WASHINGTON (CN) - American International Group's major Swiss shareholder can make an administrative claim against the IRS in its fight to recover $38 million in taxes, a federal judge ruled.
Swiss-based Starr International Co. was once the insurance corporation's largest shareholder. It is headed by former AIG chief Maurice Greenberg and named for the multinational firm's founder, Cornelius Vander Starr.
The dispute stems from a statute that taxes a foreign corporation's dividend income at a rate of 30 percent if the income is deemed sufficiently connected to business activity in the United States.
The U.S.-Swiss tax treaty halves this tax rate, but the secretary of the U.S. Treasury refused to grant such benefits to Starr on its 2008 tax return.
Starr filed its $38 million tax-refund lawsuit - amounting to half of its withholdings on AIG dividends in 2007 - after the Internal Revenue Service denied its petition for discretionary benefits under the U.S.-Swiss tax treaty.
In 2008, the subprime mortgage crisis essentially bankrupted AIG, prompting a government bailout to prevent the company's collapse.
Starr moved to Switzerland from Ireland in 2006, but Ireland also has a treaty with the U.S. permitting reduced withholding on dividends.
The government moved to dismiss, but U.S. District Judge Christopher Cooper refused last September, finding "that the government has not met its burden to present clear and convincing evidence to overcome the presumption of judicial review of federal agency action."
Cooper agreed to revisit his ruling, and made certain changes to his prior decision on Tuesday.
The judge reiterated his holding that the IRS's tax determination is subject to court review, but said that the government is entitled to treaty consultation with the Swiss government.
"It would impinge upon the Executive's prerogative to engage in that process if the court were to render consultation meaningless or dictate its outcome. Yet ordering the IRS to issue Starr a specific monetary refund - prior to any consultation having taken place - would do precisely that," Cooper wrote in a 12-page opinion.
However, the judge also opened another potential avenue for Starr to win relief. He said that Starr may pursue a claim to set aside the IRS's denial of treaty benefits under the Administrative Procedure Act (APA).
Relief under the APA cannot be monetary, but it would vacate the IRS's decision and remand it back to the agency.
"Indeed, as the government recognizes, remanding to the agency for further consideration is the norm when a court sets aside an agency's action. And this relief is not illusory," Cooper wrote.
Tuesday's ruling granted Starr leave to amend its complaint to add an APA claim. It has 21 days to do so.
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