In prosecution for using interstate communications to carry out plot to bootleg U. S. liquor into Canada to evade its taxes, U. S. Supreme Court upholds conviction because interstate wire fraud statute does not run afoul of the common law "revenue rule"
Petitioners, David B. Pasquantino, Carl J. Pasquantino, and Arthur Hilts carried out a scheme to smuggle large quantities of liquor into Canada from the United States between 1996 and 2000 to dodge Canada's heavy alcohol import taxes. Canadian taxes then due on alcohol bought in the United States and brought into Canada about doubled the liquor's purchase price.
The petitioners in New York would order liquor over the telephone from discount package stores in Maryland. They then hired Hilts and others to drive the liquor over the Canadian border. The drivers would squirrel the liquor within their vehicles and omit to declare the goods to Canadian customs officials.
A Maryland federal court convicted them of violating the federal wire fraud statute, 18 U.S.C. Section 1343. That statute bans the use of interstate wires to carry out "any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses."
The Fourth Circuit affirmed their convictions. It spurned petitioners' contention that their prosecution transgressed the traditional common law "revenue rule," which restrains courts from enforcing the tax laws of foreign nations. A closely divided U.S. Supreme Court affirms.
In the majority's view, the clear language of Section 1343 makes a crime out of petitioners' plot. In the first place, Canada's right to unpaid excise taxes on the liquor petitioners spirited into Canada constitutes statutory "property." Canada is entitled to obtain money from petitioners, the possession of which, in ordinary usage, is "something of value" to, or "property" of, the Canadian Government. [Cite] Second, petitioners' game was a "scheme or artifice to defraud" Canada of its tax revenue.
Moreover, the majority defends the above reading of Section 1343 as not debasing the common law "revenue rule." The latter allows nations to avoid directly enforcing the tax laws of other states.
Petitioners argued that courts should read statutes that invade the common law with a presumption that supports the preservation of long established and familiar principles, except where a contrary legislative intent is clear. In their view, to avoid reading Section 1343 to derogate from the revenue rule, the Court should except frauds aimed at eluding foreign taxes from the otherwise applicable statutory language. Thus, before deciding that Congress aimed to absolve the present prosecution from the ample scope of Section 1343, the Court has to find that the revenue rule clearly inhibited such a prosecution as of 1952, the year Congress passed the wire fraud statute.
According to the majority, no common law case decided as of 1952 clearly established that the revenue rule barred the United States from prosecuting a fraudulent scheme to evade foreign taxes. Our courts have traditionally regarded the revenue rule as a corollary of the theory that "[t]he Courts of no country execute the penal laws of another." The Antelope, 10 Wheat. 66, 123, 6 L.Ed. 268 (1825) (Marshall, C.J.). It first surfaced in U.S. lawsuits to collect money for the payment of foreign tax judgments.
"The present prosecution is unlike these classic examples of actions traditionally barred by the revenue rule. It is not a suit that recovers a foreign tax liability, like a suit to enforce a judgment. This is a criminal prosecution brought by the United States in its sovereign capacity to punish domestic criminal conduct. Petitioners nevertheless argue that common law revenue rule jurisprudence as of 1952 prohibited such prosecutions." [Slip op. 9]
The majority disagrees. "Petitioners first analogize the present action to several cases that have applied the revenue rule to bar indirect enforcement of foreign revenue laws, in contrast to the direct collection of a tax obligation. They cite, for example, a decision of an Irish trial court holding that a private liquidator could not recover assets unlawfully distributed and moved to Ireland by a corporate director, because the recovery would go to satisfy the company's Scottish tax obligations. Peter Buchanan Ltd. v. McVey, 1955 A.C. 516, 529 530 (Ir.H.Ct.1950), app. dism'd, 1955 A.C. 530 (Ir.Sup.Ct.1951). The court found that "the sole object of the liquidation proceedings in Scotland was to collect a revenue debt,' because if the liquidator won, "every penny recovered after paying certain costs ... could be claimed by the Scottish Revenue.' Id., at 530." [Id.]
"Buchanan and the other cases on which petitioners rely cannot bear the weight petitioners place on them," the majority contends. "Many of them were decided after 1952, too late for the Congress that passed the wire fraud statute to have relied on them. Others come from foreign courts. Drawing sure inferences regarding Congress' intent from such foreign citations is perilous, as several of petitioners' cases illustrate."
Importantly to the majority, none of these cases clearly show that the revenue rule bars this prosecution. "None involved a domestic sovereign acting pursuant to authority conferred by a criminal statute. ... A prohibition on the enforcement of foreign penal law does not plainly prevent the Government from enforcing a domestic criminal law. Such an extension, to our knowledge, is unprecedented in the long history of either the revenue rule or the rule against enforcement of penal laws." [Id.]
"Moreover, none of petitioners' cases ... barred an action that had as its primary object the deterrence and punishment of fraudulent conduct a substantial domestic regulatory interest entirely independent of foreign tax enforcement. ... Even those courts that, as of 1952, had extended the revenue rule beyond its core prohibition had not faced a case closely analogous to this one and thus we cannot say with any reasonable certainty whether Congress in 1952 would have considered this prosecution within the revenue rule." [Id.]
Citing the Mandatory Victims Restitution Act of 1996, 18 U.S.C. Sections 3663A 3664 (2000 ed. and Supp. II) (MVRA), petitioners point out that it demands restitution of the lost tax revenue to Canada. The majority sees no merit in this.
"We do not think it matters whether the provision of restitution is mandatory in this prosecution. Regardless, the wire fraud statute advances the Federal Government's independent interest in punishing fraudulent domestic criminal conduct, a significant feature absent from all of petitioners' revenue rule cases. The purpose of awarding restitution in this action is not to collect a foreign tax, but to mete out appropriate criminal punishment for that conduct."
"In any event, any conflict between mandatory restitution and the revenue rule would not change our holding today. If awarding restitution to foreign sovereigns were contrary to the revenue rule, the proper resolution would be to construe the MVRA not to allow such awards, rather than to assume that the later enacted restitution statute impliedly repealed Section 1343 as applied to frauds against foreign sovereigns."[Slip op. 10]
"Granted, this criminal prosecution "enforces' Canadian revenue law in an attenuated sense, but not in a sense that clearly would contravene the revenue rule. From its earliest days, the revenue rule never proscribed all enforcement of foreign revenue law. For example, at the same time they were enforcing domestic contracts that had the purpose of violating foreign revenue law, English courts also considered void foreign contracts that lacked tax stamps required under foreign revenue law. [Cites]."
"Like the present prosecution, cases voiding foreign contracts under foreign law no doubt "enforced' foreign revenue law in the sense that they encouraged the payment of foreign taxes; yet they fell outside the revenue rule's scope. The line the revenue rule draws between impermissible and permissible "enforcement' of foreign revenue law has therefore always been unclear." [Slip op. 11].
The cases persuade the majority that the extent to which the revenue rule barred "indirect" recognition of foreign revenue laws was not settled as of 1952. "[F]or instance, Congress might well have thought that courts would enforce the wire fraud statute, even if doing so might incidentally recognize Canadian revenue law. The uncertainty highlights that "[i]ndirect enforcement is ... easier to describe than to define,' and "it is sometimes difficult to draw the line between an issue involving merely recognition of a foreign law and indirect enforcement of it.' 1 A. Dicey & J. Morris, Conflict of Laws 90 (L. Collins gen. ed. 13th ed. 2000). ... [P]etitioners' cases do not yield a rule sufficiently well established to narrow the wire fraud statute in the context of this criminal prosecution."[Slip op. 12]
"The present prosecution creates little risk of causing international friction .... This action was brought by the Executive to enforce a statute passed by Congress. In our system of government, the Executive is "the sole organ of the federal government in the field of international relations,' United States v. Curtiss Wright Export Corp., 299 U.S. 304, 320 (1936), and has ample authority and competence to manage "the relations between the foreign state and its own citizens' and to avoid "embarass[ing] its neighbor[s],' [Cites]."
"...[W]e may assume that, by electing to bring this prosecution, the Executive has assessed this prosecution's impact on this Nation's relationship with Canada, and concluded that it poses little danger of causing international friction. We know of no common law court that has applied the revenue rule to bar an action accompanied by such a safeguard, and neither petitioners nor the dissent directs us to any. The greater danger, in fact, would lie in our judging this prosecution barred based on the foreign policy concerns animating the revenue rule, concerns that we have "neither aptitude, facilities nor responsibility' to evaluate. Ibid." [Id.]
"More broadly, petitioners argue that the revenue rule avoids giving domestic effect to politically sensitive and controversial policy decisions embodied in foreign revenue laws, regardless of whether courts need pass judgment on such laws. [Cite] ... . This worries us little here. The present prosecution, if authorized by the wire fraud statute, embodies the policy choice of the two political branches of our Government Congress and the Executive to free the interstate wires from fraudulent use, irrespective of the object of the fraud. Such a reading of the wire fraud statute gives effect to that considered policy choice. It therefore poses no risk of advancing the policies of Canada illegitimately."[Slip op. 13]
"Still a final revenue rule rationale petitioners urge is the concern that courts lack the competence to examine the validity of unfamiliar foreign tax schemes. [Cite] Foreign law, of course, posed no unmanageable complexity in this case. The District Court had before it uncontroverted testimony of a Government witness that petitioners' scheme aimed at violating Canadian tax law."
"Nevertheless, Federal Rule of Criminal Procedure 26.1 addresses petitioners' concern by setting forth a procedure for interpreting foreign law that improves on those available at common law. Specifically, it permits a court, in deciding issues of foreign law, to consider "any relevant material or source including testimony without regard to the Federal Rules of Evidence.' By contrast, common law procedures for dealing with foreign law those available to the courts that formulated the revenue rule were more cumbersome. [Cite] Rule 26.1 gives federal courts sufficient means to resolve the incidental foreign law issues they may encounter in wire fraud prosecutions." [Id.]
Finally, the majority rejects the notion that its interpretation accords Section 1343 extraterritorial effect. Petitioners' offense was complete the moment they executed their scheme intending to defraud Canada of tax revenue inside the United States. [Cite]. Therefore, only domestic conduct is at issue here. In any event, because Section 1343 punishes frauds carried out "in interstate or foreign commerce,' it is not a statute that involves only domestic concerns.
Citation: Pasquantino v. United States, No. 03 725, 2005 WL 946716 (U.S. S. C. April 26).
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