A recent post discussed the Third Circuit opinion in United States v. Stadtmauer, 2010 WL 3504321 (3d Cir., Sept. 9, 2010) in the context of its approval of the practice of prosecution witnesses opining about the guilty knowledge of other participants in concerted activity. In addition, the court also addressed another interesting topic, the availability to the government of a willful blindness instruction, sometimes called conscious avoidance or deliberate ignorance, in tax fraud cases.
Stadtmauer, an officer in several related real estate partnerships, was found guilty of subscribing to false tax returns for the entities, based on overstated and improper business deductions carried forward by accountants from internal books and records to filed returns. It is well established in non-tax fraud cases that, if the record contains the necessary factual support, the government is entitled to a “willful blindness” instruction when it lacks direct evidence that a defendant acted “willfully” (that is, consciously, with awareness, and not by accident or mistake), but can point to circumstantial evidence that the defendant turned a blind eye to facts which should have made his aware. Extension of this principle to tax cases was in doubt, however, by virtue of the Supreme Court’s decision in Cheek v. United States, 498 U.S. 192 (1991). The Cheek Court held that Title 26 prosecutions carry a more rigorous “willfulness” element than other offenses because of the complexity of the tax laws; the government must in tax cases prove not just voluntary and intentional conduct, but a violation of a known legal duty, and a defendant who in subjective good faith is unaware of that legal duty cannot be guilty of tax fraud.
Stadtmauer argued on appeal that his trial jury was wrongly instructed on “willful blindness” because such an instruction can never be used to prove the requisite knowledge of the tax code’s provisions. The court of appeals disagreed,. holding that Cheek’s beefed-up mens rea requirement did not exempt tax prosecutions from the potential application of a willful blindness instruction. A defendant who deliberately avoids learning of his tax reporting obligations has a culpable state of mind, and is unlike one who in good faith is unaware of those obligations and is therefore not culpable. So, a willful blindness instruction is available on the element requiring knowledge of the legal duty under the tax code.
Unfortunately for Stadtmauer, the Third Circuit found no error on this record in the trial judge’s having given the instruction to the jury. There was “abundant evidence” that Stadtmauer was intimately involved with the operations of the entities and was aware of how they characterized capital expenditures, charitable contributions, and gift and entertainment expenses in the general ledgers and financial statements. The jury was entitled to consider whether his failure to ask questions about the reporting of these expenses on the returns which he signed was a deliberate effort to avoid gaining guilty knowledge.