IRS Prevails in Treaty Benefits Case: Yesterday, the US District Court for the District of Columbia issued a memorandum opinion in Starr International Company, Inc. v. United States, holding that the IRS “reasonably applied” the Administrative Procedure Act’s (APA) “arbitrary and capricious” standard in denying discretionary treaty benefits to Starr International Company (Starr). Swiss-domiciled Starr, which was once the largest shareholder of the insurance giant AIG, had petitioned the IRS for a discretionary reduction in the rate applied to approximately $191 million in dividends that Starr received from AIG during the 2007 tax year. The IRS ultimately denied Starr’s request for treaty benefits, determining that a “primary purpose” of Starr’s then-recent relocation to Switzerland was to obtain treaty benefits. Starr then challenged the IRS’s decision, arguing that the IRS applied an erroneous definition of the term “treaty shopping” in reaching its conclusion. In its opinion, the district court held that it “s[aw] nothing arbitrary or capricious in the Competent Authority’s finding that ‘at least one of the principal purposes for moving Starr’s management, and therefore its residency, to Switzerland’ was to obtain tax benefits under the US-Swiss Tax Treaty.”
Fifth Circuit Vacates Tax Court Decision in Case Involving Conservation Easement Deduction and Disguised Sale of Property: The US Court of Appeals for the Fifth Circuit recently vacated the US Tax Court’s decision to disallow conservation easement charitable contribution deductions for two partnerships and to apply the partnership disguised sale of property rules to related contributions and distributions with respect to such partnerships. In BC Ranch II, LP v. Commissioner, the Fifth Circuit found that the Tax Court had applied an inappropriately narrow interpretation of section 170(h) regarding modifications to easements and the extent and timing of baseline documentation. In addition, the Fifth Circuit viewed the Tax Court as inappropriately treating the entire amount of cash transferred by taxpayers for limited partnership interests as disguised sale proceeds.
CBO, JCT Issue Report on Effects of Terminating Payments for Cost-Sharing Reductions: Today, the Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT) issued a report, The Effects of Terminating Payments for Cost-Sharing Reductions, which analyzes the effects of terminating federal payments for cost-sharing reductions (CSRs). The report estimates that implementing such a policy would increase the federal deficit, on net, by $194 billion from 2017 through 2026. According to the report, the “total increase in the deficit that would result under the policy” would include “[c]osts of $247 billion from net increases in marketplace subsidies (an increase of $365 billion for premium tax credits offset by a reduction in CSR payments of $118 billion) stemming from increases in the average subsidy per person for people receiving the ACA’s tax credits for premium assistance to purchase nongroup health insurance and in the number of people receiving those subsidies in most years.”