Appeal from the United States District Court for the District of New Jersey (D.C. Criminal Action No. 2-05-cr-00249-003) District Judge: Honorable Jose L. Linares.
The opinion of the court was delivered by: Ambro, Circuit Judge
Before: AMBRO, ALDISERT, and ROTH, Circuit Judges
I. Background. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 A. Richard Stadtmauer and the Kushner Companies. 5
B. The Other Players. . . . . . . . . . . . . . . . . . . . . . . . . .7
C. The Alleged Conspiracy. ....................8
1. The General Ledgers..................11
i. Charitable Contributions. ........11
ii. "Non-Property" Expenses........12
iii. Capital Expenditures. ......... 13
iv. Gift and Entertainment Expenses..15
2. KC's Internal Financial Statements. .....15
3. SSMB's Preparation of the Partnerships' Tax Returns.. . . . . . . . . . . . . . . . . . . . .16
D. Evidence of Stadtmauer's Knowledge. . .......19
1. "Thursday Meetings" .................21
2. "Richard Specials" and Other Special Financial Statements...............23
3. Other Circumstantial Evidence of Stadtmauer's Knowledge of Tax Law and Consciousness of Guilt. ........26
i. Rationale for Private School Tuition Payments .. . . . . . . . . . . . . . . . .26
ii. The 1996 IRS Audit. ...........26
iii. Dissenting Limited Partners and Executives. . . . . . . . . . . . . . . . 27
E. The Verdict and Stadtmauer's Post-Verdict Motions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30
II. Jurisdiction.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
III. Discussion.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31 A. Willful Blindness. . . . . . . . . . . . . . . . . . . . . . . . .32
1. Whether the District Court's Willful Blindness Instruction Applied to Stadtmauer's Knowledge of the Law..33
2. Willful Blindness and Cheek. . . . . . . . . . .38
3. Whether the District Court's Willful Blindness Instruction Applied to the Element of Specific Intent. ....46
4. Whether Trial Evidence Warranted the Willful Blindness Instruction........50
B. Lay Opinion Testimony.....................52
1. Background.. . . . . . . . . . . . . . . . . . . . . . . .52
2. Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . .59
C. Prosecutorial Misconduct. ..................71
D. Expert Testimony. . . . . . . . . . . . . . . . . . . . . . . . .76
E. Restrictions on Cross-Examination............82
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.
A. Richard Stadtmauer and the Kushner Companies
This criminal case stemmed from an investigation of Charles Kushner, a prominent real estate entrepreneur, political fundraiser, and philanthropist in New Jersey. Kushner controls hundreds of limited partnerships, each of which owns and manages a single commercial or residential property. Kushner is the general partner of each partnership and, for most, his siblings (including his brother, Murray Kushner*fn2 ) and their children are the other limited partners. These partnerships have collectively operated under the name "Kushner Companies" ("KC"). KC is not a registered entity and does not own any properties.*fn3
In the mid-1990s, Charles and Murray Kushner accused each other of taking more than his fair share out of their common businesses. During the course of the ensuing civil litigation, Murray alerted federal authorities to potential misconduct by his brother and KC. Following an investigation, Kushner pled guilty in 2004 to, among other things, assisting in the filing of false partnership tax returns and federal campaign contribution offenses.
During the course of its investigation of Kushner, the Government indicted several other individuals, including Stadtmauer-a Certified Public Accountant, a law school graduate, and Kushner's brother-in-law. He became an employee of KC in 1985, and eventually rose to become an executive vice president. In this role, Stadtmauer oversaw the operations of KC's residential and commercial properties. Stadtmauer also held a small stake (between 1% and 7%) in many of KC's partnerships. Stadtmauer and Kushner held equal interests (50% each) in Westminster Management, an entity which collected management fees from the other partnerships.
Several former KC executives testified against Stadtmauer at trial, including: (1) Chief Financial Officer ("CFO") Stanley Bentzlin; (2) Chief Operations Officer ("COO") Scott Zecher; and (3) Alan Lefkowitz, who succeeded Bentzlin as CFO in 2000. Of these three, only Zecher was indicted.*fn4
KC employed the accounting firm of Schonbraun, Safris, McCann, Bekritsky & Company, LLC ("SSMB") as its main "outside" accountant. The lead SSMB accountant for KC matters was Marci Plotkin, who served as KC's CFO in the early 1990s before returning to SSMB.*fn5 Though Plotkin was technically an employee of SSMB, KC reimbursed SSMB for yearly bonuses it paid to Plotkin*fn6 and certain of Plotkin's salary increases, and reimbursed Plotkin for the cost of her son's private school tuition. Kushner did not heed Bentzlin's warning that paying Plotkin a bonus would impair her independence and preclude SSMB from issuing financial statements on behalf of KC partnerships.
Marci Plotkin was assisted by (among others) SSMB partner Stanley Bekritsky and Anne Amici, a staff accountant who worked almost exclusively on KC matters. Plotkin, Bekritsky, and Amici were indicted along with Stadtmauer and each pled guilty to conspiring to defraud the United States. Of these three, only Bekritsky testified at Stadtmauer's trial.
C. The Alleged Conspiracy
The Government charged that Stadtmauer, Bekritsky, Plotkin, and Amici conspired to file false or fraudulent tax returns for the 1998-2001 tax years for Westminster Management and eleven other KC limited partnerships: "Oakwood Garden Developers," "Elmwood Village Associates," "Pheasant Hollow," "QEM," "Mt. Arlington," and six partnerships with variations of the name "Quail Ridge." The Government alleged that these partnerships fraudulently claimed four categories of expenditures as fully deductible business expenses*fn7 on their tax returns*fn8 : (1) charitable contributions, which generally are not deductible as business expenses; (2) expenditures incurred by one partnership but paid by a different partnership (known as "non-property" expenses); (3) capital expenditures, which generally must be amortized and depreciated over the life of the relevant asset (and thus are not immediately deductible in full); and (4) gift and entertainment expenses, which generally are not fully deductible as business expenses.
The Government's theory was that these four types of expenditures were fraudulently deducted in full as ordinary business expenses on the partnerships' tax returns through a three-step process. First, the expenses were logged in each limited partnership's general ledger via a computer-based accounting program that broke down all revenue and expenses into categories called "accounts." Second, KC used the general ledgers to prepare internal financial statements that automatically categorized these four types of expenditures as "expenses." Finally, SSMB used the general ledgers and internal financial statements to prepare external financial statements and tax returns for each partnership that falsely claimed these four categories of expenditures as fully deductible business expenses.
To illustrate, below we discuss primarily the 2000 tax return for one of the limited partnerships, Elmwood Village Associates ("Elmwood Village").
i. Charitable Contributions
Kushner and Stadtmauer frequently directed that charitable contributions be paid out of partnership funds, which were logged into the general ledger under the "contributions" account. In 2000, Elmwood Village paid approximately $186,000 to various charitable organizations, including donations to the Suburban Torah Center-the "personal synagogue" of Kushner and Stadtmauer-and to the Center's Rabbi, Stadtmauer's "rabbinical advisor." (App. 2846--47.)
Also logged under the "contributions" account were donations made to various political campaigns and political action committees, and $25,384 in private school tuition payments for Zecher's and Plotkin's children. Because the latter payments were logged as partnership expenses (rather than entered into the payroll system as taxable income), no taxes were withheld and no Form 1099 was issued to Zecher or Plotkin. Zecher testified that he generally left the descriptions blank on the checks for tuition payments because "[t]here was nothing [he] really could write. It was not an appropriate business expense." (Id. at 2817.)
ii. "Non-Property" Expenses
Whenever a particular KC partnership incurred an expense that it could not satisfy out of its current funds, Kushner would direct that a different partnership pay the expense. He referred to this practice as "losing a bill," and it was a regular agenda item for upper-level management meetings held every Tuesday (referred to as "Tuesday Meetings" or "Cash Meetings"). Typically, either Kushner, the CFO, or the controller chose the source of payment; in other instances, Kushner directed Stadtmauer to choose which partnership would pay the expense. Zecher testified that it was Kushner's view that an expense could be paid by any partnership that he controlled. Sometimes Kushner would tell Zecher that the partnership actually paying the expense "didn't matter because it was all family." (Id. at 3116.)
For example, in 1998 various KC partnerships paid more than $1 million in expenses associated with the renovation of KC's central office building in Florham Park, New Jersey.*fn9 Kushner directed Bentzlin to have several different partnerships, on a rolling basis, pay portions of the total expenses incurred as a result of the renovations. These expenditures were logged in the partnerships' respective general ledgers under the "repairs and maintenance" account. Eventually, Kushner instructed Bentzlin to review with Stadtmauer the list of all bills due for the renovation work, and directed Stadtmauer to "instruct [Bentzlin] on how to lose it," i.e., to choose "what entity to pay it out of." (Id. at 2130.)
In addition to one partnership paying another partnership's expenses, KC partnerships also paid for expenses that had no relation to any partnership's business. In 2000, Elmwood Village paid approximately $30,000 in "non-property" expenses that were booked to various general ledger accounts, including "advertising," "seminars," "legal fee-other," and "other professional fees." This amount included (among other things): (1) $10,000 paid to a consulting firm to research the viability of a comeback by then-former Israeli Prime Minister Benjamin Netanyahu; (2) $10,000 toward a $100,000 fee to pay Mr. Netanyahu to speak at a breakfast sponsored by NorCrown Bank (an entity not affiliated with KC in which Kushner held an interest); and (3) $3,815 toward a $50,000 fee to pay former Chairman of the Federal Reserve Paul Volcker to speak at another NorCrown Bank event.
iii. Capital Expenditures
From 1998 through 2001, various KC partnerships purchased capital assets and made capital improvements to their properties. In general, these expenses were logged in the partnerships' general ledgers under the "repairs and maintenance" account rather than the capital expenditures account. As Lefkowitz explained at trial, "[t]here [were] a few instances where things might have been capitalized, but as a general rule . . . everything went through expenses." (Id. at 2604.) Bentzlin explained that, although each general ledger had a capital improvement "account," capitalizing assets "wasn't the way it was done at Kushner Companies." He added that
[w]e regularly and routinely expensed [capital assets] under one of the repairs and maintenance or capital improvement accounts . . . [;] that was the way they were doing it upon my arrival, and it didn't change throughout my tenure with a few-just with a few exceptions.
. . . You didn't question it. You know, it was ruled with an iron fist. They controlled pretty much everything.
In 2000, Elmwood Village spent $269,323 on improvements that allegedly should have been capitalized, which included adding new bathrooms and kitchens to apartments-including new cabinets and $49,318.40 worth of new appliances (such as washers and dryers)-and a new truck (for $25,126). All of these expenses were logged in the partnership's general ledger under the "repairs and maintenance" general ledger account rather than a capital account.
iv. Gift and Entertainment Expenses
Kushner and Stadtmauer frequently directed various partnerships to pay gift and entertainment expenditures that had no specific connection with the partnership paying the expense. In 2000, Elmwood Village paid: (1) $12,640 to cater a brunch at the New Jersey Performing Arts Center; (2) $7,027 to a wine store for alcohol delivered to Kushner's and Stadtmauer's private homes during the holidays; (3) $5,905.23 to cater a fundraiser for former New Jersey Governor Jon Corzine; and (4) thousands of dollars for New York Yankees, New York Mets, and New Jersey Nets season tickets. Each of these expenditures was logged in Elmwood Village's general ledger under a "miscellaneous," "gifts/entertainment," or "travel" account.
2. KC's Internal Financial Statements
KC used the general ledgers to generate internal financial statements for each partnership. The accounting template (or "skeleton") used to produce these statements automatically grouped certain accounts from the general ledgers-including the "contributions," "gifts/entertainment," "miscellaneous," and "seminars" accounts-under the category of "office expenses."
In addition, the "legal fee-other" and "other professional fees" accounts were grouped under the category of "payroll and related expenses." Each of these categories-in addition to the "advertising" and "repairs and maintenance"*fn10 categories-were, in turn, grouped under the general category of "expenses," and thus deducted in full from the partnership's revenue on the internal financial statement.*fn11 This violated applicable ...