Taxation

• Author: International Law Group

In 1996, David Pasquantino and two others (jointly "defendants") started smuggling liquor into Canada where taxes on liquor were much higher than in the U.S. The Defendants were convicted of using interstate wires to defraud Canada and the Province of Ontario of excise duties and tax revenues for liquor imports and sales.

The wire fraud statute provided that: "Whoever, having devised or intending to devise any scheme or artifice to defraud ... by means of false or fraudulent pretenses ... transmits ... by means of wire ... communication in interstate or foreign commerce, any writings, signs, signals, pictures or sounds for the purpose of executing such scheme or artifice, shall be fined ... or imprisoned ..."

Defendants appeal their convictions, arguing among other things that the application of the common law revenue rule precludes prosecution under the federal wire statute (18 U.S.C. Section 1343) for using interstate wires to defraud a foreign sovereign of its tax revenue. This is an issue of first impression in the Fourth Circuit.

The U.S. Court of Appeals for the Fourth Circuit, in an en banc opinion upon rehearing, affirms. The Court holds that the common law revenue rule does not preclude prosecution under the wire fraud statute in this case.

At the outset, the Court restates the issue of first impression. The issue here is whether application of the common law revenue rule puts beyond the reach of the federal wire statute the use of interstate wires for purposes of defrauding a foreign sovereign. Section 483 of The Restatement (Third) of Foreign Relations Law of the United States (1987) describes the common law revenue rule as follows: "Courts in the United States are not required to recognize or enforce judgments for the collection of taxes, fines, or penalties rendered by courts of other states." Although the U.S. Supreme Court has never discussed the precise scope of the common law revenue rule, it noted that many courts in the U.S. have adhered to the principle that a court need not give effect to the penal or revenue laws of foreign countries.

There is some support for the Defendants' argument in precedent. In United States v. Boots, 80 F.3d 580 (1st Cir.), cert. denied, 117 S.Ct. 263 (1996), the First Circuit vacated convictions for defrauding Canada and the Province of Nova Scotia of excise duties and tax revenues on imported tobacco because upholding the convictions would amount to penal enforcement of Canadian customs and...