Supreme Court: Foreign Taxes Subject to Wire Fraud

May 2, 2005

On April 26, 2005, the Supreme Court decided that “a plot to defraud a foreign government of tax revenue violates the federal wire fraud statute.” Pasquantino v. U.S. Carl J. Pasquantino and two others were convicted under the wire fraud statute after they smuggled liquor into Canada to avoid paying taxes on the liquor. They violated the wire fraud statute when they made phone calls from New York to Maryland in order to buy the liquor they eventually smuggled. They hid the liquor in vehicles and smuggled it over the border. Petitioners were convicted and appealed to the Fourth Circuit. The Fourth Circuit originally reversed the convictions, but the Fourth Circuit then granted a rehearing and affirmed the original convictions. The Supreme Court also affirmed the convictions.

First, the Supreme Court determined that petitioners’ acts fell under the wire fraud statute. The petitioners argued that they never took any property or planned to defraud anyone. But, Pasquantino schemed to defraud by hiding the liquor. They stole tax money from the Canadian government by failing to pay it. Second, the Court determined that applying the wire fraud statute to cases where foreign taxes were evaded did not break the common-law revenue rule prohibiting courts from collecting tax claims by foreign governments. Because petitioners were being prosecuted for the domestic crime of placing interstate calls to commit fraud, the common-law revenue rule did not apply. Even though the petitioners had to pay back the money under the Mandatory Victims Restitution Act of 1996, the Court said this was not really paying taxes to a foreign government. It was just part of the criminal punishment.

This case could extend the wire fraud statute to criminal violations of foreign customs law where the foreign government is owed money. Beyond simply repaying the foreign government, the U.S. would have the option of bringing criminal charges.