Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 07-CR-801--Milton I. Shadur, Judge.
The opinion of the court was delivered by: Tinder, Circuit Judge.
ARGUED SEPTEMBER 28, 2011
Before BAUER, WOOD, and TINDER, Circuit Judges.
A jury found Chris J. Kokenis guilty of eight counts of filing a false income tax return in violation of 26 U.S.C. § 7206(1). He appeals both the convictions and his sentence. He contends that the district court erred in ruling that he could not present evidence of good faith unless he waived his Fifth Amend- ment rights and testified. He also argues that the court erred by relying on acquitted conduct in determining the sentence to be imposed. Although the district court applied the wrong standard in determining whether Kokenis could assert good faith, the error was harmless given the overwhelming evidence of a lack of good faith. The court properly excluded the evidence at issue, and our precedent precludes Kokenis's argument about acquitted conduct. We therefore affirm.
Jim Kokenis, Chris Kokenis's father, started two compa- nies, Delta Oil Corporation and Delta Energy Corpora- tion, which explored for oil and natural gas, leased mining rights from landowners, and sold "working interests" in their drilling projects to investors. Chris Kokenis was president of both Delta Oil and Delta Energy and, along with his two sisters, was a share- holder of Delta Energy. Delta Energy was a Subchapter S*fn1 corporation for federal taxation purposes, which means that its income and tax burden flow through directly to its shareholders and the shareholders are supposed to report the income on their tax returns and pay the appro- priate tax. Orlando Mondero was the controller and accountant for Delta Oil and Delta Energy. In 1998 he contacted the Internal Revenue Service with concerns about fraudulent transactions.
The IRS audited Delta Oil, Delta Energy, Jim Kokenis, and Delta Energy's shareholders: Kokenis and his two sisters. IRS Revenue Agent Thomas Dorsey, who con- ducted the audit, reviewed large sales transactions be- tween the two Delta corporations and two gas and oil investment companies, Roemer-Swanson Energy Corporation and Whiting Petroleum Corporation. He also reviewed compressor sales between Delta Energy and Robert Rosin and personal expenses of Kokenis that were paid by Delta Energy. These included real estate taxes on his residence, residential construction upgrades on his residence, and a sales commission on the sale of his residence.
Steve Swanson, former president of Roemer-Swanson, testified that in 1996 Roemer-Swanson purchased a work- ing interest in a well project from Delta Oil with a purchase price of approximately $3.92 million. In Septem- ber 1996, Delta Oil transferred $1,721,376 of the money it received from Roemer-Swanson to Delta Energy. Swanson testified that no portion of the purchase price was allocated as an advance to pay for future drilling and that Roemer-Swanson did not give any money to Delta Oil to hold in an account on behalf of Roemer- Swanson.
Mondero recorded the Roemer-Swanson sale in Delta Energy's books, noting that Delta Oil owned $695,424 and Delta Energy owned $1.7 million, with the remainder going elsewhere. When he prepared Delta Energy's 1996 tax return, he included the $1.7 million as income and gave a draft of the return to Kokenis. Mondero testified that Kokenis said there was too much money and it had to be reduced. Mondero said that he prepared another tax return as Kokenis requested and when he showed it to Kokenis, Kokenis told him it had to be reduced further and to show no profit on the sale. Mondero did as re- quested, and the final tax return did not show any income from the Roemer-Swanson sale. Kokenis signed the return, and Mondero mailed it to the IRS. Mondero testified that Kokenis later told him to recognize the transaction as a liability rather than a sale. As instructed, Mondero prepared a journal entry, dated December 31, 1997, reversing the sale. The entry noted: "Sales to record drilling liability to Roemer Swanson Energy Corpora- tion[.]" The effect was to reduce Delta Energy's income by $1.7 million.
The parties entered into a second contract in Novem- ber 1996, pursuant to which Roemer-Swanson bought a larger stake in some of the same well projects from Delta Oil for $6.75 million. Swanson testified that this contract, like the first, did not allocate any portion of the purchase price for future development or drilling and that Roemer-Swanson did not advance any money to Delta Oil to cover the cost of future drilling under that contract. Mondero recorded the sale in a journal entry on the Delta Energy books, reflecting receipt of $1.9 million from Delta Oil and recognizing the money as a sale to Roemer-Swanson. Mondero testified that he prepared a tax return for Delta Energy for the tax year 1997 based on the profit and loss statements and balance sheet. He said that he presented the income statement and tax calculations to Kokenis who told him to reduce the income, specifically instructing him to reverse the sale to Roemer-Swanson by recognizing it as a liability instead of a sale. Mondero did as instructed and reversed the sale in a journal entry. The effect of the reversal was that the money received from the sale was not reported as income by Delta Energy. Dorsey testified that the money was treated as an advance from the investor. Mondero stated that he prepared a tax return after the transaction had been reversed on the books. Kokenis signed it and Mondero, at Kokenis's direction, sent the return to the IRS.
This pattern was repeated with two Whiting Petro- leum transactions. First, in June 1998, Whiting Petro-
leum entered into a purchase and sale agreement with Delta Oil and others to purchase a working interest in well projects for approximately $4.8 million. Whiting Petroleum entered into a second purchase and sale agree- ment with Delta Oil in December 1999 for the purchase of interests in oil and gas wells for $4.15 million. The settlement date was January 10, 2000. John Hazlett, a Whiting Petroleum vice president in the late 1990s,
testified that no portion of the purchase price for either transaction was allocated to pay the cost of drilling new wells in the future. He also said that Whiting Petroleum did not advance any money to Delta Oil to pay for such a cost and did not pay Delta Oil any money to be held on account on behalf of Whiting Petroleum.
Mondero testified that he initially recorded the Whiting Petroleum transactions in the Delta Energy books and records as sales, explaining that Kokenis identified them to him as sales. Mondero prepared a tax return for Delta Energy for the tax year 1998 based on the profit and loss statements and his tax calculations. He testified that when he presented his calculations to Kokenis, Kokenis told him that the income was too big and needed to be reduced. Kokenis instructed him to reverse the sale to White Petroleum. Mondero did as instructed, increasing Delta Energy's liability and reducing its taxable income by $2.7 million. Mondero received no supporting docu- mentation to support the reversal. Then Mondero prepared a tax return based on Kokenis's instructions, Kokenis signed it, and Mondero filed it with the IRS. Mondero also testified that he prepared the tax return for Delta Energy for the tax year 2000 based on the profit and loss statements and his tax calculations. He claimed that when he showed his calculations to Kokenis, Kokenis told him to reduce the income from the Whiting Petroleum sale. Mondero did so and recorded a liability to Whiting Petroleum instead of proceeds from the sale, thus reducing taxable income. Mondero testified that he was not holding any money on behalf of Whiting Petro- leum and had no documentation to that effect. According to Mondero, Kokenis never offered any explanation why he wanted Mondero to reverse or reduce the sales trans- actions. Nor did Kokenis explain why the money received wouldn't be treated as income.
Dorsey reviewed questionable Delta Energy journal entries concerning a transaction for $2,757,773.60. The first entry, date stamped July 20, 1998, classified the transaction as a sale and stated: "To record proceeds from Roemer-Swanson for drilling of new wells in various projects." (The reference to Roemer-Swanson instead of Whiting Petroleum appears to have been an error.) A second journal entry reversed the sale with the effect of decreasing Delta Energy's income by approximately $2.7 million. Curiously, Dorsey received two different copies of the second journal entry. The first, Government Exhibit 36, was from Mondero; the other, Government Exhibit 37, was from accountant Vito Loisi (speaking for Kokenis through power of attorney) in response to Dorsey's request for documents related to the 1998
Whiting Petroleum sale. Dorsey testified that the copy of the journal entry from Mondero noted: "To reverse sale of working interest in various wells to Whiting Petro- leum per Chris Kokenis . . . ." However, the copy provided by Loisi stated: "To reclass proceeds from Whiting Petro- leum transaction." Dorsey testified that this would likely refer to a deposit or an advance rather than a sale. Dorsey requested backup documentation and an explanation as to where the transaction was described as an advance. He was never provided that information. Dorsey also testified ...