Recognizing foreign tax judgments: an argument for the revocation of the revenue rule.

• Author: Kovatch, William J., Jr.

1. INTRODUCTION

   Litigants who have obtained a judgment from a foreign court, for the most part, have little trouble convincing courts in the United States to recognize and enforce that judgment.(1) While the United States is not a member of an international convention mandating the recognition of foreign judgments,(2) such judgments are usually recognized under the doctrine of international comity.(3) Under either the applicable state statute(4) or common law,(5) foreign judgments are presumptively valid and enforceable.(6) It is the burden of the party opposing enforcement to show an acceptable reason for not recognizing or enforcing a judgment.(7)

   The case is completely different when the party seeking enforcement is a foreign nation,(8) and the judgment one of tax obligations. Under the "revenue rule," the courts of the United States are under no obligation to recognize or enforce a foreign tax judgment.(9) This rule is derived from Eighteenth Century cases wherein Lord Mansfield stated that no nation recognizes the revenue laws of another.(10)

   The revenue rule, however, is an archaic vestige of English common law.(11) The original reasoning upon which the rule is based is flawed because Lord Mansfield's statement had no bearing on the facts presented by the cases.(12) Indeed, the abolition of the revenue rule would be consistent with fundamental principles of American law and government.(13) Further, such an abolition would aid U.S. tax officials in collecting revenue from delinquent tax payers who flee overseas to escape U.S. jurisdiction.(14)

   This Article examines the revenue rule in American jurisprudence. Part I traces the development of the revenue rule in the United States. Part II examines the origins of the revenue rule in English common law and demonstrates the flaws in its inception. Part III shows the defects in the rationale behind the revenue rule. Part IV argues that the abolition of the revenue rule would be consistent with the principle that governmental authority derives from the consent of the governed. Part V explains how the United States could benefit from the abolition of the revenue rule.

2. THE REVENUE RULE IN AMERICAN JURISPRUDENCE

   The doctrine that foreign tax judgments should not be recognized was injected into American jurisprudence by Her Majesty the Queen ex rel. British Columbia v. Gilbertson.(15) There, citizens of Oregon performed logging operations in British Columbia, a province of Western Canada.(16) The defendants were assessed tax on their income from logging by the government of British Columbia.(17) The government filed a certificate of assessment with the Supreme Court of British Columbia, giving the assessment the same effect as a judgment.(18) British Columbia then filed suit in the federal courts in Oregon for the recognition and enforcement of the judgment.(19) The U.S. District Court declined enforcement, citing the revenue rule.(20)

   The U.S. Court of Appeals for the Ninth Circuit affirmed the ruling of the District Court.(21) First, the court traced the origin of the revenue rule to two Eighteenth Century English cases decided by Lord Mansfield.(22) In Holman v. Johnson, Mansfield stated, "[N]o country ever takes notice of the revenue laws of another."(23) Lord Mansfield reiterated this pronouncement in Planche v. Fletcher, stating, "One nation does not take notice of the revenue laws of another."(24) While admitting that these statements amounted to nothing more than dictum in the cases cited, the Ninth Circuit nonetheless stated that the doctrine had become well recognized.(25)

   In support of the revenue rule, the Ninth Circuit quoted the concurring opinion of Judge Learned Hand in Moore v. Mitchell:(26)

   "While the origin of the exception in the case of penal liabilities does not appear in the books, a sound basis for it exists, in my judgment, which includes liabilities for taxes as well. Even in the case of ordinary municipal liabilities, a court will not recognize those arising in a foreign state, if they run counter to the `settled public policy' of its own. Thus a scrutiny of the liability is necessarily always in reserve, and the possibility that it will be found not to accord with the policy of the domestic state. This is not a troublesome or delicate inquiry when the question arises between private persons, but it takes on quite another face when it concerns the relations between the foreign state and its own citizens or even those who may be temporarily within its borders. To pass upon the provisions for the public order of another state is, or at any rate should be, beyond the powers of a court; it involves the relations between the states themselves, with which courts are incompetent to deal, and which are intrusted to other authorities. It may commit the domestic state to a position which would seriously embarrass its neighbor."(27) Thus, the Ninth Circuit supported the imposition of the revenue rule, claiming the recognition of foreign tax judgments would force the courts of the United States to enforce the interests of a foreign government.(28) Further, the court, noting the lack of reciprocity, observed that the courts of British Columbia would not recognize a tax judgment rendered by courts in the United States. While noting that reciprocity was not a requirement for recognition, the court stated that it was a factor to be considered.(29)

   The revenue rule was stated differently when the American Law Institute revised its Restatement of Foreign Relations in 1987. "Courts in the United States are not required to recognize or enforce judgments for the collection of taxes, fines, or penalties rendered by the courts of other states."(30) Thus, according to the Restatement, nonrecognition is not mandatory.(31) Indeed, the Reporter's notes stated that the revenue rule was obsolete.(32)

   The revenue rule has also found its way into the criminal law of the United States. In United States v. Boots, two defendants entered into a plot to smuggle tobacco into Canada and avoid paying Canadian taxes and excise duties.(33) The defendants were convicted of conspiracy.(34) The U.S. Court of Appeals for the First Circuit reversed, stating that under the revenue rule, "[C]ourts generally will not enforce foreign tax judgments...."(35) The court found that a conviction was the functional equivalent of a "penal enforcement of Canadian customs and tax laws."(36) A conviction, therefore, could not be based on a violation of foreign tax law.

   A contrary conclusion was reached by the U.S. Court of Appeals for the Second Circuit in United States v. Trapilo.(37) Four defendants were charged with conspiracy to defraud the Canadian government of taxes on liquor.(38) The district court, relying on Boots, dismissed the charges.(39) The Second Circuit reversed, stating that, "At the heart of this indictment is the misuse of the wires in furtherance of a scheme to defraud the Canadian government of tax revenue, not the validity of a foreign sovereign's revenue laws."(40) The Trapilo court, therefore, did not question the rationale behind the revenue rule, but merely found it inapplicable because there was no obligation to assess the validity of Canadian revenue laws.(41)

   (Courts in the United States, then, differ on the application of the revenue rule. The Ninth Circuit discussed the rule merely in the context of the nonrecognition of foreign tax judgments.(42) Under the First Circuit's view, a criminal conviction cannot involve proof of a violation of a foreign tax law.(43) This view is not constrained solely to the nonrecognition of foreign tax judgments, but extends to the nonrecognition of all foreign tax laws.(44) The Second Circuit, however, limits the application of the revenue rule solely to those instances where a court in the United States must actually assess the validity of a foreign tax law.(45)

3. ORIGINS OF THE REVENUE RULE

   In support of the revenue rule, the Gilbertson court cited two English cases.(46) An examination of those cases is necessary to determine the strength of the authority upon which the revenue rule is based.

   1. English Precedents

      In Holman v. Johnson, Holman, a resident of Dunkirk, France, sought payment for tea sold to Johnson.(47) The entire transaction took place in Dunkirk.(48) Johnson, however, bought the tea in order to smuggle it into England and avoid customs duties.(49) Johnson argued that Holman knew that his purpose in buying the tea was to smuggle it.(50) Because this was a contract in furtherance of an illegal aim, Johnson claimed it was void and that Holman was not entitled to payment for the tea.(51) The court was faced with the issue of whether a contract for the sale of goods, which is facially valid, can be voided due to the known illegal intentions of the buyer.(52) Lord Mansfield first determined which law would apply:

      There can be no doubt, but that every action tried here must be tried by the law of England; but the law of England says, that in a variety of circumstances, with regard to contracts legally made abroad, the laws of the country where the cause of action arose shall govern.--There are a great many cases which every country says shall be determined by the laws of foreign countries where they arise. But I do not see how the principles on which that doctrine obtains are applicable to the present case. For no country ever takes notice of the revenue laws of another.(53) It is in this context that the statement that came to be known as the revenue rule was first enunciated. Lord Mansfield next discussed whether Holman had engaged in an illegal act:

      This is an action brought merely for goods sold and delivered at Dunkirk. Where then, or in what respect is the plaintiff guilty of any crime? Is there any law of England transgressed by a person making a complete sale of a parcel of goods at Dunkirk, and giving credit for them? The contract is complete, and nothing is left to be done.(54) The crux of Lord...