Illinois Dept. of Revenue v. Phillips

• Decision Date: 27 August 1985
• Docket Number: No. 84-1495,84-1495
• Citation: 771 F.2d 312
• Parties: ILLINOIS DEPARTMENT OF REVENUE, Plaintiff-Appellant, v. William PHILLIPS, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 312

771 F.2d 312

54 USLW 2147

ILLINOIS DEPARTMENT OF REVENUE, Plaintiff-Appellant, v. William PHILLIPS, Defendant-Appellee.

No. 84-1495.

United States Court of Appeals Seventh Circuit.

Argued May 22, 1985.

Decided Aug. 27, 1985.

Steven F. Molo, Neal B. Goodfriend, Chicago, Ill., for plaintiff-appellant.

Richard D. Trainor, Quinlivan & Trainor, Chicago, Ill., for defendant-appellee.

Before BAUER and COFFEY, Circuit Judges, and CAMPBELL, Senior District Judge ^*.

BAUER, Circuit Judge.

This case presents a question of first impression as to whether a state's Department of Revenue may file suit in federal court for treble damages under the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. Sec. 1961, et seq., against a retailer who files fraudulent state sales tax returns. In this case the district court granted the retailer, defendant William Phillips', motion to dismiss the RICO complaint filed by the Illinois Department of Revenue based on nine separate acts of mail fraud in the filing of Illinois Retailers' Occupation Tax returns. We reverse and remand.

I.

Because this case is before us on appeal of a motion to dismiss, we look to the allegations in the complaint for the facts in the case. On November 23, 1983, the Department of Revenue filed a complaint against William Phillips, alleging jurisdiction under RICO. The complaint alleges that the defendant operated a retail business known as True Car Wash and sold gasoline to the public at three locations in Chicago, Illinois, from July 1981 to March 1982. The plaintiff is empowered by Illinois law to administer and collect taxes pursuant to the Illinois Retailers' Occupation Tax Act, ILL.REV.STAT. ch. 120, Sec. 440 et seq, the Municipal Retailers' Occupation Tax Act, ILL.REV.STAT. ch. 24, Sec. 8-11-1, and the Regional Transportation Authority Act, ILL.REV.STAT. ch. 111 2/3, Sec. 704.03. As a retailer, defendant was required by Illinois law to file a monthly return stating his gross receipts from the sale of gasoline and the tax due, and to remit six percent of his gross receipts in payment of the retailers' and transportation taxes. The complaint alleges that for the months of July, 1981 through March, 1982 the defendant sent nine fraudulent sales tax returns to the Illinois Department of Revenue through the United States mails. The complaint alleges that the defendant knew that the sales tax returns fraudulently understated his gross receipts when he caused them to be mailed. As a result of these nine separate acts of mail fraud, the defendant had underreported sales of over $250,000 and underpaid his sales tax by $14,500.

The complaint alleges that the filing of the fraudulent sales tax returns in connection with the operation of True Car Wash and the use of the mails to transmit those returns to the state is a racketeering injury as defined in 18 U.S.C. Sec. 1961. Because defendant associated with the True Car Wash, he therefore conducted its affairs through a pattern of racketeering activity in violation of 18 U.S.C. Sec. 1962(c). Alleging injury to its business or property in the amount of the underpaid tax, the Department of Revenue seeks treble damages pursuant to 18 U.S.C. Sec. 1964(c).

II

There is no doubt that the Illinois Department of Revenue's complaint against Phillips for the fraudulent reporting and underpayment of state salestaxes for the True Car Wash sufficiently alleges the elements of a cause of action under RICO. So the Department asserts and so the defendant admits. The district court concluded the same: "the complaint adequately sets forth the injury 'by reason of' the alleged RICO violations." App. A. We agree and, to illustrate the point, briefly review the elements of the cause of action and their application to this case.

Section 1962 of RICO is violated by any person associated with an enterprise, the activities of which affect commerce, who conducts the enterprise's affairs through a pattern of racketeering activity. 18 U.S.C. Sec. 1962(a)-(d). An "enterprise" includes "any individual, partnership, corporation, association or other legal entity, and any union or group of individuals associated in fact although not a legal entity." 18 U.S.C. Sec. 1961(4). Defendant's business, the True Car Wash, therefore qualifies as an enterprise under RICO.

Mail fraud qualifies as a racketeering activity under the statute, 18 U.S.C. Sec. 1961(1), and mailing fraudulent state sales tax returns qualifies as mail fraud. United States v. Mirabile, 503 F.2d 1065, 1066-67 (8th Cir.1974). See also United States v. Flaxman, 495 F.2d 344, 349 (7th Cir.1974). A "pattern" of racketeering activity, as required by section 1962(c), requires at least two acts of racketeering activity within a ten year period. 18 U.S.C. Sec. 1961(5). Because the statute defines "racketeering activity" to include mail fraud, the defendant's mailing of nine fraudulent tax returns to the Illinois Department of Revenue over a nine month period constitutes a pattern of racketeering activity as defined in the statute. United States v. Weatherspoon, 581 F.2d 595, 602 (7th Cir.1978) (each mailing in a scheme to defraud is a separate offense so that several separate acts of mail fraud constitute a pattern of racketeering activity).

III

The Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. Sec. 1961 et seq. provides a civil remedy for private parties injured by a RICO violation:

Any person injured in his business or property by reason of a violation of section 1962 of this Chapter may sue therefore in any appropriate United States district court and shall recover threefold the damages he sustains and the cost of the suit, including a reasonable attorney's fee.

18 U.S.C. Sec. 1964(c).

A RICO plaintiff must allege injury "to business or property." 18 U.S.C. Sec. 1964(c). This court has held that the plain language of the statute dictates that the injury requirement be construed broadly. Limitations on the type of injury, such as requiring a "racketeering injury," have been rejected. Haroco v. American Nat'l Bank & Trust Co. of Chicago, 747 F.2d 384, 387 (7th Cir.1984). This court has repeatedly upheld civil RICO claims where the "only apparent injuries were those directly resulting from the predicate offenses." Id. at 397. See, e.g., Sutliff, Inc. v. Donovan Companies, 727 F.2d 648, 653 (7th Cir.1984); Bunker Ramo Corp. v. United Business Forms, Inc., 713 F.2d 1272, 1287-88 (7th Cir.1983). While the Supreme Court held that the "business and property" phrase in the Clayton Act refers only to commercial interests and competitive injuries, Hawaii v. Standard Oil Co. of California, 405 U.S. 251, 264, 92 S.Ct. 885, 892, 31 L.Ed.2d 184 (1972), this is not the case under RICO, see Schacht v. Brown, 711 F.2d 1343, 1357 (7th Cir.1983) (citing cases), although a few courts have attempted to draw such a line. See e.g., Van Schaik v. Church of Scientology of California, Inc., 535 F.Supp. 1125 (D.Mass.1982). In this case, the Illinois Department of Revenue has been injured in its property to the extent that it has been defrauded out of $14,500 in unpaid taxes.

Section 1964 provides a cause of action for "any person" injured by a RICO violation. The Act defines a person as "any individual or entity capable of holding a legal or beneficial interest in property." 18 U.S.C. Sec. 1961(3). It is essentially on the question of the standing of the Illinois Department of Revenue to bring this civil RICO action that the district court dismissed this case. The district court reasoned that "RICO should not become a vehicle for federal jurisdiction and damages in state sales tax cases." App. A. The Act itself, however, makes no distinction between state governments, consumers, competitors, or other victims in determining who qualifies as a person under the Act, and so the Department argues that there should be none. The question before us therefore is one of first impression: under RICO may a state governmental unit use federal courts and take advantage of attractive federal remedies to enforce state laws? In other words, where the language of the statute and its legislative history do not seem to forbid it, can a state governmental unit be a proper plaintiff under civil RICO, particularly to collect state taxes?

The Department argues that under the analogy to the federal antitrust laws, states have standing to sue under RICO. The civil damages provision of RICO was modeled after Section 4 of the Clayton Act which provides an antitrust cause of action for "any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws." 15 U.S.C. Sec. 15. The Supreme Court has noted that the "clearest current" in the legislative history of the civil cause of action under RICO "is the reliance on the Clayton Act model." Sedima, S.P.R.L. v. Imrex Co., Inc., --- U.S. ----, 105 S.Ct. 3275, 3282 & n. 8, 87 L.Ed.2d 346 (1985). States long have been able to sue as a person under the Clayton Act for antitrust treble damages either in their proprietary capacity or as parens patriae. Georgia v. Pennsylvania, 324 U.S. 439, 65 S.Ct. 716, 89 L.Ed. 1051 (1945). A state, however, has been held unauthorized to sue under the Clayton Act for damages for an injury to its general economy allegedly attributable to a violation of the antitrust laws. See Hawaii v. Standard Oil Company of California, 405 U.S. 251, 261, 92 S.Ct. 885, 890, 31 L.Ed.2d 184 (1972).

The plaintiff's antitrust analogy, however, is not entirely persuasive. As this circuit has noted previously, "the references to antitrust law and precedents [in the congressional debates on civil RICO] were attempts to justify the extraordinary treble damage action as a device to deter organized crime; the notion that the objectives of RICO and the Sherman Act were identical was discounted." Schacht v. Brown, 711 F.2d at 1358 (footnotes omitted). This distinction is not without reason, for...