Alain Leibman writes:
In a previous post, we explored the views of the Tenth Circuit, seconded by the Second Circuit, that a sentencing court could reduce the "tax loss" charged against a defendant by crediting him with deductions not taken on the filed but false tax returns. As noted there, the Seventh Circuit held the contrary view that no offsetting deductions could be recognized.
Appellant in a recent Seventh Circuit case cited to the views of the Tenth and Second Circuits in an effort to persuade the former to overrule its precedent on this issue. He was, however, unsuccessful. In United States v. Psihos, 683 F.3d 777 (7th Cir. 2012), the defendant restaurateur pled guilty to several counts of false subscribing based on his understatement of receipts for one of his restaurants. Unfortunately for him, as part of his effort to sell the restaurant, he and his broker provided prospective buyers with records of sales activity which were at odds with his filed returns’ report of such activity. IRS agents, posing undercover as prospective buyers, were provided with that discrepant receipt information, which led to searches of the restaurant and of off-site storage locations, all of which yielded a fairly complete second set of books for the restaurant.
Facing sentencing, Psihos argued that the unreported receipts should be offset by amounts he paid in cash payroll, cash transfers to another restaurant, cash payments for food to the other restaurant and so on. Both the trial court and then the Court of Appeals rejected his efforts to reduce the tax loss. The Court of Appeals reaffirmed the correctness of its earlier decision in United States v. Chavin, 316 F.3d 666 (7th Cir. 2002), which held that intended tax loss, and not actual loss to the IRS, was controlling under Section 2T1.1 of the Guidelines, making previously unreported deductions irrelevant. To Psihos’s argument that the Tenth and Second Circuits had the better analysis of the relevant Guidelines section, the Court of Appeals pointed out that even if it followed those other courts, Psihos would do no better because he lacked contemporaneous supporting documentation for his proposed deductions, necessary to have them applied to reduce loss. So the keeper of a double set of books was a double loser, either applying existing and reaffirmed Seventh Circuit law or applying more favorable law from other circuits.
(Alain Leibman, Esq., the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office. A former decorated federal prosecutor, he practices both criminal defense and commercial litigation in federal and state courts)