Willful Blindness Instruction

[Demosthenes]

Willful Blindness Instruction Not Barred by Supreme Court Case, Appeals Court Holds
Posted September 9, 2010, 6:32 P.M. ET

The U.S. Court of Appeals for the Third Circuit Sept. 9 joined a number of other circuit courts in concluding that the Supreme Court's decision of Cheek v. United States, 498 U.S. 192 (1991) does not prohibit a willful blindness instruction that applies to a defendant's knowledge of relevant tax law (United States v. Stadtmauer, 3d Cir., No. 09-1575, 9/9/10).

Defendant Richard Stadtmauer was convicted of one count of conspiracy to defraud the United States and nine counts of willfully aiding in the filing of materially false or fraudulent tax returns. Stadtmauer raised a number of challenges to the convictions but the court of appeals dealt mainly with the issue he raised last: whether the district court erred in giving a willful blindness instruction in the case and whether the Supreme Court's decision foreclosed the possibility that willful blindness would satisfy the legal knowledge component of the willfulness element of criminal tax offenses.

Miguel A. Estrada, Gibson, Dunn & Crutcher LLP, Washington, D.C., who argued the case before the court of appeals told BNA that he was “obviously disappointed” with the decision. He said that a review of the court's opinion was being made to “assess our appellate options.”

[LPC]

The opinion in United States v. Richard Stadtmauer, No. 09-1575 (3rd Cir. 9/9/2010)(precedential) is rather lengthy, and I'm going to post some excerpts:

Following a two-month jury trial in the District Court for the District of New Jersey, Richard Stadtmauer was convicted of one count of conspiracy to defraud the United States (in violation of 18 U.S.C. § 371), and nine counts of willfully aiding in the filing of materially false or fraudulent tax returns (in violation of 26 U.S.C. § 7206(2)). On appeal, Stadtmauer raises many challenges to these convictions. We deal principally with the issue Stadtmauer raises last: whether the District Court erred in giving a willful blindness instruction in this case, including whether the Supreme Court's decision in Cheek v. United States, 498 U.S. 192 (1991), forecloses the possibility that willful blindness may satisfy the legal knowledge component of the "willfulness" element of criminal tax offenses. We join our sister circuit courts in concluding that Cheek does not prohibit a willful blindness instruction that applies to a defendant's knowledge of relevant tax law. We reject also Stadtmauer's other claims of error, and thus affirm.

[...]

D. Evidence of Stadtmauer's Knowledge

To establish that Stadtmauer "willfully" aided in the preparation of materially false or fraudulent tax returns -- as required for a violation of 26 U.S.C. § 7206(2)13 -- the Government was required to prove beyond a reasonable doubt that he voluntarily and intentionally violated "a known legal duty." United States v. Pomponio, 429 U.S. 10, 12 (1976). Whether Stadtmauer had knowledge that the deductions claimed on the partnerships' tax returns were materially false or fraudulent was the critical issue at trial.

At trial, Bentzlin, Zecher, and Bekritsky each testified that they never discussed with Stadtmauer the falsity of any particular deduction or tax return. Accordingly, the Government sought to meet its burden of proving that Stadtmauer acted "willfully" through various forms of circumstantial evidence (some of which have already been discussed), including: (1) evidence of Stadtmauer's intimate familiarity with the partnerships and how their general ledgers were maintained; (2) evidence that Stadtmauer made decisions on how to treat partnership expenses in the past with tax consequences in mind; and (3) other evidence suggestive of a consciousness of guilt, e.g., evidence that Stadtmauer was aware that the partnerships were making improper expenditures.

1. "Thursday Meetings"

In addition to the "Tuesday Meetings" that Stadtmauer regularly attended, for many years he ran weekly "Thursday Meetings" with the limited partnerships' property managers, as well as KC's in-house counsel, controller, Bentzlin, and sometimes Plotkin.14 The purpose of each meeting was to conduct an in-depth review of one or two KC properties. The managers prepared presentation packages that showed the partnerships' actual expenses to date. Stadtmauer went through the presentations "line by line," and asked "specific" questions about each. (App. 2641.) According to Zecher, "there was nothing [Stadtmauer] didn't see fit to get involved with in property management," and he was "one of the brightest people [that Zecher had] ever met." (Id. at 2836.)

In 1996, certain property managers started using special letter codes on their general ledgers to identify "non-property" expenses paid for by their respective partnerships. The codes allowed property managers to identify those expenses more easily and exclude them from their Thursday Meeting presentations. According to Bentzlin, the property managers were hesitant to answer Stadtmauer's questions about such expenses during Thursday Meetings (previously listed as "miscellaneous" expenses on the presentations), because they knew the expenses were for expenses "paid out of other properties," and "didn't want to blurt it out in front of a roomful of people." (Id. at 2150.)

Stadtmauer was "quite unhappy" when he learned of the codes, and directed his subordinates to end the practice. (Id. at 2186.) Stadtmauer and Bentzlin ultimately decided to lump non-property expenses together under a category called "other." Doing so obviated the need for Stadtmauer to "interrogate or continue to question the property manager as to the nature of those expenditures" during Thursday Meetings, and made it easier during Tuesday Meetings to "figure out [how] the apartment complex on its own was really operating." (Id. at 2185-86.) In addition, Stadtmauer directed that KC's accounting software be modified "to allow somebody to go in and change [existing] descriptions within the general ledger." (Id. at 2187.)

Stadtmauer also frequently instructed his subordinates to omit descriptions in check requests to avoid leaving a "trail" when KC "used one property to pay another property's expenses." (Id. at 2628.) He admonished Zecher to "never put the descriptions in," because he "d[idn't] want the descriptions [to show up] in the ledger." (Id. at 2855.) Stadtmauer also "reminded [Zecher,] over and over, [to] be careful what [he] put in emails. Emails never disappear." (Id. at 2858.)

2. "Richard Specials" and Other Special Financial Statements

In certain circumstances, Stadtmauer directed that special financial statements for the partnerships be prepared for banks and other entities. These were known as "Richard Specials." These special financial statements were often prepared when KC wanted to reduce outstanding letters of credit on particular properties. Stadtmauer would direct that "negative items" that tended to depress the partnership's profitability be removed from these statements, such as capital expenditures (that had been logged as "repair and maintenance" expenses) and "nonproperty" expenses. (Id. at 2077-78.) To prepare these statements, Stadtmauer was given a "detailed report" of the partnership's general ledger, which he would go through line by line and indicate the items to be removed for the financial statement. (Id. at 2077.) KC prepared both internal and external versions of every "Richard Special"; the internal version revealed the adjustments made, while the external version showed only the final numbers after adjustments. (Id. at 2225.)

The first time Stadtmauer asked Bentzlin to create a "Richard Special," Bentzlin objected and told Stadtmauer that he "didn't think it was the right thing to do" because they "would be sending different financials out other than the ones prepared by the accountant." (Id. at 2079.) Stadtmauer argued it would be proper because they would call it a "statement from operations" (as opposed to a "statement of operations"), supposedly making clear that it wasn't a true financial statement. (Id. (emphasis added).) Bentzlin told Stadtmauer he thought the justification was "ridiculous," and though Bentzlin ultimately agreed to prepare the "Richard Specials," he "didn't want [them] ever to go out with [his] name on [them]."15 (Id.)

Similar to "Richard Specials," on several occasions KC prepared special financial statements in connection with potential acquisitions and joint ventures. For example, in 1995 certain lenders agreed to finance KC's acquisition of Elmwood Village, provided that KC would commit to making $1.5 million in capital improvements to the property and secure a $1.6 million letter of credit. These expenditures were entered, as usual, under non-capital accounts on the partnership's general ledger. At the end of the year, however, KC decided to capitalize the items on the partnership's financial statement "to get the letter of credit cancelled." (Id. at 2348.) This decision was made during a Tuesday "Cash Meeting" in which Stadtmauer participated.

Elmwood Village's 1996 tax return accurately reported almost $1 million in capital improvements. After the letter of credit was cancelled, however, KC "went back to the usual procedures of expensing those types of expenditures." (Id. at 2210.) Elmwood Village did not capitalize any expenditures after 1996, and its post-1996 returns treated the 1996 renovations that had been capitalized as fully deductible repairs.

Similarly, in 2000 KC paid $280 million to acquire a company called WNY, which owned approximately 40 properties in New Jersey, Pennsylvania, Maryland, and Delaware. KC was required to obtain a $40 million letter of credit in connection with the acquisition. Stadtmauer, Plotkin, and Zecher had a "very detailed meeting" on how they would "do the accounting for the WNY properties." (Id. at 2967.) They agreed that they would "capitalize everything and anything [they] could, instead of expensing it, like [they] always did in the other properties." (Id.) Zecher testified that Stadtmauer was "convinced, because the transaction was so large, and the $40 million [in] letters of credit were so unusual for [KC], that the banks were going to come in and look at not only the tax returns, but . . . the actual books and records." (Id.)

When the letters of credit were removed, Plotkin asked whether she should expense the capitalized items. Zecher responded that he and Stadtmauer had determined that the financial statements would "look very weird" if they stopped capitalizing. (Id. at 2970-71.)

3. Other Circumstantial Evidence of Stadtmauer's Knowledge of Tax Law and Consciousness of Guilt

i. Rationale for Private School Tuition Payments

As noted, for several years KC paid the private school tuition for, among other KC employees, Plotkin's and Zecher's children. Zecher testified that Stadtmauer came up with the idea of paying the tuition directly to the school instead of increasing Zecher's year-end bonus by that amount. (Id. at 2824.) Stadtmauer told Zecher that he was "trying to be nice" by paying the tuition directly to the school, which would allow Zecher to avoid thousands of dollars in additional income taxes. (Id.)

ii. The 1996 IRS Audit

In 1996, the Internal Revenue Service ("IRS") audited the tax returns for two KC partnerships, focusing on the large deductions taken for repairs (including $850,000 to reconstruct a building's facade, which was deducted in full as a business expense). The IRS ultimately issued "no change" letters. Following the audit, however, Plotkin sent a letter to Bentzlin -- on which Stadtmauer was copied -- instructing Bentzlin to change the word "improvements" to "repairs" in the "tenant improvements," "apartment renovations," and "building improvements" general ledger accounts. (Id. at 2269-70.) Bentzlin believed the purpose was to make these categories appear as if they contained repair and maintenance expenditures rather than "potentially a capital improvement type item." (Id. at 2270.)

iii. Dissenting Limited Partners and Executives

In addition to the Kushner family and Stadtmauer, there were other individuals who held interests in various KC partnerships. As Zecher testified at trial, many of these individuals made repeated requests for information regarding the financial state of their partnership interests. In many instances, Stadtmauer and Kushner ordered Zecher to refuse those requests.

In one instance, a partner of a KC partnership named "K & F Clinton" inquired as to certain political contributions made by that partnership and attributed to him. (Id. at 2891.) The partner denied he had ever authorized the contributions, and noted that, "had [he] been informed of the intention to make political contributions, [he] would have advised that such political contributions were inappropriate and [he] would have demanded that they not be made from K & F" funds. (Id. at 2892.) He further noted that "[n]othing in the partnership agreement authorized the disbursement of K & F funds for any unrelated purpose." (Id. at 2892-93.) Zecher got similar responses from several other partners. (Id. at 2893.)

Another limited partner -- Stanley Greenberg -- "constantly" had difficulty obtaining annual financial statements for the partnerships in which he had an interest. (Id. at 3356.) When he finally obtained and examined the partnerships' financial statements for a prior three-year period,16 "it was obvious [to him] that the expenses [claimed for] run[ning] the[] properties were way out of line." (Id.) Among other things, Greenberg noticed that the partnerships in which he had an interest had treated capital expenditures as ordinary expenses, and had made numerous charitable contributions to Kushner's and Stadtmauer's synagogues, as well as political contributions. (Id. at 3363.)

When Greenberg expressed his concerns to Kushner, the latter told him that "if you don't like it, I will give you your money back." (Id. at 3358.) Greenberg also had conversations with Stadtmauer, both in person and by phone, regarding the improper expenses being paid by the partnerships, and asked Stadtmauer to "stop [KC from] doing what they were doing." (Id.) Though he offered no "excuse . . . or any explanation" for the expenses, Stadtmauer rejected Greenberg's request, explaining that "that was the way they did business." (Id.) Following these conversations, KC attempted to buy out Greenberg's interests in the partnerships.

In addition to these dissenting limited partners, the Government also introduced testimony that KC executives were expected not to challenge KC's accounting practices. As Bentzlin explained, "[y]ou had to do pretty much as you were told [at KC]. [Stadtmauer] and [Kushner] often would throw tirades at any number of the meetings on a regular routine basis or in the office, you know, that you really didn't have latitude to make any changes." (Id. at 2190.)

Former CFO Alan Lefkowitz learned this lesson the hard way. In early 2001, he emailed Kushner to ask whether he should follow the past practice of paying a bill for a Mikvah (a Jewish ritual) with funds from one of the partnerships. Kushner was furious, and admonished Lefkowitz that he "should never write something like th[at] down." (Id. at 2613.) According to Zecher, Kushner was angry that Lefkowitz had "put[] in an email in writing that [KC was] paying bills for a . . . not-forprofit project out of . . . for-profit properties." (Id. at 2858.) Kushner printed out the email and hand-wrote: "This guy is a definite Moron. We must deal with the situation." Kushner forwarded a copy of the email (bearing his hand-written note) to Stadtmauer, and it was later discussed among upper-level management. Stadtmauer later told Zecher: "This is a stupid thing to do and you better make sure this guy doesn't do it again." (Id.)

Lefkowitz was eventually barred from Tuesday Meetings and later resigned. He believed that management (including Stadtmauer) had concluded that he was not a "team . . . player," i.e., was "not willing to go along with what they want[ed] to do." (Id. at 2613.)

[...]

A. Willful Blindness

Stadtmauer argues that the District Court erred in giving a willful blindness instruction to the jury for three reasons. Relying on Cheek v. United States, 498 U.S. 192 (1991), he first argues that the "willfulness" element of criminal tax offenses -- which "requires the Government to prove that the law imposed a duty on the defendant, [and] that the defendant knew of th[at] duty," id. at 201 -- can never be satisfied by willful blindness. Second, he contends that the Court improperly instructed the jury that the element of intent could be satisfied through proof of willful blindness, by analogy in violation of our recent en banc decision in Pierre v. Attorney General, 528 F.3d 180 (3d Cir. 2008) (en banc). He finally argues that the trial evidence did not warrant a willful blindness instruction.

We exercise plenary review over whether a willful blindness instruction properly stated the law. United States v. Khorozian, 333 F.3d 498, 507-08 (3d Cir. 2003); see also United States v. Wert-Ruiz, 228 F.3d 250, 255 (3d Cir. 2000). We review a district court's determination that the trial evidence justified the instruction for abuse of discretion, United States v. Flores, 454 F.3d 149, 156 (3d Cir. 2006), and "view the evidence and the inferences drawn therefrom in the light most favorable to the [G]overnment," Wert-Ruiz, 228 F.3d at 255.


1. Whether the District Court's Willful Blindness Instruction Applied to Stadtmauer's Knowledge of the Law

Before turning to Stadtmauer's first challenge to the District Court's willful blindness instruction, we address the Government's contention that the Court's instruction applied only to Stadtmauer's knowledge of facts, not his knowledge of the law.

The Government's initial proposed willful blindness instruction plainly applied to Stadtmauer's knowledge of the law. The final sentence of that instruction stated: "You may find that [the] defendant acted knowingly . . . if you find either that the defendant actually knew about the applicable IRS requirements for the prosecution years, or that the defendant deliberately closed his . . . eyes to what he . . . had every reason to believe." (Supp. App. 60.) Stadtmauer submitted a brief objecting to this instruction. Though he conceded that willful blindness may be appropriate to establish knowledge of facts, he argued that, under Cheek, "willfulness" requires actual knowledge of the law, which cannot be satisfied through deliberate ignorance.

At the charging conference, the Government submitted a revised instruction that omitted the reference to Stadtmauer's knowledge of "applicable IRS requirements." It instead instructed the jury that the "element of knowledge" would be satisfied if the Government proved beyond a reasonable doubt "a conscious purpose by the defendant to avoid knowledge [that] the tax returns at issue were false or fraudulent as to a material matter." (App. at 3973-74.) Though the Government revised its charge to address Stadtmauer's objections, it nonetheless made explicit its position that willful blindness could cover both knowledge of the law and knowledge of facts, arguing that "it is a little difficult to say that it can't [apply to] legal [knowledge] at all[,] because it's really kind of a mixed question of law and fact[] in many [tax] cases."20 (Id. at 3905.)

In its final instructions, the District Court gave a willful blindness instruction consistent with the Government's revised instruction. In relevant part, the Court instructed the jury as follows:

The element of knowledge on the part of the defendant may be satisfied by inferences drawn from proof that the defendant closed his eyes to what would otherwise have been obvious to the defendant. A finding beyond a reasonable doubt of a conscious purpose by the defendant to avoid knowledge that the tax returns at issue were false or fraudulent as to a material matter would permit an inference that he had such knowledge.

Stated another way, the defendant's knowledge of a fact or circumstance may be inferred from his willful blindness to the existence of that fact and circumstance.

No one can avoid responsibility for a crime by deliberately ignoring what is obvious. Thus, you may find that the defendant knew that the tax returns at issue were false or fraudulent as to a material fact based on evidence that you find exists that proves beyond a reasonable doubt that the defendant was aware of a high probability that the tax returns at issue were false or fraudulent as to a material matter; and two, that defendant consciously and deliberately tried to avoid learning about this fact or circumstance.

(App. 3973-74 (emphases added).) Thus, though the Court's willful blindness instruction referred to Stadtmauer's "knowledge of a fact or circumstance," it also instructed the jury that the Government could satisfy its burden of proof on "the element of knowledge" by proving that Stadtmauer consciously avoided learning that the returns were "false or fraudulent as to a material matter," using language that tracks the applicable statute. See 26 U.S.C. § 7206(2).

The Government argues that the Court's reference to Stadtmauer's knowledge that the tax returns were "false or fraudulent as to a material matter" was merely "addressed to Stadtmauer's knowledge of the contents of the returns." (Appellee's Br. at 77.) The Government notes, for example, that regardless of Stadtmauer's knowledge of the relevant tax laws, he could have consciously avoided learning of "the fact that an expenditure from one partnership was falsely represented as a deduction of another partnership," a question of fact that did not require proof of Stadtmauer's knowledge of tax law. (Id. at 79.) We disagree.

The Government's charges in this case were not limited to improper deductions for "non-property" expenses (i.e., expenses paid by a partnership different than the one that actually incurred the expense). Indeed, the bulk of the allegedly improper deductions were for expenditures that should have been capitalized, and it was undisputed that these amounts were paid for work that was actually performed. Rather, for this category of deductions (and others), the Government's theory was that legitimate expenditures were deducted in a fraudulent manner on the partnerships' tax returns.

To prove that Stadtmauer knew the partnership tax returns were "false or fraudulent as to a material matter" with respect to these deductions, the Government needed to establish two "facts" beyond a reasonable doubt: (1) that Stadtmauer knew that these expenditures were claimed as fully deductible business expenses; and (2) that he knew those deductions were impermissible under the relevant tax laws (i.e., that they rendered the tax returns "false or fraudulent as to a material matter"). Cf. United States v. Schiff, 801 F.2d 108, 113 (2d Cir. 1986) (noting that in a criminal tax case the defendant's "knowledge of tax law [is], itself, a fact to be proved as part of the government's case") (emphasis in original). In that light, we believe a reasonable juror could have interpreted the District Court's willful blindness instruction as applying not only to Stadtmauer's knowledge of facts (i.e., which expenditures were claimed as deductible business expenses on the tax returns), but also his knowledge of the law (i.e., whether those deductions were materially "false or fraudulent" under the Tax Code). Accordingly, we turn to Stadtmauer's argument that the Court's instruction incorrectly stated the law in that regard.

2. Willful Blindness and Cheek

Stadtmauer argues that a willful blindness charge that applies to a defendant's knowledge of the law is "categorically and unequivocally" inappropriate in a criminal tax case in light of the Supreme Court's decision in Cheek. (Appellant's Br. at 69.) We disagree.

We begin with the facts of Cheek. The defendant there stopped filing federal income tax returns in 1980 and was charged with (1) willfully failing to file federal income tax returns and (2) willfully attempting to evade income taxes. 498 U.S. at 194. Cheek's defense at trial was that, as a result of "indoctrination" he received as a member of a group that believed the federal tax system is unconstitutional, he "sincerely believed that the tax laws were being unconstitutionally enforced and that his actions . . . were lawful," and thus had "acted without the willfulness required" for the offenses charged. Id. at 196.

The trial court instructed the jury that, to satisfy the element of "willfulness," the Government was required to "prove the voluntary and intentional violation of a known legal duty, a burden that could not be proved by showing mistake, ignorance, or negligence." Id. However, the court also instructed the jury that only "an objectively reasonable good-faith misunderstanding of the law would negate willfulness." Id. (emphasis added). The Seventh Circuit Court affirmed Cheek's conviction, holding that "even actual ignorance is not a defense unless the defendant's ignorance was itself objectively reasonable." Id. at 198.

The Supreme Court reversed. It first reaffirmed that the term "willfully," as used in criminal tax statutes, "carv[es] out an exception to the traditional rule" that ignorance of the law is not a defense to criminal liability. Id. at 200. Second, it reaffirmed its prior decisions establishing that "the standard for the statutory willfulness requirement is the 'voluntary, intentional violation of a known legal duty.'" Id. at 201 (quoting Pomponio, 429 U.S. at 12); see also United States v. Bishop, 412 U.S. 346, 360 (1973).

Turning to the jury instruction given in Cheek's trial, the Court concluded that the trial judge erred in instructing the jury that "a claimed good-faith belief must be objectively reasonable" to "negat[e] . . . evidence purporting to show a defendant's awareness of the legal duty at issue." 498 U.S. at 203. The Court explained that, in proving that a defendant had "actual knowledge" of the legal duty imposed on him by the tax laws, the Government must also

negat[e] a defendant's claim of ignorance of the law or a claim that because of a misunderstanding of the law, he had a good-faith belief that he was not violating any of the provisions of the tax laws. This is so because one cannot be aware that the law imposes a duty upon him and yet be ignorant of it, misunderstand the law, or believe that the duty does not exist. In the end, the issue is whether, based on all the evidence, the Government has proved that the defendant was aware of the duty at issue, which cannot be true if the jury credits a good-faith misunderstanding and belief submission, whether or not the claimed belief or misunderstanding is objectively reasonable.

Id. at 202. The Court thus distinguished between two types of persons: (1) a person with "actual knowledge" of a legal duty, and (2) a person who, in good faith, is ignorant of the duty, misunderstands it, or believes that it does not exist. It held that criminal tax liability could not attach to a person in the latter category.

Stadtmauer's attempt to equate a person who deliberately avoids learning of a legal duty with a person falling within the latter category (e.g., one who is ignorant of that duty by virtue of a good-faith belief or misunderstanding) is not persuasive. The willful blindness charge, also known as a "deliberate ignorance" charge, originates from the Ninth Circuit Court's decision in United States v. Jewell, 532 F.2d 697 (9th Cir. 1975). See United States v. Caminos, 770 F.2d 361, 365 (3d Cir. 1985). Jewell explained that

[t]he substantive justification for the [charge] is that deliberate ignorance and positive knowledge are equally culpable. The textual justification is that in common understanding one "knows" facts of which he is less than absolutely certain. To act "knowingly," therefore, is not necessarily to act only with positive knowledge, but also to act with an awareness of the high probability of the existence of the fact in question. When such awareness is present, "positive" knowledge is not required.

Jewell, 532 F.2d at 700 (emphasis added). Thus, willful blindness is a "subjective state of mind that is deemed to satisfy a scienter requirement of knowledge," United States v. One 1973 Rolls Royce, 43 F.3d 794, 808 (3d Cir. 1994), and "cannot become a safe harbor for culpable conduct," Wert-Ruiz, 228 F.3d at 258.

We see nothing in Cheek -- which did not involve a willful blindness instruction -- that suggests the Supreme Court intended to exempt criminal tax prosecutions from this general rule. Cf. United States v. Bussey, 942 F.2d 1241, 1249 (8th Cir. 1991) (defendant's reliance on Cheek in challenging willful blindness instruction in criminal tax trial was "seriously misplaced" because "Cheek did not involve a willful blindness instruction"). The justification for requiring knowledge of the relevant tax laws is that, "in our complex tax system, uncertainty often arises even among taxpayers who earnestly wish to follow the law, and it is not the purpose of the law to penalize frank difference[s] of opinion or innocent errors made despite the exercise of reasonable care." Cheek, 498 U.S. at 205 (internal quotation marks and citation omitted); see also Bryan v. United States, 524 U.S. 184, 195 (1998) (explaining that "[t]he danger of convicting individuals engaged in apparently innocent activity" is what "motivated [the Court's] decision[]" in Cheek); United States v. Murdock, 290 U.S. 389, 396 (1933) ("Congress did not intend that a person, by reason of a bona fide misunderstanding . . . , should become a criminal by his mere failure to measure up to the prescribed standard of conduct."), overruled on other grounds by Murphy v. Waterfront Comm'n, 378 U.S. 52 (1964). By definition, one who intentionally avoids learning of his tax obligations is not a taxpayer who "earnestly wish[es] to follow the law," or fails to do so as a result of an "innocent error[] made despite the exercise of reasonable care." Cheek, 498 U.S. at 205 (internal quotation marks and citation omitted). Rather, a person who deliberately evades learning his legal duties has a subjectively culpable state of mind that goes beyond mere negligence, a good faith misunderstanding, or even recklessness. Cf. Wert-Ruiz, 228 F.3d at 237 ("Willful blindness is not to be equated with negligence or lack of due care, for willful blindness is a subjective state of mind that is deemed to satisfy a scienter requirement of knowledge." (internal quotation marks and citation omitted)); see also 1973 Rolls Royce, 43 F.3d at 808 (describing the "mainstream conception of willful blindness as a state of mind of much greater culpability than simple negligence or recklessness, and more akin to knowledge").

Several of our sister circuit courts have similarly concluded that a willful blindness instruction that applies to a defendant's knowledge of tax law does not run afoul of Cheek. See United States v. Anthony, 545 F.3d 60, 64-65 (1st Cir. 2008); United States v. Dean, 487 F.3d 840, 851 (11th Cir. 2007); Bussey, 942 F.2d at 1248-49. 21 The First and Eleventh Circuit Courts have interpreted Cheek as counseling that, though a belief that one is complying with the tax laws need not be "objectively reasonable" to constitute a defense, it nonetheless must be "held in good faith." Anthony, 545 F.3d at 65; see also Dean, 487 F.3d at 851 (reasoning that the Cheek Court had, "albeit, not in so many words," held that "the law would not countenance" willful blindness to one's tax obligations). Accordingly, "the defense that the accused did not know of his [legal] duty fails if he came by his ignorance through deliberate avoidance of materials that would have apprised him of his duty, as such avoidance undermines the claim of good faith." Anthony, 545 F.3d at 65; see also Dean, 487 F.3d at 851 ("A willful blindness instruction is entirely appropriate where the evidence supports a finding that a defendant intentionally insulated himself from knowledge of his tax obligations.").

We agree with the reasoning of these Courts and join them in concluding that a willful blindness instruction that applies to a defendant's knowledge of the law in a criminal tax case (such as the instruction at issue here) does not run afoul of Cheek.

The District Court's willful blindness instruction in this case also adhered to our precedent requiring that such an instruction "'make clear that the defendant himself was subjectively aware of the high probability of the fact in question, and not merely that a reasonable man would have been aware of the probability.'" Wert-Ruiz, 228 F.3d at 255 (quoting Caminos, 770 F.2d at 365). The Court instructed the jury that it must find beyond a reasonable doubt that Stadtmauer (1) "was aware of a high probability that the tax returns at issue were false or fraudulent as to a material matter," and (2) "consciously and deliberately tried to avoid learning about this fact." (App. 3974.) The Court told the jury that it could not find the element of knowledge satisfied if it found only that Stadtmauer "should have known that the tax returns at issue were false as to a material matter[,] or that a reasonable person would have known of a high probability of that fact." (Id. (emphases added).) Finally, the Court stressed that it was insufficient that Stadtmauer "may have been stupid or foolish or may have acted out of inadvertence or accident. A showing of negligence or of a good-faith mistake of law is not . . . sufficient to support a finding of . . . knowledge." (Id.)

The instruction as a whole thus belies Stadtmauer's claims that the District Court "allowed the jury to substitute a failure to inquire for evidence of actual knowledge of the tax laws"; allowed the jury to convict him simply for being "ignorant of" or "for misunderstanding" the law; and instructed the jury to apply an "objective test[]" in determining whether he had knowledge of the law.22 (Appellant's Br. at 70-71.) Accordingly, we conclude that the Court's willful blindness instruction correctly stated the law.

3. Whether the District Court's Willful Blindness Instruction Applied to the Element of Specific Intent

Though we agree with Stadtmauer that the District Court's willful blindness instruction could be interpreted as applying to his knowledge of the law, we reject his argument that the instruction also (and impermissibly) applied to the element of intent.

In addition to requiring a "known legal duty," Cheek requires proof that the defendant "voluntarily and intentionally violated that duty." 498 U.S. at 201. "Willfulness" thus requires more than a general intent to accomplish an act; it requires proof that the act was done with the specific intent to do something that the law forbids. See id. at 200-01; Pomponio, 429 U.S. at 12-13; Murdock, 290 U.S. at 394-95; see also Carter v. United States, 530 U.S. 255, 268 (2000) (explaining that general intent (as opposed to specific intent) requires "that the defendant possessed knowledge [only] with respect to the actus reus of the crime").

The penultimate paragraph of the District Court's willful blindness instruction stated:

[Y]ou may find that the defendant acted knowingly and willfully if you find beyond a reasonable doubt either that the defendant actually knew that the tax returns were false or fraudulent as to a material matter or that the defendant deliberately closed his eyes to what he had every reason to believe.

(App. 3974.) Stadtmauer argues that the Court's instruction that the jury could find that Stadtmauer "acted knowingly and willfully" if he "deliberately closed his eyes to what he had every reason to believe" improperly substituted willful blindness for proof of a specific intent, as the element of "willfulness" encompasses both a knowledge and intent component. In that light, Stadtmauer argues that the Court's instruction by analogy ran afoul of Pierre, where we held that, although "[w]illful blindness can be used to establish knowledge," it "does not satisfy the specific intent requirement" under the Convention Against Torture ("CAT").23 528 F.3d at 190.

Even assuming that the inclusion of these two words ("and willfully") in the District Court's willful blindness instruction was technically an incorrect statement of the law,24 we conclude that the Court's "instructions, taken as a whole, properly instructed the jury as to the proof required" for the element of intent. United States v. Leahy, 445 F.3d 634, 650 (3d Cir. 2006). The Court's instructions made clear that willful blindness applied only to the element of knowledge. See App. 3973 ("The element of knowledge on the part of the defendant may be satisfied by inferences drawn from proof that the defendant closed his eyes to what would otherwise have been obvious to him." (emphasis added)). Indeed, aside from two isolated instances where the Court mentioned the words "willfully" or "willfulness,"25 its eight-paragraph instruction referred only to the "element of knowledge," Stadtmauer's "knowledge that the tax returns at issue were false or fraudulent," or his "knowledge of a fact or circumstance." It never mentioned "intent," "purpose," or any other language that could be reasonably interpreted as applying to the element of intent.

In this context, we cannot agree that a reasonable juror would have concluded from the District Court's instructions that a finding of willful blindness may also satisfy the element of specific intent. See United States v. Gurary, 860 F.2d 521, 527 n.6 (2d Cir. 1988) (though the trial court "also mentioned conscious avoidance in connection with willfulness, the components of which are knowledge and intent, a fair reading of . . . the charge as a whole indicate[d] that conscious avoidance was to be used only in connection with the knowledge component"). Accordingly, we reject Stadtmauer's contention that the Court's willful blindness instruction improperly charged the jury as to the element of intent.

4. Whether Trial Evidence Warranted the Willful Blindness Instruction

Stadtmauer finally argues that the trial evidence did not warrant a willful blindness instruction, noting simply that "[n]ot one" of the Government's witnesses directly claimed that he "deliberately tried to shield himself from learning any fact about the tax returns." (Appellant's Br. at 75.) We disagree. The Government need not present direct evidence of conscious avoidance to justify a willful blindness instruction. E.g., United States v. Singh, 222 F.3d 6, 11 (1st Cir. 2000). In any event, the District Court did not err in concluding that the instruction was warranted in this case.

At trial, there was abundant evidence that Stadtmauer was intimately involved with the operations of the partnerships and was aware of how the partnerships characterized capital expenditures, charitable contributions, gift and entertainment expenses, and "non-property" expenses in the general ledgers and financial statements. There was also evidence that, despite this knowledge -- and despite the logical inference that, as Bentzlin described, "if there is garbage in, [there's] garbage out" (App. 2281) -- Stadtmauer spent very little time reviewing the partnerships' tax returns, and never asked questions of SSMB as to the propriety of the expenses deducted therein. One possible inference from this is what Stadtmauer asked the jury to draw: that he relied in good faith on his accountants to prepare the tax returns consistent with applicable law (and thus had no need to review them closely). However, another possible inference is that Stadtmauer deliberately avoided "ask[ing] the natural follow-up question[s]" -- e.g., whether the deductions claimed in the tax returns were consistent with how expenses were falsely characterized in the general ledgers and reported on the financial statements -- despite his awareness of a high probability of that fact. Wert-Ruiz, 228 F.3d at 257; United States v. Brodie, 403 F.3d 123, 158 (3d Cir. 2005); see also United States v. Stewart, 185 F.3d 112, 126 (3d Cir. 1999) (evidence justified willful blindness instruction in mail fraud and money laundering trial, where the defendant maintained that he "lacked the intent to defraud because he relied upon the findings of solvency reported in state examinations and audit reports," and where the jury reasonably could have concluded that the defendant "recognized the likelihood of insolvency yet deliberately avoided learning the true facts").

In this context, we conclude that the Court did not abuse its discretion in giving a willful blindness instruction.26

[...]

[Joey Smith]

Excellent. This should eliminate the occasional Kuglin-type acquittal, although I would prefer to see it limited to promoters.

[Dr. Caligari]

Excellent. This should eliminate the occasional Kuglin-type acquittal, although I would prefer to see it limited to promoters.

This is going to affect a lot more than tax defiers. Back in the day, when I used to defend criminal tax cases (for non-TP clients), the most common defense was lack of willfullness-- the mistakes on the return were the accountant's fault, or the result of sloppy record-keeping, or bad legal advice, etc., etc. A willful blindness instruction hurts in all of those cases.

That being said, the Third Circuit is not breaking any new ground here. Most circuits routinely allow the instruction in tax cases.

[Famspear]

I only quickly skimmed the text of the opinion.

In the context of the facts of the case, the "willful blindness" really related directly to knowledge of facts, and only indirectly to knowledge (or lack of knowledge) of the law.

Under Cheek, willfulness is not present where the defendant had an actual good faith belief based on a misunderstanding caused by the complexity of the tax law. Willfulness connotes the voluntary, intentional violation of a known legal duty.

The lack of knowledge, the lack of awareness, of a FACT such as the essential nature of a particular disbursement -- the awareness that the disbursement was business related, and the awareness that disbursement was expensed on the books for financial statement purposes and deducted on the tax return or, alternatively, the awareness that the disbursement was capitalized as an asset and NOT deducted on the tax return -- is arguably not the same as the lack of knowledge (the lack of awareness) of a legal duty.

An action taken by a manager to deliberately avoid the "learning" of certain "facts" might indeed be evidence of awareness of a legal duty, at least awareness of a sort of general legal duty.

So, we have two kinds of "knowledge" or "awareness": knowledge of the law, and knowledge of the facts.

Knowledge of the facts would be something like "I am aware that this disbursement was for a personal, non-business purpose."

Knowledge of the law would be "I am aware that disbursements for non-business personal expenses are generally non-deductible for federal income tax purposes."

Of course, the defendant wants to try to combine the two "awarenesses" for purposes of a Cheek defense -- by saying, "hey, look, if I wasn't aware of the factual nature of the disbursement (albeit, because of my willful blindness to the facts, my deliberate avoidance of learning the facts), I also could not be "aware" that the deduction of that particular item on the tax return was a violation of the law."

Interesting argument.

[LPC]

Interesting argument.

One of the problems with the Cheek subjective definition of "willfulness" is that it does lead to some interesting arguments, many of which are barely comprehensible to most lawyers, much less jurors.

In my early days of drafting wills and trusts, I often fell into the error of writing complicated formulations which might be technically correct, but which were largely incomprehensible. I eventually learned that the goal was to write something that was immediately comprehensible at a superficial level, expressing a clear intent, while also being technically correct when analyzed more closely and carefully.

Similarly, the goal in many jury instructions seems to be to create a jury instruction that conveys the sense of what is meant, is technically correct, and still allows the jury to apply its common sense (and sense of justice) without getting bogged down in too much analysis.

[Duke2Earl]

"Oh sweet blindness... a little magic... a little kindness.
Oh sweet blindness, all over me..."

Laura Nyro