain to me exactly how the consultation process works in practice?

[00:38:56] Speaker 03:
When it happens, and can Switzerland veto a decision if the IRS says, we think someone's qualified, they're the poster child for this exemption, or this exception, discretion?

[00:39:10] Speaker 06:
Your Honor, I only know what's in the administrative record of this case, which is that Switzerland does not have a veto.

[00:39:16] Speaker 06:
It does not require an agreement, but it is more than a notification.

[00:39:20] Speaker 06:
And the difference between Article 3... But they can't change the outcome.

[00:39:24] Speaker 06:
They may change the outcome.

[00:39:25] Speaker 06:
They don't have the power to change the outcome.

[00:39:28] Speaker 06:
But the consultation implies that the competent authority of the United States is going to listen to Switzerland and take them into account.

[00:39:35] Speaker 06:
And that can be outcome-determined.

[00:39:37] Speaker 03:
So what happened here?

[00:39:38] Speaker 03:
I mean, the letter talks about you gave the notification you had the exchange with Switzerland.

[00:39:43] Speaker 03:
What happened here?

[00:39:43] Speaker 06:
What happened here is the consultation has not happened yet, because under Article 226 of the treaty, the consultation must only precede a grant of benefits, not a denial of benefits.

[00:39:52] Speaker 03:
That's how I read the treaty, but then, as they pointed out quite correctly, the technical explanation says exactly the opposite.

[00:39:59] Speaker 06:
That's correct, Your Honor, but where the treaty and the technical explanation are in conflict, the treaty governs.

[00:40:03] Speaker 06:
The technical explanation is essentially legislating a future extension.

[00:40:06] Speaker 03:
Well, then why were you notified in Switzerland?

[00:40:08] Speaker 06:
because presumably the IRS wanted to notify the Swiss government that it had gotten this request for benefits and denied it.

[00:40:15] Speaker 06:
Just as under Article 2.3 of the treaty, the IRS would notify the Swiss government and vice versa about completed changes in domestic law.

[00:40:25] Speaker 03:
So you would have the burden of proving political question.

[00:40:27] Speaker 03:
And so your evidence, what evidence does the government have in this case to establish a political question?

[00:40:36] Speaker 06:
Your Honor, the consultation requirement is a diplomatic exercise between the U.S.

[00:40:40] Speaker 06:
competent authority and the Swiss competent authority.

[00:40:43] Speaker 06:
That exercise can be outcome determinative of a request for benefits under Article 22.6.

[00:40:49] Speaker 03:
What evidence is there of that?

[00:40:51] Speaker 06:
Well, Your Honor, given that this has never come up before and that it hasn't happened in this case, we can't be certain that it would happen in this case.

[00:40:59] Speaker 06:
But on the flip side, you know, Starr has the burden of proving standing.

[00:41:03] Speaker 06:
And as the district court held in its opinion, for the same reason, because the courts may not predetermine the outcome of this diplomatic exercise, Starr's refund suit is not redressable.

[00:41:17] Speaker 02:
Oh, that just doesn't...

[00:41:18] Speaker 02:
That just doesn't follow at all.

[00:41:22] Speaker 02:
You've got a refund action.

[00:41:24] Speaker 02:
They're coming in saying the IRS hasn't justified its denial of a refund.

[00:41:32] Speaker 02:
George Henderson gave a bunch of considerations, for example, saying you just haven't supported

[00:41:39] Speaker 02:
your position, taking your money away.

[00:41:42] Speaker 02:
You need to say, we don't need to issue an injunction.

[00:41:45] Speaker 02:
All we need to say is you haven't supported your position, IRS.

[00:41:48] Speaker 02:
We're sending it back.

[00:41:50] Speaker 02:
We don't get it.

[00:41:51] Speaker 02:
We're sending it back.

[00:41:52] Speaker 02:
Everyone knows that you can engage in consultation, and indeed, you must engage in consultation.

[00:41:59] Speaker 02:
You certainly can't say we refuse to engage in consultation.

[00:42:03] Speaker 02:
They would otherwise win, but we're not going to consult.

[00:42:06] Speaker 02:
So we would just send it back.

[00:42:08] Speaker 02:
There's no injunction in play.

[00:42:09] Speaker 02:
You keep talking about an equitable remedy, and it's not available under the IRS statute.

[00:42:17] Speaker 02:
It wouldn't be a requisite here.

[00:42:20] Speaker 02:
We're looking at the evidence presented in the case before the IRS, and we're saying it's deficient, if that's what we held.

[00:42:28] Speaker 06:
Your Honor, in any event, it's not deficient.

[00:42:30] Speaker 06:
And may I address?

[00:42:31] Speaker 02:
No, no, wait.

[00:42:32] Speaker 02:
What's wrong with that?

[00:42:34] Speaker 02:
I don't, I'm not, I want to make sure I leave here understanding your concern because I do not get it.

[00:42:40] Speaker 02:
If the record, suppose, let me put it this way, suppose the record is this, they come in, same information, and the IRS says, we don't like you, and so you're not getting a refund.

[00:42:56] Speaker 02:
Do you think equitable relief is somehow a bar toward the court saying, that's not good enough?

[00:43:03] Speaker 02:
know your honor because we can give them relief right it's just a matter of what statute provides this court's ability to say that's not good enough you mean under 7422 the court couldn't say in that situation where the IRS said we don't like you

[00:43:18] Speaker 02:
And so we're not giving you a refund.

[00:43:22] Speaker 06:
Your Honor, if that's how we read the Cohen case, if this court disagrees, then whatever statute, and if the court further thinks, which of course we would disagree, that the reasoning is inadequate or arbitrary in some way, then whichever statute is used to remand to the agency for further proceedings is used to remand to the agency for further proceedings.

[00:43:44] Speaker 06:
The outcome's the same.

[00:43:46] Speaker 06:
But it wouldn't change the fact that the court is not able, at this juncture, to outright award a refund.

[00:43:52] Speaker 06:
It would just be a return to the IRS for further proceedings and perhaps consultation.

[00:43:56] Speaker 02:
You're fighting a fight I haven't even gotten to yet.

[00:43:58] Speaker 02:
I mean, you're trying to anticipate their answer.

[00:44:00] Speaker 02:
I'm trying to understand your theory of the case.

[00:44:03] Speaker 02:
In my hypothetical, you don't doubt for a minute.

[00:44:06] Speaker 02:
Put yourself on the other side.

[00:44:08] Speaker 02:
If you present it, you don't doubt for a minute that you could get an order from this court sending the case back

[00:44:16] Speaker 02:
to the IRS or an order from the district court sending the case back to the IRS and saying, this is inadequate.

[00:44:22] Speaker 06:
Your Honor, we don't dispute that, you know, if it is inadequate, they can get an order from this court sending it back to the IRS saying this is inadequate.

[00:44:28] Speaker 03:
Under 7422?

[00:44:29] Speaker 06:
Yes, under 7422.

[00:44:32] Speaker 06:
If the court believes that Cohen is not a bar to that remedy, then we agree it could be done under 7422, Your Honor.

[00:44:40] Speaker 06:
Okay.

[00:44:42] Speaker 06:
May I address the merits of the letter very briefly, Your Honors?

[00:44:45] Speaker 04:
Briefly, but I do have a question before you do, and that is, you said that after consultation, that the consultation could be outcome determinative.

[00:44:55] Speaker 04:
So how do you read Article 22.6?

[00:44:58] Speaker 04:
Because I thought that the IRS could still, even after consultation, deny the benefits.

[00:45:07] Speaker 04:
Are you reading May as

[00:45:10] Speaker 06:
No, Your Honor.

[00:45:13] Speaker 06:
Our reading of Article 226 is that if the IRS reaches a tentative conclusion that it wishes to grant benefits, it consults the Swiss, and after taking the view of the Swiss competent authority into account, the IRS will then make a final determination on whether to grant or deny benefits.

[00:45:29] Speaker 04:
But it may still not grant it.

[00:45:32] Speaker 04:
Yes, absolutely, Your Honor.

[00:45:33] Speaker 04:
Regardless of what the Swiss say.

[00:45:34] Speaker 06:
Yes, that's correct.

[00:45:36] Speaker 06:
That's correct.

[00:45:36] Speaker 06:
As to the merits, this notion that the competent authority somehow didn't respond to major issues raised by STAR was first raised in STAR's reply brief and has therefore been waived.

[00:45:50] Speaker 03:
Before we even get to this, because I don't know how to analyze the merits until, can you tell me by pointing to the determination letter, the agency decision at issue here, what the legal test for a principal purpose was identified?

[00:46:06] Speaker 06:
It was applied, Your Honor.

[00:46:08] Speaker 03:
How did they decide?

[00:46:09] Speaker 03:
Because the briefing has very different visions of what a principal purpose means.

[00:46:16] Speaker 03:
And there may be even third and fourth options for what a principal purpose means under this treaty.

[00:46:22] Speaker 03:
And so I'm trying to find where in the determination letter they explain what a principal purpose means.

[00:46:30] Speaker 06:
The determination letter doesn't explain that, Your Honor, but a principal purpose everywhere it's used in tax law, as illustrated by all of the cases and the other regulations that we cite in our brief, means one of the principal purposes.

[00:46:43] Speaker 06:
In fact, the technical explanation says one of the principal purposes.

[00:46:47] Speaker 03:
No, I get that A doesn't mean duh, so I'll give you that.

[00:46:52] Speaker 03:
But I'm still confused as to what it means to be a principal purpose for the move, because as at least I understood your brief, and this is not in the determination, so it may be a chennery problem, but the brief seemed to be saying they had a chart

[00:47:07] Speaker 03:
And one of the factors they were thinking about was U.S.

[00:47:10] Speaker 03:
taxes.

[00:47:11] Speaker 03:
So that made it a principal purpose.

[00:47:13] Speaker 03:
Is that what you mean?

[00:47:14] Speaker 03:
Is that the legal test for a principal purpose that you think is correct and you think that's what was applied here?

[00:47:21] Speaker 06:
Your Honor, the test is, was this a major purpose?

[00:47:24] Speaker 06:
Was it one of the factors that weighed heavily to use the language from the Seventh Circuit and the Santa Fe Pacific?

[00:47:29] Speaker 03:
That's not from the determination letter under this treaty.

[00:47:32] Speaker 06:
No, Your Honor, but remember at the time this determination letter was issued, no one knew whether these determinations were even judicially reviewable or if they were what standard would be applied.

[00:47:42] Speaker 03:
When you say weigh heavily, does it have to weigh heavily in favor of moving to Switzerland or could a principal purpose for moving to Switzerland be something that weighed heavily against moving to Switzerland?

[00:47:53] Speaker 06:
Your Honor, given the test here, the standard and technical explanation was whether the acquisition of treaty benefits was a principal purpose.

[00:48:03] Speaker 03:
So under that language, in this treaty, it has to weigh heavily in favor of moving to Switzerland.

[00:48:09] Speaker 06:
Yes, that would be one of the factors that weighed heavily in favor of moving to Switzerland.

[00:48:14] Speaker 03:
It doesn't have to be the.

[00:48:15] Speaker 03:
I got the distinction.

[00:48:17] Speaker 03:
But tax benefits had to weigh heavily in favor of moving to Switzerland.

[00:48:22] Speaker 03:
The acquisition of tax benefits under the Treaty of Europe.

[00:48:26] Speaker 06:
Not.

[00:48:27] Speaker 06:
The question is not whether STAR would be better off in Switzerland than it was in Ireland.

[00:48:32] Speaker 06:
The question is not whether STAR would be better off in Switzerland than it would be in the United States.

[00:48:36] Speaker 06:
The question is, as the district court held at pages 66 to 67 of the appendix, when STAR moved to Switzerland, was one of the principal purposes for locating in Switzerland the acquisition of benefits under the Swiss tax treaty?

[00:48:51] Speaker 03:
And so if the chart that they had which said bad under U.S.

[00:48:55] Speaker 03:
law, I get they had the parentheses about unless there's an exception.

[00:48:59] Speaker 03:
If it had said worst possible outcome and hadn't had the parentheses, it just said worst possible outcome, could that be?

[00:49:09] Speaker 03:
And then they moved to Switzerland and they applied for these benefits.

[00:49:13] Speaker 03:
Could you still say that that was a principal purpose?

[00:49:16] Speaker 06:
No, Your Honor, because the worst possible outcome would be paying the 30 percent that they would have to pay as a domestic corporation, and that would mean they weren't receiving treaty benefits.

[00:49:25] Speaker 06:
And if they can't possibly receive treaty benefits, it can't be.

[00:49:27] Speaker 03:
No, my theory, they moved to Switzerland just like now, and then they've applied for this discretionary grant of treaty benefits.

[00:49:34] Speaker 03:
So they do the same thing they did here.

[00:49:35] Speaker 03:
The only difference is the chart said

[00:49:39] Speaker 03:
bad, but didn't have the parentheses underneath about the exception.

[00:49:43] Speaker 03:
What would happen then?

[00:49:45] Speaker 03:
Your Honor, I think that would still remain in the discretion of the competent authority because... So when they say something's bad, they can still say that the reason they went there was for the principal purpose of acquiring that bad tax status?

[00:49:58] Speaker 06:
Well, Your Honor, this matrix is a self-serving after-the-fact reconstruction made specifically to support stars.

[00:50:05] Speaker 03:
Well, that sounds like the evidentiary dispute that you would want to have in district court.

[00:50:08] Speaker 03:
We don't have any basis for deciding any of that stuff right now, do we?

[00:50:12] Speaker 06:
No.

[00:50:13] Speaker 06:
In fact, Your Honor, the district court accepted that this is what the chart wants.

[00:50:15] Speaker 03:
And I didn't see the determination letter saying anything about that chart, did it?

[00:50:19] Speaker 06:
Not specifically, but the determination letter says that, I'm sorry, Your Honor.

[00:50:23] Speaker 03:
Go ahead.

[00:50:24] Speaker 06:
The determination letter says expressly that it starts move to Switzel and suggests an intent to get treaty benefits.

[00:50:30] Speaker 06:
And in the Chiquita Brands versus SEC case, the pin side is 805F3299.

[00:50:36] Speaker 06:
This court made clear that Chenery does not bar agencies from coming into court and elaborating on the reasons in the letters.

[00:50:42] Speaker 06:
It doesn't bar agencies from coming into court and citing facts that aren't specifically discussed in the decision document.

[00:50:48] Speaker 06:
We just can't go beyond those four sets of circumstances that the competent authority recognized.

[00:50:55] Speaker 03:
Which didn't actually find anything.

[00:50:58] Speaker 06:
Your Honor, the competent authority expressly found on the second page of the determination letter that it was impossible to conclude, based on those four sets of circumstances, that acquiring treaty benefits was not one of Starr's principal purposes in locating Switzerland.

[00:51:12] Speaker 03:
No, but they didn't find anything factually in those four bullet points, right?

[00:51:17] Speaker ?:
May?

[00:51:18] Speaker 03:
May have done may have done and then the wonderful may or may not have been intentional So it may or may not have been intentional.

[00:51:24] Speaker 03:
So that's evidence of intent

[00:51:27] Speaker 06:
Your Honor, what the Comet Authority found was that these four factors, the first three are the history of Starr, and then Starr's resemblance to structures that, in 2006, the IRS had recently determined to be abusive, were sufficient to show that Starr had a principal purpose of acquiring tax benefits when it moved to Switzerland.

[00:51:48] Speaker 06:
In particular, Starr originally incorporated and located... What does it say they were abusive?

[00:51:53] Speaker 03:
It says, not in accord with recent developments of U.S.

[00:51:56] Speaker 03:
policy on acceptable corporate ownership.

[00:51:59] Speaker 06:
Your Honor, it is undisputed in this case.

[00:52:01] Speaker 06:
As the district court found, this is referring to the IRS's discovery of situations in which U.S.

[00:52:08] Speaker 06:
individuals invested in the U.S.

[00:52:11] Speaker 06:
through entities set up in treaty countries and other tax havens that were abusive.

[00:52:19] Speaker 06:
So this is a reference to those abusive structures.

[00:52:22] Speaker 06:
And that star has not challenged that.

[00:52:24] Speaker 06:
The district court held that it is essentially undisputed.

[00:52:27] Speaker 06:
Any challenge to that has been waived at this point.

[00:52:32] Speaker 04:
Can I ask you about this third country resident

[00:52:39] Speaker 04:
whether it's a requirement or not.

[00:52:42] Speaker 04:
In your technical explanation of paragraph six, you say that the reason this provision is included or this discretionary provision is included in recognition of the fact that there may be cases where significant participation by third party residents

[00:53:01] Speaker 04:
is warranted.

[00:53:02] Speaker 04:
Now, that's your only, at least the technical explanation, is the only reason for why 226

[00:53:10] Speaker 04:
was promulgated, so what is your position about the presence or not of a third country resident?

[00:53:19] Speaker 06:
Your Honor, that's not the only reason that Article 22 was promulgated, and the technical explanation makes clear that it's not.

[00:53:25] Speaker 06:
Page 60 of the technical explanation says that all of the tests in Article 22, page 60 of the technical explanation, Your Honor.

[00:53:33] Speaker 04:
Page what?

[00:53:34] Speaker 06:
Page 60, six zero.

[00:53:36] Speaker 04:
And what would that be in the addendum?

[00:53:41] Speaker 04:
Oh, yeah.

[00:53:42] Speaker 04:
Okay.

[00:53:43] Speaker 04:
I've got 60.

[00:53:45] Speaker 06:
I believe it's page 14 of Vietnam.

[00:53:46] Speaker 06:
Yeah.

[00:53:47] Speaker 04:
Okay.

[00:53:48] Speaker 04:
Go ahead.

[00:53:58] Speaker 04:
Well, that discusses Article 22.

[00:54:00] Speaker 04:
Yes, it's Article 22.

[00:54:02] Speaker 04:
All right, and I was discussing the exemption that is paragraph 6.

[00:54:06] Speaker 06:
Your Honor, I will get there in one moment, if I may.

[00:54:09] Speaker 06:
Article 22, the discussion of Article 22 makes clear that all of the tests and limitations on benefit provisions are intended to root out taxpayers who have a principal purpose of acquiring tax benefits.

[00:54:21] Speaker 06:
as opposing counsel conceded here this morning, the mechanical tests, including those that expressly talk about the residents of beneficiaries and whether they're third country beneficiaries or not, are surrogates for intent.

[00:54:34] Speaker 06:
So really, everything in Article 22 goes to, did you have a principal purpose of obtaining benefits under the treaty when you moved to the United States or Switzerland?

[00:54:42] Speaker 06:
Now, on page 72,

[00:54:44] Speaker 06:
of the technical explanation when it talks about paragraph six, it says, persons that establish operations, this is the end of the second paragraph of the discussion of paragraph six, persons that establish operations in one of the states with a principal purpose of obtaining the benefits of the convention ordinarily will not be granted relief under paragraph six.

[00:55:03] Speaker 06:
That, it's undisputed, provides the legal standard.

[00:55:06] Speaker 06:
And as the district court held, I believe it's page 54 of the appendix,

[00:55:12] Speaker 06:
This is the legal standard.

[00:55:13] Speaker 06:
Treaty shopping, which generally involves third country residents, not always, but generally involves third country residents, may be the evil at which Article 22 was aimed, but the legal standard is the principal purpose test.

[00:55:27] Speaker 06:
Now, because residents and the other mechanical factors are surrogates for intent,

[00:55:34] Speaker 06:
The technical explanation at 59 to 60 makes clear that these mechanical tests carve out the sets of taxpayers that the drafters of this treaty between the United States and Switzerland believed could be presumed to be located in a treaty country for something other than a principal purpose of obtaining tax benefits.

[00:55:54] Speaker 06:
So therefore, if you don't fall into one of these categories in this treaty,

[00:55:59] Speaker 06:
irrespective of what any other treaty may say, then the principal purpose test applies to you.

[00:56:04] Speaker 06:
Starr's arguments that really the absence of a third country resident is determinative mean that it's trying to rewrite the mechanical tests in the treaty to encompass it.

[00:56:15] Speaker 04:
Well, it may not be determinative, but your own explanation has recognized that the reason for the exemption is third party or third country residents.

[00:56:24] Speaker 04:
But you have answered my question, so thank you.

[00:56:27] Speaker 04:
Any more questions?

[00:56:29] Speaker 04:
Okay, thank you.

[00:56:32] Speaker 04:
Does Mr. Mann, do you have any time left?

[00:56:37] Speaker 04:
All right, why don't you take two minutes?

[00:56:42] Speaker 01:
Okay.

[00:56:42] Speaker 01:
I'd like to pick up right where you left off, which is on this third country resident point.

[00:56:49] Speaker 01:
Every reference to the purpose of Article 22 and to Paragraph 6, when it's describing the actual purpose of the provision,

[00:56:58] Speaker 01:
refers to a third country resident and the concern about funneling benefits to third country residents.

[00:57:05] Speaker 01:
And the structure of this particular provision is, to me, highly relevant to these questions in that the discretion that's afforded to the competent authority is intended to be afforded in the circumstance where a third country resident has already been identified through the mechanical tests.

[00:57:28] Speaker 01:
And as makes very clear on that very page we were just reading, in paragraph 6, page 72, it starts out by saying, paragraph 6 provides that a resident of one of the contracting state that is not otherwise entitled to the benefits of the convention may be granted benefits under the convention by the competent authority of the other contracting state.

[00:57:52] Speaker 01:
This discretionary provision is included in recognition of the fact that with increasing scope and diversity of international economic relations, there may be cases where significant participation by third country residents in an enterprise is warranted by business reasons.

[00:58:09] Speaker 01:
And by the way, then the very next sentence is the test that we've all been citing.

[00:58:13] Speaker 01:
The point being that

[00:58:16] Speaker 01:
you're supposed to first identify a third country resident.

[00:58:19] Speaker 01:
And then the competent authority has the discretion.

[00:58:22] Speaker 03:
If they had found the smoking gun memo here in which Starr said, the reason we're going to Switzerland

[00:58:33] Speaker 03:
is those great treaty benefits.

[00:58:36] Speaker 03:
Maybe they thought they had a mechanic, they fell in mechanically or they felt really confident they'd get this exercise of discretion.

[00:58:44] Speaker 03:
But if they said the reason we're going is for those treaty tax benefits, no third country is anything like that involved.

[00:58:51] Speaker 03:
Your position is they still would have to be granted the discretionary benefits?

[00:58:58] Speaker 01:
My position is that's completely irrelevant.

[00:59:00] Speaker 03:
No, no, it's very relevant to your interpretation of this treaty provision where you're trying to say it's only about third countries and they say no, no, no, no, that's a big problem.

[00:59:10] Speaker 03:
It's not the only thing.

[00:59:11] Speaker 03:
So your position is not the only thing.

[00:59:13] Speaker 01:
No, my position is

[00:59:15] Speaker 01:
That is the whole point of the treaty.

[00:59:17] Speaker 01:
The whole point of the treaty is to find those people who are interested in moving jurisdictions for the purpose of realizing treaty benefits.

[00:59:27] Speaker 01:
They are encouraging you to invest in that jurisdiction rather than in a jurisdiction that doesn't have a U.S.

[00:59:34] Speaker 01:
treaty.

[00:59:34] Speaker 01:
And so the point is to encourage investment.

[00:59:36] Speaker 01:
The notion that if I'm super interested in treaty benefits,

[00:59:40] Speaker 01:
then I'm bad, but if I'm just kind of interested, then I'm okay.

[00:59:45] Speaker 01:
Makes no sense when you think about the underlying purpose, but most importantly, you don't have to get all the way there with me on the notion that it is a per se rule where you need a third country resident.

[00:59:56] Speaker 01:
As Judge Henderson pointed out a few minutes ago, the fact that the competent authority, there can't be any question that it's a highly relevant factor, given the prominence it plays in the TE and the, by the way, the Senate report.

[01:00:09] Speaker 01:
The fact that it's not even mentioned is an indication that the determination letter is arbitrary and capricious.

[01:00:17] Speaker 02:
In the three seconds you have left, what's your response on Cohen?

[01:00:21] Speaker 01:
On Cohen?

[01:00:24] Speaker 01:
Cohen doesn't really have an application here.

[01:00:26] Speaker 01:
If you determine that we have an appropriate refund suit, then we don't have a proper APA suit.

[01:00:32] Speaker 01:
We think we have a proper refund suit.

[01:00:35] Speaker 01:
So we can proceed with 7422.

[01:00:40] Speaker 01:
If you determine that we don't have a proper refund suit because of some consultation requirement, then we have a proper APA suit.

[01:00:46] Speaker 01:
That's all Cohen stands for as it relates to this case.

[01:00:52] Speaker 02:
Okay.

[01:00:52] Speaker 02:
Thank you.