United States v. John Psihos , 683 F.3d 777 ( 2012 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 11-2683
U NITED S TATES OF A MERICA,
Plaintiff-Appellee,
v.
JOHN P SIHOS,
Defendant-Appellant.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 08 CR 1026—Blanche M. Manning, Judge.
A RGUED D ECEMBER 8, 2011—D ECIDED JUNE 15, 2012
Before M ANION, R OVNER, and T INDER, Circuit Judges.
M ANION, Circuit Judge. John Psihos pleaded guilty to
four counts of making false statements in a tax return.
The district court determined that the tax loss was
$837,724 and sentenced Psihos to 24 months’ imprison-
ment, which was the low end of the applicable guideline
range. The court also ordered Psihos to pay $837,724
in restitution. Psihos appeals, arguing that the tax loss
was only $22,292.27; that the restitution amount was
2 No. 11-2683
erroneous; and that the district court procedurally erred
in sentencing him within the guideline range without
addressing his argument for an outside-the-guidelines
sentence. We affirm.
I.
John Psihos immigrated to the United States from
Greece in his early twenties. He eventually opened his
own restaurant and later went on to own three
restaurants in the Chicago area: Flanagan’s (the most
successful of the three), Café Oceana, and Full Moon.
Flanagan’s and Full Moon were organized together as
one S-Corporation and Café Oceana was set up as a
separate S-Corporation. Psihos was apparently a good
employer, assisting employees in need; he was also very
generous to those in the community, helping with
various charitable causes.
While hard-working and generous, Psihos was also
operating illegally, at least when it came to his tax ob-
ligations. Psihos kept two sets of books for Flanagan’s,
and for (at least) the four tax years of 2001-2004, he sub-
stantially underreported his gross receipts. The govern-
ment discovered the tax fraud when Psihos listed
Flanagan’s for sale through a real estate brokerage com-
pany. A fact sheet prepared by the broker calculated
Flanagan’s average monthly gross receipts at $170,000
and average annual gross receipts at $2,040,000. This
netted an average yearly operating profit of $554,840.
Based on the discrepancy between Psihos’s tax filings
No. 11-2683 3
and this information, the IRS dispatched undercover
agents to pose as potential buyers.
The undercover agents, posing as a husband and wife
interested in purchasing Flanagan’s, individually or
together met with Psihos three times in April and May of
2005. During these meetings, Psihos explained how he
kept track of the actual receipts at Flanagan’s. He ex-
plained that each night at closing, the managers would
bring him envelopes with all of the money, receipts,
register tapes, and payout information. He would then
provide this material to Wendy, one of his managers, who
would prepare a weekly summary report. Psihos showed
these summary reports to the undercover agents, along
with the envelopes from which these summaries were
prepared. Psihos stated that he had these records
showing what he was “actually getting” from the restau-
rant going back to 2001.
On May 31, 2005, agents executed a search warrant at
one of Psihos’s restaurants and seized, among other
items, the weekly summary sheets. Later they also seized
from a storage shed the envelopes detailing Flanagan’s
nightly sales and cash payouts. IRS revenue agents re-
viewed the weekly summary sheets and cross-referenced
those figures with the nightly figures listed on the enve-
lopes. Based on these records, the revenue agents calcu-
lated the gross receipts actually collected at Flanagan’s
for the tax years 2001-2004. In calculating the gross re-
ceipts, the IRS made adjustments based on any cash
overages/shortages noted, as well as based on the
amounts noted on the envelopes as improperly entered
4 No. 11-2683
or listed as cash payouts. The government’s calculation
was as follows:
Year N et Receipts G ross Receipts U nreported Receipts
Per IRS Per Return Per IRS
2001 $2,021,304.37 $1,420,405.00 $600,899.37
2002 $2,003,204.59 $1,323,240.00 $679,964.59
2003 $2,007,044.71 $1,298,778.00 $708,266.71
2004 $1,867,214.82 $1,320,832.00 $546,382.82
The IRS then concluded that the additional taxes due
on Psihos’s personal tax returns, based on these unreported
receipts, were: $226,752 for 2001, $244,799 for 2002,
$213,186 for 2003, and $152,987 for 2004. These unreported
receipts resulted in a total tax loss to the IRS of $837,724
for the period of 2001 through 2004.
Based on the above, a grand jury indicted Psihos
on eight counts. Counts 1-4 charged tax evasion and
counts 5-8 charged Psihos with four counts of making
false statements in a tax return. Psihos entered into a plea
agreement with the government and pleaded guilty to
the four counts of making false statements in a tax re-
turn. At sentencing, the government argued that the
loss was $837,724, while Psihos countered that the gov-
ernment’s figure did not account for numerous
deductible expenses. Specifically, Psihos argued that
the tax loss should be reduced by: amounts paid to
DJ/promoters from door charges; amounts paid in cash
wages; the cost of complimentary drinks and food; the
total he transferred to his other restaurant Café Oceana;
No. 11-2683 5
and cash payments made to Café Oceana for food
supplied by Café Oceana to Flanagan’s. Psihos submit-
ted a chart summarizing his position on the amount of
the tax loss (attached to this opinion as Exhibit A).
Psihos then argued that based on his calculations, the
tax loss would be 28% of the total unreported gross
of $79,615.26, or $22,292.27.
The district court gave Psihos credit for the cash pay-
outs listed on the envelopes—as had the government in
its loss calculation—but rejected his remaining claimed
reductions, concluding that the various offsets he
proposed amounted to “unclaimed deductions” and that
it could not consider such deductions based on this
court’s decision in United States v. Chavin, 316 F.3d 666(7th Cir. 2002). The court added that Chavin was “par-
ticularly well-taken” in this case because Psihos did not
have any invoices supporting his purported cash payouts.
After the district court rejected Psihos’s arguments
concerning the loss calculation, Psihos argued that he
should nonetheless receive a sentence below the guide-
line range because the calculated loss overstated the
harm to the government. In sentencing Psihos, the dis-
trict court did not specifically discuss this argument,
but concluded that a sentence of 24 months (the low end
of the guideline range, which was 24-30 months) was
appropriate in this case. The district court also ordered
Psihos to pay restitution in the amount of $837,724.
Psihos appeals.
6 No. 11-2683
II.
On appeal, Psihos argues that the district court erred
in determining the tax loss for sentencing purposes and
that the true loss was only $22,292.27. Relatedly, he
argues that the district court erred in ordering resti-
tution of $837,724 because the actual loss was only
$22,292.27. Finally, Psihos claims that the district court
procedurally erred in sentencing him within the guide-
line range without considering his argument for a
lower sentence. We consider each issue in turn.
A. Tax Loss
Psihos argues on appeal that the district court erred
in calculating the tax loss for sentencing purposes at
$837,724. As detailed above, Psihos claims that the real
loss to the government was only $22,292.27 because the
government’s calculation failed to take into account
cash payments for excludable items and/or deductible
expenses, including cash payments to DJs and promoters
from door charges, cash wages, the cost of compli-
mentary drinks and food, cash transfers to his other
restaurant Café Oceana, and cash payments to Café
Oceana for food supplied by Café Oceana to Flanagan’s.
As the district court found, Psihos’s argument is fore-
closed by this court’s decision in United States v. Chavin,
316 F.3d 666 (7th Cir. 2002). In Chavin, the defendant had
argued that the tax loss for sentencing purposes should
take into account available deductions that he could
have taken. This court rejected that argument, first
No. 11-2683 7
noting that the “the government [had] contend[ed] that
‘tax loss’ refers to the amount of loss that the defendant
attempted or intended to create through his tax offense.
[And] [i]f we accept this interpretation, then unclaimed
deductions should not be taken into account because
they have no relevance to the amount of loss that the
scheme attempted to produce.” Id. at 677. This court then
held:
It is apparent from the definition of “tax loss” pro-
vided in the guidelines that the government has the
correct position. The guidelines state that “tax loss is
the total amount of loss that was the object of the
offense.” § 2T1.1(c)(1). We take the phrase “the
object of the offense” to mean that the attempted or
intended loss, rather than the actual loss to the gov-
ernment, is the proper basis of the tax-loss figure.
Here, the object of Chavin’s offense was the amount
by which he underreported and fraudulently stated
his tax liability on his return; reference to other unre-
lated mistakes on the return such as unclaimed de-
ductions tells us nothing about the amount of loss
to the government that his scheme intended to create.
Id. (emphasis added). Chavin thus makes clear that
Psihos’s alleged cash payments are irrelevant in deter-
mining the tax loss caused by his fraudulent statements.
Psihos counters that Chavin is distinguishable because
it concerned deductions and not “above-the-line” reduc-
tions from gross income. The government and Psihos
then duel over whether the various cash payments
would be considered deductions or above-the-line re-
8 No. 11-2683
ductions from gross income. The distinction, however, is
irrelevant—the point of Chavin is the same: tax loss is
based on the object of the offense and should not take
into account “unrelated mistakes.” Id. In fact, in noting
that “unrelated mistakes” were irrelevant to the loss
calculation, the court in Chavin said “such as unclaimed
deductions,” showing that “unclaimed deductions” were
merely illustrative of the types of mistakes or omissions
which should not be considered in calculating the loss.
Alternatively, Psihos requests that this court overrule
Chavin based on a recent Tenth Circuit decision,
United States v. Hoskins, 654 F.3d 1086 (10th Cir. 2011).
In Hoskins, the Tenth Circuit said that the sentencing
guidelines do “not categorically prevent a court from
considering unclaimed deductions in its sentencing
analysis.” Id. at 1094. The Hoskins court also noted, how-
ever, that the guidelines do not require a sentencing
court to engage in the “nebulous and potentially complex
exercise of speculating about unclaimed deductions”
where the defendant “offers weak support” for his tax-loss
estimate. Id. (internal quotation omitted). In this case,
even if we were to follow the reasoning of Hoskins,
Psihos would not benefit because, as the district court
concluded, there was an utter lack of support for Psihos’s
claimed cash payments. While he had kept meticulous
records of the cash receipts and also kept detailed
notes of some cash offsets, Psihos has absolutely no
documentation to support his other claimed cash pay-
ments. For the same reason, Psihos’s reliance on dicta
from the Second Circuit indicating that a tax loss under
the guidelines could be adjusted for “legitimate but
No. 11-2683 9
unclaimed deductions,” United States v. Martinez-Rios,
143 F.3d 662, 671 (2d Cir. 1998); United States v. Gordon,
291 F.3d 181, 187 (2d Cir. 2002), serves him no better.
In short, even if the sentencing guidelines did not “cate-
gorically prevent a court from considering unclaimed
deductions,” Hoskins, 654 F.3d at 1094, the absence of
any contemporaneous supporting documentation of the
purported cash outflows makes this case well suited to
the general rule established in Chavin—that other deduc-
tions are not considered in determining the tax loss.
Under these circumstances, we see no reason to recon-
sider our decision in Chavin.
B. Restitution
Psihos next argues that even if the $837,724 tax loss
calculation was permissible for guideline purposes,
the district court erred in ordering restitution in that
amount because that was not the true loss the govern-
ment suffered. Psihos acknowledges that, before the
district court, he did not distinguish between tax loss and
restitution; rather, he told the district court that the tax
loss would be a guiding principle in determining the
restitution amount. Accordingly, this court’s review is
for plain error. See United States v. Salem, 597 F.3d 877, 884
(7th Cir. 2010). As we have oft repeated, “under the plain
error standard, the party asserting the error bears the
burden of persuasion on the following points: (1) that
there is error, (2) that the error is plain, and (3) that the
error ‘affects substantial rights.’ ” United States v. Jumah,
493 F.3d 868, 875 (7th Cir. 2007) (quoting United States v.
10 No. 11-2683
Olano, 507 U.S. 725, 732-34 (1993)). “If these three condi-
tions are met, the court may exercise its discretion to
notice a forfeited error, but only if it (4) ‘seriously affects
the fairness, integrity, or public reputation of judicial
proceedings.’ ” United States v. Day, 418 F.3d 746, 750 (7th
Cir. 2005) (quoting Olano, 507 U.S. at 732).
Psihos is correct that the “intended loss” for guideline
purposes is broader than the loss for purposes of restitu-
tion; a restitution order, unlike a calculation of loss
under the guidelines, must be based on the amount of the
loss actually caused by the defendant. United States v.
Dokich, 614 F.3d 314, 319 (7th Cir. 2010). But the district
court did not plainly err in ordering restitution of
$837,724 because, as the district court found, Psihos’s
claimed cash outflows were not adequately supported.
Psihos kept detailed records for Flanagan’s and those
records included a daily listing of cash payouts, but
there was no contemporaneous documentation of the
purported payouts to bouncers, promoters, for pur-
ported complimentary food and drink given to cus-
tomers, or for transfers or payments to Café Oceana. The
government need only prove the amount of restitution
by a preponderance of the evidence and where there
are detailed records showing the actual loss, it is entirely
reasonable for a court to conclude that allegations of
undocumented expenses do not overcome the govern-
ment’s proof.
While it would have been helpful had the district
court expressly stated that it found that the $837,724
represented both the intended loss for guideline
No. 11-2683 11
purposes and the actual loss for restitution purposes,
given that Psihos did not argue that there was a distinc-
tion between the two, it is understandable that the
district court was not more explicit in its holding. But,
after noting that “the government had given Psihos credit
for payouts reflected in seized records,” the court stated
that it rejected “the defendant’s assertion that he should
be given credit for hundreds of thousands of dollars of
additional but completely undocumented cash payouts
and transfers between his restaurants.” While Psihos
points to affidavits from employees indicating that the
claimed payouts were made, because the record also
supports the conclusion that $837,724 is the actual loss,
Psihos cannot show that there was an error which
affected his substantial rights. See United States v. Arroyo,
406 F.3d 881, 890 (7th Cir. 2005) (stating that “although
the district court did not make explicit findings tying
defendant’s cocaine distribution to his heroin offense,
the record could support the conclusion that the two
offenses were part of the same course of conduct” and
therefore defendant could not show an error which af-
fected his substantial rights).
Moreover, even if we were to find plain error, under
the circumstances of this case, we would decline to
exercise our discretion to notice that forfeited error for
several reasons. First, there is absolutely no basis to
determine the amount of purported cash payments be-
cause, even under Psihos’s version of events, he did not
keep track of the various claimed outlays. Second, and
relatedly, if Psihos had truly shifted cash to Café
Oceana—the largest reduction he seeks—then he would
12 No. 11-2683
be entitled to a reduction in restitution only if Café
Oceana had reported those cash inflows as revenues;
yet Psihos lacks the corresponding records from Café
Oceana showing its receipt of those funds, and in turn its
reporting the money as revenue to the IRS. Third, Psihos
kept no record of the cash payments to bouncers and
promoters, which in turn creates a near certainty that
the government suffered a loss of taxes owed by those
recipients. Under all of these circumstances, we would
not exercise our discretion to notice the claimed error.
C. Challenge to Sentencing
Finally, Psihos argues that the district court erred
procedurally in sentencing him because it did not
consider his request for a sentence below the guideline
range based on his claim that the tax loss overstated the
seriousness of the offense. It is true that the district
court did not expressly discuss this argument in sen-
tencing Psihos to 24 months’ imprisonment—the low end
of the range. But in rejecting Psihos’s arguments for a
lower tax loss calculation, the district court made clear
that a lower figure was not justified because Psihos
had not provided adequate documentation. Under these
circumstances, there was no reason for the district court
to discuss Psihos’s argument in more detail when
setting the sentence at 24 months. And in sentencing
Psihos, the district court stated that it had considered
Psihos’s arguments, but that the need to provide deter-
rence in the arena of self-reporting taxes justified the
sentence. The district court’s 24-month sentence was
No. 11-2683 13
presumptively reasonable because it was within the
guideline range and there is no basis for us to overcome
that presumption. United States v. Moreno-Padilla, 602
F.3d 802, 810 (7th Cir. 2010). Accordingly, the district
court’s sentence stands.
III.
The district court did not err in determining that the
tax loss caused by Psihos’s offense was $837,724. Other
cash payments that Psihos could have used to reduce
his taxable income cannot be considered based on this
court’s decision in Chavin—a decision we decline to
overturn. And even if the tax loss could be reduced by
such cash payments, Psihos, as the district court found,
has not established that he actually made the claimed
payments. For this reason, the district court did not
commit plain error in ordering restitution of $837,724.
Finally, the district court did not err procedurally in
sentencing Psihos within the guideline range without
discussing his argument for a lower sentence based on
a lower actual loss. The 24-month sentence, which was
at the low end of the guideline range, was reasonable.
We A FFIRM .
14 No. 11-2683
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