Dagger in hand

A man of prodigious fortune, coming to add his opinion to some light discussion that was going on casually at his table, began precisely thus: "It can only be a liar or an ignoramus who will say otherwise than," and so on. Pursue that philosophical point, dagger in hand.

--Michel de Montaigne, Of the art of discussion.

Stab back: cmnewman99-at-yahoo.com


This page is powered by Blogger. Isn't yours?
Monday, April 05, 2004
Up to the Supremes
Just got word that the Court granted a petition for certiorari that I played a big role in drafting. So I'm actually going to be writing the briefs for a Supreme Court case, going up against Ted. Pretty wild. I won't be arguing it, of course. Unless something were to happen to the partner I'm working with....

Just kidding Laura. You know I love ya.

So what is the issue, you ask? It's somewhat excruciatingly legal, but here's a fairly user friendly description I wrote for a legal newspaper before we actually got the case:

When is a tax not a tax? When it's property!

Our circuit split of the week concerns an obscure legal doctrine that could have potentially far-reaching consequences to any business that pays--or owes--taxes to foreign nations. First, the doctrine. As you no doubt remember from law school, there is a common law rule of venerable lineage known as the "revenue rule." As formulated in section 483 of the Restatement (Third) of Foreign Relations Law, the revenue rule states that "Courts in the United States are not required to recognize or to enforce judgments for the collection of taxes, fines, or penalties rendered by the courts of other states." Jurists from Lord Mansfield on have given various justifications for this rule, mainly involving reluctance to have the courts of one nation get involved in parsing, applying, enforcing, and--heaven forfend--"subjecting to potentially embarrassing judicial scrutiny" the tax codes of foreign nations. Under the normal application of this doctrine, if a foreign nation--say, Canada--were to issue a judgment against a U.S. company doing business in that nation for unpaid taxes owed to the foreign government, the judgment would not be enforceable in a U.S. court, even if the general principles of comity ordinarily favoring enforcement were satisfied. Last month, an en banc panel of the U.S. Court of Appeals for the Fourth Circuit opened a hole in this doctrine big enough to drive a truck through.

In this case, the truck in question happened to be laden with cheap booze intended to help slake the thirst of suffering Canadian consumers oppressed by their nation's onerous sin taxes. Defendant Mr. Pasquantino and his associates are accused of finding an enterprising way to provide Ontario drinkers with discounted spirits. The government alleges that they accomplished this by purchasing in bulk in Maryland and smuggling in smaller quantities across the Canadian border, so as to share with their customers the significant savings to be derived from avoidance of excise taxes. As we shall see, the element of this business plan most abhorrent to the eyes of the law was not the alleged smuggling, but the nefarious use of a telephone to order the liquor in the first place.

Pasquantino and company were prosecuted and convicted in federal court. The federal prosecutors, however, did not charge them with smuggling. After all, the goods were going out, not coming in. Instead, the prosecutors charged Pasquantino with wire fraud. Those phone calls to the wholesale liquor store, you see, had been made in furtherance of a "scheme to defraud." Here is where it gets interesting. As most readers are undoubtedly aware, the federal wire fraud statute (18 U.S.C. 1343) requires that interstate wires be used in furtherance of a scheme to defraud someone of "property." So whom did Pasquantino "defraud"? Of what "property"? Not his customers, certainly. They got exactly what they bargained for--cheap booze. No, in this case the "property" that served as the basis for the wire fraud charge was the Canadian government's "property rights in accrued tax revenue." U.S. v. Pasquantino, 336 F.3d 321 (4th Cir. 2003). The question thus arises: Isn't a prosecution on this basis tantamount to the U.S. government enforcing Canadian tax law?

An earlier case in the First Circuit had answered this question in the affirmative, invoking the mighty revenue rule to reverse a wire fraud conviction against another group of entrepreneurs involved in the clandestine cross-border tobacco business. See U.S. v. Boots, 80 F.3d 580 (1st Cir. 1996). In Boots, the First Circuit reasoned that even though the case did not require them to enforce a foreign tax judgment as such, upholding the conviction would "amount functionally to penal enforcement of Canadian customs and tax laws." Id. at 587. The first Fourth Circuit panel to hear Pasquantino's appeal agreed with this reasoning, and voted to reverse the convictions in an opinion by Judge Gregory. The case went en banc, and resulted in a majority opinion affirming the convictions, written by Judge Hamilton, who had dissented from Judge Gregory's opinion. In Judge Hamilton's view, the feds' prosecution of Pasquantino did not enforce Canada's revenue law. Rather, it merely vindicated "our government's substantial interest in preventing our nation's interstate wire communication systems from being used in furtherance of criminal fraudulent enterprises." 336 F.3d at 331. That the property belonged to the foreign government by virtue of its revenue laws was "merely incidental." Id.

As Judge Gregory--this time in dissent--pointed out, the majority opinion glosses over an important question. Without interpreting and applying Canada's revenue laws, how could the district court possibly determine that any property interest in accrued but unpaid taxes had arisen? And how could Pasquantino, in ordering liquor from a Maryland wholesaler, have been scheming to defraud Canada of a property interest that didn't exist yet? After all, had he been stopped on the border before a single bottle got through, no tax obligation would ever have arisen. See id. at 342. One might take this logic another step further and wonder, given that wire fraud is a predicate RICO offense, what would prevent Canada from bringing a civil RICO suit to recover the "property" of which it had been "defrauded?" Would Judge Hamilton regard this as federal enforcement of Canadian revenue law, or as merely a vindication of the government's interest in making whole the victims of interstate racketeers?

The question raised by the Fourth Circuit's ruling has potential implications far beyond the context of cross-border rum-running. If widely adopted, this reasoning could pave the way for federal prosecution of domestic acts whose only wrongful element is that they seek to circumvent or avoid payment of taxes owed to foreign sovereigns. Given that there is now a direct split of authority between the First Circuit and the Fourth Circuit's en banc opinion, there would seem to be a reasonable chance that the United States Supreme Court will grant certiorari were the defendants to seek it.

Whaddayaknow? Turns out there really was a reasonable chance after all. I've learned a lot about the case since writing the glib blurb, and there's definitely more to it. First, my RICO hypothesis isn't just a hypothesis. It's already happened a number of times that foreign sovereigns have tried to sue under RICO to recover tax revenue of which they had been "defrauded." So far courts have rejected these claims, saying that they are barred by the revenue rule. This creates an irreconcilable disjunct in which the same conduct constitutes "wire fraud" if prosecuted criminally, but not if made the basis of a civil RICO claim.

Second, by using wire fraud in these cases, the feds are doing an end run around a number of statutes Congress has enacted specifically to deal with these situations. For example, there's a statute on the books to deal with prosecution of international smuggling (18 USC 546), and it allows for such prosecution only to the extent there is reciprocity from the other country, as well as limiting sentencing to two years. By using the wire fraud statute, the feds circumvent these limitations. Which is why they have made this their statute of choice for going after international smugglers when they feel like doing so. Then there's the fact that we actually have a tax treaty with Canada, which states that "[n]o assistance shall be provided" with regard to Canadian revenue claims against persons who are U.S. citizens or corporations at the time that the tax liability is incurred. And even in those cases where we do provide assistance (presumably against non-citizens), we are supposed to do so only when a revenue claim has been "finally determined." See Revised Protocol Amending the Convention With Respect to Taxes on Income and on Capital of September 26, 1980, Mar. 17, 1995, U.S.-Canada, art. 15, S. Treaty Doc. No. 104-4.

Given both of these provisions, it seems highly incongruous to conclude, as did the Fourth Circuit, that the wire fraud statute--adopted without any apparent consideration of international tax issues at all--authorizes federal prosecutors to bring criminal actions against U.S. citizens for evasion of any revenue law promulgated by any foreign country, regardless of whether there is or ever could be a "finally determined" tax judgment on which to base such prosecution.

To most people, this probably isn't the sexiest Supreme Court case they can imagine. But as I've said before, it's important to keep the government on its leash in these areas. So wish me luck.

Comments: Post a Comment