Yet Another Imaginative Use of RICO: A Tax Grab

By November 2, 2009Briefly Legal, Taxation

The U.S. Supreme Court begins two weeks of oral arguments today. (Schedule.) The case we’re watching most closely this week will be argued Tuesday, Hemi Group v. New York, NY. The question presented:

Whether city government meets the Racketeer Influenced and Corrupt Organizations Act standing requirement that a plaintiff be directly injured in its “business or property” by alleging non commercial injury resulting from nonpayment of taxes by non litigant third parties.

In other words, at issue is whether New York City can sue online cigarette sellers under RICO for not paying city taxes. The NAM’s Legal Beagle search engine summarizes the case and its potential consequences.

Manufacturers are very concerned about this effort by state and local jurisdictions to skirt constitutional limits on the extraterritorial reach of their laws. If New York can assert jurisdiction over a company that has no physical presence in the city, and then claim a RICO violation for failure to collect sales taxes, along with treble damages, this could revolutionize tax enforcement around the country. It is another example of efforts by states to greatly expand the traditional requirement that it may only exercise jurisdiction over persons or companies with a physical presence, or nexus, in the state.

One of the NAM’s top priorities in the legal sphere right now is resisting increasing and imaginative efforts by state governments, mostly, to get at business income generated in other venues.  (See, for example, Ford Motor Co. v. Delaware Director of Revenue.) You can understand how profligate governments would want to find new sources of revenues, but bootstrapping these revenue grabs creates an even more chaotic, burdensome tax system and a business climate hostile to job creation.

See also Scotusblog, “Does RICO Confer Standing Upon State and Local Governments? (Hemi Group, LLC v. City of New York Argument Preview).”

Being heard today — and the case getting the bulk of the news coverage — is Jones v. Harris Associates, dealing with compensation for mutual fund investment managers. Former SEC Commissioner Paul Atkins examines the case in today’s Wall Street Journal in an op-ed, “Tort Lawyers Target Mutual Fund“:

If you invest in mutual funds, you should be worried about a case argued today at the U.S. Supreme Court. The lawsuit aims at overturning the way investment managers of mutual funds are paid. The process has worked well and fairly for decades. If it is thrown out, every mutual-fund fee arrangement could end up being litigated in a federal court. This will not benefit the vast majority of investors. …The issue in Jones v. Harris Associates L.P. boils down to this: Should judges or independent directors of mutual funds determine the fees of mutual-fund investment managers?

See also Bloomberg, “Bogle Takes on Mutual Fund Industry as Top Court Considers Fees,” Reuters, “Supreme Court case to test funds’ fee structure.

UPDATE: See also Paul Schott Stevens, “The Trial Lawyers’ Latest Target: Mutual Fund

UPDATE: See also Washington Times editorial, “Stop suing yourself.”

Also on the Court’s schedule for today is Shady Grove Orthopedic Associates v. Allstate Insurance Company. The NAM’s Legal Beagle search engine summarizes the case here.

On May 4, the Supreme Court agreed to decide whether a state legislature can prohibit the federal courts from using the class action device for certain state law claims. If upheld, this decision could lead many more states to adopt legislation that prohibits the use of class actions for state law violations. If reversed, claims brought by out-of-state plaintiffs would have the procedural advantage of class-action litigation over in-state residents who must use state courts for their individual claims.

See also Scotusblog, “A new look at the “Erie doctrine”

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