International Taxes and Crimes: The “Revenue Rule,” RICO, and Wire Fraud

Share this Article
Facebook Icon LinkedIn Icon Twitter Icon
Jason B. Freeman

Jason B. Freeman

Managing Member

214.984.3410
jason@freemanlaw.com

Mr. Freeman is the founding member of Freeman Law, PLLC. He is a dual-credentialed attorney-CPA, author, law professor, and trial attorney.

Mr. Freeman has been named by Chambers & Partners as among the leading tax and litigation attorneys in the United States and to U.S. News and World Report’s Best Lawyers in America list. He is a former recipient of the American Bar Association’s “On the Rise – Top 40 Young Lawyers” in America award. Mr. Freeman was named the “Leading Tax Controversy Litigation Attorney of the Year” for the State of Texas for 2019 and 2020 by AI.

Mr. Freeman has been recognized multiple times by D Magazine , a D Magazine Partner service, as one of the Best Lawyers in Dallas, and as a Super Lawyer by Super Lawyers, a Thomson Reuters service. He has previously been recognized by Super Lawyers as a Top 100 Up-And-Coming Attorney in Texas.

Mr. Freeman currently serves as the chairman of the Texas Society of CPAs (TXCPA). He is a former chairman of the Dallas Society of CPAs (TXCPA-Dallas). Mr. Freeman also served multiple terms as the President of the North Texas chapter of the American Academy of Attorney-CPAs. He has been previously recognized as the Young CPA of the Year in the State of Texas (an award given to only one CPA in the state of Texas under 40).

International Taxes and Crimes: The “Revenue Rule,” RICO, and Wire Fraud

The Revenue Rule is a common law doctrine that precludes adjudication of foreign tax claims and enforcement of foreign tax judgments in a United States court.[1] The prime justification behind the Revenue Rule is judicial comity. It arises from a concern that U.S. courts called upon to enforce another country’s laws may risk acting in a manner that cuts against the public policy of the United States.[2] Conversely, declining to uphold another country’s laws in an American court on the grounds that it violates American public policy could offend the other country. Regardless of the outcome, under the Revenue Rule, the judiciary will generally not probe into policy considerations that could affect foreign relations, as such matters are better handled by other branches of government.

 

In deciding whether a claim falls under the Rule, courts look not to form, but to substance. Thus, even if a lawsuit is not a direct tax action, if the suit would require a United States court to enforce the tax laws of another country, then adjudication is still barred by the Rule. While the Rule seems simple on its face, it quickly becomes complicated when applied to suits that are not direct tax enforcement claims, such as instances of criminal activity in the U.S. that result in tax consequences in another country. These types of claims can fall under the Racketeer Influenced and Corrupt Organization Act (RICO) or wire fraud statutes.

RICO imposes civil and criminal penalties upon enterprises involved in organized crime or patterns of racketeering activity, such as mail fraud or wire fraud.[3] When an enterprise conducts such activities in the United States to avoid taxes imposed by other countries, then the governments of those countries may attempt to recover the taxes through a civil RICO suit in an American court on the theory that the RICO violations caused damage to the “property” of the government—namely, its tax revenue. When a government takes action this way, courts are likely to apply the Revenue Rule to bar the suit on the grounds that the government is, in substance, using alternative theories to seek enforcement of its tax laws through American courts.

In the criminal context, however, the Supreme Court held in Pasquantino v. United States that the Revenue Rule does not bar wire fraud prosecution initiated by the United States when the basis of the wire fraud claim is evasion of foreign taxes.[4] While the Supreme Court recognized the validity of the Revenue Rule in cases where a country seeks to recover tax liability through judicial action, the Court distinguished these types of cases from “criminal prosecution[s] brought by the United States in its sovereign capacity to punish domestic criminal conduct.” Further, the Court asserted that the Revenue Rule has not been used by a court to bar an action “that had as its primary object the deterrence and punishment of fraudulent conduct.” This object, according to the Court, centers around a “substantial domestic regulatory interest” that is “entirely independent of foreign tax enforcement.” This is true even though the remedy for wire fraud crimes is restitution to the injured party.[5] In effect, this results in the United States compelling payment of foreign taxes to a foreign government.

In support of this ruling, the Court examined the traditional policy justifications behind the Revenue Rule and found that allowing United States prosecution of wire fraud crimes that resulted in foreign tax evasion would not implicate those concerns. While proceeding with this type of claim would require courts to “recognize foreign law to determine whether the defendant violated U.S. law,” the federal government’s role in initiating prosecution implies a consideration by the executive branch of the possible impact of the suit on foreign policy.

Further, an American statute criminalizing the fraudulent use of interstate wires reflects solely the policy of both the executive branch and the legislative branch; therefore, the Court found no risk that the United States would be forced to “advance the policies of [another country] illegitimately.” Finally, the Court found that the judiciary would not be incompetent to consider foreign tax law when (1) the issue of foreign tax law is not unmanageably complex, and (2) the Federal Rules of Criminal Procedure provide guidance for the interpretation of foreign law. The Court has clearly taken a strong position that criminal suits in the U.S. that implicate foreign tax laws will not be barred by the Revenue Rule.  Pasquantino leaves open the question, however, of whether the Revenue Rule applies to civil suits brought by foreign governments in the United States that implicate foreign tax laws.

The Revenue Rule is not necessarily absolute. As a common-law rule, it could be eliminated or altered via treaty.[6] The United States is not the only country that recognizes the Rule. Courts in Canada, England, and Ireland have applied the Revenue Rule to bar certain tax collection suits as well.

[1] Republic of Honduras v. Philip Morris Companies, Inc., 341 F.3d 1253, 1256 (11th Cir. 2003).

[2] Moore v. Mitchell, 30 F.2d 600, 604 (2d Cir. 1929) (Hand, L., Concurring), aff’d, 281 U.S. 18, 50 S. Ct. 175, 74 L. Ed. 673 (1930) (“Even in the case of ordinary municipal liabilities, a court will not recognize those arising in a foreign state, if they run counter to the ‘settled public policy‘ of its own.”).

[3] Attorney Gen. of Canada v. R.J. Reynolds Tobacco Holdings, Inc., 268 F.3d 103, 107 (2d Cir. 2001) (quoting the legislative history of RICO).

[4] Pasquantino v. United States, 544 U.S. 349, 362 (2005).

[5] See id. at 382 (Ginsburg, J., Dissenting).

[6] See Her Majesty Queen in Right of Province of British Columbia v. Gilbertson, 597 F.2d 1161, 1165 (9th Cir. 1979).

 

White Collar Defense Lawyers

Accused of tax evasion, wire fraud,  conspiracy, or a RICO crime?  Contact us as soon as possible to discuss your rights and the ways we can assist in your defenseWe handle all types of cases, including complex international tax fraud allegations. Schedule a Consultations Today!