Originally published by Ruchelman P.L.L.C. in Insights 6, no. 9 (2019).
INTRODUCTION
When asking a U.S. tax adviser to describe the "revenue rule," it would not be surprising for the adviser to say that it refers to formal guidance issued by the I.R.S. that can be relied on by other taxpayers as authority for a position taken in a tax return.
However, the term has a much different meaning in a cross-border context. As explained by one author:
The revenue rule, a common law doctrine with origins in the eighteenth century, is a battleground in the twenty-first century. . . . In its modern form the revenue rule generally allows courts to decline entertaining suits or enforcing foreign tax judgments or foreign revenue laws.1
In a U.S. Supreme Court case of this century, the revenue rule is described in the following language:
Since the late 19th and early 20th century, courts have treated the common-law revenue rule as a corollary of the rule that, as Chief Justice Marshall put it, '[t]he Courts of no country execute the penal laws of another.' . . . The rule against the enforcement of foreign penal statutes, in turn, tracked the common-law principle that crimes could only be prosecuted in the country in which they were committed. The basis for inferring the revenue rule from the rule against foreign penal enforcement was an analogy between foreign revenue laws and penal laws [citations omitted].2
The revenue rule can be overridden by treaty, and where it has, the U.S. and Canadian tax authorities have, in recent years, collected the taxes due in the other country.
This article will explore (i) the general development of the revenue rule, (ii) the applicable provisions of the Canada-U.S. Income Tax Treaty (the "Treaty") allowing for assistance in collection and exchanges of information, (iii) one U.S. wire fraud case, and (iv) several recent cases in the U.S. where taxpayers raised creative arguments to attack the validity of the Treaty provisions but to no avail.
DEVELOPMENT OF THE COMMON LAW RULE
Under common law, a court will not enforce the revenue laws of other countries. In the English case King of the Hellenes v. Brostron,3 Rowlatt J. emphasized this revenue rule, stating:
It is perfectly elementary that a foreign government cannot come here – nor will the courts of other countries allow our Government to go there – and sue a person found in that jurisdiction for taxes levied and which he is declared to be liable in the country to which he belongs.
The Dutch government was also precluded from collecting Dutch succession duties levied on a Dutch estate with an English-resident beneficiary. Tomlin J. in re Visser, The Queen of Holland v. Drukker4 stated:
My own opinion is that there is a well-recognized rule, which has been enforced for at least 200 years or thereabouts, under which these courts will not collect the taxes of foreign States for the benefit of the sovereigns of those foreign States; and this is one of those actions which these courts will not entertain.
The reasons for not enforcing a foreign state's revenue laws was explained by the House of Lords in Government of India, Ministry of Finance (Revenue Division) v. Taylor:5
If one State could collect its taxes through the courts of another, it would have arisen through what is described, vaguely perhaps, as comity or the general practice of nations inter se. . . . Tax gathering is an administrative act, though in settling the quantum as well as in the final act of collection judicial process may be involved. Our courts will apply foreign law if it is the proper law of a contract, the subject of a suit. Tax gathering is not a matter of contract but of authority and administration between the State and those within its jurisdiction. If one considers the initial stages of the process, which may, as the records of your Lordships' House show, be intricate and prolonged, it would be remarkable comity if State B allowed the time of its court to be expended in assisting in this regard the tax gatherers of State A.
Footnotes
1. Mallinak, "The Revenue Rule: A Common Law Doctrine for the Twenty-First Century," 16 Duke J. Comp. & Int'l L. 79 (2006)).
2. Pasquantino v. U.S. , 544 U.S. 349, 360 et. seq, (2005).
3. (1923) 16 LI. L.Rep. 190, 193.
4. [1928] Ch. 877, 884; 44 T.L.R. 692.
5. [1955] A.C. 491. The factual background in this case is as follows. The government of India sought to enforce and collect capital gains tax from the sale of an English company that carried on business in India. The English company filed for voluntary liquidation and the Indian government brought its claim in the English bankruptcy proceeding. The House of Lords decision was unanimous.
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