United States v. DiRico

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

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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).

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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

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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

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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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