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Illinois Department of Revenue v. Phillips

August 27, 1985

ILLINOIS DEPARTMENT OF REVENUE, PLAINTIFF-APPELLANT,
v.
WILLIAM PHILLIPS, DEFENDANT-APPELLEE



Appeal from the United States District Court for the Northern District of Illinois, Eastern Division., No. 83 C 8541 - William T. Hart, Judge.

Author: Bauer

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

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 Organization Act (RICO), 18 U.S.C. § 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, § 440 et seq, the Municipal Retailers' Occupation Tax Act, ILL. REV. STAT.ch 124, § 8-11-1, and the Regional Transportation Authority Retailers' Occupation Tax Act, ILL. REV. STAT.ch. 111 2/3, § 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. § 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. § 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. § 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 sales taxes for the True Car Wash sufficiently alleges the element 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. § 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. § 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. § 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. § 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 constitues [sic] 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. § 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 ...


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