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A recent decision by the 4th U.S. Circuit Court of Appeals not only creates a conflict with the 1st Circuit and perhaps the 2d Circuit over the little-known “common law revenue rule,” it also offers a peek into the world of modern-day bootlegging. The July 18 en banc decision is U.S. v. Pasquantino, No. 01-4463. According to Senior Judge Clyde H. Hamilton (writing for all but two dissenting judges), the brothers David and Carl Pasquantino, residents of Niagara Falls, N.Y., bought “low-end liquor” by the truckload in Maryland and then smuggled it into Ontario, Canada, thus depriving the Canadian and provincial governments of their hefty “sin taxes” on liquor. Tipped off by the large-scale purchases, the U.S. Bureau of Alcohol, Tobacco and Firearms nabbed the brothers and one of their drivers in a sting operation. All three were convicted in a Baltimore federal court of violating the U.S. wire fraud statute, 18 U.S.C. 1343, on the theory that they had used telephone lines in furtherance of a scheme to defraud foreign governments of property rights in accrued tax revenue. Common law revenue rule The three defendants argued that their convictions were improper under the common law revenue rule, a doctrine having its roots in English common law prior to the founding of the United States. Hamilton, quoting the Restatement (Third) of Foreign Relations Law, described the rule as saying, “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.” Hamilton denied that the defendants’ conviction fell within the ambit of the rule. He noted that the Restatement formulation makes “a critical distinction between the nonenforcement (or nonrecognition) of foreign tax judgments [and] the nonenforcement (or nonrecognition) of foreign revenue laws.” While the trial court necessarily had to make a judgment about Canadian and provincial law before concluding that the defendants had attempted to defraud Canada and Ontario, the “prosecution of the Defendants depended neither upon the enforcement nor recognition of a foreign tax judgment,” Hamilton wrote. Hamilton acknowledged that in a 1996 decision, U.S. v. Boots, 80 F.3d 580, the 1st Circuit had ruled that a wire-fraud conviction that takes cognizance of a foreign revenue law could be the “functional equivalent” of an enforcement of a foreign judgment. The Boots court vacated the wire-fraud convictions of defendants accused of defrauding Canada and the province of Nova Scotia of excise taxes on imported tobacco. The 1st Circuit said that the wire-fraud prosecution, no less than the enforcement of a foreign judgment, offended the concerns underlying the common law revenue rule. Most important among those concerns was the constitutional principle that the legislative and executive branches, and not the judiciary, should make policy in the foreign relations realm. In rejoinder to Boots, Hamilton said that neither foreign judgments or foreign laws were enforced in the case at hand: “the fact that the property at issue . . . belonged to foreign governments by virtue of those governments’ respective revenue laws is merely incidental to prosecution under the federal wire fraud statute.” Hamilton also discounted the 1st Circuit’s separation-of-powers worries, noting that Congress enacted the wire-fraud statute and that the executive branch had made the decision to use that statute to prosecute fraudulent evasion of foreign taxes. Although the 2d Circuit has considered the common law revenue rule, its position seems uncertain, judging by the fact that both Hamilton and 4th Circuit Judge Roger Gregory, who wrote a dissenting opinion taking a position like that of the 1st Circuit, pointed to 2d Circuit decisions supporting their side of the argument. Young’s e-mail address is gyoungnlj.com.

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