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United States v. Trombetta

United States District Court, W.D. Pennsylvania

June 26, 2018



          Joy Flowers Conti Chief United States District Judge

         In these findings and conclusions, the court will rule upon the disputes concerning the amount of restitution, which affects both defendants Nicholas Trombetta (“Trombetta”) and Neal Prence (“Prence”) (collectively, “defendants”). The court will make separate tentative findings and rulings concerning Trombetta's objections to his presentence investigation report and advisory guideline range.[1]

         On August 24, 2016, Trombetta pleaded guilty to Count 6 of the indictment at criminal action number 13-227, which charged him with a Klein conspiracy[2] in violation of 18 U.S.C. § 371. On September 28, 2017, Prence pleaded guilty to the same Klein conspiracy at count 6 of the indictment at criminal action number 13-227. Each defendant entered his guilty plea pursuant to a plea agreement with the government.

         A Klein conspiracy in violation of 18 U.S.C. § 371 involves defrauding the Internal Revenue Service (“IRS”) of its property (i.e., tax dollars) and constitutes an “offense against property” that is covered by the Mandatory Victims Restitution Act (“MVRA”), 18 U.S.C. §§ 3663, 3663A, 3664. United States v. Turner, 718 F.3d 226, 236 (3d Cir. 2013). Restitution in the full amount of the victim's loss, as determined by the court, shall be ordered in this case. 18 U.S.C. §§ 3663A, 3664(f)(1)(A).

         The parties made numerous filings regarding the amount of restitution. (ECF Nos. 290, 294, 299, 354). On March 28, 2018, the court held a hearing on the amount of restitution. (Transcript, ECF No. 364). The parties filed post-hearing proposed findings of fact and conclusions of law (ECF Nos. 365, 366, 367). The determination of the amount of restitution in this case is ripe for decision.

         Legal Background

         In the case of an identifiable victim (such as the IRS), the court shall enter a restitution order for the full amount of the victim's actual loss without consideration of a defendant's ability to pay. See Turner, 718 F.3d at 236. The defendant's finances can be considered, however, in specifying the manner in which restitution is paid. 18 U.S.C. § 3664(f)(2). Unlike the “amount of loss” for the offense level calculation, the amount of restitution cannot exceed the actual, provable loss of the victim. United States v. Wirth, 719 F.3d 911, 915 (8th Cir. 2013).

To obtain restitution for tax losses, the government must prove by a preponderance of evidence that the defendant caused the United States to suffer an actual loss. See United States v. Ellefsen, 655 F.3d 769, 782 (8th Cir. 2011); Hirmer, 767 F.Supp.2d at 1311-14. The actual loss would be the revenue loss to the United States-in other words, the amount the defendant should have paid in taxes to the United States. See Ellefsen, 655 F.3d at 782; Hirmer, 767 F.Supp.2d at 1311-14. Given that the loss is the tax liability of the defendant, determining the amount of restitution requires consideration of the applicable deductions, exemptions, penalties, and others intricacies of the tax code. See Ellefsen, 655 F.3d at 782 (noting that the government presented a “detailed explanation of the amount of taxes, penalties, interest, and additional payments, for each year, ” and used the testimony and reports of IRS agents to establish the amount of restitution).

United States v. Garza, No. EP-11-CR-3021, 2012 WL 2027025, at *11 (W.D. Tex. June 5, 2012). Although Trombetta and Prence stipulated to the “amount of loss” for the purpose of the offense level in U.S.S.G. § 2T4.1, they may challenge the “actual loss” suffered by the IRS for the purpose of restitution.

         The procedure for issuance of a restitution order is governed by 18 U.S.C. § 3664. Disputes are resolved by the court by the preponderance of the evidence. The government has the initial burden to demonstrate the amount of the IRS' actual loss. 18 U.S.C. § 3664(e). Defendants have the burden to demonstrate their financial resources and needs. Id. The burden to demonstrate other matters is allocated by the court as justice requires. Id. In United States v. Seligsman, 981 F.2d 1418, 1421 (3d Cir. 1992), the court of appeals instructed that in determining restitution, the sentencing court should make findings on the record about: (1) the amount of loss actually sustained by the victim; (2) how the loss is connected to the offense of conviction; and (3) the defendant's financial needs and resources. The court explained that “difficulties of measurement” do not preclude the court from ordering restitution. If the exact amount owed is difficult to determine, the court should “reach an expeditious, reasonable determination of appropriate restitution by resolving uncertainties with a view toward achieving fairness to the victim.” Id. (citations omitted). The findings of fact here relate only to the first and second matters, i.e., the actual loss and its relation to the offense of conviction. The third matter, defendants' respective financial needs and resources, will be addressed at the sentencing hearings.

         The government relies largely on the factual allegations set forth in the indictment. In his plea agreement, Trombetta stipulated that the facts set forth in count 6 were true and correct, with two minor modifications. Prence did not enter a stipulation of facts in his plea agreement, but did admit his guilt to count 6. At the restitution hearing, the government introduced a recorded statement in which Prence admitted that he prepared tax returns reflecting allocations of income in the names of straw owners of Avanti Management Group (“AMG”) while knowing that Trombetta was the true owner of that income. Gov't Exh. 14. Prence fully participated as a co-conspirator by knowingly preparing false tax returns to conceal Trombetta's income from the IRS. The amount of the IRS' actual loss is the same for both Trombetta and Prence.[3]

         Findings of Fact

         1. Trombetta was the founder and chief executive officer of the Pennsylvania Cyber Charter School (“PA Cyber”). (Indictment ¶ 1, incorporated by ¶ 45).

         2. Trombetta founded AMG in 2008. (Indictment ¶ 5, incorporated by ¶ 46). AMG is a limited liability company that filed its taxes on Form 1120S. AMG's income and deductions flowed through to the individual members' returns. (ECF No. 364 at 10, 18; Government Exh. 2). AMG provided the funds to pay the straw owners' taxes each year. (ECF No. 364 at 24; Indictment ¶ 64).

         3. Nearly all of AMG's revenue came from a management services contract with the National Network of Digital Schools Management Foundation (“NNDS”).[4] Id. Trombetta was the controlling party on both sides of the transactions involving PA Cyber and NNDS, and then in turn, was the controlling party on both sides of the transactions between NNDS and AMG. (Indictment ¶ 51).

         4. Trombetta selected four straw owners of AMG to be put in place to hold and manage assets for him until an unspecified future time when Trombetta would overtly assume ownership of AMG. Indictment ¶ 55.

         5. One2One Enterprises (“One2One”) was founded by Trombetta and his sister, Elaine Trombetta Neill (“Neill”). (Indictment ¶ 9, incorporated by ¶ 49; ¶ 53).

         6. One2One is a Schedule C business, which is similar to a sole proprietorship. Its taxes were reported and paid by Neill and her husband on Schedule C to their Form 1040 individual tax returns. (ECF No. 364 at 11-12).

         7. One2One was never treated as a partnership and never filed a Form 1065 to report partnership income. Id.

         8. “One2One served as a vehicle to allow Defendant Nicholas Trombetta to use his position of influence over PA Cyber, NNDS, AMG, BOSS, Wingspan and other entities in the private sector to covertly channel money to himself, to Elaine Trombetta Neill, to other family members and to other persons.” Id.

         9. The object of the conspiracy was to conceal the true nature, source and amount of Trombetta's income “by diverting such income to AMG, where it accumulated for his future use, and to One2One, where it was available as current income” in order to defraud the IRS. (Indictment ¶ 51).

         10. In so doing, Trombetta “concealed his position as the direct beneficiary and recipient of funds generated by PA Cyber, the school wherein he held the position of CEO.” Id.

         11. Trombetta “also attempted to avoid public discovery and scrutiny of his conflict of interest as the controlling party” on both sides of the relevant ...

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