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The United States can prosecute schemes to defraud federal, state or foreign governments of taxes under mail and wire fraud statutes because taxes constitute property under those statutes, a federal appeals court has ruled. The unanimous ruling of the 2nd U.S. Circuit Court of Appeals, issued this week, put to rest several ambiguities surrounding mail and wire fraud statutes, especially in light of the U.S. Supreme Court’s ruling in Cleveland v. United States, 531 U.S. 12 (2000). In Cleveland, the court ruled that unissued state video poker licenses did not qualify as “property” under mail and wire fraud statutes. Some argued that the ruling could significantly change the way federal courts interpreted these statutes, and perhaps call into question whether taxes could be deemed property under them. In the 2nd Circuit case, Fountain v. United States, 03-2188, John Fountain challenged his guilty plea to a scheme to deprive the Canadian government of revenue. Fountain, a former New York state police officer, had been involved in a plan to transport cigarettes from Canada to the St. Regis Mohawk Reservation and then back to Canada, where they would be sold on the black market. He was sentenced to five years in prison. After Fountain executed his plea, though, the Supreme Court issued its ruling in Cleveland. The 2nd Circuit, meanwhile, decided that the “revenue rule” bars civil lawsuits in the United States aimed at enforcing foreign tax laws ( Attorney General of Canada v. R.J. Reynolds Tobacco Holdings, Inc., 268 F.3d 103, 2001). Fountain subsequently sought a habeas corpus petition, arguing that his attorney was ineffective for failing to pursue a defense under the revenue rule, and that taxes owed to a government are not property under wire fraud statutes. Northern District Judge Thomas J. McAvoy denied the request, but certified the case for appeal to the circuit court. This week, the 2nd Circuit affirmed McAvoy, ruling that Cleveland effected a “limited alteration” of wire fraud statutes rather than “completely redirecting the stream.” In Cleveland, the circuit court said, the Supreme Court merely decided that licenses — not taxes — are not property of the state. “While a liquor license might not constitute property in the hands of the state, the sales taxes that the government can anticipate collecting from transactions in alcohol are property under the mail and wire fraud statutes,” Judge Robert A. Katzmann wrote for the circuit. “This result accords with the manner in which the government’s right to collect taxes has historically been treated even outside the context of the mail and wire fraud statutes.” As far as the 2nd Circuit’s ruling on civil suits over foreign taxes in R.J. Reynolds, Katzmann said, it did not change the court’s previous ruling in United States v. Trapilo, 130 F.3d 547 (1997), which held that the common law revenue rule does not bar criminal prosecutions under the mail and wire fraud statutes. Bruce R. Bryan of Syracuse represented Fountain; Assistant U.S. Attorney Elizabeth S. Riker represented the government.

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