Section of Taxation Publications
  VOL. 59
NO. 2
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Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.


Imagine that you walk into work tomorrow and find a criminal indictment sitting on your desk. The indictment alleges that recent actions by your company violated the wire fraud statute and that you, as the CEO, are criminally liable.1 According to the government, your company used the U.S. telephone wire system to place calls between New York and California for the purpose of defrauding the Chinese government of property. Specifically, the Government contends that your company defrauded China by not paying taxes due under a Chinese revenue law. While this hypothetical may seem absurd at first, the Supreme Court’s recent decision in Pasquantino v. United States makes this very situation all too realistic.2 Until the Court’s recent decision in Pasquantino, the common law revenue rule was understood to prevent suits such as that described in the hypothetical above. Specifically, the revenue rule prevented the maintenance of a lawsuit in a U.S. court that involved the enforcement of a foreign tax law. The primary rationale for this rule, discussed in Part I, was that revenue rules are positive laws promulgated by an individual sovereign, and as such they should have no force outside of the individual sovereign’s borders. In Pasquantino, the Supreme Court casually brushed aside this traditional understanding of the revenue rule and for the first time distinguished between direct and indirect enforcement of foreign tax laws. In doing so, the Court greatly limited the traditional scope of the rule and created the possibility that American businessmen and tax practitioners could face criminal charges for violations of obscure provisions of a foreign state’s tax code. The Court in Pasquantino held that a criminal prosecution under the wire fraud statute which resulted in the indirect enforcement of a foreign tax law was not barred by the common law revenue rule.3 The case, which is summarized in Part II, involved an appeal from Petitioners’ convictions under the wire fraud statute for the misuse of the U.S. wire system in furtherance of a scheme to defraud Canada of taxes due that nation on imported alcohol.4 In arguments before the Court, the Petitioners raised two issues: (1) whether Canada’s right to collect taxes “was . . . ‘money or property’ within the meaning of the wire fraud statute;”5 and (2) even if the taxes were property, whether this prosecution nevertheless was barred by the common law revenue rule as it “required the court to take cognizance of the revenue laws of Canada.”6 The Court, as discussed in Part III, rejected both of these contentions, concluding instead that the revenue rule was not applicable to this prosecution.7 Part IV of this Note examines the potential impact of Pasquantino. This Note contends that the majority’s restrictive interpretation of the revenue rule and the rule’s animating principles was not only incorrect, but is also potentially extremely troubling. First, the majority’s construction of the revenue rule essentially makes it inapplicable as a bar to any criminal prosecution involving indirect enforcement of a foreign tax law. As a result, U.S. businesses and businessmen may find themselves facing criminal prosecutions for unintentional violations of foreign revenue laws. Second, the Court’s restrictive interpretation of the rule may undermine existing U.S. tax treaties and will make it substantially more difficult for the United States to negotiate tax treaties in the future. Finally, the majority’s formulation of the rule leaves lower courts with no guidance as to how to apply the revenue rule in future criminal prosecutions. This Note proposes that the courts should respond to Pasquantino as follows: (1) in view of the continuing importance of the revenue rule in the modern global economy, the courts should interpret Pasquantino as narrowly as possible; and (2) the Supreme Court should adopt the presumption that the revenue rule applies in all civil and criminal prosecutions in which direct or indirect enforcement of foreign revenue law is of substantial importance. This approach, discussed in Parts IV and V, does not require overruling Pasquantino,8 but instead requires the Supreme Court to embrace the nonderogation canon’s presumption favoring the retention of “long-established and familiar” common law doctrines.9 By embracing this presumption, the Court will create a workable and equitable framework within which to apply the revenue rule. Additionally, it will force Congress to be more precise when wording criminal statutes that may invade the common law. Not only will the courts benefit from this change, but American businessmen and tax practitioners will once again be able to act, secure in the knowledge that they will not face arbitrary prosecutions for violations of obscure foreign tax laws.


Published by
Section of Taxation, American Bar Association
With the Assistance of
Georgetown University Law Center


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