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The European Commission plans to sue U.S. tobacco companies for billions of tax dollars that it believes European Union member states have lost to cigarette smuggling. But an obscure tax rule may make exporting litigation much harder than exporting cars or chocolates. The commission, the executive arm of the 15-member European Union, said on July 19 that it plans to sue cigarette makers in U.S. court, alleging that the companies colluded with smugglers in Europe. A two-year investigation by the European Anti-Fraud Office estimates that cigarette smuggling cost the union more than $4 billion in lost taxes in 1998. An E.U. spokeswoman declined to name the companies to be sued or to provide other specifics of the planned suit, except to say that it should be filed in a matter of weeks. The E.U. case will join suits filed by Colombia and Ecuador seeking taxes lost to smuggling. Whatever the grounds for the suit, however, a ruling in a separate case by a Binghamton, N.Y., federal judge a few weeks earlier casts doubt on all of the cases. On June 29, U.S. District Judge Thomas J. McAvoy dismissed a racketeering lawsuit filed by Canada’s Attorney General Anne McLellan for the Canadian government against R.J. Reynolds Tobacco Co., five related companies and a Canadian tobacco industry group. Attorney General of Canada v. R.J. Reynolds Tobacco Holdings, No. 99-2194 (N.D.N.Y.). The complaint, filed in December, alleged a scheme in which cigarettes were smuggled into Canada, avoiding that country’s high cigarette taxes. But the defendants persuaded McAvoy to dismiss the case, on the strength of the “Revenue Rule,” which prevents foreign governments from using U.S. courts to collect their taxes. “[W]hile the origins of the Revenue Rule and its continued applicability are subject to serious question…the rule appears to be the law of this Circuit,” McAvoy wrote in his opinion. “We find the court’s overall opinion encouraging because the court itself questioned the validity of the Revenue Rule in the first place,” said Jason L. Peltz, a partner in the Chicago office of Denver’s Bartlit Beck Herman Palenchar & Scott, one of Canada’s lawyers. Industry lawyers said that Canada had little reason to be encouraged. C. Stephen Heard, of Sullivan & Heard in New York, said that the Revenue Rule acts as an “absolute ban.” The U.S. government can get around the ban only by passing specific laws or entering into tax enforcement treaties with other countries, he said. Heard represents RJR-Macdonald, a Canadian subsidiary of R.J. Reynolds Tobacco Co., and three other Reynolds subsidiaries. The Revenue Rule was first applied by the English judge Lord Mansfield in 1775, and has been used only a handful of times in the United States. E.U. lawyers will have trouble finding a helpful precedent in that handful. At press time, Canada had not announced whether it plans to appeal.

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