Supreme Court Dispatches

Bootleg, Eh?

The ineffable, unknowable mystery of the Canadian tax code.

I am sometimes asked by the people who pay me how I choose which cases to cover in the Supreme Court. The calculus isn’t complicated: I make it a general rule to cover any case that deals with drugs, alcohol, small children, stupid criminals, brazen policemen, nakedness, sex, pornography, love, lust, and strippers. But today I find myself forced to add another subject area to this intriguing list: the Canadian tax code.

Not a lot of reporters attend this morning’s oral argument in Pasquantino v. United States,perhaps because it is, as Justice Ruth Bader Ginsburg observes, a very odd case. The trouble started when David Pasquantino and his brother Carl began smuggling cheap booze into Canada for sale on the black market. They’d probably argue that the trouble really started when dopey Canada hiked up the taxes on alcohol to the point that, between federal and provincial sales taxes and a “sin” tax on top of all that, the average total tax on Canadian alcohol is 83 percent (as opposed to 44 percent in the United States). Here was a situation begging for a little bit of American Robin Hoodery—the defendants were actually doing Canadians a service if you think about it: making crap vodka available at every income bracket across North America.

The brothers and one of their drivers were charged in U.S. court with violating the federal wire-fraud statute—18 U.S.C. Section 1343. The government alleged that they broke this law by arranging to buy and transport cheap hooch with phone calls between New York and Maryland, thus defrauding the Canadian government of an alleged $3 million in duty and taxes. Throughout the morning, the question lingers: If these guys stole from the Canadians, why isn’t Canada prosecuting them? The answer must have something to do with the Bush administration’s ongoing war on criminals-without-borders. That or the Mounties are just too stoned to care.

After a jury trial, the defendants were found guilty and sentenced to five years in prison. A divided panel of the 4th Circuit Court of Appeals reversed their convictions, holding that a hoary common-law doctrine, the “revenue rule,” barred prosecution by the U.S. government for violation of Canadian tax law. The revenue rule dates back several hundred years to England, where the beer is generally better anyhow. The doctrine bars the courts of one country from prosecuting folks for violating other country’s tax laws. The theory was that this promotes national sovereignty and restricts the local effects of incomprehensible foreign policies. If Canada wants to enforce its own wacky tax code, goes the thinking, it should do so. But the Americans shouldn’t be in the business of carrying Canada’s water. Or beer, for that matter.

When the 4th Circuit reheard the case en banc,they flipped positions. By a 9-2 vote, the appeals court found the convictions could stand because this “revenue rule” prohibits the U.S. government from “enforcing” foreign tax judgments; it doesn’t bar the government from “recognizing” them. No, really, there’s a difference, they say. I still can’t figure out the difference, but maybe that’s why I’m just a reporter. Since there is a split between the 1st Circuit (which doesn’t allow such prosecutions) and the 2nd Circuit (which does), the high court agreed to take the case.

It’s always fun when the court hears a plain old vanilla statutory construction case. It helps clarify, for one thing, which of the justices can read.

Laura Brill represents the Pasquantino brothers and Arthur Hilts, the driver. She opens by listing five reasons this prosecution is outside the scope of what American courts should be doing. Justice Sandra Day O’Connor stops her, incredulous: “How can you not allow the United States to use its wire-fraud statute to apprehend someone carrying out the scheme of smuggling?”

Brill starts to respond, but Justice Antonin Scalia interrupts to remind her that there is an antismuggling statute that might have applied in this case, but it only works “for countries with reciprocity” and that if “Canada won’t do this for the United States … that suggests we don’t want to do this for Canada.”

Brill notes that the allegations against the Pasquantinos weren’t even adjudicated in Canadian courts: The American court, by calculating the tax burden and setting the penalties, “became an apparatus of the government of Canada.” Sounds almost communist when she puts it that way.

Brill explains that foreign tax laws, unlike foreign contracts, are based on policy—often policy, such as customs law, aimed at disadvantaging foreign countries. Why would the United States be enforcing those policies on Canada’s behalf? She goes on to argue that, even though the federal wire-fraud * statute is worded with extraordinary breadth (criminalizing “any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent purposes …”), the unpaid taxes in this case cannot be viewed as either “money” or “property.” Again O’Connor launches an acid bomb: “Tax revenues are not property in your view?”

Ginsburg wonders why the Canadian government hasn’t been bothered to prosecute this case. Brill replies that an indictment was filed, but no effort to extradite the defendants was ever made. Lazy Mounties. Anthony Kennedy, like O’Connor, can’t believe the United States can’t prosecute bad guys anywhere around the globe: “The government has an interest in saying, ‘Look—if you want to smuggle, have your system in Canada. But don’t use our wire system.’ ”

Ginsburg asks whether the defendants’ sentences were increased based on the magnitude of the fraud, and Brill replies that yes, the court ratcheted up their six-month sentences to 57 months “based on our courts making an assessment of Canadian law.”

Deputy Solicitor General Michael Dreeben is one of the best oral advocates around, but he faces an uphill battle today. When he starts to explain how it’s in the United States’ interest to prosecute these guys for being bad, Scalia retorts: “But that’s true for everything. The more broadly you read the statute, the more bad guys we’re gonna catch!” He adds, “What about people who evade Cuban tax law, which many think is unjust? This gets us into foreign policy.” This leads Justice Stephen Breyer to wonder whether we would similarly go after White Russians fleeing from Lenin, which devolves into a lengthy laundry list of other countries with wacky tax policies, including Belarus, Ukraine, and Vietnam. Foreign tax codes, he continues to intone, are “complex.” Why are American courts messing with them at all?

Dreeben reminds him that the government isn’t charging every tax evader in America—just those who use the phones to commit wire fraud. So, Breyer is forced to ape the phone call between the disgruntled White Russian, plotting to evade Lenin’s onerous Russian tax regime, and his cousin in Brooklyn: “Don’t tell Lenin we’re coming,” he hisses. He grins at Dreeben. I’ll give you wire fraud, baby. … That and some time travel.

Justice John Paul Stevens, filling Chief Justice Rehnquist’s tap shoes while the chief recuperates from cancer treatments, is of the kinder, gentler school of presiding: “You said there were four federal interests,” he says, “but you’ve only been able to identify one.”

Later Ginsburg points out that “Congress has said that with respect to wire fraud, restitution to victims is mandatory,” yet “here, restitution sounds like the U.S. enforcing Canadian tax law,” so no restitution was required of the brothers. Dreeben insists that the United States has its own independent reasons for prosecuting these guys, as distinct from Canada’s. When Ginsburg characterizes the revenue rule as “one country doesn’t mess with another country’s taxes,” Dreeben is quick to correct her: The rule means the United States won’t act at the behest of some foreign country to enforce that country’s tax rules. It doesn’t mean the United States walks away when it’s in its interest to prosecute fraud.

In her rebuttal, Laura Brill says this is not accurate: “The common-law cases universally say it does not matter who is bringing the claim,” she argues. The United States has no independent interest in prosecuting these men since they never even committed fraud here. Whatever misstatements were made at the Canadian border happened in Ontario, not here. Aside from Kennedy and O’Connor, it’s not clear that anyone else on the court agrees that Canadians are too lame to enforce their own tax law—or that American judges have the ample free time necessary to ponder the hidden nuance of foreign tax codes in general.


By the way, for those of you who think “working at home” is just a euphemism for catching up on Oprah in your Garanimals, kindly note that Chief Justice William H. Rehnquist authored one of the two unanimous opinions handed down today—in Leocal v. Ashcroft, holding that a drunken driving accident isn’t a “crime of violence” permitting the government to deport a permanent resident. Hats off to the chief, from someone who plans to be in her own Garanimals by the time you read this.

Correction, Nov. 10, 2004: This article originally referred to “the federal wiretap statute” in this sentence, as opposed to the federal wire fraud statute, which was at issue in the case. (Return to corrected sentence.)