Tuesday, December 4, 2012

Coplan #5 - Conscious Avoidance / Willful Blindness - Affirmed as to 1; Sidestepped as to 2 (12/4/12)

I continue discussion of the issues in United States v. Coplan, et al., 703 F.3d 46 (2d Cir. 11/29/12), here and here.

Readers will recall that I have discussed in these blogs the concept of conscious avoidance which appears under various labels (most prominently now, willful blindness (see fn 39 of the opinion below).  The concept, in summary (at risk of losing nuance), is that the statutory requirement for a specific intent (willfulness for a tax crime) can be satisfied if a defendant does not have that intent but consciously avoids learning of a fact that would be a key element of criminality.  Three defendants in Coplan appealed the use a conscious avoidance instruction.

Here is the conscious avoidance instruction for tax evasion that was given (this is not in the opinion, I obtained if from another source):
In determining if a defendant acted knowingly, you may consider whether he deliberately closed his eyes to what otherwise would have  been obvious to him. If, for example, you find beyond a reasonable doubt that the defendant you are considering was aware of a high probability that a CDS Add-On shelter transaction lacked a reasonable possibility of a profit, and that the defendant acted with a conscious purpose to avoid learning the truth about whether or not the shelter had a reasonable possibility of a profit, then the knowledge element is satisfied. In other words, it is no defense that a defendant deliberately closed his eyes to what was right in front of him. On the other hand, if you find that a shelter lacked a reasonable possibility of a profit but that the defendant you are considering actually believed in good faith that the shelter had a reasonable possibility of a profit, then the defendant cannot be convicted of tax evasion on the substantive count you are considering.
I quote the Court's conscious avoidance discussion in full:
B. Conscious Avoidance Instruction 
The defendants further argue that there was no factual basis for the conscious avoidance instruction in connection with Counts Two and Three, the tax evasion charges. "'A conscious avoidance instruction permits a jury to find that a defendant had culpable knowledge of a fact when the evidence shows that the defendant intentionally avoided confirming the fact.'" United States v. Quinones, 635 F.3d 590, 594 (2d Cir. 2011) (quoting United States v. Ferrarini, 219 F.3d 145, 154 (2d Cir. 2000)). fn39 A conscious avoidance instruction is appropriate only when (1) "a defendant asserts the lack of some specific aspect of knowledge required for conviction," and (2) "the appropriate factual predicate for the charge exists, i.e., the evidence is such that a rational juror may reach the conclusion beyond a reasonable doubt that the defendant was aware of a high probability of the fact in dispute and consciously avoided confirming that fact." United States v. Ferguson, 676 F.3d 260, 278 (2d Cir. 2011) (quotation marks omitted). The Government need not choose between an "actual knowledge" and a "conscious avoidance" theory. United States v. Kaplan, 490 F.3d 110, 128 n.7 (2d Cir. 2007).
   fn39 We have recently noted that "[t]he Supreme Court appears to now prefer the appellation 'willful blindness.'" United States v. Ferguson, 676 F.3d 260, 278 n.16 (2d Cir. 2011) (quoting Global—Tech Appliances, Inc. v. SEB S.A., 131 S. Ct. 2060, 2070 & n.9 (2011)). Because the parties used the term "conscious avoidance" below, we continue to use that term for purposes of this case. 
In this case, the Government requested a conscious avoidance instruction in connection with the scienter element of Counts Two and Three, the tax evasion charges. The defense objected that there was no factual predicate for the conscious avoidance instruction; the District Court overruled the objection, finding unspecified "adequate evidence" to support the charge. The jury was instructed that the knowledge element would be satisfied if a defendant "was aware of a high probability that a CDS add-on shelter transaction lacked a reasonable possibility of a profit" and "acted with a conscious purpose to avoid learning the truth about whether or not the shelter had a reasonable possibility of a profit." 
With respect to Coplan, we conclude that the conscious avoidance instruction was clearly justified. In February 2001, Coplan reviewed and commented on a spreadsheet he received from Belle Six that listed the Add-On clients and provided basic information about each client. That spreadsheet reflected the cost of the client's investment and the maximum potential payout ratio for the investment—two of three data points necessary to evaluate profit potential. Specifically, the spreadsheet showed that the investment for each taxpayer cost approximately  0.5% of the desired tax loss, and that the maximum payout ratio for each taxpayer was approximately 2:1 (profit to premium). See note 25, ante (describing the 2:1 payoff ratio). From these two variables, it was apparent that Add-On lacked profit potential if the fees exceeded 1.0%. Given Coplan's role as the head of SISG and his involvement in setting the Add-On fees, there was sufficient evidence to allow the jury to conclude that, if Coplan did not have actual knowledge that the fees exceeded 1.0%, he "decided not to learn th[at] key fact," Rodriguez, 983 F.2d at 458. For that reason, we conclude that the conscious avoidance instruction was appropriate with respect to Coplan. 
The factual basis for the conscious avoidance instruction as to Shapiro and Nissenbaum presents a much closer question. Because we are reversing Counts Two and Three with respect to Shapiro and Nissenbaum based on the insufficiency of the evidence, see Part II.B, ante, we need not, and do not, reach their challenges to the conscious avoidance instruction.
I am encouraged that the Court continued its somewhat skeptical focus on the facts in support of criminal convictions and noted that at least two of the cases presented a closer question on the propriety of using the conscious avoidance instruction.

The Second Circuit and, I would  hope at least, most other Circuits understands the dangers in the conscious avoidance instruction.  I offer for your download the discussion of conscious avoidance from the current draft of Federal Tax Crimes book, here, but cut and paste the portion with the Second Circuit's warning:
Considering the potential for jury misunderstanding of the concept, Courts require that the judge be very careful in the charge to the jury.  For example, the Second Circuit’s clear holding is that “a conscious avoidance charge must communicate two points: (1) that a jury may infer knowledge of the existence of a particular fact if the defendant is aware of a high probability of its existence, (2) unless the defendant actually believes that it does not exist.” fn126 To reinforce its insistence on these charges, the Second Circuit recently said: 
    fn126  United States v. Kaiser, 609 F.3d 556, 566 (2d Cir. 2010) (quoting and citing other Second Circuit cases (quotations and citations omitted).) 
Indeed, we have repeatedly emphasized that the prosecutor should request that the “high probability” and “actual belief” language be incorporated into every conscious avoidance charge. We ordered that the opinion [so holding] be circulated to all Assistant United States Attorneys engaged in criminal prosecutions in the Circuit. fn127
   fn 127 Id.  For similar cautions on the use of the conscious avoidance instructions, see United States v. Skilling, 554 F.3d 529, 548-49 (5th Cir. 2009), vacated on other grounds, ___ U.S. ___, 130 S. Ct. 2896 (2010).

For those wanting the entire tax evasion willfulness instruction, which contained the conscious avoidance instruction quoted above, here it is in full and in context:
24. TAX EVASION SECOND ELEMENT – KNOWLEDGE AND WILLFULNESS 
The second element which the government must prove beyond a reasonable doubt is that the defendants acted willfully and knowingly. 
In this case, to satisfy the requirement of proving that a defendant acted knowingly, the government must prove beyond a reasonable doubt that the defendant you are considering knew that the relevant taxpayer employed or would employ the CDS Add-On tax shelter, took or would take a deduction attributable to the shelter on his tax return, and would have reported a substantially higher tax liability if the taxpayer had not done those things. 
Whether a defendant had that knowledge is a question of fact to be determined by you, on the basis of all the evidence. An act is done knowingly only if it is done purposely and deliberately, and not because of mistake, accident, negligence or some other innocent reason. 
In determining if a defendant acted knowingly, you may consider whether he deliberately closed his eyes to what otherwise would have been obvious to him. If, for example, you find beyond a reasonable doubt that the defendant you are considering was aware of a high probability that a CDS Add-On shelter transaction lacked a reasonable possibility of a profit, and that the defendant acted with a conscious purpose to avoid learning the truth about whether or not the shelter had a reasonable possibility of a profit, then the knowledge element is satisfied. In other words, it is no defense that a defendant deliberately closed his eyes to what was right in front of him. On the other hand, if you find that a shelter lacked a reasonable possibility of a profit but that the defendant you are considering actually believed in good faith that the shelter had a reasonable possibility of a profit, then the defendant cannot be convicted of tax evasion on the substantive count you are considering. 
The government must also prove beyond a reasonable doubt that the defendant you are considering acted willfully.\ 
Willfulness here has a particular meaning with respect to attempts to evade taxes. A willful act in this context is defined as a voluntary and intentional violation of a known legal duty. Thus, the government must prove beyond a reasonable doubt that the defendant possessed the specific intent to defeat or evade the payment of taxes which the defendant knew it was the relevant taxpayer’s duty to pay. With respect to Counts Two and Three, you may find that a defendant acted willfully only if the government has persuaded you beyond a reasonable doubt that the defendant knew two things: first, that the relevant CDS Add-On tax shelter transaction lacked economic substance, and, second, that the relevant taxpayer intended to or did claim losses from the shelter to offset taxable income or gain reported on his tax return. 
As I have already told you, what the defendant under consideration knew or intended involves his state of mind. We have no way of knowing what was in a person’s mind other than by observing and considering the circumstances of his conduct and any statements or writings made by or to him. To repeat, you may have to look at circumstantial evidence in order to determine the defendant’s knowledge and intent, and his knowledge and intent in this area may be established entirely on the basis of circumstantial evidence. 
It is permissible to infer willfulness from any conduct, the likely effect of which would be to mislead or to conceal, for example: making or instigating others to make false statements to agents; placing property or a business in the name of another; or using false or misleading characterizations for payments. By citing these examples, I certainly do not mean to suggest that this is the only conduct on which to infer willfulness, nor do I express any view as to whether conduct similar to these examples took place here. You may also consider the background and sophistication of the defendant you are considering. 
In other words, in determining whether the defendant you are considering acted with knowledge and intent to evade income taxes, look at all of the circumstances concerning the transactions involved and that defendant’s role in them. Were the transactions carried out in the usual way of doing business? If not, why not? Were the transactions straightforward and open, or were they devious or intended to conceal something? 
In addition, a defendant does not act willfully if he believes in good faith that his actions comply with the law. Therefore, if the defendant actually believed in good faith that what he was doing was in accord with the tax law, and that the relevant taxpayer reported all of the taxes he owed, he cannot be said to have had the criminal intent to willfully evade taxes. Thus, if you find that the defendant you are considering honestly believed that the relevant taxpayer owed no additional taxes, even if that belief was unreasonable or irrational, then you should find that defendant not guilty. However, you may consider whether or not that defendant actually held that belief at that time in good faith. 

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