
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-
