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Unassessed Taxes and Injury Under RICO

Below, Stanford Law School’s Brian Goldman recaps Tuesday’s oral argument in Hemi Group v. City of New York. Brian’s earlier preview of the case is available here. Check the Hemi Group v. City of New York (08-969) SCOTUSwiki page for additional updates.

At oral argument on November 3 in Hemi Group v. City of New York, the Court wrestled with the case’s two primary questions:  First, do unassessed taxes fit within RICO’s definition of “property,” such that treble damages can be sought when a civil defendant commits a predicate act that deprives a local government of the ability to collect taxes?  Second, were the defendant’s actions here – running an internet cigarette business that advertised products as “tax free” to customers in high tobacco tax jurisdictions, and then failing to comply with federal law requiring that sales be reported to purchasers’ states to facilitate tax collection – a proximate cause of the City’s loss?

On the first question – one that had divided the courts of appeals – counsel for Hemi Group, Randolph Barnhouse, encountered sharp resistance from the bench.  Though he attempted to distinguish between the opportunity to collect taxes – an inchoate sovereign interest – and tax revenues themselves, the Court appeared to view this as a distinction without a difference.  The Chief Justice, for example, noted that “a lawsuit with a potential recovery [is] regarded as property of an individual,” and Justice Ginsburg referred to Pasquantino v. United States, a 2005 case in which the Court held that Canada’s right to receive tax revenue was “property” within the meaning of the federal wire fraud statute.  Barnhouse responded that RICO’s definition of “property” is narrower than in other criminal statutes.  Moreover, he suggested that because the amount of taxes owed the City could not yet be calculated, no cognizable property interest existed.  Justice Scalia, who brought the courtroom to laughter an impressive four times over the course of the hour, dismissed that point as a simple issue of damages, which the City would have to prove later at trial.

Leonard Koerner, arguing for the City, faced significant challenges of his own.  Justice Breyer voiced concern over the potential repercussions of the City’s position: could California try to close its current budget deficit by using RICO to seek treble damages from “every corporation that files an income tax return and makes two false statements”?  Koerner noted that he couldn’t “dispute [the] fact pattern” – a concession that seemed to alarm Justice Kennedy.  Moreover, the Chief Justice and Justice Kennedy expressed concern that the City would be able to prosecute any mail-order company whose customers did not pay tax.  But Koerner argued that, notwithstanding other possible local government uses of RICO, Congress had made clear its intent to place cigarette taxes within RICO’s reach by adding violations of the Cigarette Contraband Trafficking Act as predicate offenses under RICO.  And in a variant on an “unclean hands” argument, Koerner observed that it is disingenuous for Hemi Group to argue that the lost taxes are not property because they were never assessed, when the City was prevented from assessing the taxes by the Group’s failure to provide the names of cigarette purchasers as required by law.

On the second question, Hemi Group’s challenge seemed to gain more traction.  Barnhouse contended that any injury to the City was indirect, because individual purchasers’ decisions not to pay the use taxes they owed constituted an independent intervening force.  Justices Alito, Breyer, and Ginsburg seemed skeptical that any causal link to Hemi Group was attenuated, given the Group’s heavy advertising of “tax free” cigarettes and the City’s inability to assess taxes without the sales reports the Group was required to provide.  In his argument, Koerner picked up on this point, faulting Hemi Group for “leading the consumer to believe they didn’t have an obligation to pay.”  Justice Scalia wasn’t so sure that customers were actually led astray by the website: “I’ve known a lot of New Yorkers, and not many of them are that gullible.”  And the Chief Justice suggested that “[t]he injury is directly caused by the consumers who don’t pay the taxes.”  Koerner acknowledged that, to prove causation, the City would have to show at trial that it could (and would) have actually collected taxes had it received the list of purchasers, but he expressed confidence the City could do so.  He maintained that, because Hemi Group’s “entire business plan is based on not paying tax,” its fraudulent acts were a proximate cause of the City’s injury.

Because she was a member of the Second Circuit panel that issued the decision below, Justice Sotomayor did not participate in Tuesday’s argument.  Should the Court divide evenly, the lower court opinion will be left undisturbed.