Court Opinion

ID: 9496232
Source: CourtListenerOpinion
Date Created: 2023-08-05 16:21:03.243065+00
Date Added: 2024-06-11T17:57:26.424611
License: Public Domain

GREGORY, Circuit Judge,
dissenting:
I.
Pursuant to the common-law revenue rule, I find that the activities at issue in this case are not cognizable under the federal wire-fraud statute, 18 U.S.C. § 1343. Accordingly, I respectfully dissent.
II.
A.
The majority claims to rely on the Restatement’s formulation of the revenue rule, which states, “Courts in the United States are not required to recognize or enforce judgments for the collection of taxes ... rendered by the courts of other states.” Ante, at 327 (citing Restatement (Third) of the Law of Foreign Relations § 483) (emphasis added). Rather than applying . this rule as stated, however, the majority narrows its application only to those rare instances in which a court is compelled to actually enforce the judgment of a foreign court, finding that the rule only “pertains to the nonenforcement of foreign tax judgments.... ” Ante, at 329 (emphasis added). In so holding, the majority reads the words “to recognize” completely out of the Restatement section on which it purportedly relies. With its eon-strained application of the revenue rule, the majority has created new law that does not find support in the Restatement, Supreme Court precedent, nor in any of the rulings from our sister circuits.
In Banco Nacional de Cuba v. Sabbatino, the Supreme Court suggested that the revenue rule would reach beyond actual enforcement of foreign tax judgments, and extend to any case in which a court would be compelled to “give effect to the ... revenue laws of foreign countries or sister state's.” 376 U.S. at 412, 413, 84 S.Ct. 923 (1964) (citing Moore v. Mitchell, 30 F.2d 600 (2d Cir.1929)) (emphasis added). Predating Banco Nacional de Cuba, the Court in Milwaukee County v. M.E. White Company, although not ultimately deciding the case on revenue rule grounds, specifically recognized that:
[i]t has often been said, and in a few cases held, that statutes imposing taxes [as opposed to judgments enforcing those statutes] are not entitled to full faith and credit ... because the courts of one state should not be called upon to scrutinize the relations of a foreign state with its own citizens, such as are involved in its revenue laws, and thus commit the state of the forum to positions which might be seriously embarrassing to itself or its neighbors.
296 U.S. 268, 274-75 (1935) (internal footnotes omitted). In sum, long before Congress’ passage of the wire fraud statute at issue in the present case, “the United States Supreme Court acknowledged the broad scope of the revenue rule.” Attorney Gen. of Canada v. R.J. Reynolds Tobacco Holdings, Inc., 268 F.3d 103, 126 (2d Cir.2001) (citing Milwaukee Co., 296 U.S. at 275, 56 S.Ct. 229).
*339Additionally, the First Circuit, in United States v. Boots, held that the revenue rule is implicated when a United States court is called upon to “effectively pass[ ] on the validity and operation of the revenue laws of a foreign country.” 80 F.3d 580, 587 (1st Cir.1996). In Boots, the defendants took part in a scheme to transport tobacco from a Native American reservation in upstate New York into New Brunswick, Canada, without paying taxes and excise duties on the tobacco. To bypass customs checkpoints, the tobacco was transported surreptitiously into Canada through another reservation in Maine. The defendants were charged with and found guilty of conspiracy to commit wire fraud, in violation of 18 U.S.C. §§ 371 and 1343. The First Circuit reversed the convictions, basing its decision primarily on the revenue rule. Id. at 583-84. The Court explained, “Although this case does not require us to enforce a foreign tax judgment as such, upholding defendants’ section 1343 conviction would amount functionally to penal enforcement of Canadian customs and tax laws.” Id. at 587. With this decision, the First Circuit recognized that the revenue rule applies not only when a foreign law is being enforced, but also when, as the Restatement suggests, an American court is compelled to “recognize” the validity of that foreign law. The Boots court continued:
The scheme to defraud at issue — proof of which is essential to conviction — had as its sole object the violation of Canadian revenue laws. To convict therefore, the district court and this court must determine whether a violation of Canadian tax laws was intended and, to the extent implemented, occurred. In so ruling, our courts would have to pass on defendants’ challenges to such laws and any claims not to have violated or intended to violate them.
Id. at 587.
Although it declined to exercise its discretion and dismiss the indictment before it, the Second Circuit, in United States v. Trapito, 130 F.3d 547 (2d Cir.1997), applied the same formulation of the revenue rule as did the Boots court. The Trapito court found that because “there is no obligation to pass on the validity of Canadian revenue law, ... the common law revenue rule is not properly implicated.” Trapilo, 130 F.3d at 552-553. That is, the court recognized the converse — had it been required to pass on the validity of a foreign tax law, the revenue rule would have been implicated. This would be true, the court implicitly conceded, even if it had not been required to enforce a judgment based on an application of that law.1
This statement of the rule was reaffirmed by the Second Circuit in Attorney General of Canada v. R.J. Reynolds Tobacco Holdings, Inc., where the court held, “[U]nder the revenue rule, United States courts avoid the application of a foreign sovereign’s tax laws” in order to “avoid entanglement with questions about the underlying validity of a foreign sovereign’s laws.” 268 F.3d at 126. While acknowledging that “the precise scope of the rule” *340remains an unanswered question of federal law, id at 109, the court nevertheless determined that “sound policy considerations, including international comity, the proper exercise of sovereign powers, institutional competence and separation of powers, and recognition of the U.S.-Canada tax treaty relationship, support the continuing viability and application of the revenue rule to this case,” id at 126.
The First and Second Circuit’s recitations of the revenue rule, along with the Supreme Court’s understanding of the doctrine, are buttressed by the rule’s common law history. At least since the eighteenth century, courts have appreciated the broad scope of the rule, which provides that “[o]ne nation does not take notice of the revenue laws of another.” Planche v. Fletcher, 99 Eng. Rep. 164, 165 (1779). Even more forcefully, in the case of Holman v. Johnson, Lord Mansfield recited what he regarded as a firmly established principle, that “no country ever takes notice of the revenue laws of another.” 98 Eng. Rep. 1120, 1121 (K.B.1775) (emphasis added). The majority disregards this history, explaining that Lord Mansfield’s comments are dicta, and that, accordingly, they “cannot serve as a source of binding authority in American jurisprudence.” Ante, at 329. The majority’s argument, however, is unpersuasive, since I cite English common law, not as binding authority, but as persuasive evidence that courts have long since recognized that the revenue rule applies both to the nonenforcement of foreign tax judgments as well as to the nonrecognition of foreign revenue laws.
Notwithstanding this well-established precedent, both from the English and American courts, the majority crafts an exceedingly narrow view of the revenue rule, limiting its application only to those cases in which a United States court is compelled to actually enforce the collection of a foreign tax judgment, and prohibiting its use in any case requiring a United States Court to pass on the validity of, or give effect to, a foreign revenue law. Because this revision creates a circuit split on an issue where such a division is unwarranted, I dissent from the majority’s formulation of the revenue rule.
B.
As is evident from the above discussion, the revenue rule is a discretionary doctrine, one that is guided by “constitutional and prudential considerations.... ” Boots, 80 F.3d at 587. See also Attorney Gen. of Canada, 268 F.3d at 113 (“We do not suggest that the revenue rule always bars United States courts from furthering the tax policies of foreign sovereigns.”); Trapilo, 130 F.3d at 550 (recognizing that “our courts will normally not enforce foreign tax judgments”) (emphasis added); Boots, 80 F.3d at 587 (noting that “our courts have traditionally been reluctant to enforce foreign revenue laws”) (emphasis added); European Comty. v. R.J.R. Nabisco, Inc., 150 F.Supp.2d 456, 476 (E.D.N.Y.2001) (“The revenue rule is discretionary rather than jurisdictional.”); Restatement (Third) of the Law of Foreign Relations, § 483 (noting that courts are “not required” to apply the rule). As such, we need not apply the doctrine in every criminal prosecution simply because the prosecution may be colored by some aspect of a foreign revenue rule. In the present case, however, the traditional rationales underlying the rule forcefully support its application.
The rationale of the revenue rule, the First Circuit explained:
has been said to be that revenue laws are positive rather than moral law; they directly affect the public order of another country and hence should not be sub*341ject to judicial scrutiny by American courts; and for our courts effectively to pass on such laws raises issues of foreign relations which are assigned to and better handled by the legislative and executive branches of government.
Boots, 80 F.3d at 587. Similarly, the Second Circuit recently noted that revenue laws “mirror the moral and social sensibilities of a society. Sales taxes, for example, may enforce political and moral judgments about certain products. Import and export taxes may reflect a country’s ideological leanings and the political goals of its commercial relationships with other nations.” Attorney Gen. of Canada, 268 F.3d at 111. Consistent with the well-articulated explanations from the First and Second Circuits, I believe the revenue rule bars wire fraud prosecutions that are premised upon schemes to violate foreign tax laws because “[n]o court ought to undertake an inquiry which it cannot prosecute without determining whether those [foreign revenue] laws are consonant with its own notions of what is proper.” Moore v. Mitchell, 30 F.2d 600, 604 (2d Cir.1929) (Hand, J., concurring). That such an intrusive inquiry is required here cannot be denied, as we must determine the validity and application of Canada’s tax laws.
The United States, arguing that interpretation of foreign laws is unnecessary, relies on the Second Circuit’s decision in Trafilo, where the court explained that the wire fraud statute proscribed the “use of the telecommunications systems of the United States in furtherance of a scheme whereby one intends to defraud another of property. Nothing more is required. The identity and location of the victim, and the success of the scheme, are irrelevant.” 130 F.3d at 552 (emphasis in original). Based on this observation, the Trapilo court concluded that the revenue rule would be inapplicable to the government’s wire fraud prosecution because “[a]t the heart of th[e] indictment [was] the misuse of the wires in furtherance of a scheme to defraud the Canadian government of tax revenue, not the validity of a foreign sovereign’s revenue laws.” Id. at 552.
The flaw in the Trapilo court’s reasoning is transparent. The court recognized the need for evidence of a scheme to defraud another of property, but then erred by simply assuming that the property— Canada’s right to tax revenues — existed. Id. at 552. The tax revenues would have existed, of course, only if the liquor at issue in Trafilo had been subject to the relevant revenue laws. That is, the existence of property necessarily depended upon the court’s analysis of Canada’s tax laws. The Trapilo court, as a matter of logic, actually did inquire into the validity of a foreign sovereign’s tax laws, without even realizing that it had done so.
This failing in the Trapilo court’s reasoning was recognized by the Second Circuit in United States v. Pierce, 224 F.3d 158 (2000), where the court stated:
We did not say or suggest in Trafilo, however, that it did not matter whether Canada in fact taxed or levied a duty on liquor sales or imports, or that a guilty mind without something about which to feel guilty was a crime. And while we assumed in Trafilo that the government would be able to prove what the indictment alleged, we must on this appeal determine whether the government in fact did so at trial.
Id. at 167. The Pierce court then reversed the convictions before it, based on the insufficiency of the evidence, explaining:
A scheme to deceive, however dishonest the methods employed, is not a scheme ' to defraud in the absence of a property right for the scheme to interfere with.... The Pierces are not accused of scheming to defraud the Canadian *342government of its property, but of its right to obtain property, its right to be paid money. To prove the existence of a scheme to defraud the Canadian government[,] the prosecution had to prove the existence of such a right.
Id. at 165 (emphasis in original).
Usually, both the identity of the victim and the success of the scheme are irrelevant to a wire fraud prosecution. See Trapilo, 130 F.3d at 552. When the victim is a foreign sovereign, however, these factors take on a new importance. In the present case, to determine whether there was a scheme to defraud another of property, this court would have to conclude that Canada’s and Ontario’s “right to be paid money” had materialized. Pierce, 224 F.3d at 165. That is, we would have to find that the defendants had succeeded in their scheme, at least in so far as to actually transport liquor across the Canadian-American border. Stated differently, had the defendants been captured before a single bottle of alcohol crossed into Canada, they could not have been prosecuted under the wire fraud statute because the requisite property would never have come into existence. See id. No foreign taxes would be owed.
It is inescapable that in passing on whether defendants intended to violate Canadian law and deprive Canada of its right to taxes and duties owing on actually imported liquor, “our courts would have to pass on defendants’ challenges to such laws and any claims not to have violated or intended to violate them.” Boots, 80 F.3d at 587. The United States, in count one of the underlying indictment, charged, “At all times relevant to the Indictment, the governments of Canada and the Province of Ontario levied excise duties and taxes on the importation and sale of liquor.” By alleging the existence of foreign revenue laws, the government effectively conceded that the applicability of Canadian law was central to its case.
The government reasserted the importance of these foreign excises during sentencing. In proposing sentences for the district court to consider, the prosecution turned not to the United States Sentencing Guidelines as one might expect, but rather to Canadian revenue law. The government concluded that “Canadian customs duties and excise taxes on a typical case of liquor [totaled] approximately $100 American.” Based on its understanding of foreign law, the government then attempted to calculate the amount of tax revenue that would have been paid to foreign sovereigns had the liquor been lawfully imported into Canada. In figuring the tax losses for which David and Carl Pasquantino could be held responsible, the prosecution suggested the figure of $3,589,200.00. In making the same calculation in Arthur Hilts’ case, the government arrived at the figure of $1,167,600.00.
The government’s — and the court’s — -reliance on Canadian revenue law at sentencing is particularly revealing. The base offense level for a violation of 18 U.S.C. § 1343, is 6. For defendants with a criminal history category of I, the guideline range for a violation of the federal wire fraud statute is 0-6 months. The sentences received by the defendants, however, were substantially more severe. For each count of conviction, Carl and David Pasquantino were sentenced to 57 months of imprisonment, to be served concurrently, and Arthur Hilts was sentenced to a term of 21 months for his conviction on count one of the indictment. The court arrived at these longer terms of imprisonment by increasing the defendants’ offense levels based on the amount of loss to the victim, which in this case was the lost tax revenue to the Canadian and Ontario governments. The Pasquantinos’ offense lev*343els were increased by 13 and Arthur Hilts’ offense level was increased by ll.2 Because the bulk of the defendants’ sentences were related, not to the American crime of wire fraud, but to the Canadian crime of tax evasion, I conclude that this case was primarily about enforcing Canadian law.
The court’s reliance on the government’s amount-of-loss computations is deeply troubling for another reason as well — the calculations were not based on any specific knowledge of what the tax liability would have been for the defendants. Instead, the court relied wholly on the testimony of Gina Marie Jonah, an intelligence officer with Canadian Customs. Officer Jonah, who was not offered as an expert witness, testified as to the approximate amount of tax that is generally owed on liquor imported into Canada. She commented, “Alcohol is taxed very high in Canada,” but she did not reference any provisions of Canadian law in making this observation. Rather, based on her experience in working at the border, she surmised that on a case of alcohol worth $56 American, Canadian taxes would probably equal $100 American.
The district court never determined whether Officer Jonah’s calculations were accurate as a matter of Canadian law. Notwithstanding this uncertainty, the court relied on these calculations to determine the defendants’ offense levels under the Sentencing Guidelines. Of course, had it engaged in a more detailed application of foreign tax law, the court could have clarified the ambiguity regarding the amount of loss to the Canadian government. Yet that inquiry would have required precisely the kind of analysis that the common-law revenue rule seeks to avoid.
III.
Lastly, it must be noted that applying the revenue rule in this case would not mean that any of the defendants would go unpunished; they have all been indicted in Canada for two breaches of Canadian criminal law: (1) failure to file excise taxes; and (2) possession of unlawfully imported spirits. The Executive should determine whether to extradite the defendants to Canada to face these charges. The Canadian courts could then decide the issue that is at the core of both the American and Canadian prosecutions: whether, and to what extent, the defendants have defrauded the governments of Canada and Ontario out of tax revenues owed pursuant to their own, sovereign, excise laws.
Judge Michael joins in this dissent.

. As explained in Part II.B., infra, although the Trapito court correctly summarized the common-law revenue rule, the court erred in its application of the rule. In fact, the court's ruling in Trapito, which reversed the district judge’s decision to dismiss the indictment against the defendants, was called into doubt by the Second Circuit's subsequent decision in United States v. Pierce, 224 F.3d 158 (2d Cir.2000), where the court reversed the convictions of two of the Trapito defendants. The Trapito ruling was further limited by the Second Circuit's opinion in Attorney General of Canada, where the court found "the Boots reasoning persuasive" in the context of a civil action, and that, as a result, the circuit's earlier reasoning in Trapito was "not controlling here.” 268 F.3d at 123-24.

. In addition to the 13 and 11-level adjustments mentioned above, each of the defendants received an upward adjustment of 2 levels for a crime that involved more than minimal planning. The Pasquantinos received an additional 4-level increase for their organizing role in the offense. Arthur Hilts received a 3-level decrease for his minimal role in the offense.