Revenue Rule Does Not Bar Foreign Tax Authority’s Fraud Suit to Recover Refund Payments Where No Tax Was Owed

1. Introduction

Skatteforvaltningen v. Markowitz (2d Cir. Aug. 31, 2026) is a bellwether appeal from the Southern District of New York’s multidistrict litigation concerning Denmark’s effort to recover hundreds of millions of dollars paid out on dividend-withholding “refund” claims tied to purported trading in Danish equities.

The plaintiff-appellee, Skatteforvaltningen (“Skat”)—Denmark’s tax authority—won a jury verdict for fraud against Richard and Jocelyn Markowitz, John and Elizabeth van Merkensteijn, and numerous pension plans they controlled. Defendants conceded a decisive factual point at trial: they were never entitled to the claimed refunds because the underlying “trading” did not result in beneficial ownership of Danish shares, receipt of dividends, or any Danish withholding tax. Their defense was lack of scienter: they claimed they were duped by their London-based trading partner (Solo Capital / Sanjay Shah).

On appeal, defendants advanced three primary challenges: (i) the entire suit is barred by the common law revenue rule; (ii) key state-of-mind evidence was improperly excluded (Federal Rules of Evidence 804(b)(1) and 403); and (iii) the evidence was insufficient to impose fraud liability on the spouses via agency.

2. Summary of the Opinion

The Second Circuit (Nardini, LEE, and Robinson, JJ.) affirmed the judgments. The court held:

  • Revenue rule: Skat’s claims are not barred because the suit does not seek to enforce Danish tax law or collect Danish taxes. With defendants conceding no dividends, no withholding, and thus no Danish tax owed or paid, the case is “garden variety commercial fraud” to recover money induced by false claims—not collection of a foreign tax liability.
  • Evidence: The district court did not abuse its discretion in excluding (a) Shah’s U.K. testimony under Rule 804(b)(1) (no sufficiently “similar motive” for Skat to develop testimony as to these defendants) and (b) various lawyer/tax-related items under Rule 403 as minimally probative and potentially confusing/misleading.
  • Agency/spousal liability: Sufficient evidence supported the finding that Jocelyn and Elizabeth authorized their husbands to act on their behalf regarding the plans and investments, and that the fraud fell within the scope of that authority.

3. Analysis

3.1. Precedents Cited

(a) Supreme Court framing of the revenue rule

The opinion’s organizing authority is Pasquantino v. United States, which describes the revenue rule as historically barring courts from enforcing foreign tax laws and treating it as a corollary of the rule that “[t]he Courts of no country execute the penal laws of another” (quoting The Antelope). The Second Circuit drew from Pasquantino two methodological points:

  1. The inquiry is substance over form: whether the action seeks, directly or indirectly, to enforce or collect foreign taxes.
  2. Where precedent does not supply a clear categorical bar, courts consider the purposes of the rule—especially avoiding judicial evaluation of “policy-laden enactments of other sovereigns” and attendant international friction.

(b) Second Circuit revenue-rule civil enforcement cases

Defendants relied heavily on the Second Circuit’s civil RICO revenue-rule decisions: Att'y Gen. of Canada v. R.J. Reynolds Tobacco Holdings, Inc. (“Canada”), European Cmty. v. RJR Nabisco, Inc. (“EC I”), and European Cmty. v. RJR Nabisco, Inc. (“EC II”).

The court treated these cases as the relevant “barred” paradigm: foreign sovereigns seeking damages equal to lost tax revenues from tax evasion (smuggling-related duties and taxes). Those were direct (or at least clearly tax-revenue) recovery actions—precisely what the revenue rule forbids.

The decisive distinction: in Skatteforvaltningen v. Markowitz, defendants conceded they were never taxpayers as to the supposed Danish dividends—no shares, no dividends, no withholding, no unpaid tax—so Skat was not trying to recover “lost tax revenues” but to recover money paid out because of false representations.

(c) “Intent-focused” non-bar cases and the role of foreign-law adjudication

The opinion invoked United States v. Trapilo to underscore that where liability turns on defendants’ intent to defraud rather than adjudicating the validity or application of foreign revenue law, revenue-rule concerns are diminished. With defendants’ concession eliminating contested Danish-law questions (such as beneficial ownership disputes), the trial centered on defendants’ knowledge and intent.

(d) A frequently cited state case and the court’s limitation of its reach

Defendants invoked Banco Do Brasil, S.A. v. A.C. Israel Commodity Co. to argue that fraud claims can still be impermissible foreign revenue enforcement. The Second Circuit treated Banco Do Brasil as standing for an uncontroversial principle: a foreign sovereign cannot relabel a tax-collection effort as a different tort. But it refused to extend Banco Do Brasil to cover a suit where no tax was owed and the claim is to recover money obtained by deception.

(e) Appellate standards and evidence rulings

On evidence, the court relied on: United States v. DiNapoli (Rule 804(b)(1) “similar motive”), United States v. Kandic (abuse-of-discretion review), Old Chief v. United States (availability of alternative proof informs Rule 403 balancing), and harmless-error principles drawn from cases including Utica Mut. Ins. Co. v. Munich Reinsurance Am., Inc. and Lore v. City of Syracuse.

(f) Agency doctrine and imputation

For spousal liability, the court applied New York agency principles, citing N.Y. Marine & Gen. Ins. Co. v. Tradeline (L.L.C.), Citibank, N.A. v. Nyland (CF8) Ltd., Vista Food Exch., Inc. v. Comercial De Alimentos Sanchez, and the imputation rationale articulated in Kirschner v. KPMG LLP. It also rejected attempts to limit authority to “investing for retirement” as too narrow given evidence of broad delegated financial control.

3.2. Legal Reasoning

(a) The new clarifying rule: no “tax claim” when the sovereign seeks return of fraud-induced disbursements and no tax was owed

The Second Circuit’s central move is conceptual: it classifies Skat’s case as one to recover stolen funds rather than one to collect foreign taxes. The court’s reasoning hinges on defendants’ concession: because defendants never owned the shares and never received dividends, they never owed or paid Danish withholding tax. Therefore, Skat’s suit cannot be characterized as collecting a foreign tax obligation “at its core.”

The court analogized the claim to a fabricated-invoice fraud: if someone submits fake invoices to a government agency and is paid, a suit to recover those payments is not “enforcement” of the agency’s regulatory scheme; it is ordinary fraud recovery. Here, the Danish tax system was merely the instrument of the deception.

(b) Narrowing the “fraud exception” critique

The court expressly rejected the idea that it was creating a categorical “fraud exception” to the revenue rule. Instead, it tied its holding to the nature of this fraud: it was not intertwined with adjudicating a tax obligation (e.g., inflated refunds on real dividends, fabricated deductions, or evaded taxes), but rather involved refund claims concerning events that never occurred.

(c) Purpose-based confirmation: minimal foreign-law entanglement and reduced sovereignty friction

Echoing Pasquantino v. United States, the court emphasized that the “principal evil” is judicial evaluation of another sovereign’s policy enactments. With defendants’ concession, the case required no meaningful judicial parsing of Danish tax policy or the validity of Danish revenue choices—only a fact question of defendants’ intent.

The court also dismissed the idea that denying a forum would reduce friction; if anything, closing U.S. courts to a foreign sovereign allegedly defrauded by U.S. actors could itself provoke friction.

(d) Treaty arguments (Denmark/Japan): assistance-in-collection clauses are about taxes owed, not recovery of never-owed payouts

Defendants argued that tax treaties (the U.S.-Japan protocol and U.S.-Denmark treaty) treat recovery of fraudulent refunds as “tax claims,” implying judicial relief should be barred. The court read those provisions as addressing intergovernmental assistance in collecting taxes due (including scenarios involving fraud that produces an underpayment), not as speaking to civil fraud suits seeking return of funds where no tax was ever owed.

(e) Evidence rulings: deference to trial management and relevance to the only live issue (scienter)

  • Rule 804(b)(1): The court agreed Skat lacked a sufficiently “similar motive” in U.K. litigation to develop testimony about whether Shah disclosed the scheme to these particular defendants, since these defendants were not parties there and the issue was “incidental” in that case.
  • Rule 403 (law-firm opinion; attorney emails; IRS forms): With entitlement conceded, materials assuming legitimate trades had limited probative value and carried risk of juror confusion (i.e., “lawyers were involved, therefore no fraud”). The court also relied on “alternative proof” actually presented (e.g., testimony and stipulations) to find exclusion well within discretion and, in any event, harmless.

(f) Agency and spouses: broad delegated financial authority can encompass wrongful means used to pursue the authorized objective

The court held the jury could find actual authority based on the wives’ testimony and conduct: forming LLCs and plans, signing documents, authorizing husbands (and staff) to act for the plans, and broadly delegating household finances. The court rejected the argument that authority to “invest” cannot include fraud; under New York law, where an agent acts within the scope of authority to pursue the principal’s objectives, the principal can be liable even if the agent used fraudulent means.

3.3. Impact

(a) Revenue-rule boundary clarification in civil suits by foreign tax authorities

The decision clarifies—at least within the Second Circuit—that the revenue rule does not categorically shield U.S. defendants from civil liability merely because a foreign tax authority was the victim and the fraud exploited tax-refund machinery. Where the sovereign seeks return of fraud-induced disbursements and the defendants conceded (or the proof shows) that no underlying tax was owed, the case is treated as non-tax commercial fraud rather than foreign tax enforcement.

(b) Litigation strategy consequences

  • Defendants’ concessions can reshape the revenue-rule analysis: By conceding no shares/dividends/withholding, defendants eliminated the foreign-law adjudication hook and narrowed the case to intent—making a revenue-rule defense substantially harder.
  • Evidence framing: “We consulted lawyers / filed IRS forms” will be scrutinized for relevance to the precise misstatement and scienter at issue, and may be excluded under Rule 403 if it risks confusing “legal compliance in one domain” with truthfulness in another.
  • Agency exposure in family/closely held structures: Broad delegation plus affirmative steps to create and benefit from investment entities can support vicarious fraud liability even for spouses who deny knowledge.

(c) Relationship to cross-border fraud recovery

The opinion strengthens the availability of U.S. civil forums for foreign sovereigns seeking to recover funds lost to complex, cross-border financial frauds that “touch” tax administration but do not require adjudicating a foreign tax obligation. It also signals that courts will be attentive to whether a case truly seeks “tax revenues” (as in smuggling/evasion cases like “Canada”) or seeks return of payments made because of deception.

4. Complex Concepts Simplified

  • Common law revenue rule: A judge-made doctrine that generally prevents U.S. courts from hearing cases whose real aim is to enforce a foreign country’s tax laws or collect its taxes. The key question is whether the suit is, in substance, about collecting taxes owed (barred) or about something else (sometimes allowed).
  • Direct vs. indirect enforcement: “Direct” is essentially a suit to recover unpaid taxes. “Indirect” is a suit that would give extraterritorial effect to foreign tax enforcement mechanisms (for example, shifting enforcement costs or otherwise substituting for foreign tax collection).
  • Rule 804(b)(1) former testimony: Prior testimony can be admitted when the witness is unavailable, but only if the party against whom it is offered previously had a similar motive and opportunity to examine the witness on the same issue.
  • Rule 403 balancing: Even relevant evidence can be excluded if it is likely to confuse the jury or waste time and adds little probative value—especially when the point can be shown through other evidence.
  • Agency (actual authority): If you authorize someone to act for you and subject to your control, you can be responsible for what they do within that authorization. Under New York law, the principal can be liable even if the agent used fraudulent means to pursue the principal’s objective.

5. Conclusion

Skatteforvaltningen v. Markowitz draws a practical line around the revenue rule: a foreign tax authority’s civil action to recover money paid out on wholly false refund claims is not transformed into barred “tax enforcement” where defendants never owed any tax. With foreign-law adjudication largely absent (especially after defendants’ concession), the case fits ordinary fraud principles, and the court saw no sovereignty or separation-of-powers rationale requiring dismissal.

The decision also reinforces deferential review of trial-level evidentiary management in intent-centric fraud trials and highlights the reach of agency doctrine in family-controlled investment structures—where broad delegated financial authority can support vicarious liability even for principals claiming ignorance of the agent’s fraudulent methods.