United States Court of Appeals
For the First Circuit
No. 04-1285
UNITED STATES OF AMERICA,
Appellee,
v.
AUGUSTINE E. PESATURO,
Defendant, Appellant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[George A. O'Toole, Jr., U.S. District Judge]
Before
Lynch, Circuit Judge,
Stahl, Senior Circuit Judge,
and Lipez, Circuit Judge.
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.
February 16, 2007
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
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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-
1
The tax rate at the time was 24.4 cents per gallon.
-3-
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
2
At trial, employees of Sprague Energy (Covenant Oil's main
supplier) testified that they operated their terminals using a card
system. Each customer would drive up, insert a card into the
pumping machine, and enter a pin number before being allowed to
purchase fuel. If the card and pin number indicated that the
customer had signed an exemption form, the customer could obtain
kerosene at a price that did not include federal fuel excise taxes;
otherwise, the customer would be charged a price that included
these taxes.
-4-
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,
3
Blending kerosene with No. 1 diesel is a common and
legitimate practice. Kerosene contains a lower concentration of
wax in its composition than does No. 1 diesel; therefore, the
mixture remains liquid at lower temperatures than pure diesel. The
gelling of No. 1 diesel can clog vehicle fuel lines at low
temperatures, disabling vehicles. However, when one mixes kerosene
with No. 1 diesel for on-road use, tax becomes payable to the
government for the kerosene added to the blend.
4
While Covenant was the primary entity responsible for the
fuel tax, section 7201(1) applies to "[a]ny person who willfully
attempts in any manner to evade or defeat any tax . . . or the
payment thereof," thus encompassing the individual actions of those
who contributed to Covenant's failure to pay these taxes. See,
e.g., United States v. Tanios, 82 F.3d 98, 100 (5th Cir. 1996)
(sustaining defendant's conviction for conspiracy to evade federal
fuel excise taxes owed by a corporate entity with which he
conducted business); United States v. Fawaz, 881 F.2d 259, 266 (6th
Cir. 1989) (affirming the conviction of a gas station owner who
evaded the retail dealer's excise tax on diesel fuel).
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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
5
The district court dismissed this charge at the government's
suggestion because the government failed to present any evidence to
support it.
-6-
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
6
The Department of Treasury noted that:
Congress has found that considerable evasion may be
occurring under the pre-1994 taxing structure. See
Shortfall in Highway Trust Fund Collections: Hearing
before the Subcommittee on Investigations and Oversight
of the House Committee on Public Works and
Transportation, 102d Cong., 2d Sess. (1992). Congress
sought to correct the weaknesses of pre-1994 law by
amendments made to the Code . . . .
58 Fed. Reg. 63,069 (1993).
-7-
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
7
Section 4081 states, in pertinent part, "There is hereby
imposed a tax . . . (i) on the removal of a taxable fuel from any
refinery, [and] (ii) the removal of a taxable fuel from any
terminal . . . ." 26 U.S.C. § 4081(a)(1)(A) (1994).
Section 4083 defines "taxable fuel," for the purposes of
Section 4081, to include gasoline and diesel fuel, where "diesel
fuel" is further defined, in relevant part, as "any liquid (other
than gasoline) which is suitable for use as a fuel in a diesel-
powered highway vehicle." 26 U.S.C. § 4083(a)(1), (3)(A)(i)
(1994).
8
Section 4091, which governed sales of diesel until the 1993
amendments, imposed the tax on the sale of diesel fuel "by the
producer or importer thereof." 26 U.S.C. § 4091(a) (1992).
Section 4092 further defined "producer" to include registered
wholesale distributors. 26 U.S.C. § 4092(b)(1)(B)(i) (1992). In
practice, therefore, the tax was not imposed under the old regime
until a registered wholesale distributor like Covenant sold the
fuel to a retailer, or at the wholesaler's own retail pumps.
9
Sales of home heating oil have never become subject to
taxation upon removal from a terminal. Instead, home heating oil
is sold untaxed but dyed; if inspectors find dyed fuel in the tanks
of vehicles traveling on the road, the owners of those vehicles are
fined.
-8-
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
10
26 C.F.R. § 48.4081-1(c)(2)(i) (1996) states: "Effective
April 1, 1996, diesel fuel means any liquid (other than gasoline)
that, without further processing or blending, is suitable for use
as a fuel in a diesel-powered highway vehicle, diesel-powered
train, or diesel-powered boat. However, diesel fuel does not
include kerosene [or other enumerated fuels] . . . ." Temporary
regulations to the same effect were in place between 1994 and 1996.
-9-
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 kerosene; however, even if it does not,
kerosene is surely at least a "liquid other than gasoline or diesel
fuel," and is thus subject to the tax.11
The new rule made the seller of the fuel "jointly and
severally liable for the tax . . . if the seller knows or has
reason to know that the fuel will not be used in a nontaxable
use."12 Id. at (a)(2)(ii). The new rule expanded the seller's tax
11
As discussed below, Pesaturo argues that 26 C.F.R. §
48.4081-1 (1996) excludes kerosene from the definition of "diesel
fuel" for purposes of § 4081; however, we do not agree that the
regulation extends to the definition of diesel fuel under § 4041.
12
The new rule states, in pertinent part:
(1) In general. Tax is imposed by section 4041 on the
delivery into the fuel supply tank of the propulsion
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liability by (1) eliminating the requirement that fuel be supplied
to the fuel tank by the seller or that the seller receive written
notice from the buyer that the buyer intends to use the fuel on the
road before the seller is liable for the tax, and (2) by making the
seller jointly and severally liable if he knows or has reason to
know that the fuel will be used on the road.
To summarize, the amendments tightened control over the
taxation of diesel fuels by: (1) making No. 1 diesel taxable upon
removal from a terminal, and (2) strengthening the regulation
governing kerosene sales by broadening the circumstances under
which sellers were liable for the tax and imposing joint and
several liability on sellers where they had actual or constructive
knowledge that the fuel would be put to on-road use.
engine of a diesel-powered highway vehicle . . . of --
(i) Any diesel fuel on which tax has not been imposed by
section 4081;
(ii) Any diesel fuel on which a credit or payment has
been allowed under section 6427; or
(iii) Any liquid other than gasoline or diesel fuel.
(2) Liability for tax --
(i) In general. The operator of the highway vehicle
. . . is liable for the tax imposed . . . .
(ii) Joint and several liability of the seller. The
seller of the fuel is jointly and severally liable for
the tax imposed . . . if the seller knows or has reason
to know that the fuel will not be used in a nontaxable
use.
26 C.F.R. § 48.4082-4(a)(1)-(2) (1996).
-11-
B. Arguments Based on Statutory Provisions and Rules
On appeal, Pesaturo argues that the old rule governs his
tax liability for sales of kerosene. Alternatively, he argues
that, even if the new rule applies, it should be read to require
the seller to deliver the taxable fuel into the fuel supply tank of
a vehicle before tax liability attaches to the seller and, except
for the sales to the undercover IRS agents (accounting for roughly
1,000 gallons of liquid fuel, in total), the government's evidence
involves only deliveries into fuel storage tanks. Finally,
Pesaturo argues that even if delivery into a fuel storage tank is
enough to trigger tax liability on the seller of taxable fuel, the
government provided insufficient evidence that Pesaturo knew or
should have known that such sales were for on-road uses.
1. The Old Rule or the New Rule?
In arguing that the old rule applies, Pesaturo points out
that the regulation implementing § 4081 (26 C.F.R. § 48.4081-
1(c)(2) (1996), supra note 10) excludes kerosene from the
definition of "diesel fuel" between 1994 and 1998. He also cites
a 1994 notice in the Federal Register informing taxpayers that the
IRS would not change the tax treatment of kerosene until it had
determined how best to implement the tax on kerosene used on the
road.13 Pesaturo interprets these texts as indicating that the
13
This notice was described as follows: "Notice 94-72 (1994-2
C.B. 553) informed taxpayers that the IRS was reviewing this issue
and would not change the treatment of kerosene until the issuance
-12-
taxation of kerosene would proceed precisely as it had before the
1993 amendments - through § 4041 as construed by the old rule. The
government argues that the exclusion of kerosene from the
definition of diesel fuel during this period serves only to exempt
sales of kerosene from automatic taxation upon removal from a
terminal, and not from the new regulations governing the "back-up
tax."
We agree with the government that the better reading of
these texts and Congress's intent is to exclude kerosene only from
taxation upon removal from a terminal. Indeed, the regulation
Pesaturo cites for the proposition that "diesel" does not include
"kerosene," 26 C.F.R. § 48.4081-1(a) (1996), makes clear that this
regulatory section only provides definitions "for purposes of the
tax on taxable fuel imposed by section 4081," (emphasis added) and
thus has nothing to say about whether "diesel" includes "kerosene"
for the purposes of § 4041. Moreover, a further regulation arising
from the 1993 amendments, 26 C.F.R. § 48.4041-0 (1996), tellingly
entitled "Applicability of regulations relating to diesel fuel
after December 31, 1993," provides that "[s]ections 48.4041-3
through 48.4041-1714 do not apply to sales or uses of diesel fuel
of further guidance. The IRS is continuing its review of this
issue. Accordingly, the final regulations do not treat kerosene as
diesel fuel." 61 Fed. Reg. 10,450 (1996).
14
These sections relate to the application of taxes on various
types of fuel, including aviation fuel, and taxable liquid fuels
with dual uses.
-13-
after December 31, 1993." The old rule is contained within that
range. The regulation continues: "For rules relating to the
diesel fuel tax imposed by section 4041 after that date, see
§48.4082-4," the new rule. Id. In sum, the regulations provide no
support for the proposition that "diesel" should be defined to
exclude "kerosene" in relation to § 4041 and they unequivocally
state that the "old rule" is inapplicable after 1993.
Finally, Congress adopted the 1993 reforms to plug the
loopholes through which tax dollars were being siphoned away from
the government and into the pockets of unscrupulous sellers. The
principal tactic employed by Congress was to make sales of No. 1
diesel taxable at the terminal; however, as discussed above, the
Internal Revenue Service also tightened the regulations that
governed sales of fuel not taxed at the terminal, such as kerosene.
2. Delivery into a Fuel Supply Tank
Pesaturo argues that, even if the new rule applies,
Covenant was not liable for the tax because the seller incurs tax
liability only when the seller delivers the fuel into the fuel
supply tank of a diesel-powered vehicle. This argument relies on
a misunderstanding of the text and purpose of the new rule. Under
the old rule, sellers were liable for the tax upon delivery "by the
seller into the fuel supply tank of the vehicle," (emphasis added).
The new rule takes a different approach, as reflected in its text.
Sellers are now jointly and severally liable for the tax if the
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seller knew or had reason to know the fuel would later be
"deliver[ed] into the fuel supply tank" by any party. The
obligation to collect and remit the tax is no longer linked to the
delivery by the seller into the fuel supply tank of the vehicle.
Pesaturo would have us ignore these subtle but
significant changes to the text and urges us to read "delivery by
the seller into the fuel supply tank of the vehicle" back into the
new regulation. However, we find the government's interpretation
of the regulation more persuasive both textually and in the context
of the government's stated purpose of increasing fuel tax
compliance. If fuel is delivered into a bulk supply tank
temporarily for later use on the road and the seller knew or had
reason to know of this later use, the seller is jointly responsible
for the tax due. The objective is to ensure payment of taxes, and
the new provision casts a wider net by extending the seller's
liability to uses of which he is aware even if they occur further
down the supply path.15
15
Pesaturo also argues that the district court should have
applied the rule of lenity – interpreting an ambiguous statute in
the light most favorable to the defendant – because of the
transitional nature of the regulations during this period.
Specifically, he argues that the court should have interpreted the
new regulation to require delivery of the fuel into the fuel supply
tank by the seller before a sale becomes taxable. However, we find
the new rule regulating the taxation of kerosene unambiguous and we
therefore do not entertain Pesaturo's argument for lenity.
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3. Knowledge
Pesaturo argues that, even if the new rule applies and
delivery into a storage tank does not insulate the seller from tax
liability, the government presented insufficient evidence that
Pesaturo knew or should have known how much, if any, of the fuel at
issue would be used on the road.
We find Pesaturo's argument disingenuous. Direct
testimony at trial established that Covenant sold No. 1 diesel
mixed with 20%-55% kerosene (on which no tax was remitted to the
government) to bulk storage tanks owned by three trucking company
customers – JAG Enterprises, M&M Transport, and M. Korson &
Company, Inc. – on 13 different occasions between May 1995 and
March 1996. Although Pesaturo contends that all three companies
had both on-road and off-road uses for fuel, representatives of all
three companies testified that they believed the price they paid
Covenant for fuel included the on-road tax. Also, representatives
of Korson and JAG indicated that they bought different fuel from
Covenant for their on-road and off-road uses. There is no reason
to think that Pesaturo's customers would have paid the much higher
tax-inclusive price for fuel they intended to use in nontaxable
applications. They paid the tax because their on-road use of the
fuel required it.
It is true that the jury was given no instruction that
the regulation governing § 4041 required Pesaturo to know that
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sales of kerosene would be put to on-road use. Pesaturo failed to
object to this omission from the jury instructions at the time of
the trial, focusing instead on the judge's refusal to instruct the
jury that the seller was only liable for the tax when the seller
delivered the fuel into the fuel supply tank of a vehicle.
However, any error on this point was harmless. The jury was duly
instructed that tax evasion required not just that a tax be due and
owing, but that defendant "willfully attempt[ed]" to evade the tax.
See 26 U.S.C. § 7201. The jury could only find such willfulness if
it also found that Pesaturo knew that the fuel sold to buyers such
as Korson, JAG and M&M Transport would be used on the road.16
C. Burden-Shifting by the Government
Pesaturo argues that the government impermissibly shifted
the burden of proof to him through a summary witness, Gary Lindahl,
an IRS revenue agent who was unconnected to the case but who was
present in the courtroom during most of the trial.17 Since
16
The government offers an alternative basis for Pesaturo's
tax evasion under 26 U.S.C. § 4081(b)(1) (1996), which imposes a
tax on blended fuels. Section 4041(a)(1)(B) says, "No tax shall be
imposed by this paragraph on the sale or use of any liquid if tax
was imposed on such liquid under section 4081." There may be an
argument that § 4041 was intended to apply exclusively to unmixed
kerosene (since § 4081 imposes a tax on blended kerosene).
However, this argument was not raised, and thus we assume for our
purposes that § 4041 applies to blended kerosene on which no tax
was actually paid. We also do not reach the merits of the
government's argument basing Pesaturo's liability under § 4081
because the evidence supports Pesaturo's liability under § 4041.
17
Lindahl testified that he had been present for "99 percent"
of the testimony; he had missed part of one witness's testimony but
-17-
Covenant's records indicated no sales of kerosene, Lindahl used
evidence from the trial to calculate the amount of kerosene
Covenant could have sold for on-road use. Lindahl began with the
amount of kerosene purchased by Covenant and subtracted kerosene
sales to MDT (Covenant's largest customer, who used all of the fuel
it purchased from Covenant in off-road applications). Because
sales of kerosene to MDT were also not recorded, the amount of
kerosene sold to MDT was imputed based on the total fuel sales to
MDT and the testimony of several witnesses that Covenant blended
kerosene into the fuel sold to MDT at a ratio of 30% kerosene to
70% No. 2 diesel. Kerosene, which has a lower viscosity than
either No. 1 or No. 2 diesel, was added to the fuel to prevent the
fuel from "gelling" in the fuel lines in cold temperatures.
Although the witnesses agreed on this ratio, they disagreed as to
whether or not Covenant sold blended fuel to MDT exclusively during
the winter months. Those who testified that blended fuel was sold
to MDT outside of the winter months noted that railcars were often
sent through cold climates – across the Rocky Mountains, for
instance – before they reached their destinations. As a result,
the government assumed the 30:70 ratio for sales throughout the
year. Since this would overestimate the gallons of kerosene sold
to MDT if the fuel sold to MDT outside of winter was not blended,
this approach resulted in a conservative estimate of the gallons of
had since read the transcript of that testimony.
-18-
kerosene unaccounted for by sales to MDT and therefore available
for sale in taxable uses.
Pesaturo argues that, by subtracting non-taxable kerosene
sales to MDT from Covenant's kerosene purchases to arrive at a
figure of 358,740 gallons available for sale in taxable uses, the
government impermissibly shifted the burden of proof to defendant
to account for the legitimate sale of that fuel.18 In response, the
government characterizes its approach as the normal process of
establishing a fact through the use of circumstantial evidence, and
notes further that its estimate was necessitated by Pesaturo's own
lack of accurate record-keeping. Indeed, Covenant's bookkeeper
testified that Pesaturo instructed her to record all kerosene sales
as sales of home heating oil, leading to the absurd accounting
result that Covenant's records showed purchases – but no sales – of
kerosene, notwithstanding that Covenant had no fuel storage
facilities save the storage tanks of its three trucks.
The prosecution never argued to the jury that it had to
find that the unaccounted-for kerosene was sold for taxable use
because of the absence of records otherwise accounting for its
sale. Instead, the prosecution noted the amount of unaccounted-for
18
Pesaturo's trial counsel urged the judge to issue a curative
instruction to the jury, reminding the jurors that the government
has the burden of proving each and every fact necessary to
establish the alleged crime and that there is "no burden on the
defendant to come forward with any evidence at all." The judge
refused, stating: "I think I've covered it."
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kerosene, asked the rhetorical question "where did the rest go?",
and answered the question by pointing to the evidence.19
Furthermore, the judge carefully instructed the jury:
The burden of proof rests with the government. A
defendant has no burden to prove that he is not guilty of
what is charged. The burden is always with the
government to prove that he is guilty of what the
government charges him with. . . . The government must
establish each element of the offense charged by proof
that convinces you and leaves you with no reasonable
doubt.
We agree with the government that there was no impermissible burden
shifting in this case.
D. Materiality of the Adjustments to Pesaturo's Tax Return
Pesaturo challenges the jury's determination that he
willfully made a material false statement regarding Covenant's 1995
tax return in violation of 26 U.S.C. § 7206(1). The government's
burden under this statute is to prove the following elements:
(1) that the defendant made or caused to be made, a
federal income tax return for the year in question which
he verified to be true; (2) that the tax return was false
as to a material matter; (3) that the defendant signed
the return willfully and knowing it was false; and (4)
19
The prosecution's argument continued:
Well, the evidence shows where it went. . . . You heard
testimony from David Genarro from Korson [Trucking]. He
was purchasing diesel fuel. He owned a trucking company.
Diesel fuel, by definition, is on-the-road fuel. Yet, he
received kerosene with that diesel fuel. You heard
testimony from JAG, James Gasbarro, he was purchasing
diesel fuel, and he received kerosene. Ladies and
gentlemen, you can look at the tickets. It shows
kerosene being purchased. This was diesel fuel being
sold to trucking companies for use in their trucks.
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that the return contained a written declaration that it
was made under the penalty of perjury.
United States v. Boulerice, 325 F.3d 75, 79-80 (1st Cir. 2003).
We review de novo whether there was sufficient evidence
for the jury to find that Pesaturo's instruction to his accountant
resulted in a materially false representation on Covenant's tax
return. We will affirm if "'after assaying all the evidence in the
light most amiable to the government, and taking all inferences in
its favor, a rational factfinder could find, beyond a reasonable
doubt, that the prosecution successfully proved the essential
elements of the crime.'" United States v. Lavoie, 433 F.3d 95, 98
(1st Cir. 2005) (quoting United States v. O'Brien, 14 F.3d 703, 706
(1st Cir. 1994)).
Covenant's accountant testified that, when he found that
the company's cash balance exceeded its receipts by $62,359,
Pesaturo explained the discrepancy by claiming that the higher
number reflected various cash sales for which receipts were
unavailable. He further explained that a commensurate amount of
cash had been used to purchase fuel from Sprague Energy and thus
both sales and cost of goods sold should be adjusted to reflect
these cash transactions.
Pesaturo offered no documents supporting the cash
purchase of kerosene. Moreover, representatives of Sprague Energy
testified at trial that the company rarely sold fuel on a cash
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basis and only to customers whose credit-worthiness was at issue;
further testimony established that Covenant's credit-worthiness was
not questioned by Sprague during this period. In addition, both
the government and Pesaturo stipulated at trial that "it was not
the policy or practice of Valero Energy Corporation [Covenant's
other fuel supplier] to accept cash . . . for payment."
Based on this evidence, a reasonable jury could have
found that Pesaturo, alerted to the existence of unaccounted-for
cash in Covenant's account, fabricated cash purchases to inflate
Covenant's cost of goods sold in a misguided attempt to neutralize
the extra receipts discovered by his accountant. The correct
adjustment would have been a $62,359 adjustment in sales with no
adjustment to cost of goods sold. However, that would have
increased Covenant's tax liability, which Pesaturo wanted to avoid.
E. Sufficiency of Evidence on the Conspiracy Charge
Pesaturo also argues that the government presented
insufficient evidence to support the conspiracy charge. To prove
liability under 18 U.S.C. § 371, the government must show that "two
or more persons conspire[d] either to commit any offense against
the United States, or to defraud the United States . . . and one or
more of such persons d[id] any act to effect the object of the
conspiracy." Pesaturo argues specifically that there was
insufficient evidence of an agreement between him and the drivers
who sold untaxed kerosene to undercover IRS agents. However,
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Pesaturo errs in focusing solely on these sales. The taxable sales
were made to numerous customers, by multiple Covenant drivers, and
over an extended amount of time.
Pesaturo insists that neither mere employment in a common
business enterprise, see Ingram v. United States, 360 U.S. 672,
677-80 (1959), nor mere association with conspirators, see United
States v. Gomez-Pabon, 911 F.2d 847, 853 (1st Cir. 1990), is
sufficient to prove that an agreement existed on which the
government could ground a conspiracy charge. The government's
evidence established more than mere association. Testimony at
trial established that Pesaturo controlled all business decisions
at Covenant. He scheduled fuel purchases and deliveries, set the
price at which fuels were sold, marketed the company's products,
and even instructed the bookkeeper in how to account for sales of
different products.
While the government did not present evidence of an
explicit agreement between Pesaturo and his drivers, we do not
require evidence of an explicit agreement to ground a conspiracy
conviction. See United States v. Patrick, 248 F.3d 11, 20 (1st
Cir. 2001) (noting the "well-established legal principle that a
conspiracy may be based on a tacit agreement shown from an implicit
working relationship"). Given the extent of the evidence regarding
the tax evasion, the small size of Covenant Oil, and Pesaturo's
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pervasive control over that enterprise, it is simply implausible to
argue that the drivers were acting on their own.
F. Propriety of Pesaturo's Sentence
Under the Federal Sentencing Guidelines, Pesaturo's
sentence was linked to the amount of tax loss attributable to his
crimes. See USSG § 2T1.1. At his sentencing, the judge calculated
the tax loss based on the taxes due on 358,740 gallons of kerosene
bought by Covenant but not sold to MDT for use in its off-road
applications,20 and the tax loss resulting from the false inflation
of Covenant's cost of goods sold on its 1995 tax return,21 resulting
in a total tax loss of $108,878.22
Pesaturo was sentenced in February 2004, before the
Supreme Court's decision in United States v. Booker, 543 U.S. 220
(2005). Although Pesaturo's challenge to his sentence is difficult
to decipher, we understand that it reduces to two points: (1) that
the jury had to find the amount of tax loss beyond a reasonable
doubt and (2) that, even if a court could make the tax loss
finding, the court's calculation of the tax loss was erroneous.
20
358,740 gallons x $0.244/gallon (tax).
21
$62,359 at a tax rate of 34%.
22
In addition to basing the length of sentence on this figure,
the court imposed restitution on Pesaturo in this amount. The
government sought additional restitution in the amount of $75,335
for the Commonwealth of Massachusetts for state taxes evaded; the
judge refused this request.
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Pesaturo bases his first argument on Booker. However,
Booker does not help him. The sentencing flaw at issue in Booker
was not judicial factfinding per se, but the application of the
sentencing guidelines as mandatory rather than advisory. United
States v. Antonakopoulos, 399 F.3d 68, 79-80 (1st Cir. 2005). To
the extent we construe Pesaturo's argument as a challenge also
based on the mandatory nature of the sentencing regime, we review
for plain error because, despite his arguments to the contrary,
Pesaturo failed to argue below that his sentence violated either
Apprendi v. New Jersey, 530 U.S. 466 (2000), or Blakely v.
Washington, 542 U.S. 296 (2004).
Under the plain error standard, a defendant ordinarily
must "point to circumstances creating a reasonable probability that
the district court would impose a different sentence more favorable
to [him] under the new 'advisory Guidelines' Booker regime."
Antonakopoulos, 399 F.3d at 75. We further stated there that the
"use of judicial fact finding . . . ordinarily cannot alone meet
[this] standard," id. at 80. Pesaturo's only other possible plain
error argument is his claim that the court erred in calculating the
tax loss.
On this point, Pesaturo argues that the judge erred
because there was evidence at trial that at least some of the fuel
sold to Korson, JAG and M&M Transport was used in off-road
applications. The government points out, however, that because the
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amount of a tax loss is often uncertain, the Sentencing Guidelines
"contemplate that the court will simply make a reasonable estimate
based on the available facts." See USSG § 2T1.1 cmt. n.1 (2006);
accord United States v. Hart, 324 F.3d 575, 578 (8th Cir. 2003)
(finding no clear error where the trial court accepted the
government's calculation of defendant's personal income where
defendant failed to keep financial records); United States v.
Bishop, 291 F.3d 1100, 1114-15 (9th Cir. 2002) (finding no error
where the court based its sentence on the government's calculation
of tax loss, which assumed "married filing jointly" rather than
"married filing separately" tax status, used standard deductions
rather than itemized deductions, and failed to deduct certain sums
from defendant's income). Here, it was defendant's own lack of
accurate record-keeping – he recorded no sales of kerosene although
his records indicated that he purchased 662,105 gallons – that made
the court's estimation necessary.
Even if we allowed that some of the kerosene was sold for
purely off-road use, Pesaturo's sentence is unlikely to change. As
the government points out, such non-taxable sales of pure kerosene
would have had to account for upwards of 44% of Covenant's kerosene
sales before his sentencing range would be affected. Since several
witnesses testified that Covenant made no sales of pure kerosene
and no witness testified to a single instance of such a sale, the
judge's determination that Pesaturo should be sentenced based on
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the full amount of the tax owing on all of its unaccounted-for
kerosene sales is not plainly erroneous.
III.
For the foregoing reasons, we affirm the conviction and
sentence. So ordered.
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