U.S. Tax Attorney Denied Habeas Corpus in Extradition Proceeding Based on Netherlands Criminal Tax Conviction (2/10/20)

In Valentino v. United States Marshal (S.D. Tex. Civ. Action 4:20-CV-304 order dated 1/30/20), here, the court denied Valentino’s request for habeas corpus relief in an extradition proceeding.  Valentino is an attorney who practiced international tax law (see some bio information in JAT Comments below at #4).

The Court starts as follows:

I. Procedural Background 

This habeas case arises out of an extradition proceeding. Joseph Valentino was charged and convicted by the Kingdom of the Netherlands for participating in a criminal organization that intentionally filed false corporate tax returns. The Amsterdam district public prosecutor issued a summons for the criminal proceedings in the Netherlands on November 19, 2002. Trial was held in absentia and the judgment was rendered on February 24, 2004. After Valentino appealed his conviction and sentence to the Court of Appeals of Amsterdam, during which proceedings he was represented by counsel, the Court of Appeals rendered a new judgment finding Valentino guilty on two counts: Count One — "participation in an organization for the purpose of committing crimes" — and Count Two — "co-perpetration of intentionally incorrectly filing a tax return provided by tax law." He was sentenced to thirty-four months in prison. 

On February 2, 2018, the United States sought Valentino's extradition to the Kingdom of the Netherlands to execute a sentence on his conviction. Valentino was arrested around April 18, 2018. After holding a detention hearing, United States Magistrate Judge Stephen Wm. Smith ordered Valentino to be released on reasonable conditions pending his extradition hearing. United States v. Valentino, No. 18-mj-00146, 2018 WL 2187645, at *6 (S.D. Tex. May 11, 2018). Judge Smith found that Valentino did not pose a flight risk or a danger to the community and had a "reasonable likelihood" of prevailing on one or more issues at his extradition hearing. He found special circumstances supporting Valentino's release and ordered him released on bond pending the extradition hearing. He noted that "this is only a decision on whether to release Valentino pending the extradition hearing," which "placed [the court] in the difficult task of assessing Valentino's success on the merits" without "prejudging the claims or the evidence until both sides have had an opportunity to be fully heard. Further, the court may not have before it all of the evidence that will be presented in the extradition hearing." Id. at *5 (emphasis added). 

Valentino then moved to dismiss the extradition complaint. Magistrate Judge Peter Bray held a formal extradition proceeding on December 4, 2019, and on January 23, 2020, issued a thorough, 37-page opinion denying Valentino's Motion to Dismiss the United States' Extradition Complaint. Judge Bray certified Valentino as extraditable. 

The next day, Valentino filed a Petition for a Writ of Habeas Corpus under 28 U.S.C. section 2241, which currently is pending before this Court. Dkt. 1. Valentino asserts that the Court should grant the writ and hold that extradition must be denied because (1) all but two of the charges against Valentino were barred by the statute of limitations under United States law, (2) the fourteen-year delay between conviction and the extradition complaint violates Valentino's due process rights, and (3) the Netherlands failed to establish probable cause to believe that Valentino had the requisite knowledge to convict him of the charged offenses. These arguments were raised in the extradition proceedings and addressed in Judge Bray's opinion. Valentino asserts he has a high likelihood of success on these claims, and that he poses no flight risk or danger to the community. These factors, he argues, along with the Netherlands' fourteen-year delay between convicting him and seeking his extradition, establish "special circumstances" that warrant his release until determination of his habeas petition.

Compassionate Release from Incarceration Based on COVID-19 Pandemic (4/20/20; 5/7/20)

This blog entry was updated on 5/4/20 to add a short notice discussion of Paul Daugerdas' denial of compassionate release in paragraph 5 below; and on 5/7/20 to add a reference and link to Peter Reilly's blog on the Daugerdas matter.

The Procedurally Taxing Blog has an excellent posting today on the compassionate release of a notorious tax criminal, Morris Zukerman.  Leslie Book, Court Grants Compassionate Release to High Profile Tax Felon Morris Zukerman (Procedurally Taxing Blog 4/20/20), here.  The blog entry discusses the Court’s granting Zukerman release because of his physical characteristics (75 years old, diabetes, hypertension and obesity) and close physical incarceration with other inmates that might make him particularly susceptible to COVID-19 infection and serious consequences.

Since I have never before considered the compassionate release provision, 18 USC § 3582, and have not done any independent research, I refer readers to the PT Blog entry linked above, which also has a link to the decision granting Zukerman the release.

JAT Comments:

1.  I wonder whether this and related decisions granting compassionate release in the age of COVID-19 will open the floodgates of such requests for those who, sometimes with the aid of their attorneys, conjure up some special characteristics.  (See paragraph 4 below discussing the Valentino habeas corpus proceeding.)

2.  I wonder whether the Court’s reacted too hastily to the exhaustion requirement.  As often with seeking relief from Government agencies, the statute requires that the incarcerated person first seek relief from the agency.  Zukerman did seek that relief but, rather than waiting for an answer to his request or the passage of 30 days, he filed the court proceeding three days after the request.  Had that process been allowed, perhaps the Bureau of Prisons could have found some accommodation to meet at least some of the concerns claimed by Zukerman.  But, the court just blew past the exhaustion requirement based on his physical characteristics, the conditions of his incarceration and the COVID-19 pandemic.  In my posting earlier today, I said:  "(Presumably, the Bureau of Prisons had time in the court proceedings to offer the court its views as to why it believed Zukerman were not at disproportionate risk.)"  I have just reviewed Zukerman's letter response to the Government's opposition, CourtListener here, and quote from it on this issue (pp. 2-3):

Individual B, the Houston Attorney in the Smith NPA, Is Unmasked (12/1/20; 12/2/20)

I recently posted on the Brockman indictment and the Smith NPA.  One Big Fish Indicted and Lesser Big Fish Achieves NPA for Cooperation (Federal Tax Crimes Blog 10/16/20), here.  In that post I noted:

11.  (Added 9:30pm):  Being from Houston, I was particularly interested in the Houston lawyer who assisted Smith. The Houston lawyer is identified as Individual B in NPA Exhibit A, Statement of Facts.  In summary, Individual B did some very bad acts, creating offshore structures and disguising Smith's participation in those offshore structures.  Brockman (identified as Individual A) referred Smith to Individual B.  I don't know who the Houston lawyer is, but suspect that having practiced in Houston during this period, I likely know Individual B (whoever he or she is).  If anyone knows and is willing to share that information, please let me know.

The Houston attorney, Individual B, is named in a Motion to Dismiss in part for lack of Venue and to Transfer to the Southern District of Texas, here.  The relevant paragraph is (p. 11 of Motion, p. 18 of pdf) (bold-face supplied):

Fourth, and by contrast, the Statement of Facts made by Smith (“Individual Two”) in connection with his Non-Prosecution Agreement describes the extensive role of “Individual B, a lawyer in private practice in Houston, Texas who specializes in foreign trusts and ‘asset protection’ planning,” whom the defense recognizes to be Carlos Kepke. Keneally Decl. Ex. M at Statement of Facts ¶ 5. Mr. Kepke’s practice is located in Houston, Texas, as reflected on his website, his LinkedIn Profile, and the State Bar of Texas lawyer profile. Keneally Decl. Ex. N, Ex. O, Ex. P. The defense is not aware of Mr. Kepke’s role in this investigation, but he is an obvious potential witness.

Kepke's web site is here.  On that web site, he touts his work on Offshore Structures for U.S. Income Tax and Estate Tax Savings.

JAT Comments:

9th Circuit Imposes a Sentencing Double Whammy for State Tax Loss Relevant Conduct

In United States v. Yip, ___ F.3d ___ (9th Cir. 2010), decided 1/13/10, the Ninth Circuit held, consistently with most other circuits, that relevant conduct for sentencing purposes includes relevant state tax loss in determining the tax loss for the first step of the tax crimes sentencing calculation. See my prior blog here discussing United States v. McElroy, 587 F.3d 73, 88-89 (1st Cir. 2009). The Ninth Circuit also held that the relevant conduct factored into this tax loss calculation is not concerned with expiration of the statute of limitations for criminal prosecution. Finally, the Ninth Circuit, having just required the state tax relevant conduct to be included in the tax loss, said that the defendant is not entitled to factor in the appropriate federal tax deduction for state taxes. This is the holding I discuss in this blog.

The unclaimed deductions issue may present itself at two stages of a criminal case -- (i) at trial in addressing the tax due and owing element that the Government must prove (see my prior blog here; see also United States v. Helmsley, 941 F.2d 71, 83- 89 (1991), cert denied, 502 U.S. 1091 (1991).); and (ii) at sentencing in determining the offense level under S.G. 2T1.1. The holding in Yip addresses only the second stage. I quote from the opinion so the reader can understand the Ninth Circuit's reasoning (case citations and one footnote omitted):

Relying on the latter clause, the Second Circuit has concluded that, under the amended Guidelines, tax loss should be adjusted for "'legitimate but unclaimed deductions.' " Several other circuits, however, disagree. These sister circuits have offered three reasons to refuse to allow a defendant to reduce tax loss by the amount of unclaimed deductions. First, deductions are not permissible if they are unintentionally created or are unrelated to the tax violation, because such deductions are not part of the "object of the offense" or intended loss. Second, the revisions of Amendment 491 [to the Sentencing Guidlines] were so extensive that the mere fact that the revised § 2T1.1 does not include the former "offsetting adjustments" reference fails to demonstrate that deductions are now permissible. Finally, our sister circuits reject the nebulous and potentially complex exercise of speculating about unclaimed deductions. The Tenth Circuit observed that it does not interpret the Guidelines "as giving taxpayers a second opportunity to claim deductions after having been convicted of tax fraud. . . . Rather, we are merely assessing the tax loss resulting from the manner in which the defendant chose to complete his income tax returns."

We are persuaded by the Fourth, Fifth, Seventh, Tenth, and Eleventh Circuits. The amendment to § 2T1.1's application notes is irrelevant to our analysis. It is true that the notes no longer state that § 2T1.3's alternative minimum standard "may be easier to determine, and should make irrelevant the issue of whether the taxpayer was entitled to offsetting adjustments that he failed to claim." But this sentence was deleted when § 2T1.3 was deleted in its entirety from the Guidelines. As a reference to § 2T1.3 was no longer logical, such a change does not show an intent to allow unclaimed deductions sufficient to undercut our decision in Valentino.

Section 2T1.1 does permit "a more accurate determination" of tax loss than the 28% approximation. A more accurate determination might involve applying a different tax rate or incorporating exemptions and deductions legitimately claimed by the taxpayer on a tax return. But that section does not require a court to speculate about tax deductions that the taxpayer chose not to claim. n3 We hold that § 2T1.1 does not entitle a defendant to reduce the tax loss charged to him by the amount of potentially legitimate, but unclaimed, deductions even if those deductions are related to the offense.

n3 We note, for instance, that a taxpayer is entitled to deduct either state income tax or state sales tax, but not both. 26 U.S.C. § 164(b)(5)(A). Some of the states in our circuit impose both an income tax and a sales tax. Reconstructing a hypothetical federal tax return for a resident of one of these states would require selecting between these potential deductions.

In Defendant's case, he cannot even argue that the state taxes are legitimate, but unclaimed, deductions. The state taxes are not legitimate deductions because he did not pay them. A cash-basis taxpayer may deduct state and local taxes "for the taxable year within which paid." 26 C.F.R. § 1.1641(a). The district court properly refused to reduce the tax loss attributed to Defendant to account for an imputed deduction from his unpaid state taxes.

The court ultimately held that the defendant was not entitled to the deductions because he had not paid the state tax. It is not at all clear that the Ninth Circuit would allow the deductions even for an accrual method taxpayer. In apparent dicta (not necessary because of the "not paid / cash method" final holding), the Court sweeps very broadly on the issue of unclaimed deductions.

I am troubled by the Ninth Circuit's refusal to allow the state tax deduction after it required, properly I think, that the state tax loss be included in the calculation. The purpose of the tax loss calculation is to determine the loss by reference to what the taxpayer would have paid if he had done it right. If the had done it right, the state tax would have been paid (hence failure to pay is properly included in the sentencing tax loss) and the state tax deduction would have been taken in calculating the federal tax loss (hence federal tax would have been less). That should, in my mind, set the appropriate tax loss for sentencing purposes.  But I am not the judge (or judges in this case).

I am also unpersuaded about the perceived difficulty or uncertainty in making the calculation.  We require citizens to make this type of calculation routinely in filing their tax returns.  This is not beyond the capacity of the courts, the Probation Office and counsel for the parties (and their experts) to calculate or make a reasonable estimate of what the effect of these unclaimed deductions should be.