Court Opinion

ID: 2963692
Source: CourtListenerOpinion
Date Created: 2015-09-21 21:14:00.104731+00
Date Added: 2024-06-11T15:01:19.908369
License: Public Domain

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.  

                                         -2-

                                      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"

                                         -3-

          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

                                         -4-

          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. 
          ___

                                         -6-

                    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

                                         -7-

          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.
          ______

                                         -9-

                    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.
                                                         ___

                                         -10-

                    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.

                                         -13-