United States v. DiRico

Opinion

USCA1 Opinion

UNITED STATES COURT OF APPEALS

                                FOR THE FIRST CIRCUIT

                                 ____________________



          No. 94-1471



                                    UNITED STATES,



                                      Appellee,



                                          v.



                                   FRANCIS DIRICO,



                                Defendant - Appellant.



                                 ____________________



                     APPEAL FROM THE UNITED STATES DISTRICT COURT



                          FOR THE DISTRICT OF MASSACHUSETTS



                   [Hon. Douglas P. Woodlock, U.S. District Judge]
                                              ___________________



                                 ____________________



                                        Before



                                 Cyr, Circuit Judge,
                                      _____________

                            Bownes, Senior Circuit Judge,
                                    ____________________

                           and McAuliffe,* District Judge.
                                           ______________



                                _____________________



               John A. MacFadyen,  with whom Harold C. Arcaro,  Jr., was on
               _________________             ______________________

          brief for appellant.

               Rita G. Calvin,  Attorney, Tax Division, U.S.  Department of
               ______________

          Justice, with  whom Loretta Argrett, Assistant  Attorney General,
                              _______________

          Donald K.  Stern,  U.S.  Attorney, Robert  E.  Lindsay  and  Alan
          ________________                   ___________________       ____

          Hechtkopf, Attorneys, Tax  Division, U.S. Department of  Justice,
          _________

          were on brief for appellee.


____________________



                                    March 11, 1996

                                 ____________________



                              
          ____________________



          *  Of the District of New Hampshire, sitting by designation.



McAULIFFE,  District Judge.   Appellant  Francis DiRico
                    McAULIFFE,  District Judge.
                                ______________



          ("DiRico") challenges  a number of  rulings made by  the district



          court during his  criminal trial on charges of false subscription



          to a tax return, as  well as the sentence imposed.   We limit our



          discussion to the one issue raised by DiRico that has merit.



                    While this  court was considering  the multiple  issues



          raised  on appeal,  the United  States  Supreme Court  issued its



          opinion in United States v. Gaudin, 115 S. Ct. 2310 (1995).  That
                     _____________    ______



          decision  clarified  a  point  of  law  relevant  to  this  case.



          Accordingly,  the  government  suggested that  the  parties  file



          supplemental briefs addressing DiRico's claim that when the trial



          judge determined  "materiality" under  26 U.S.C.    7206(1) as  a



          matter  of law,  he  impermissibly  directed  the  jury's  guilty



          verdict, at  least with regard  to that essential element  of the



          crime of conviction.  



                    The parties  were directed to file  supplemental briefs



          on that issue by September 15, 1995.  Having now considered those



          briefs  and the  Supreme  Court's  opinion  in United  States  v.
                                                         ______________



          Gaudin,  115 S.  Ct. 2310  (1995),  we find  that the  challenged
          ______



          instruction on materiality, although appropriate when given, see,
                                                                       ___



          e.g., United States v. Romanow, 509  F.2d 26, 28 (1st Cir. 1975),
          ____  _____________    _______



          nevertheless  constitutes reversible  error  under Gaudin,  which
                                                             ______



          decision is applicable to this case.  Accordingly, we reverse and



          remand.  


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BACKGROUND
                                      BACKGROUND
                                      __________



          I.  PROCEDURAL HISTORY.
          I.  PROCEDURAL HISTORY.



                    On  March 30,  1993, a  federal grand  jury  returned a



          three-count  indictment against  DiRico.    Counts  One  and  Two



          charged  him  with  willfully attempting  to  evade  his personal



          income tax liability for tax years 1986 and 1987, in violation of



          26 U.S.C.   7201.  Count  Three charged him with willfully making



          and  subscribing  a  false corporate  tax  return  for Industrial



          Electric and  Electronics, Inc., for the fiscal  year ending June



          30, 1987, in violation of 26 U.S.C.   7206(1).  After a thirteen-



          day  trial, the jury acquitted DiRico  on Counts One and Two, but



          convicted him on Count Three.



          II.  PERTINENT FACTS.
          II.  PERTINENT FACTS.



                    During the relevant tax years, DiRico was president and



          sole  shareholder of  Industrial Electric  and  Electronics, Inc.



          ("IE&E"), a  cellular communications  company.   IE&E's employees



          performed routine  bookkeeping and  accounting functions  for the



          company,  and Warren  Lynch  served  as  the  company's  in-house



          accountant.   IE&E also  retained an  outside accounting  firm to



          review its books and prepare corporate tax returns.  



                    IE&E  managed its financial affairs with the assistance



          of  a computer-based accounting  system.  Each  IE&E customer was



          assigned  an  account  number, and  each  customer's  payment was



          logged into the computer system  as a credit against the numbered



          account.  Most customer account numbers began with the prefix "1"


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or "2,"  but several  were assigned  the prefix "5."   These  so-



          called "5" accounts were the focus of the criminal prosecution.  



                    Payments  received on  the "1"  and  "2" accounts  were



          deposited in  an IE&E corporate  account at Bank of  New England.



          Payments on the "5" accounts,  however, were given to DiRico, who



          deposited them at the Abington Savings  Bank, where he maintained



          several  personal accounts.   DiRico  converted  most of  the "5"



          account receipts into  cash, money orders, and  cashier's checks,



          thereby frustrating any effort to trace the disposition of  those



          funds.



                    At  the end  of each  month,  IE&E employees  generated



          reports related to  cash flow, accounts receivable,  and payments



          received.  Those reports were secured in bound volumes and placed



          into storage.   Reports related  to the "5" accounts  were stored



          separately.  And, although receipts from all customers, including



          payments  to the  "5" accounts,  were  entered into  the computer



          system,  neither Lynch  (who  did  not know  how  to operate  the



          computer system) nor  the outside accountants  were aware of  the



          existence of the "5" accounts.   So, when the outside accountants



          prepared the corporate tax return for the fiscal year ending June



          1987, they did not include  monies received from the "5" accounts



          in calculating corporate gross income. 



                    At  trial, DiRico admitted that he knew the accountants



          were unaware of the "5" account  receipts.  He also conceded that



          he under-reported  gross receipts  on IE&E's  1987 corporate  tax



          return.  However, he claimed that despite under-stating its gross


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receipts,   the  company  actually  paid  the  proper  amount  of



          corporate tax and, therefore, the  return was "correct."  He also



          argued  that  the false  information  on the  1987  corporate tax



          return  was not  "material" so  long  as IE&E  actually paid  the



          proper amount of federal tax due.



                    With regard to  the "materiality" element of  the false



          subscription  charge,  the  trial  judge  followed  then-existing



          practice and gave the following instruction:


It  also must be a return that's false as

                      to  a material matter.   That is,  it was

                      untrue  when made  and then known  by the

                      defendant to be untrue when he was making

                      it.   Materiality  is a  question largely

                      for the Court to determine.  The question

                      of whether or  not it is material  is one

                      on which I will instruct you.  And I will

                      instruct you that the amount of the gross

                      receipts or, more accurately here because

                      we deal  with an accrual  basis taxpayer,

                      the sales reported on  a corporate return

                      is a  material matter within  the meaning

                      of this particular statute.  


(Trial Transcript,  volume 14  at 104.)   DiRico objected  to the



          court's instruction in a timely fashion.  



                                      DISCUSSION
                                      DISCUSSION
                                      __________



                    The  Supreme Court's recent opinion in United States v.
                                                           _____________



          Gaudin,  supra, makes  it  clear that  when  "materiality" is  an
          ______   _____



          element  of a charged  crime and takes  on a factual  aspect, the



          jury must  decide whether that  element has been proved  beyond a



          reasonable doubt.  Plainly, an instruction that removes  from the



          jury's  consideration one of the  essential factual elements of a



          crime charged cannot stand.  Jury instructions  cannot operate to



                                         -5-



deprive a criminal defendant of  his or her constitutional "right



          to have a jury determine, beyond a reasonable doubt, his guilt of



          every element of  the crime with  which he is charged."   Gaudin,
                                                                    ______



          115 S. Ct. at 2320.  



                    In  Gaudin,  the  defendant  was  charged  with  making
                        ______



          material  false statements  on Department  of  Housing and  Urban



          Development  ("HUD") loan  documents in  violation  of 18  U.S.C.



            1001.  The trial court  instructed the jury that the government



          was required  to prove  that  the alleged  false statements  were



          material  to the  activities and  decisions of  HUD, and  further



          instructed the jury that the "issue  of materiality . . . is  not



          submitted to you for your decision but rather is a matter for the



          decision of  the court.   You are instructed that  the statements



          charged in the indictment are material statements."  Id. at 2313.
                                                               ___



          The jury  convicted the defendant,  but the Court of  Appeals for



          the Ninth Circuit reversed, reasoning that taking the question of



          materiality  from  the  jury violated  rights  guaranteed  to the



          defendant by the Fifth and Sixth Amendments to the  Constitution.



          The Supreme Court subsequently agreed, holding that:


The   Constitution   gives   a   criminal

                      defendant the right to demand that a jury

                      find him guilty  of all  the elements  of

                      the crime with which  he is charged;  one

                      of  the elements in  the present  case is

                      materiality; respondent  therefore had  a

                      right   to    have   the    jury   decide

                      materiality.


Id. at 2314. 
          ___


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In the context of this appeal, we discern no obvious or



          substantive distinction  between the "materiality" element  of 18



          U.S.C.    1001 and  the "materiality" element  of the  crime with



          which DiRico  was  charged, i.e.,  false  subscription to  a  tax
                                      ____



          return in violation  of 26 U.S.C.   7206(1).  See, e.g., Knapp v.
                                                        ___  ____  _____



          United  States,  116  S.  Ct.  666  (1995)  (remanding  case  for
          ______________



          reconsideration  of   defendant's  conviction  under   26  U.S.C.



            7206(1) in light  of Gaudin); Waldron v. United  States, 116 S.
                                 ______   _______    ______________



          Ct. 333 (1995) (remanding case for reconsideration of defendant's



          conviction  under  18  U.S.C.     1014  (false  statements  to  a



          federally insured bank) in light of Gaudin).  
                                              ______



                    The  government  concedes materiality  is  an essential



          element of the crime of  false subscription.  It argues, however,



          that as a  matter of law  "gross receipts (sales) are  a material
               ___________________



          matter  in the  computation of  income  from a  business and  the



          amount of tax due  on that income."  (Supplemental Brief  for the



          Appellee, at  11.)   Accordingly, the  government contends  that,



          even in the  wake of United States  v. Gaudin, a trial  judge may
                               _____________     ______



          properly  instruct  a  jury  that  statements  on  a  tax  return



          regarding  gross receipts  are  "material" as  a  matter of  law.



          Given the  facts of this  particular case, we are  constrained to



          disagree.



                    DiRico's defense  was straightforward:  he  argued that



          if  deductible expenses equaled  or exceeded gross  receipts, any



          statement  of gross receipts  could not be  material because that



          information could  have had no  tangible effect on the  amount of


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tax due --- proper calculation of which being the very purpose of



          completing  and  filing the  return  in  the  first place.    The



          government  responds persuasively  by  arguing  that an  accurate



          statement of gross receipts is essential to a correct computation



          of taxable income (as distinguished from simply the taxes due and



          payable).   As  the government  contends,  it need  not prove  an



          actual tax deficiency in any  false subscription case in order to
                                   ___



          demonstrate  that a  taxpayer's false  statement  was "material."



          The government need  only prove to the jury,  beyond a reasonable



          doubt,  that the  alleged  false statement  at  issue could  have



          influenced  or affected  the  IRS in  carrying out  the functions



          committed to it  by law.  United  States v. Romanow, 509  F.2d at
                                    ______________    _______



          28.1  



                    It  may well  be a  straightforward matter in  this and



          most  other  cases  for  the  government  to  produce  sufficient



          evidence, possibly through  the testimony of a  representative of



          the IRS, to establish beyond a reasonable doubt that an incorrect



          gross  receipts  or taxable  income  entry has  the  potential to



          affect  a  legitimate   function  of  the  IRS.     Nevertheless,



          "materiality" is both an essential  element of the crime of false



          subscription, and a mixed question of law and fact.  Accordingly,

                              
          ____________________



          1   In  this case,  for  example, the  government might  meet its

          burden by satisfying  the jury that defendant's  false statements

          had "the potential for hindering the IRS's efforts to monitor and

          verify [defendant's] tax liability."  United States v. Greenberg,
                                                _____________    _________

          735  F.2d 29, 31-32  (2d Cir.  1984); see  also United  States v.
                                                _________ ______________

          Taylor, 574 F.2d 232, 235 (5th Cir.), cert. denied, 439  U.S. 893
          ______                                ____________

          (1978); United  States v. Fawaz,  881 F.2d 259, 263-64  (6th Cir.
                  ______________    _____

          1989);  United States  v. DiVarco,  484 F.2d  670, 673  (7th Cir.
                  _____________     _______

          1973), cert. denied, 415 U.S. 916 (1974).
                 ____________



                                         -8-



the  government must  prove and  the  jury (not  the court)  must



          ultimately find an alleged false statement to be  material beyond



          a  reasonable  doubt in  order  to convict.    In general,  to be



          material,  "the  statement  must  have   a  natural  tendency  to



          influence, or  [be] capable of  influencing, the decision  of the



          decisionmaking body to which it  was addressed. "  Gaudin, 115 S.
                                                             ______



          Ct.  at 2313 (quoting Kungys v. United  States, 485 U.S. 759, 770
                                ______    ______________



          (1988)).     Determining  whether   a  particular  statement   is



          "material"  requires the  jury to apply  the legal  definition of



          materiality to  the particular  facts of  a given  case.   Id. at
                                                                     ___



          2314.



                    In  light  of  the Supreme  Court's  recent  opinion in



          Gaudin,  we conclude  that in  the context  of a  prosecution for
          ______



          false  subscription  under 26  U.S.C.    7206(1),  "materiality,"



          being an element of  the offense and a mixed question  of law and



          fact, is a matter for the jury to decide.  While  the trial judge



          must  properly  instruct the  jury  on  the legal  definition  of



          materiality, only the jury can decide whether the facts proved at



          trial  meet that  legal  standard.   That  the  materiality of  a



          statement  might appear  to  be  self-evident,  or  the  evidence



          tending to establish  that element might seem  overwhelming, does



          not empower  the  trial court  to  remove consideration  of  that



          element from the  jury.  Because the "materiality"  issue in this



          particular case  was not conceded  by the defendant, and  in fact



          defendant  asked that  it be  submitted to  the jury  (before the



          Gaudin decision issued) the jury should have decided the matter.
          ______


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The   government's  argument   that  the   faulty  jury



          instruction  amounted to harmless error is  appealing, but we are



          persuaded  that in  light  of  the fact  that  the trial  court's



          instruction was intended to and did effectively  direct a finding



          of "materiality," the only proper disposition is to remand.



                    Our  analysis of  this issue  begins  with the  Supreme



          Court's opinion  in Chapman  v. California, 386  U.S. 18  (1967),
                              _______     __________



          where the Court recognized that some constitutional errors in the



          course of a criminal trial may be harmless and, therefore, do not



          require reversal of a conviction.   The Court has since explained



          the Chapman harmless error analysis as follows:  
              _______


Consistent with the jury-trial guarantee,

                      the  question  [Chapman]   instructs  the
                                      _______

                      reviewing court to  consider is not  what

                      effect  the  constitutional  error  might

                      generally  be  expected  to have  upon  a

                      reasonable jury,  but rather  what effect

                      it had  upon  the guilty  verdict in  the

                      case at hand. . . . The inquiry, in other

                      words, is  not whether, in  a trial  that

                      occurred  without  the  error,  a  guilty

                      verdict would surely  have been rendered,

                      but whether  the guilty  verdict in  this
                                                           ____

                      trial  was surely  unattributable to  the

                      error.   


Sullivan  v. Louisiana, 113  S. Ct. 2078,  2081 (1993) (citations
          ________     _________



          omitted).   While  most  constitutional  errors  have  been  held



          amenable to the  Chapman harmless error  analysis, others are  of
                           _______



          such  a fundamental  nature that  they will  always invalidate  a



          conviction.  Accordingly, "[t]he question in the present  case is



          to which category the present error belongs."  Id.
                                                         ___


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The  Due   Process  Clause   of  the  Fifth   Amendment



          guarantees that no  one shall be convicted of  a criminal offense



          "except upon  proof  beyond  a reasonable  doubt  of  every  fact



          necessary to constitute  the crime with which he is charged."  In
                                                                         __



          re  Winship,  397  U.S. 358,  364  (1970).    That constitutional
          ___________



          guarantee is  obviously interrelated with  the defendant's  Sixth



          Amendment right to trial by jury:  


The Sixth  Amendment provides  that "[i]n

                      all  criminal  prosecutions,  the accused

                      shall  enjoy the  right  to a  speedy and

                      public trial, by an  impartial jury." . .

                      .   The right includes, of course, as its

                      most important element, the right to have

                      the  jury, rather  than the  judge, reach

                      the requisite finding of "guilty."  Thus,

                      although a judge may direct a verdict for

                      the defendant if  the evidence is legally

                      insufficient to  establish guilt,  he may

                      not  direct a  verdict for the  State, no

                      matter how overwhelming the evidence.  


Sullivan, 113 S.  Ct. at 2080.    In Sullivan the  Court reasoned
          ________                             ________



          that  because the  trial  court  erroneously defined  "reasonable



          doubt" for  the jury, the harmless error  analysis articulated in



          Chapman was inapplicable:
          _______


Since, for  the reasons  described above,

                      there had been no jury verdict within the

                      meaning  of  the   Sixth  Amendment,  the

                      entire  premise  of   Chapman  review  is
                                            _______

                      simply  absent.    There  being  no  jury

                      verdict   of  guilty-beyond-a-reasonable-

                      doubt,  the  question  whether  the  same
                                                           ____

                      verdict   of  guilty-beyond-a-reasonable-

                      doubt would have been rendered absent the

                      constitutional    error     is    utterly

                      meaningless.  There is  no object, so  to
                                                 ______

                      speak, upon which harmless-error scrutiny

                      can operate.  The most an appellate court



                                         -11-



can conclude  is that a jury would surely
                                                   ____________

                      have  found  petitioner guilty  beyond  a
                      ___________

                      reasonable doubt  -- not that  the jury's

                      actual   finding  of   guilty  beyond   a

                      reasonable  doubt would  surely not  have
                                        _______________________

                      been different absent  the constitutional
                      ______________

                      error.   That is  not enough.   The Sixth

                      Amendment  requires  more  than appellate

                      speculation about  a hypothetical  jury's

                      action, or else directed verdicts for the

                      State would be sustainable  on appeal; it

                      requires  an   actual  jury   finding  of

                      guilty.


Id.  at  2082 (citations  omitted).   So,  where  a jury  has not
          ___



          rendered a  verdict that addresses every essential element of the



          charged offense, and therefore has  not rendered a verdict on the



          crime charged,  the question  of whether the  same verdict  would



          have   been  rendered   absent   the   constitutional  error   is



          meaningless.  Here, because  the jury  did not  determine whether



          the  government  had  proved,  beyond  a  reasonable  doubt,  the



          existence of an  essential factual element of the  crime of false



          subscription  (i.e., materiality),  there  was "no  jury  verdict
                         ____



          within  the meaning of  the Sixth  Amendment" and  harmless error



          analysis is inapplicable.  Id. at 2081-82.
                                     ___



                    In light of our conclusion that, at least in this case,



          "materiality"  was  an  essential factual  element  of  the crime



          charged, the trial court's withdrawal of that issue from the jury



          constituted a "structural  defect" in the trial  process, Arizona
                                                                    _______



          v. Fulminante, 499 U.S. 279,  310 (1991), which requires reversal
             __________



          of DiRico's  conviction.  Simply  stated, we  cannot conclude  on



          appeal that the government proved "beyond a reasonable doubt that



          the  error  complained  of  did  not  contribute to  the  verdict



                                         -12-



obtained," since a verdict of guilt as to every essential element



          was never obtained.  Chapman, 386 U.S. at 24.  
                               _______



                                      CONCLUSION
                                      CONCLUSION
                                      __________



                    For  the foregoing  reasons, defendant's  conviction is



          reversed  and the  case is  remanded for further  proceedings not



          inconsistent with this opinion.


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