Appeal from a judgment of conviction and forfeiture entered in the United States District Court for the Eastern District of New York (Charles P. Sifton, Judge) for mail fraud and racketeering relating to the failure to pay state sales taxes.
Oakes and Newman, Circuit Judges, and Keenan, District Judge.*fn* Jon O. Newman, Circuit Judge, dissenting.
Oscar Porcelli appeals a conviction on sixty-one counts of mail fraud, 18 U.S.C. § 1341 (1982), and one count of violating the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1962(c) (1982). These acts all relate to the filing of a series of -- some one hundred -- fraudulent New York State sales tax returns with respect to sales at twelve retail gasoline stations owned in whole or in part by Porcelli or one of his corporations. After a jury trial before Charles P. Sifton, Judge, in the United States District Court for the Eastern District of New York, resulting in the convictions, the jury also returned a verdict of forfeiture of $4,755,000 representing the unpaid sales taxes as well as of thirty-four of Porcelli's corporations to the United States. Porcelli was sentenced to concurrent two-year terms on each of the sixty-two counts, with the execution of all but six months suspended, and was placed on probation for a period of five years. He was ordered to make restitution to the State of New York in the amount of $4,755,000 less any sums collected by the State pursuant to the judgment of forfeiture in this case or any civil tax proceeding. Following the forfeiture verdict, Judge Sifton entered a judgment of forfeiture which directs that Porcelli forfeit the sum of $4,755,000 and his interest in thirty-four corporations to the United States. The moneys or proceeds from the properties seized are to be paid to the State of New York up to the amount of all unpaid sales taxes, interest, and civil penalties and then to the United States up to an amount equal to twice the amount of sales tax and interest paid to the State of New York. Judge Sifton also denied Porcelli's motion for a new trial on grounds of ineffective assistance of counsel.
On appeal Porcelli argues that use of the mail fraud statute violated due process, that proof of mail fraud was legally insufficient in terms of proof as to specific criminal intent and in terms of proof as to "mailings"; that the mail fraud statute does not encompass tax violations; that the Government's use of RICO to prosecute Porcelli for state sales tax underpayments violates the intent of Congress; that the RICO conviction should be reversed because there was no evidence that the enterprise charged in the indictment was conducted through racketeering activity; that the forfeitures are supported by insufficient evidence and are tainted by erroneous instructions and ambiguous special interrogatories to the jury; that the forfeitures should be reversed because they are cruel, unusual, and grossly disproportionate to the misdeeds of the retail gasoline companies involved; and that appellant was denied the effective assistance of counsel.
We think that the prosecution of a state sales tax evader for a RICO violation pushes that law to its outer limits, especially when that tax evasion was not made criminal by the state itself at the time that the fraudulent returns were filed. We nevertheless affirm the convictions (except for six counts involving only the mailing of blank forms by the State to Porcelli's companies) by virtue of the extraordinarily broad sweep of RICO and of the federal mail fraud statute and despite McNally v. United States, 483 U.S. 350, 55 U.S.L.W. 5011, 97 L. Ed. 2d 292, 107 S. Ct. 2875 (1987). We believe, however, following United States v. Horak, 833 F.2d 1235 (7th Cir. 1987), that the forfeitures were overly broad because they included corporations as to which the Government did not prove any direct receipts from the fraudulent gas station corporations, and we think that the trial judge must reconsider the defendant's claim that the forfeitures were disproportionate. We do not think that Porcelli satisfies either prong of the test of ineffective counsel under Strickland v. Washington, 466 U.S. 668, 80 L. Ed. 2d 674, 104 S. Ct. 2052 (1984). Therefore we affirm the convictions and the denial of a new trial, but we reverse the order relating to forfeiture and remand for further findings.
Viewing the evidence most favorably to the Government, twelve of defendant's retail gasoline stations filed false sales tax returns between 1978 and 1982, enabling them to omit to pay approximately $4,755,000 in state sales tax. This represented two-thirds of the $6.7 million in taxes the stations owed on sales during that period.
Porcelli first entered the retail gasoline business in 1973 in partnership with one Jimmy Garcias Sorentino. From then to 1979, the two men purchased and operated a chain of retail service stations which by 1979 had grown to fourteen in number. As of June 1, 1979, they terminated their partnership and each continued to operate seven of the stations. Each retail gasoline station was organized as a separate corporation, and we will call them the operating corporations. The real estate underlying each station was separately held by what we will call the realty corporations. Porcelli formed a new management company, Ditmas Oil Associates, Inc. ("Ditmas"). Ditmas was the parent company of the group. It had a gasoline terminal which was used to supply gasoline to the various retail outlets. Porcelli also formed a trucking company called Chamber Transport, which made deliveries from the Ditmas terminal to the various retail stations, and a security company known as MK Armored Services, which picked up the sales proceeds at the retail stations and brought them to Porcelli's central money room at Ditmas.
In 1982 Porcelli consolidated his holdings, which had increased to seventeen, into two corporations, Gaseteria Oil Corporation, Inc., and Bosbay Service Center, Inc., and ultimately into the one, Gaseteria.
There was testimony, which is supported by New York statutory authority, that retailers must register with the State and obtain a certificate of authority to collect sales taxes, and that the State mails blank sales tax returns to all registered retailers at the beginning of every sales tax quarter. The returns, setting forth the total dollar amount of quarterly sales and the sales taxes due on that amount, are required to be filed by Article 29 of the New York Tax Law (McKinney 1987).
We will return to the New York sales tax law as it pertains to petroleum products in our discussion of McNally v. United States. Suffice it to say here that Count One of the indictment lists 143 racketeering acts, numbered 1(a) through 26(h). Some of the racketeering acts involve two mailings -- one of a blank return by the State to one of Porcelli's corporations and the second of a fraudulently completed return by a Porcelli corporation to the State. A number of racketeering acts charged relate only to the second type of mailing, and six acts charged cover only the first. The parties stipulated that each of the 143 sales tax returns was mailed as described in the indictment.
A state sales tax auditor, James McGill, audited the tax returns listed in the indictment. He obtained sales data from Porcelli's suppliers reflecting the dollar value of the gasoline they provided to Porcelli's terminal or retail stations and compared that data to the sales declared by Porcelli on the tax returns. In making this comparison, McGill assumed that Porcelli sold gasoline at the same price he paid for it, thus realizing no profits at all. The parties stipulated that the gas stations did in fact sell all gasoline at a price equal to or greater than that at which it was purchased.
McGill's audit determined that during the last year of Porcelli's partnership with Garcia his corporations reported approximately $3,580,000 in sales, or only 26% of their true sales for the year. This resulted in an underpayment of sales taxes due the State of New York of some $798,000. During the three and a half years following the termination of the partnership with Garcia, i.e., from June of 1979 through 1982, Porcelli's businesses had sales of $69,600,000 but reported only $20,330,000, thereby underpaying taxes due New York State by $3,957,000. Thus the total amount of Porcelli's underpayments was the $4,755,000 previously stated.
At trial Porcelli's accountant, Murray Katz, who prepared most of the tax returns, made it clear that he did so with Porcelli's knowledge and at his urging. He related the conversation he had with Porcelli in 1979 when he realized that the oil companies supplying Porcelli generated printed summaries of their sales which, if revealed to the State tax authorities, would reveal the Porcelli operating companies' fraud. Porcelli told Katz not to worry because the State tax authorities would never obtain supplier records and compare them to his companies' returns. After Porcelli and Garcia split up, Porcelli and Katz discussed consolidating the Porcelli holdings into one corporation. They decided against doing so because they believed that a single sales tax return for all of the gas stations was more likely to be audited than individual returns filed for each station. In September 1979, Katz attempted to prepare, he testified, an accurate set of sales tax returns; when Porcelli saw the figures he told Katz that it would be impossible for him to stay in business and grow without understating his sales tax liabilities.
While Katz was working for Porcelli, Mobil Oil sued three of the operating companies and sought copies of their sales tax returns in civil discovery. Porcelli directed Katz to prepare a set of dummy tax returns setting forth the true sales volume of the operating companies, and Katz did so. The dummy returns showed substantially greater sales than the amounts shown on the returns actually filed.
There was further evidence of Porcelli's involvement in the tax fraud: He received daily sales reports concerning each station, he set the prices charged for gasoline, and he had monthly summaries of sales in gallons and dollars which were kept in his office, as well as weekly statements of cash balances in corporate bank accounts. He had previously admitted that he had total control over his business, "purchasing, selling, decision making, building, firing, hiring, everything," claiming that he did not delegate authority to, or share decision-making responsibilities with, anyone. When the State started an audit of one of Porcelli's retail stations, "Gasaver," Porcelli, according to Katz, insisted on preparing its returns himself and did so.
By January of 1982, Porcelli had received notices from state authorities that he owed millions of dollars in back sales taxes plus interest and penalties, but he continued to employ and rely upon Katz. Indeed, according to Katz, Porcelli offered him a $200,000 bribe to plead guilty to filing false returns, accept sole responsibility for the sales tax frauds, and falsely exculpate Porcelli. We will discuss further evidence pertaining to Porcelli's RICO enterprise under that topic.
Porcelli's first argument is that because the State of New York itself did not punish criminally the failure of a vendor to pay over to the State sales taxes collected from a customer, use of the federal mail fraud statute to do so violated due process of the law. Porcelli is correct as far as New York law is concerned. In People v. Valenza, 60 N.Y.2d 363, 457 N.E.2d 748, 469 N.Y.S.2d 642 (1983), the Court of Appeals examined the structure of the "penalties and interest" provision, section 1145, of the Tax Law. Certain violations were subject to both criminal and civil penalties, while others, including the failure to remit sales taxes, were subject to civil penalties only (with one small exception not relevant here). The court therefore held that "the failure to pay over sales taxes may not be considered criminal conduct and is subject to civil penalties only." 60 N.Y.2d at 370, 457 N.E.2d at 750, 469 N.Y.S.2d at 645.
The overall argument that Porcelli had no notice that his conduct was illegal is nevertheless unavailing in light of United States v. DeFiore, 720 F.2d 757 (2d Cir. 1983), cert. denied, 467 U.S. 1241, 104 S. Ct. 3511, 82 L. Ed. 2d 820 (1984). The defendant there argued that the wire fraud statute should not apply to schemes to defraud the state governments of taxes due. This court followed four other circuits that had squarely applied the federal fraud statutes to state tax law violations. We held that the federal wire fraud statute was applicable to a scheme to defraud the State of New York of cigarette taxes. The court said that the focus of the wire fraud statute "is upon the misuse of the wires, not the regulation of state affairs. . . . In short, principles of federalism do not provide a basis for reversal." Id. at 761-62 (citations omitted). In so holding, the court distinguished Judge Weinfeld's decision in United States v. Henderson, 386 F. Supp. 1048, 1052 (S.D.N.Y. 1974), which held that Congress did not intend to apply the mail fraud statute to a scheme to defraud the United States by evading the payment of taxes. DeFiore distinguished Henderson as involving a federal income tax fraud prosecution and also cited United States v. Miller, 545 F.2d 1204, 1216 n.17 (9th Cir. 1976), cert. denied, 430 U.S. 930, 51 L. Ed. 2d 774, 97 S. Ct. 1549 (1977), which rejected Henderson in the context of a federal tax violation. DeFiore, 720 F.2d at 761.
To be sure, neither Defiore nor the cases from the other circuits, United States v. Melvin, 544 F.2d 767 (5th Cir.), cert. denied, 430 U.S. 910, 51 L. Ed. 2d 587, 97 S. Ct. 1184 (1977); United States v. Brewer, 528 F.2d 492 (4th Cir. 1975); United States v. Mirabile, 503 F.2d 1065 (8th Cir. 1974), cert. denied, 420 U.S. 973, 43 L. Ed. 2d 653, 95 S. Ct. 1395 (1975); and United States v. Flaxman, 495 F.2d 344 (7th Cir.), cert. denied, 419 U.S. 1031, 42 L. Ed. 2d 306, 95 S. Ct. 512 (1974), considered the argument that a state's failure to make underpayment of taxes criminal should bar federal prosecution. That does not mean, however, that the broad federal mail fraud statute does not apply, since it punishes "any scheme or artifice to defraud" in which the jurisdictional means-- the mails -- are employed.
Porcelli casts his due process argument in a slightly different way, focusing on the mental element of the offense. He begins with the rule of lenity, that "'ambiguity concerning the ambit of criminal statutes should be resolved in favor of lenity.'" Liparota v. United States, 471 U.S. 419, 427, 85 L. Ed. 2d 434, 105 S. Ct. 2084 (1985) (quoting Rewis v. United States, 401 U.S. 808, 812, 28 L. Ed. 2d 493, 91 S. Ct. 1056 (1971)). Porcelli refers us to James v. United States, 366 U.S. 213, 221-22, 6 L. Ed. 2d 246, 81 S. Ct. 1052 (1961), in which the Court reversed a tax evasion conviction for lack of proof of willfulness because the defendant's conduct, according to the contemporaneous judicial gloss, had been proper when it occurred. The argument is that given the "gloss" of the New York sales tax law during the indictment period, Porcelli could not, "in legal contemplation, have formed the intent necessary to commit" fraud. Kahr v. Commissioner, 414 F.2d 621, 627 (2d Cir. 1969); see also United States v. Dixon, 536 F.2d 1388, 1401 (2d Cir. 1976) (mail fraud requires specific intent). He also interprets his comments to Katz, that in effect the underpayment was a "loan" from the State, as meaning that he could not have thereby had the specific intent.
The specific intent required under the mail fraud statute is the intent to defraud, e.g., United States v. Rodolitz, 786 F.2d 77, 80-81 (2d Cir.), cert. denied, 479 U.S. 826, 93 L. Ed. 2d 52, 107 S. Ct. 102 (1986), and not the intent to violate a statute. Porcelli intended to defraud the State. We read Katz's testimony as showing that Porcelli knew full well that he was not simply "borrowing" money from the State. Accordingly, we reject this due process claim.
Six of the sixty-one counts of mail fraud charged only a mailing of a blank sales tax return from New York State to Porcelli, without the return mailing of a fraudulent return. Porcelli argues that these mailings by the State were not in furtherance of his so-called fraudulent scheme and that those six counts somehow tainted his entire trial. We agree with the first argument, but not with the second. True, this court has gone quite far in holding that routine mailings are sufficient to form the basis for mail fraud convictions. E.g., United States v. Muni, 668 F.2d 87, 90 (2d Cir. 1981); United States v. Reed, 639 F.2d 896, 906 (2d Cir. 1981). Under Pereira v. United States, 347 U.S. 1, 8, 98 L. Ed. 435, 74 S. Ct. 358 (1954), use of the mails need not be an essential element of the scheme; rather, mailings are in furtherance of a fraudulent scheme if they are "incident to an essential part of the scheme." Cf. United States v. Maze, 414 U.S. 395, 38 L. Ed. 2d 603, 94 S. Ct. 645 (1974) (finding use of mails not sufficiently closely related to respondent's scheme to support mail fraud conviction).
The use of forms mailed by the State was a necessary part of Porcelli's scheme. However, the mailing of a form by the State, and nothing more, is not sufficiently closely related to his scheme to support a separate mail fraud count. United States v. Freitag, 768 F.2d 240 (8th Cir. 1985), and United States v. Bosby, 675 F.2d 1174 (11th Cir. 1982), are distinguishable in that they involved personalized checks that the defendants caused to be mailed and that were essential to their schemes. Thus we reverse as to mail fraud counts 2, 13, 18, 24, 40, and 51 corresponding to Rackeetering Acts 15(f), 16(f), 18(f), 19(f), 21(f), and 24(d).
These reversals do not disturb Porcelli's other convictions. It was not prejudicial to include the mailings by the State in the other counts where there were returned fraudulent mailings. We perceive no prejudicial spillover from the inclusion of the six racketeering acts as to which we reverse or from those mail fraud counts themselves. See United States v. Cody, 722 F.2d 1052, 1060-61 (2d Cir. 1983), cert. denied, 467 ...