U.S. v. Pesaturo

• Decision Date: 16 February 2007
• Docket Number: No. 04-1285.,04-1285.
• Citation: 476 F.3d 60
• Parties: UNITED STATES of America, Appellee, v. Augustine E. PESATURO, Defendant, Appellant.
• Court: U.S. Court of Appeals — First Circuit

476 F.3d 60

UNITED STATES of America, Appellee, v. Augustine E. PESATURO, Defendant, Appellant.

No. 04-1285.

United States Court of Appeals, First Circuit.

Heard October 5, 2006.

Decided February 16, 2007.

William J. Cintolo, with whom Thomas R. Kiley, Nicholas A. Kenney, and Cosgrove, Eisenberg & Kiley were on brief, for appellant.

S. Robert Lyons, with whom Eileen O'Connor, Assistant Attorney General, and Alan Hechtkopf were on brief, for appellee.

Before LYNCH, Circuit Judge, STAHL, Senior Circuit Judge, and LIPEZ, Circuit Judge.

LIPEZ, Circuit Judge.

At the heart of this appeal is a complex regulatory scheme governing federal fuel excise taxes. Augustine Pesaturo was convicted by a jury on charges that he evaded such taxes, conspired with his employees to do so, and provided a false statement leading to a fraudulent tax return. On appeal, he argues primarily that he was never liable for the taxes he allegedly evaded. The relevant statute was amended in 1993, and the charged conduct occurred when the regulations implementing the statute were in a state of transition. Nonetheless, we conclude that a jury could permissibly find that Pesaturo was liable for the taxes that underlie his conviction, and that he willfully failed to pay those taxes. We also find Pesaturo's additional arguments meritless and therefore affirm.

I.

Pesaturo owned and operated Covenant Oil ("Covenant"), a fuel delivery company that purchased fuel from "terminals" — fuel storage and distribution facilities supplied by pipeline or vessel. Covenant's employees loaded the fuel onto trucks and delivered it to customers who used the fuel to power trucks, heating and refrigeration units, and railroad cars, as well as in other applications. In 1995 and 1996 Covenant was a small operation. Pesaturo managed the business with the help of one clerical worker and a handful of drivers to operate its three trucks. Aside from the storage tanks of these trucks, Covenant had no fuel storage facilities.

Covenant primarily distributed diesel fuels, including No. 1 diesel, No. 2 diesel (also referred to as home heating oil), and kerosene. While these three fuels differ only slightly in chemical composition, the methods for taxing them differed significantly. The government imposes a tax upon all three fuels when they are used to power vehicles on the road.¹ A tax is not imposed for off-road uses, such as powering farm equipment, heating homes, or operating the refrigeration and heating units that "piggyback" on trucks and railroad cars, known as "reefers." This case arises from the government's allegation that Pesaturo failed to pay taxes due on substantial amounts of fuel he sold during 1995 and 1996.

During that period, No. 1 diesel was taxed upon its removal from a terminal. In practice, Covenant's suppliers included the federal excise tax in the price of No. 1 diesel and remitted the tax to the government, much like a gas station collects gasoline taxes from consumers at the pump. Customers who used the No. 1 diesel in off-road applications could file for a refund of the tax directly from the government. The price of home heating oil and kerosene purchased at a terminal did not include federal excise taxes. Home heating oil, which is intended for off-road use, was dyed red to alert buyers and inspectors to its tax-free status and to deter unscrupulous sellers from selling it for on-road use without collecting the tax and remitting it to the government. Kerosene was not dyed out of concern that the dye would impair the function of unvented space heaters commonly run on kerosene. Instead, most terminals required their customers to sign exemption forms accepting responsibility for paying the excise taxes directly to the government if the kerosene was subsequently sold for on-road use.²

Because all three fuels could power vehicles on the road, and companies like Covenant only paid the tax-inclusive price for No. 1 diesel upon purchase from a terminal, an unscrupulous company had incentives to mix No. 1 diesel with kerosene (which was cheaper to obtain because its price at the terminal did not include the excise tax) and to sell the resulting mixture as fully taxed No. 1 diesel or as a blend of No. 1 diesel and kerosene on which the excise tax had been fully paid. Through this scheme, the unscrupulous seller could charge the tax-inclusive price for the fuel and keep the "tax" owed to the government on the kerosene portion of the blend. Alternatively, sellers could undercut their competitors' prices for No. 1 diesel by blending untaxed kerosene with the taxed No. 1 diesel and collecting only a portion of the tax on the kerosene intended for on-road use, thus passing on some of the savings to the customer, while still turning a profit.³ Even if the seller did not collect the tax on the kerosene intended for on-road use, it had an obligation to remit that tax to the government.

Pesaturo was indicted in 2002 on three counts of evading federal excise taxes on sales of fuel in 1996, in violation of 26 U.S.C. § 7201;⁴ one count of conspiring with two Covenant drivers to evade excise taxes, in violation of 18 U.S.C. § 371; and two counts of filing materially false tax returns, for 1995 and 1996, in violation of 26 U.S.C. § 7206(1). After an eight-day trial, a jury found Pesaturo guilty on all counts, except the final count of filing a false tax return for 1996, which the district court dismissed.⁵ Pesaturo was sentenced to 24 months incarceration on each count, to run concurrently, and three years supervised release; he was ordered to pay a fine of $5,000, restitution of $108,878.61, and a $400 assessment. In support of the sentence, the district court found that tax was due on all kerosene purchased by Covenant in 1995 and 1996 that was not accounted for by sales to Covenant's largest customer, Merchant's Despatch Transportation (MDT), a railroad company that used the fuel in off-road applications.

On appeal, Pesaturo's primary argument is that the district court misconstrued the statute and regulations governing fuel taxes during the relevant period and that, as a matter of law, he was not liable for the taxes he allegedly evaded and conspired to evade. He asserts four additional claims of error: (1) the trial court impermissibly allowed the government to shift the burden of proof to him; (2) the evidence did not support a finding that he made false statements on his 1995 tax return; (3) the evidence was insufficient to establish a conspiracy; and (4) the court erred in calculating the tax loss on which his sentence was based and, moreover, his sentence is unconstitutional because it was based on a fact — the amount of untaxed kerosene — that was neither charged by the grand jury nor found beyond a reasonable doubt by the petit jury.

II.

Before addressing the arguments that Pesaturo makes on appeal, we must explain the regulatory regime that governed the payment of excise taxes on sales of No. 1 diesel and kerosene from 1994 to 1996, the period covered by the indictment.

A. Regulatory Overview

The government has historically imposed an excise tax on fuel used in motor vehicles driven on public roads. Concerned about tax evasion,⁶ Congress amended the statute governing fuel excise taxes in 1993. In part, these amendments added diesel fuels to the fuels on which federal excise taxes are collected upon their removal from a refinery or terminal by bringing them under 26 U.S.C. § 4081 (1994).⁷ This effectively moved the point of taxation further back in the distribution chain, away from the many small-scale wholesalers like Covenant and toward the less numerous terminals and refineries.⁸ Sales of kerosene, however, did not become subject to tax upon removal from a refinery or terminal until 1998.⁹ During the transitional period between the 1993 amendments and this 1998 decision on the taxation of kerosene, Congress continued to study whether kerosene should be taxed at the terminal. In the meantime, kerosene was exempt from § 4081's imposition of tax at the terminal by regulation,¹⁰ and sales of kerosene were governed by the so-called "back-up tax," § 4041(a), which applies to sales of fuel that are exempt from § 4081.

Section 4041 imposes the federal excise tax at the point of sale to consumers, requiring sellers to collect the tax in some circumstances and buyers to pay the tax directly to the government in others. In relevant part, § 4041 requires the tax to be imposed when fuel is: "(i) sold by any person to an owner, lessee, or other operator of a diesel-powered highway vehicle . . . or (ii) used by any person as a fuel in a diesel-powered highway vehicle." 26 U.S.C. § 4041(a)(1)(A)(i), (ii) (1994) (emphasis added).

Although § 4041 was not changed by the 1993 amendments, the relevant regulatory body — the Internal Revenue Service of the Treasury Department — responded to the Congressional action by changing the regulation implementing § 4041, expanding the conditions under which sellers of kerosene are liable for the federal excise tax. The "old rule" specified that a "taxable sale" occurred if the "fuel is delivered by the seller into the fuel supply tank of the vehicle" or, if the fuel is not delivered directly into a fuel supply tank of a vehicle, if the purchaser "furnishes a written statement to the seller before or at the time of the sale" stating that the fuel will be used for a taxable purpose. 26 C.F.R. § 48.4041-5 (1996). In the absence of a "taxable sale," the buyer would be liable for the tax if the fuel was used on the road.

The "new rule" stated that § 4041 imposes a tax on, inter alia, "[a]ny diesel fuel on which tax has not been imposed by section 4081 . . . or [][a]ny liquid other than gasoline or diesel fuel," that is delivered into "the fuel supply tank . . . of a diesel-powered highway vehicle." 26 C.F.R. § 48.4082-4(a)(1)(i), a(1) (1996), It is likely that the "diesel fuel" referred to in this regulation includes...