USCA1 Opinion
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
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No. 94-1471
UNITED STATES,
Appellee,
v.
FRANCIS DIRICO,
Defendant - Appellant.
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APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Douglas P. Woodlock, U.S. District Judge]
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Before
Cyr, Circuit Judge,
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Bownes, Senior Circuit Judge,
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and McAuliffe,* District Judge.
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John A. MacFadyen, with whom Harold C. Arcaro, Jr., was on
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brief for appellant.
Rita G. Calvin, Attorney, Tax Division, U.S. Department of
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Justice, with whom Loretta Argrett, Assistant Attorney General,
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Donald K. Stern, U.S. Attorney, Robert E. Lindsay and Alan
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Hechtkopf, Attorneys, Tax Division, U.S. Department of Justice,
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were on brief for appellee.
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March 11, 1996
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* Of the District of New Hampshire, sitting by designation.
McAULIFFE, District Judge. Appellant Francis DiRico
McAULIFFE, District Judge.
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("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
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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.
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Gaudin, 115 S. Ct. 2310 (1995), we find that the challenged
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instruction on materiality, although appropriate when given, see,
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e.g., United States v. Romanow, 509 F.2d 26, 28 (1st Cir. 1975),
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nevertheless constitutes reversible error under Gaudin, which
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decision is applicable to this case. Accordingly, we reverse and
remand.
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BACKGROUND
BACKGROUND
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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
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The Supreme Court's recent opinion in United States v.
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Gaudin, supra, makes it clear that when "materiality" is an
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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,
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115 S. Ct. at 2320.
In Gaudin, the defendant was charged with making
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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.
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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
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return in violation of 26 U.S.C. 7206(1). See, e.g., Knapp v.
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United States, 116 S. Ct. 666 (1995) (remanding case for
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reconsideration of defendant's conviction under 26 U.S.C.
7206(1) in light of Gaudin); Waldron v. United States, 116 S.
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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).
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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
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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
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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
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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
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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,
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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,
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735 F.2d 29, 31-32 (2d Cir. 1984); see also United States v.
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Taylor, 574 F.2d 232, 235 (5th Cir.), cert. denied, 439 U.S. 893
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(1978); United States v. Fawaz, 881 F.2d 259, 263-64 (6th Cir.
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1989); United States v. DiVarco, 484 F.2d 670, 673 (7th Cir.
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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.
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Ct. at 2313 (quoting Kungys v. United States, 485 U.S. 759, 770
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(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
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2314.
In light of the Supreme Court's recent opinion in
Gaudin, we conclude that in the context of a prosecution for
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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),
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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:
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Consistent with the jury-trial guarantee,
the question [Chapman] instructs the
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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
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trial was surely unattributable to the
error.
Sullivan v. Louisiana, 113 S. Ct. 2078, 2081 (1993) (citations
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omitted). While most constitutional errors have been held
amenable to the Chapman harmless error analysis, others are of
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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
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re Winship, 397 U.S. 358, 364 (1970). That constitutional
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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
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that because the trial court erroneously defined "reasonable
doubt" for the jury, the harmless error analysis articulated in
Chapman was inapplicable:
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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
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simply absent. There being no jury
verdict of guilty-beyond-a-reasonable-
doubt, the question whether the same
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verdict of guilty-beyond-a-reasonable-
doubt would have been rendered absent the
constitutional error is utterly
meaningless. There is no object, so to
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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
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have found petitioner guilty beyond a
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reasonable doubt -- not that the jury's
actual finding of guilty beyond a
reasonable doubt would surely not have
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been different absent the constitutional
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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
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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
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within the meaning of the Sixth Amendment" and harmless error
analysis is inapplicable. Id. at 2081-82.
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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
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v. Fulminante, 499 U.S. 279, 310 (1991), which requires reversal
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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.
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CONCLUSION
CONCLUSION
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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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