U.S. v. Schilling

• Citation: 142 F.3d 388
• Decision Date: 15 April 1998
• Docket Number: 96-4161,Nos. 96-4160,s. 96-4160
• Parties: -1509, 98-1 USTC P 50,335 UNITED STATES of America, Plaintiff-Appellee, v. John T. SCHILLING and Robert J. Schilling, Defendants-Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

Page 388

142 F.3d 388

81 A.F.T.R.2d 98-1509, 98-1 USTC P 50,335

UNITED STATES of America, Plaintiff-Appellee, v. John T. SCHILLING and Robert J. Schilling, Defendants-Appellants.

Nos. 96-4160, 96-4161.

United States Court of Appeals, Seventh Circuit.

Argued June 5, 1997.

Decided April 15, 1998.

Andrew B. Baker, Jr. (argued), Office of the United States Attorney, Dyer, IN, for Plaintiff-Appellee.

Nick J. Thiros (argued), Cohen & Thiros, Merrillville, IN, for Defendant-Appellant.

Before POSNER, Chief Judge, and COFFEY and EASTERBROOK, Circuit Judges.

COFFEY, Circuit Judge.

Brothers John and Robert Schilling appeal the trial court's decision that the Government did not breach the plea agreement.

In the Plea Agreement, the Schillings agreed to plead guilty to a conspiracy to defraud the U.S. Treasury Department ("Treasury") and admitted intentionally failing to report the sale of 300,000 gallons of diesel fuel from their company's federal excise tax returns for the period from January 1987 through December 1988. The Government, for its part, agreed to drop seven counts against the Schillings and agreed to recommend that the Schillings be sentenced to the minimum sentence under the applicable sentence guideline range, pursuant to Fed.R.Crim.P. 11(e)(1)(C). The Government also agreed to recommend a two-level reduction in the guideline offense level for acceptance of responsibility, agreed not to recommend sentencing enhancement for obstruction of justice ¹ or for the use of sophisticated means to impede discovery of the crime, ² and agreed that it would make no further recommendations as to the specific sentence within the applicable guideline range. ³

Also in the Plea Agreement, the Schillings agreed that the Government reserved the right to "tell the Court the good things about me and the bad things about me," to present evidence which may affect the sentencing guideline range, and, to "fully apprise the Court of the nature of the criminal conduct."

At the Schillings' sentencing hearing, the trial judge allowed the Government, over the defendants' objection, to present evidence demonstrating that the defendants' criminal conduct involved more than the 300,000 gallons of diesel fuel that they had admitted to. Based on the evidence presented, the trial court found that the true quantity of unreported fuel caused a tax evasion of $1,000,635: the federal government had been deprived of $392,622 in excise taxes, and the States of Illinois and Indiana had been deprived of $608,013 in excise taxes. ⁴ Obviously, the Schillings faced a sentencing guideline range more severe than the one they would have faced had the court determined the gallonage to total 300,000 (under table 2T4.1 of the Sentencing Guidelines, the offense level for $90,000 of unpaid taxes (300,000 gallons taxed at 15% federal and 15% state) would be 12). The base offense level for unpaid taxes in excess of one million dollars--which is what the district court decided as the correct amount--was 16. The trial judge added two points for "using sophisticated means to avoid discovery," raising the total offense level to 18. An offense level of 18 gives a sentencing range of 27 to 33 months imprisonment; the trial judge sentenced the defendants to the minimum, 27 months.

The Schillings argue that the Government breached the Plea Agreement by introducing evidence of fuel sales totaling more than 300,000 gallons, and further claim that the trial court erred when, after the alleged breach occurred, they were not permitted to withdraw their guilty pleas.

We affirm the trial court's finding that the Government did not breach the Plea Agreement, and also agree with the trial court's decision to deny the Schillings' request to withdraw their guilty pleas.

I. BACKGROUND

Even though diesel fuel and heating oil are the same substance, if the substance is sold at a gas station as diesel fuel, the excise tax is significantly greater than if it were marketed as heating oil.

Up until April 1988, gas station owners selling diesel fuel were responsible for collecting the federal diesel excise tax from the purchasers. The gas station owners were required to pay the taxes, listing the total amount of their diesel sales on quarterly federal excise tax returns. Effective April 1, 1988, the law transferred the collection responsibilities--rather than the gas station owner doing the collecting, the wholesaler now collected the tax when selling the fuel to the gas station owner. Retailers who purchase the fuel intending to sell it as heating oil avoid the higher diesel tax by certifying to the distributor that the fuel will be used for heating oil, agriculture or other exempt use.

In 1988, the Schillings, who had been in the fuel industry for twenty years, obviously had knowledge of the existing laws and the difference in taxes between diesel fuel and heating oil. The Schillings owned and operated several fuel-related outlets during this period of time, including RKS Trucking, R & J Enterprises, and the Schilling Brothers Truck Stop in St. John, Indiana. In 1987 and 1988, the Schillings' diesel fuel businesses obligated them to pay a 15.1 cent/gallon federal excise tax and similar state excise taxes to the States of Indiana and Illinois.

According to the indictment, to which the Schillings pled guilty, from January 1987 through December 1988 the Schillings engaged in a continued pattern of fraud on their fuel sales, where they collected diesel excise tax from their customers but failed to remit the proper taxes, or records of the sales, to state and federal governments. The trial court found that this conspiracy had the following components.

Richard Statt. From January through August 1987, the Schillings purchased at least 248,574 gallons of diesel from one Richard Statt, who owned two small oil companies named R & D Oil and Decker Oil, in Gary, Indiana. The Schillings paid cash for this fuel and transported it to their truck stop. Although the Schillings collected excise taxes from truckers who purchased this diesel fuel at their truck stop, they neither reported this diesel fuel on their quarterly tax returns nor paid the proper amount of federal or state excise taxes.

The Conoco Pipeline. Between the spring and fall of 1987 the Schillings purchased between 20,000 and 25,000 gallons of diesel from the manager of the Conoco pipeline terminal in Griffith, Indiana. The Schillings were fully aware of the fact that the Conoco manager routinely and illicitly skimmed fuel from the pipeline. He sold it to the Schillings for half the market value. The Schillings sold this fuel at their truck stop, again pocketing the unreported excise taxes.

Carson Petroleum. The Schillings also purchased diesel fuel from an Indiana company named Carson Petroleum. The Schillings were regular customers of Carson and in fact reported the bulk of their purchases on their quarterly excise tax returns. However, they did not report all of the purchases on the excise tax returns: they omitted 74,051 gallons.

Delta Fuel/Ameropan and U.S. Oil. The Schillings utilized a shell corporation known as Delta Fuel to take advantage of the difference in excise taxes between diesel fuel and heating oil. Using Delta, the Schillings pretended to be heating oil dealers while purchasing the fuel without paying the diesel excise tax. They then sold the fuel as diesel fuel and retained the amount due as taxes for themselves. In 1987 and 1988, the Schillings used Delta to purchase 408,000 gallons of fuel from Ameropan and 93,000 gallons from U.S. Oil. ⁵ The Schillings filed the proper forms with the respective companies stating that the fuel was to be used for heating oil. The Schillings' certifications were fraudulent; the Schillings intended to and in fact did sell the fuel as diesel at their truck stop. After collecting the excise taxes and keeping it for themselves, they carried out their fraud scheme and failed to report these sales on their quarterly federal excise tax returns.

Delta Fuel/Wright Industries. In their most brazen and sophisticated scheme, the Schillings, using their shell company (Delta), purchased 3,106,226 gallons of fuel in 1988 from a wholesaler and sold it to Wright Industries, an Illinois company. In this scheme they sold the fuel for seven cents less than what they paid for it but suffered no loss when they bought the fuel because they bought it without paying taxes on it (because they certified that they would sell it as heating oil). When they illicitly turned around and sold the fuel as diesel, they collected (and failed to report) the taxes due. Because the pricing shortfall was only 7 cents, and because the taxes that they pocketed totaled 30.6 cents per gallon (15.1 cents per gallon federal excise tax and 15.5 cents per gallon Illinois excise tax), they made quite a profit on the sale.

After an I.R.S. investigation into their activities, a federal grand jury returned an eight-count indictment against the Schillings on May 19, 1993. Count One charged them with conspiracy to defraud the U.S. Treasury in violation of 18 U.S.C. § 371 by means of filing false federal excise tax returns, which, in turn, contravenes 26 U.S.C. § 7206(1) and 7206(2). The initial count of the Indictment listed numerous overt acts undertaken by the appellants in furtherance of the conspiracy. ⁶ While some of the identified acts involved an unknown, "to be determined" amount of fuel, the others alleged, in aggregate, that appellants had trafficked in more than one million gallons of unreported petroleum.

The remaining counts of the Indictment involved the Schillings' filing of false excise tax returns. Counts Two and Three charged Robert Schilling with making and subscribing false quarterly Federal Excise Tax Returns. Counts Four and Five charged John Schilling with aiding and abetting the making of false quarterly Federal Excise Tax Returns. And, Counts Six, Seven and Eight charged the Schillings...