2nd Circuit Dismisses EU Suit to Recover Lost Tax Revenue

Citing the common law doctrine known as the “revenue rule,” the 2nd Circuit, on remand from the Supreme Court, dismissed a civil suit brought by the European Union under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961-1968 (“RICO”) against RJR Nabisco, Inc., which suit sought to recover lost tax revenues due to alleged smuggling. European Community v. RJR Nabisco, Inc., Dcket Nos. 02-7325 (L); 9/13/05.

[The EU alleged RJR had participated in a smuggling enterprise within the meaning of RICO and had committed various predicate acts of racketeering, including mail and wire fraud, and money laundering. The complaint sought to recover treble damages pursuant to RICO for duties and taxes not paid on cigarettes; and injunctive relief to end smuggling and to ensure future compliance.]

The appeals court initially observed that under the “revenue rule”  courts of one nation will not enforce final tax judgments or unadjudicated tax claims of other nations. The rationale for the rule is predicated in the belief that the judiciary should not evaluate enactments of a foreign sovereign. The EU asserted, however, that the the revenue rule had been abrogated by amendments to RICO embodied in the Patriot Act.

The court acknowledged that various provisions in the Patriot Act did address the conduct alleged. However, it found that neither the amendments nor legislative history evidenced a Congressional intent to abrogate the doctrine, which was necessary for two reasons: First, serious policy implications and “embarrassment” might follow if one nation’s courts analyzed the validity of another’s laws; and second, the executive, rather than the judicial branch, should decide when one nation should enforce another nation’s tax laws.

The EU cited Pasquantino v. U.S., 125 S.Ct. 1766 (2005) for the proposition that the revenue rule had not barred prosecution under 18 U.S.C. § 1343 where Canada had been fraudulently deprived of its right to collect tax money. Although prosecution did in a sense “enforce” Canadian law, the court found the connection was nevertheless “too attenuated” to be significant, since the U.S., rather than a foreign sovereign, had commenced the prosecution.

The court concluded that where a domestic sovereign enforces its own penal law, there is little risk of causing the evil against which the revenue rule was traditionally thought to guard: judicial evaluation of “policy-laden” enactments of foreign sovereigns. However, where the executive branch does not expressly consent to the litigation, separation of powers militates against the judiciary being drawn into foreign relations issues better handled by the political branches of government.

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