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A.G. Schneiderman, Acting Tax Commissioner Manion And Comptroller Dinapoli Announce $4.3 Million Settlement With Owners Of For-Profit School Network For Overcharging State; Failing To Pay Taxes

NEW YORK—Attorney General Eric T. Schneiderman, Acting Tax Commissioner Nonie Manion and Comptroller Thomas P. DiNapoli announced today a settlement with K3 Learning, Inc. (f/k/a Metropolitan Preschools, Inc.) and its president and owner Michael C. Koffler, together with his sons, Brian and Daniel Koffler, and his special education preschool, Sunshine Development School (“SDS”), for overcharging the State of New York for services rendered by SDS and for failing to pay millions in personal and corporate income tax.  Following a coordinated investigation with the Department of Taxation and Finance and an audit and investigation by the Office of the State Comptroller, Koffler and the other parties have agreed to pay the State over $4.3 million to resolve the investigation.

“We won’t allow special education programs to be exploited for personal financial gain.  These defendants used their programs as a way to defraud the government and cheat on their taxes—sticking law abiding New Yorkers with the bill in the process,” said Attorney General Schneiderman.

“The bottom line is that this family trio launched a scheme to underreport millions of dollars in income, fleecing New York State and its honest taxpayers,” said NYS Tax Department Acting Commissioner Nonie Manion. “We’ll continue to work alongside all levels of law enforcement, including Attorney General Schneiderman and his team, to ensure that those who try to scam the system face justice.”

"This family manipulated the system to enrich themselves at the expense of children with special needs," said State Comptroller Thomas P. DiNapoli. "Now, thanks to my partnership with Attorney General Schneiderman, they will pay back millions for their actions. My office will continue to work to protect vulnerable New Yorkers and punish those who exploit those in need and defraud the taxpayers."

An investigation by the Attorney General’s office revealed a complicated leasing arrangement created by Michael Koffler and SDS with the purpose and effect of inflating claims for rent reimbursement to the State of New York. Specifically, Bridan Realty III, LLC, an entity created and controlled by Michael Koffler, entered into a lease for space for the special education preschool SDS, and then subleased the space to SDS at a substantial mark up. The investigation revealed no legitimate reason for the mark-up and found that Bridan performed no services for SDS. Instead, the company was merely a pass-through entity controlled by the Kofflers and used to pay the Kofflers, their credit card bills, their boat expenses, and even partial tuition for Brian’s law school.  Indeed, the sham entity’s name derives from the Koffler sons, Brian and Daniel.

Furthermore, an audit by the Office of the State Comptroller found over a million dollars in an additional overcharges stemming from unreasonable high executive compensation for Michael Koffler, unrecoverable expenses – such as lobbying and legal fees –and accounting errors, among other erroneous charges.  As part of the agreement, SDS has agreed to any reimbursement rate adjustments required to fully compensate the State Education Department and the New York City Department of Education for these past overcharges.

The Attorney General, with the help of the Department of Taxation and Finance, found that each of Michael, Brian, and Daniel Koffler, as well as SDS, underreported taxable income on their tax returns.  In the largest tax avoidance finding, Michael Koffler reported millions in losses from various entities on his personal income tax return even though he lacked supportable basis to do so.  Additionally, he failed to report as income various personal and living expenses that were paid by entities under his control. These included payments from an “Executive Account” for rent for his New York City apartment, personal credit cards, various utility and maintenance bills for the Koffler’s vacation home in Westhampton and expenses incurred in Saint Barth’s and Westhampton.

Attorney General Schneiderman expresses his thanks to the staff of the New York State Department of Taxation and Finance, especially Stephanie Lane, Tax Auditor II in the Office of Counsel, for identifying the tax issues in the matter and for their important assistance in bringing this investigation to resolution. The Attorney General would also like to thank the Office of the State Comptroller for its work on the audit of SDS’s re-imbursement overcharges. 

The Comptroller’s examination was conducted by the Division of State Government Accountability and the Division of Investigations. 

The Attorney General’s investigation was conducted by Special Counsel Nicholas Suplina under the auspices of the Taxpayer Protection Bureau, which is overseen by Bureau Chief Thomas Teige Carroll and Deputy Bureau Chief Scott Spiegelman. The Taxpayer Protection Bureau, which enforces the New York State False Claims Act including tax claims made thereunder, is a bureau in the Criminal Division, which is overseen by Chief Deputy Attorney General Jason Brown.