In the Matter of Brookford, LLC, Appellant,v.New York State Division of Housing and Community Renewal, et al., Respondents.BriefN.Y.May 2, 2018To be Argued by: VICTOR A. KOVNER (Time Requested: 30 Minutes) APL-2016-00211 New York County Clerk’s Index No. 100065/15 Court of Appeals of the State of New York In the Matter of the Application of BROOKFORD, LLC, Appellant, For a Judgment Pursuant to Article 78 of the Civil Practice Law and Rules, – against – NEW YORK STATE DIVISION OF HOUSING AND COMMUNITY RENEWAL and MARGARET SCHUETTE FRIEDMAN, Respondents. BRIEF FOR APPELLANT Of Counsel: VICTOR A. KOVNER THOMAS R. NEWMAN JEFFREY TURKEL CAROL M. LUTTATI VICTOR A. KOVNER, ESQ. DAVIS WRIGHT TREMAINE LLP 1251 Avenue of the Americas, 21st Floor New York, New York 10020-1104 Tel.: (212) 489-8230 Fax: (212) 489-8340 THOMAS R. NEWMAN, ESQ. DUANE MORRIS LLP 1540 Broadway New York, New York 10036-4086 Tel.: (212) 692-1028 Fax: (212) 692-1020 (For Further Appearances See Reverse Side of Cover) Printed on Recycled Paper JEFFREY TURKEL, ESQ. ROSENBERG & ESTIS, P.C. 733 Third Avenue New York, New York 10017 Tel.: (212) 867-6000 Fax: (212) 551-8484 CAROL M. LUTTATI, ESQ. LAW OFFICES OF CAROL M. LUTTATI 150 East 58th Street New York, New York 10155 Tel.: (212) 829-0011 Fax: (212) 829-0055 Attorneys for Appellant CORPORATE DISCLOSURE STATEMENT Petitioner-appellant Brookford, LLC has no parents, subsidiaries, or affiliates. RE\49426\0001\2196527v4 TABLE OF CONTENTS Page PRELIMINARY STATEMENT. 1 STATEMENT OF JURISDICTION. 1 STATEMENT OF QUESTIONS PRESENTED .2 SUMMARY OF ARGUMENT .4 THE GOVERNING STATUTES ,8 A. Legislative History and Intent B. Legislative Restrictions on the Income Verification Procedure .8 .9 C. CRL§ 26-403.1 10 1. Annual Income 10 2. The Statutory Income Verification Procedure 10 STATEMENT OF FACTS 12 A. The Parties 12 B. Owner Serves an ICF. 12 C. Owner Petitions for Deregulation D. Tenant’s Initial Answer to Owner’s Petition for Deregulation E. Proceedings Prior to DHCR’s Challenged Order Herein F. DHCR Moves to Remand 12 12 13 14 G. DHCR Demands Confidential Tax Information to which it is not Entitled 15 H. DHCR’s Challenged Order. SUPREME COURT’S DECISION 16 18 -i- RE\49426\0001\2196527v4 THE FIRST DEPARTMENT’S DECISION 20 ARGUMENT 21 POINT I BECAUSE THE PERCEIVED CONFLICTS WITHIN CRL § 26-403.1 DO NOT EXIST, THERE IS NO NEED TO APPORTION TENANT’S INCOME 21 Courts Must Harmonize Perceived ConflictsA. 21 All Reported Joint Income is Tenant’s Income as a Matter of Law B. 22 Owner’s Interpretation Harmonizes the Various Statutory Provisions C. 25 POINT II IF THIS COURT FINDS THE STATUTORY PROVISIONS TO BE IN CONFLICT, IT SHOULD RESOLVE THAT CONFLICT AGAINST APPORTIONMENT 28 The Governing Rules of Statutory Construction Apportionment Defeats the Legislature’s Goal of Ease of Administration 28A. B. 29 Apportionment Defeats the Legislature’s Goal of Prohibiting Invasive Investigations Apportionment Defeats the Legislature’s Goal that DTF shall have Exclusive Jurisdiction to Determine Income C. 34 D. 38 The Legislative History Says Nothing about the Primary Residence Provision E. 41 POINT III DHCR’S MEMORANDUM OF UNDERSTANDING IS CONTRARY TO THE STATUTE AND LEGISLATIVE INTENT, AND LEADS TO ABSURD RESULTS 45 A. A Memorandum of Understanding Cannot Authorize an Administrative Agency to Violate a Statute B. Apportionment Leads to Either “Blind Acceptance” or Multiple Violations of the Statute 45 47 -ii- RE\49426\0001\2196527v4 CONCLUSION 52 - in - RE\49426\0001\2196527v4 TABLE OF AUTHORITIES Page(s) State Cases 103 E. 86th St. Realty Corp v New York State Div. ofHous. & Community Renewal, 12 AD3d 289 (1st Dept 2004) 315 E. 72nd St. Owners, Inc. v New York State Div. ofHous. & Community Renewal, 101 AD3d 647 (1st Dept 2012) 9 E. 10 LLC v New York State Div. of Hous. & Community Renewal, 2009 WL 229659 (Sup Ct, NY County, January 26, 2009, No. 109744/08) A.J. Clarke Real Estate Corp. v New York State Div. of Hous. & Community Renewal, 307 AD2d 841 (1st Dept 2003) Angelo v Angelo, 74 AD2d 327 (2d Dept 1980) Artibee v Home Place Corp., 28 NY3d 739 (2017) Burger King, Inc. v State Tax Commn., 51 NY2d 614 (1980) Cintron v Calogero, 15 NY3d 347(2010) Dutchess County Dept, of Social Servs. v Day, 96 NY2d 149 (2001) Foley v Bratton, 92 NY3d 781 (1999) Franklin Apt. Assoc, v New York State Div. of Hous. & Community Renewal, 2007 WL 7289398 (Sup Ct, Westchester County, March 15, 2007, No. 16725/06) 26 26 31,37, 39 27 24, 42 22 21 28 22, 26 22, 26 49 - iv - RE\49426\0001\2196527v4 Jones v Berman, 37 NY2d 42(1975) Katz 737 Corp v Cohen, 104 AD3d 144 150 (1st Dept 2012), Iv denied 21 NY3d 864 (2013) . KSLM-Columbus Apts., Inc. v New York State Div. ofHous. and Community Renewal, 5 NY3d 303 (2005) Lacher v New York State Div. of Hous. & Community Renewal, 25 AD3d 415 (1st Dept 2006), Iv denied 1 NY3d 704 (2006) Langham Mansions, Co. v New York State Div. of Housing & Community Renewal, 2004 WL 5488004 (Sup Ct, NY County, Nov. 12, 2004, No. 101442/04) 36 Leepson v Holland, 171 Misc2d 84 (Sup Ct NY Co 1996) ajf’d 245 AD2d 176 (1st Dept 1997) 46 38 45 50 9,31 London Terrace Gardens v New York State Div. of Hous. & Community Renewal, 6 Misc3d 1020(A) (Sup Ct, NY County 2005) 37 Matter of 1-4 Management LLC, DHCR Adm. Rev. Dckt. No. BQ-410025-RO, issued May 3, 2016.. Matter of 737 Park Avenue Acquisition, LLC, DHCR Adm. Rev. Dckt. No. AS-410026-RO, issued Jan. 20, 2013 . Matter of Classic Realty v New York State Div. of Hous. & Community Renewal, 309 AD2d 205 (1st Dept 2003), revd on other grounds 2 NY3d 142 (2004) Matter of DaimlerChrysler Corp. v Spitzer, 7 NY3d 653 (2006) Matter of Diegelman v City of Buffalo, 28 NY3d 231 (2016) 50 34, 39 36,38,49, 50 43 43 - v - RE\49426\0001\2196527v4 Matter of Extell Belnord LLC, DHCR Adm. Rev. Dckt. No. XI-410040-RO, issued Nov. 13, 2009.... 34, 40, 41 Matter of Ferrara, 10NY2d 1(1961) Matter of Giffuni Bros, v New York State Div. of Hous. & Community Renewal, 293 AD2d 402 (1st Dept 2002), Iv denied 99 NY2d 505 (2003) Matter of Goodman, 95 NY2d 15 (2000) Matter of Gore, DHCR Adm. Rev. Dckt. No. KC-410037-RT, issued Oct. 1, 1996. Matter of Grossman, DHCR Adm. Rev. Dckt. No. DV-410025-RT, issued Aug. 24, 2016 43, 50 Matter of Kaplan, DHCR Adm. Rev. Dckt. No. BM-410017-RT, issued Apr. 10, 2014 34, 39 Matter of Montgomery Trading LLC, DHCR Adm. Rev. Dckt. No. EM-410017-RO, issued May 20, 2016 39, 40 Matter of Moran Towing & Transp. Co. v New York State Tax Commn., 72 NY2d 166 (1988) Matter of Phelan, DHCR Adm. Rev. Dckt. No. CU-410028-RT, issued May 26, 2015 Matter of Prominent Assets LLC, DHCR Adm. Rev. Dckt. No. WH-410034-RO, issued Dec. 22, 2008 34, 40 Matter of S&P Associates of New York, LLC, DHCR Adm. Rev. Dckt. No. DQ-410044-RO, issued July 22, 2015 34, 39 Matter of Webster v Tully, 82 AD2d 976 (3d Dept 1981), <#V/56NY2d532(1982). 32 36, 39 28 31 22, 45 31 23 - vi - RE\49426\0001\2196527v4 Matter of Williamsburg Assets LLC, DHCR Adm. Rev. Dckt. No. XH-410008-RO, issued Feb. 16, 2010 Matter of Woolley, DHCR Adm. Rev. Dckt. No. KE-410086-RT, issued Aug. 15, 1996 Nestor v New York State Div. of Hous. & Community Renewal, 257 AD2d 395 (1st Dept 1999), /v denied 93 NY2d 982 (1999) Parkview Assets LLC v New York State Div. of Hous. & Community Renewal, 26 Misc3d 1238(A) (Sup Ct, NY County 2010) Pataki v Kiseda, 80 AD2d 100 (2d Dept 1981), appeal dismissed 54 NY2d 606 (1981), Iv dismissed 54 NY2d 831 (1981) Pell v Bd. of Educ., 34 NY2d 222(1974) People v Duggins, 3 NY3d 522 (2004) Perosi v LiGreci, 98 AD3d 230 (2d Dept 2012) Power v New York State Div. of Hous. & Community Renewal, 61 AD3d 544 (1st Dept 2009), Iv denied 13 NY3d 716 (2010) RAM I LLC v New York State DHCR, 123 AD3d 102 (1st Dept 2014) Rangolan v County of Nassau, 96 NY2d 42 (2001) Schumer v Holtzman, 60 NY2d 46(1983) 40,41 32 30,31,35,36 37,39 28 49 22 28 38 8 22 46, 47 - vii - RE\49426\0001\2196527v4 Sun Beach Real Estate Dev. Corp. v Anderson, 98 AD2d 367 (2d Dept 1983), affd for reasons stated below 62 NY2d 965 (1984) Weber v Town of Cheektowaga, 284 NY 377 (1940) 21 49 Federal Cases Helvering v Janney 311 US 189 (1940) Taft v Helvering, 311 US 195 (1940) 23 23 Statutes 2426 USC § 1 26 USC §22 26 USC § 25A 26 USC §32 26 USC § 6013(d)(3) Administrative Code of the City of New York at § 26-401 etseq. Administrative Code of the City of New York at § 26-501 et seq. CRL§ 26-401.1(b) CRL§ 26-403.1 CRL§ 26-403.1(a) CRL§ 26-403.1(a)(1) CRL § 26-403.1(a)(2) CRL § 26-403.1(a)(3) CRL §26-403.1(b) 24 24 24 22 8 8 34 8, 10, 18,21 21,41,42 10, 22, 24, 25 10 10 10, 26,38 - viii - RE\49426\0001 \2196527v4 CRL § 26-403.1(c)(1) CRL § 26-403.1(c)(2) L 1993, ch 253, § 10 L 1993, ch 253, §5 L 1993, ch 253, §6 L 1993, ch 256, §28 L 1997, ch 116, § 13 L 1997, ch 116, § 14 Labor Law § 592(1) Rent Regulation Reform Act of 1993 (L 1993, ch 253) RSL 26-504.3 11 11 11 8 8 46 10 10 32 8, 9, 10, 11,29 8 Tax Law § 171-b Tax Law § 171-b(3)(b) Tax Law § 601 Tax Law § 607(a) 11 11,26, 34,38 24 23 Other Authorities 1993 NY Legis Ann DHCR Operational Bulletin 94-1 DHCR Operational Bulletin 94-1 Section 1(B)(3) DHCR Operational Bulletin 95-3 Governor’s Bill Jacket, L 1993, ch 253 The New York State Senate Introducer’s Memorandum in Support of the RRRA-93 9, 29, 30 37,46 37 37, 46 10, 29,35 30 -ix- RE\49426\0001 \2196527v4 Treatises McKinney’s Cons Laws of NY, Book 1, Statutes § 98(b) 28 Regulations 26 CFR§ 1.6013-4(b) 23 9NYCRR Part 2211 46 - x - RE\49426\0001\2196527v4 PRELIMINARY STATEMENT Petitioner-appellant Brookford, LLC (Owner) appeals from an order of the Appellate Division, First Department issued on August 4, 2016 (R. 501-06), which affirmed a September 17, 2015 judgment of the Supreme Court, New York County (Lobis, J.) (R. 6-15) in the underlying article 78 proceeding. Supreme Court, in turn, affirmed a November 19, 2014 order of respondent-respondent New York State Division of Housing and Community Renewal (DHCR). DHCR’s order denied Owner’s petition to deregulate the subject Central Park West apartment under the high-rent, high-income provisions of the New York City rent control statute. STATEMENT OF JURISDICTION Supreme Court issued its judgment denying Owner’s article 78 petition on September 17, 2015; the judgment was entered on September 29, 2015 (R. 15). Owner timely filed a Notice of Appeal on October 6, 2015 (R. 4-5). The First Department affirmed the judgment on August 4, 2016 (R. 506). DHCR served Owner with Notice of Entry that same day. Owner timely served its motion for leave to appeal on DHCR and Tenant on September 2, 2016. The First Department granted Owner’s motion for leave to appeal to the Court of Appeals on November 1, 2016 (R. 500). RE\49426\0001\2196527v41 STATEMENT OF QUESTIONS PRESENTED 1. Where the high-income luxury deregulation statute defines a tenant’s “annual income” as “the federal adjusted gross income as reported on the New York state income tax return,” and as a matter of federal and state tax law, AGI reported on a joint tax return is indivisible and wholly ascribable to each joint filer, can jointly reported federal AGI be “apportioned” between one joint filer who lives in the apartment and another joint filer who does not? The First Department answered this question in the affirmative. 2. Where there is a perceived conflict within a statute, should the Court (a) harmonize the statutory provisions in a manner that preserves the essential purposes of all provisions, and renders them internally compatible; or (b) declare one provision the victor, and nullify all other purportedly conflicting provisions? The First Department resolved the perceived conflict by giving effect to one provision of the statute, and nullifying three allegedly conflicting provisions. Was it arbitrary and capricious for DHCR to interpret the high-income3. luxury deregulation statute as authorizing DHCR to (a) demand confidential documents that the statute expressly prohibits DHCR from demanding; (b) make income determinations when the statute explicitly vests the New York State Department of Taxation and Finance (DTF) with the power to make such determinations; and (c) determine issues that DHCR admits that it is incompetent to determine? -2- RE\49426\0001\2196527v4 The First Department answered this question in the negative. Can administrative agency action be lawfully predicated on an4. unpublished Memorandum of Understanding that purports to authorize practices and procedures that are ultra vires the governing statute? The First Department answered this question in the affirmative. -3- RE\49426\0001\2196527v4 SUMMARY OF ARGUMENT Owner filed its deregulation petition with DHCR in 2006, believing that the income of respondent-respondent Margaret Schuette Friedman (Tenant) and her husband (tenant of record Si Friedman) exceeded the $175,000 statutory income threshold. The governing statute defines “annual income” as “the federal adjusted gross income [AGI] as reported on the New York state income tax return,” and vests DTF with exclusive jurisdiction to determine whether a tenant’s income exceeds the threshold. The Friedmans elected to file joint returns for the two years in question — benefiting from the lower rates afforded to joint filers — and reported federal AGI of $200,831 in 2004 and $228,823 in 2005. Pursuant to the plain language of the statute, the subject apartment should have been deregulated years ago. As a defense to deregulation, Tenant argued that the governing statute defined “total annual income” as “the sum of the annual incomes of all persons who occupy the housing accommodation as their primary residence.” Tenant asserted that her husband permanently vacated the marital apartment in 2005, such that his income should not be counted for purposes of deregulation. Tenant instead argued that DHCR should “apportion” between her and her husband the federal AGI they reported jointly. Perceiving a conflict between (i) the statutory definition of “annual income” as federal AGI as reported (the as reported provision); and (ii) the statutory -4- RE\49426\0001\2196527v4 proscription against counting the annual income of persons who do not occupy the apartment as a primary residence (the primary residence provision), DHCR demanded and received confidential tax documents from Tenant, including actual tax returns, W-2 and 1099 forms, and IRS Wage and Income Transcripts. After reviewing these tax documents, and purporting to interpret technical provisions of the federal and state tax codes, DHCR - a rent agency - determined that Tenant’s share of the federal AGI as jointly reported was below the statutory threshold, and denied Owner’s petition for deregulation. Supreme Court and the First Department thereafter affirmed. DHCR and the courts below held that the purported conflict between the as reported and primary residence provisions could only be resolved by (i) deeming the primary residence provision to be inviolate; (ii) “apportioning” the jointly reported income; and (iii) nullifying three statutory provisions inconsistent with apportionment. For the reasons set forth below, the order of the First Department should be reversed. There is no conflict to resolve. The Legislature defined “annual income” by using the well-settled term “federal adjusted gross income as reported.” One of the most basic concepts in federal and New York State tax law is that jointly reported income cannot be divided and is wholly ascribable to each joint filer. The joint -5- RE\49426\0001\2196527v4 income is thus properly considered to be Tenant’s income. Ascribing this income to Tenant gives effect to both (i) the as reported provision, because the $200,831 and $228,823 figures were actually reported on the tax returns in question; and (ii) the primary residence provision, because the joint income is fully ascribable to Tenant, who primarily resides in the apartment. Should this Court determine that the as reported and primary residence provisions are in conflict, that conflict cannot be resolved by apportionment. Apportionment nullifies the as reported provision, because the “apportioned” income was never reported to any taxing authority. Apportionment, with its accompanying invasive investigation, also nullifies those statutory provisions that bar DHCR from demanding confidential tax information from tenants. The legislative history establishes that the Legislature barred DHCR from such conduct to protect tenant privacy, and to facilitate an easily administered income verification procedure that merely required DTF to determine whether the federal AGI as reported - on returns already in DTF’s possession — was above the statutory threshold. Apportionment also nullifies those provisions of the statute that vest DTF with exclusive jurisdiction to verify tenant income. Here, DHCR usurped DTF’s jurisdiction by purporting to determine that Tenants’ apportionment percentages were accurate, and that her apportioned income fell below the statutory threshold. -6- RE\49426\0001\2196527v4 DTF played no role. Worse still, DHCR has never explained where it obtained the expertise to analyze tax documents or the relevant tax statutes and regulations. Indeed, DHCR has admitted in past high-income deregulation proceedings that it is incompetent to do so. DHCR and the Courts below held that apportionment was justified by a 1994 Memorandum of Understanding (MOU) between DHCR and DTF. An MOU, of course, cannot violate the governing statute or nullify its key provisions. The procedures outlined in the MOU require DHCR to blindly accept a tenant’s self-created apportionment percentages, and direct DTF to apportion income by multiplying the federal AGI as reported by those unverified percentages. When Owner objected to DHCR’s blind acceptance, DHCR abandoned the MOU procedures, conducted an audit of tenant’s tax returns and supporting documents, and determined that the apportioned income barred deregulation. Even DHCR’s counsel was forced to admit that the extraordinary procedure DHCR undertook herein was not authorized by either the governing statute or the MOU. Apportionment must be rejected because it creates, rather than resolves, purported statutory conflicts. In contrast, Owner’s interpretation of the statute harmonizes the various statutory provisions and construes them in a way that renders them internally compatible. -7- RE\49426\0001\2196527v4 THE GOVERNING STATUTES A. Legislative History and Intent In 1993, the New York State Legislature enacted the Rent Regulation Reform Act of 1993 (L 1993, ch 253) (RRRA-93), which, inter alia, reformed rent regulation by permitting deregulation of high-rent apartments occupied by high- income tenants. To that end, the Legislature amended the New York City rent control statute (CRL)1 to add new section 26-403.1 (L 1993, ch 253, § 5). The Legislature added a virtually identical provision, section 26-504.3, to the Rent Stabilization Law (RSL)2 (L 1993, ch 253, § 6).3 The First Department summarized the Legislature’s intent with respect to high-income deregulation as follows: “[T]he original Rent Regulation Reform Act of 1993 was an ‘attempt to restore some rationality’ to a system which ‘provides the bulk of its benefits to high income tenants’ (Mem. of Sen. Kemp Hannon, 1993 NY Legis Ann, at 175). The Act recognizes that ‘[t]here is no reason why public and private resources should be expended to subsidize rents for these households’ (id.)” (Noto v Bedford Apts. Co., 21 AD3d 762, 765 [1st Dept 2005]; see also RAM I LLC v New York State Div. of Hous. & Community Renewal, 123 AD3d 102, 106 [1st Dept 2014] [“the legislative history indicates a preference not to have people who can easily afford market value rental property inhabit rent-regulated 1 See Administrative Code of the City of New York at § 26-401 et seq. 2 See Administrative Code of the City of New York at § 26-501 et seq. 3 Because the high-income deregulation provisions under the CRL and the RSL are virtually identical, Owner will rely herein on case law relating to both statutes. -8- RE\49426\0001\2196527v4 housing”]; Leepson v Holland, 171 Misc2d 84, 87 [Sup Ct, NY County 1996], affd 245 AD2d 176 [1st Dept 1997] [“[t]he Legislature in enacting the Reform Act made a finding that wealthy tenants should no longer have the subsidies of stabilized rents”]). B. Legislative Restrictions on the Income Verification Procedure The legislative history of the RRRA-93 establishes that the Legislature created a simple income verification procedure, whereby the tenant would forward to DHCR the bare minimum information needed for DTF to locate the tenant’s tax returns. “The income verification procedure prescribed by this bill is simple. It primarily relies on a voluntary certification process which places minimal burdens on the tenants and DHCR. To provide some inducement for high income tenants to comply with the certification provisions of this bill, the bill does provide for a simple and straight forward income verification process which must be accomplished by DHCR and Taxation and Finance. This verification process simply requires individual matches of tenant provided information against tax data on file with taxation and finance.” (Senate Introducer’s Mem in Support, 1993 NY Leg Ann at 176). The only portions of the legislative debate that focused on the income verification procedure took place in the State Senate. There, Senator Hannon explained in response to a question about the income verification provisions: “Well, we have tried to do a very simple procedure, one that mandates that all privacy considerations remain intact, one that, because this is directed toward level of -9- RE\49426\0001\2196527v4 income, seeks to reform this system and ... can be done with simple verification. It leaves the bureaucracy out of this process at the very beginning. It also then asks DHCR only to check [income] upon [a landlord’s] appeal and not to check anything else but whether or not the records of the state reflect an income that’s greater than the eligibility limit (emphasis added). (Senate Debate on NY Assembly Bill A8859, July 7, 1993 at 8211-12). C. CRL § 26-403.1 1. Annual Income CRL § 26-403.1(a)(1) defines “annual income” and states in relevant part: “For purposes of this section, annual income shall mean the federal adjusted gross income as reported on the New York state income tax return. Total annual income means the sum of the annual incomes of all persons who occupy the housing accommodation as their primary residence other than on a temporary basis ....” (emphasis added). As is relevant to this case, which began in 2006, the income threshold for luxury deregulation is $175,000 for each of the two preceding calendar years, and the rent threshold is $2,000 (see CRL § 26-403.1[a][2] and CRL §26- 403.1[a][3]).4 2. The Statutory Income Verification Procedure CRL § 26-403.1(b) establishes the procedure by which DTF shall determine whether a tenant’s federal AGI, as reported on the New York State income tax 4 The Legislature originally set the deregulation income threshold at $250,000 per year in the RRRA-93. Pursuant to L 1997, ch 116, §§ 13 and 14, the Legislature lowered the threshold to $175,000 for proceedings commenced before July 1, 2011. -10- RE\49426\000 1 \2196527v4 return, exceeds the statutory threshold. First, the owner serves an Income Certification Form (ICF) on the tenant. The ICF must state that “the income level certified to by the tenant may be subject to verification by the department of taxation and finance pursuant to section one hundred seventy-one-b of the tax law and shall not require disclosure of any income information other than whether the aforementioned threshold has been exceeded” (emphasis added). If the tenant does not timely return the ICF to the owner, or if the owner disputes the tenant’s certification, CRL § 26-403.1(c)(1) permits the owner to petition DHCR to verify “whether the total annual income exceeds the deregulation income threshold in each of the two preceding calendar years.” The RRRA-93 also amended Tax Law § 171-b (L 1993, ch 253, § 10). Tax Law § 171-b(3)(b) directs DTF to verify income when DHCR so requests, but cautions that (i) DTF may only report to DHCR whether the income is above or below the threshold; and (ii) “[n]o other information regarding the annual income of such persons shall be provided.” CRL § 26-403.1(c)(2) establishes DTF’s role in the income verification process: “If the department of taxation and finance determines that the total annual income is in excess of the deregulation income threshold in each of the two preceding calendar years, the division shall ... notify the owner and tenants of the results of such verification.” - 11 - RE\49426\0001\21 96527v4 STATEMENT OF FACTS A. The Parties Owner owns the building located at 315 Central Park West in Manhattan (R. 18). Si Friedman first occupied the subject rent controlled apartment in 1955 (R. 21). He died on November 3, 2006 (id.). His wife, Margaret Schuette Friedman, succeeded to the apartment upon his death (R. 7). B. Owner Serves an ICF On or about April 27, 2006, Owner served Si and Margaret Friedman with an ICF (R. 51-53), to which they did not respond (R. 22). C. Owner Petitions for Deregulation On or about June 28, 2006, Owner filed with DHCR a Petition by Owner for High Income Rent Deregulation (R. 54-57). D. Tenant’s Initial Answer to Owner’s Petition for Deregulation Tenant answered that her husband had permanently vacated the apartment before Owner served the ICF (R. 67). She asserted that she and her husband had filed joint New York State income tax returns for the two calendar years in question (2004 and 2005), and conclusorily alleged that her “share” of the federal AGI as reported on those joint returns was 34.32% and 30.52%, respectively (id.). Based on those percentages, Tenant argued that her “share” of the jointly reported - 12- RE\49426\0001\2196527v4 federal AGI was “$175,000.00 or less in either of the two preceding calendar years” (R. 64). E. Proceedings Prior to DHCR’s Challenged Order Herein DHCR’s Rent Administrator denied Owner’s petition for deregulation on December 5, 2007 (R. 107). On April 30, 2008, DHCR’s Commissioner affirmed that order on administrative review (R. 108-10). The Commissioner’s order, like the Rent Administrator’s order, did not mention apportionment, and represented that the combined income of Tenant and her husband did not exceed the deregulation threshold. Owner then commenced an article 78 proceeding (R. 113-33). Before filing its petition, Owner’s counsel, pursuant to the Freedom of Information Law, obtained a copy of a portion of an August, 2007 “Confidential Submission” by Tenant to DHCR (Partial Confidential Submission) (R. 27). The Partial Confidential Submission — which DHCR had never served on Owner - consisted of (i) 2004 and 2005 W-2 and 1099 forms for Tenant and her husband; (ii) Tenants’ complete 2004 New York State tax return; (iii) Tenants’ complete 2005 New York State tax return; (iv) Tenants’ 2005 federal tax return; and (v) a deed and a lease relating to certain condominium property (R. 139-40). The Partial Confidential Submission revealed that federal AGI, as actually reported on the 2004 and 2005 joint New York State income tax returns, was $200,831 in 2004 and $228,823 in 2005 (R. 136-37). - 13- RE\49426\0001\2196527v4 During the article 78 proceeding, DHCR represented that “DTF’s search included the tax records of Si Friedman and Margaret Schuette Friedman and found that the statutory threshold was not exceeded by their total annual income for 2004 and 2005” (R. 151). DHCR would thereafter concede that this was not true (R. 188-89). On March 10, 2009, Supreme Court affirmed DHCR’s April 30, 2008 order (R. 167-76). F. DHCR Moves to Remand Owner thereafter perfected its appeal to the First Department (R. 28). Rather than defending its order on appeal, DHCR moved for an order of remand (R. 177- 78). DHCR admitted that it had blindly accepted Tenant’s uncorroborated 34.32% and 30.52% “apportionment” percentages at face value, and had directed DTF to multiply by those percentages the federal AGI as actually reported on the 2004 and 2005 joint tax returns, i.e., $200,831 x 34.32% and $228,823 x 30.52%, respectively (R. 188). DTF then “determined” that Tenant’s apportioned income was below $175,000 for both years, although DHCR represented to Owner that there had been no apportionment, and that the combined income of Tenant and her husband was below $175,000: “The sources of the percentages used by DTF were not disclosed anywhere by the Rent Administrator; however, they appear to be those supplied by Margaret Friedman in - 14- RE\49426\0001\2196527v4 her ‘Answer to Petition and Notice to Tenant to Provide Information for Verification of Household Income (for 2006 Petitions).’ Applying the percentages to the jointly reported income, DTF informed the rent administrator that the federal adjusted gross income was below the threshold amount for each year in question. The Rent Administrator then advised the parties that the DTF ‘has located [tax] records for the names listed below ... [and] has determined that the total annual income of those persons occupying the subject housing accommodation, whose records were located was $175,000 or less....’ The names listed were Si Friedman and Margaret Friedman (citations, footnotes, and paragraph numbering omitted). (R. 188-89). The First Department granted DHCR’s motion on August 4, 2011 (R. 198). G. DHCR Demands Confidential Tax Information to which it is not Entitled Pursuant to a notice dated April 11, 2014, DHCR directed Tenant to obtain and forward to DHCR confidential tax information on file with the IRS: “The only additional submission that DHCR requires is a copy of the document provided to the tenant by the Internal Revenue Service (IRS) as a result of the tenant submitting the attached IRS 4506T form for the year 2005. The tenant should request of the IRS a transcript of items in section 8 of said form specific to her and her deceased spouse. When received, copies should then be sent to DHCR as certified by tenant’s counsel, with tax ID number information redacted, within 35 days of the date of this notice.” (R. 240). - 15- RE\49426\0001\2196527v4 Owner objected and responded on May 16, 2014, asserting, inter alia, that DHCR had no right to demand, no right to see, and no expertise to analyze Tenant’s IRS Wage and Income Transcripts (IRS Transcripts) (R. 244-51). H. DHCR’s Challenged Order DHCR issued the Challenged Order on November 19, 2014 (R. 41-49). After determining that Tenant’s husband did not live in the apartment on the ICF service date, DHCR held that it was obligated to “apportion” the federal AGI actually reported on the 2004 and 2005 joint New York State income tax returns: “Since Mr. Friedman was not a qualified occupant of the subject apartment and his income should not be included in the relevant household income, only that portion of the joint income reported on their tax returns which is individually attributable to the tenant, Margaret Schuette- Friedman, is properly included in the relevant household income in determining whether the subject apartment qualifies for high income rent deregulation. However because of the filing of joint returns for the two years, the owner asserts that DHCR is obligated, notwithstanding any finding that S. Friedman was not the resident of the subject apartment on the date for service of ICF, to assure that his income be included in determining whether the household income exceeds the deregulation threshold. The Commissioner respectfully disagrees with this position. None of [the various] cases cited [by Owner] ... involved the need, authority or ability of DHCR to reconcile what otherwise may seem facially conflicting provisions governing deregulation: the use of returns vs. - 16- RE\49426\0001\2196527v4 the use of income limited to tenants in occupancy in ascertaining whether deregulation is appropriate.” (R. 46-47). DHCR then disclosed the purported source of its right to apportion federal AGI as reported on a New York State tax return: “After the passage of the deregulation law, DHCR and the New York State Division [sic] of Taxation and Finance ... entered into a Memorandum of Understanding (MOU) governing the interface between the two state agencies required by the law. It specifically called for the apportionment and review of the actual income of the tenant actually in occupancy in instances just like this analyzing whether deregulation is appropriate.” (R. 47). DHCR next confirmed that its determination that Tenant’s “apportioned” income was below $175,000 was premised on (i) the “Confidential Submission,” which DHCR had only partially forwarded to Owner; and (ii) the IRS Transcripts, which DHCR withheld from Owner: “[The] transcripts ultimately received from the IRS through the tenant, although not shared with the owner, are not inconsistent with the credible evidence reviewed by both parties and DHCR, that the tenant’s income is below the deregulation threshold.” (R. 48-49). - 17- RE\49426\0001V2196527v4 SUPREME COURT’S DECISION Supreme Court found an “apparent conflict” within CRL § 26-403.1 between the method of computing income and the persons whose income is to be counted (R. 10-12). Supreme Court ruled that the only way to harmonize these supposedly conflicting provisions was to interpret the statute as authorizing the “apportionment” of joint income as actually reported: “Contrary to Owner’s argument, the fact that, under federal and State tax law, neither the income, nor the resulting tax liability, listed on a joint return may be apportioned between the filers does not bar ... apportionment in connection with deregulation proceedings. The issue is whether such apportionment is barred by the definition of ‘annual income’ in RCL § 26- 403.1. [T]he Court concludes that apportionment is not barred for the following reason. RCL § 26-403(1) prescribes an unambiguous and simple method of ascertaining a tenant’s ‘annual income,’ according to which, for example, DHCR need not take into account the income of a tenant’s corporation. However, it is also the case that the Legislature intended that only the income of occupants of a housing accommodation be taken into account in determining whether an apartment should be deregulated. This court concludes that the statutory method of ascertaining a tenant’s income may not trump the clearly expressed statutory determination that only the income of tenants occupying the premises at the time [the] ICF is served may be counted” (citations omitted). - 18- RE\49426\0001\2196527v4 (R. 10-12). Supreme Court then determined that the manner in which DHCR apportioned the joint income herein was permissible even though it violated applicable law: “DHCR was faced, here, with the impasse of having DTF include the income of Mr. Friedman, although he had vacated the apartment more than a year before Owner served the ICF, accepting Ms. Friedman’s allocation without question, or violating its own rule limiting the information that it can demand from tenants. Administrative agencies have ‘no authority to create a rule out of harmony with the statute.’ In the unprecedented circumstances of this case, where complying with its rule would have required DHCR either to accept Ms. Friedman’s allocation blindly, or to violate the statutory limit on those whose ‘annual income’ is to be included in ascertaining ‘total annual income,’ it was neither irrational, nor contrary to law, for DHCR to violate its own rule” (citations omitted, emphasis added). (R. 14). - 19- RE\49426\0001\2196527v4 THE FIRST DEPARTMENT’S DECISION The First Department affirmed Supreme Court’s order on August 4, 2016 (R. 501-06). The Court held that because Tenant’s husband did not primarily reside in the apartment on the ICF service date, DHCR was authorized to apportion the income that Tenant jointly reported in 2004 and 2005: “DHCR, as per the statute, properly excluded the income of respondent’s husband from the total annual calculation income for 2004 and 2005, the two years immediately preceding the year petitioner filed the deregulation petition. Income of spouses who vacate the premises prior to the ICF service date may not be included in the total annual income calculations. As respondent and her husband filed a joint tax return, a calculation had to have been made as to the income of the sole occupant of the apartment. Pursuant to RRRA-93, DHCR and the Department of Taxation and Finance entered into a Memorandum of Understanding that provides procedures for determining income. This Memorandum of Understanding was properly used in determining that respondent’s adjusted gross income, as reported, was less than the statutory threshold for high rent deregulation. [W]e find that the operative statute unambiguously provides that only the income of the occupants of the housing accommodation shall be included in calculating the total annual income” (internal citations omitted). (R. 503-05). -20- RE\49426\0001\2196527v4 ARGUMENT POINT I BECAUSE THE PERCEIVED CONFLICTS WITHIN CRL § 26-403.1 DO NOT EXIST, THERE IS NO NEED TO APPORTION TENANT’S INCOME Each tribunal that has ruled in this case has held, either explicitly or implicitly, that there are conflicts within CRL § 26-403.1 that can only be resolved by “apportioning” Tenant’s federal AGI as jointly reported on her New York State income tax returns. In fact, there are no conflicts. The perceived conflicts disappear when it is accepted that as a matter of federal and New York State tax law, joint income cannot be apportioned, and is wholly ascribable to each joint filer. Because all of the joint income Tenant actually reported is Tenant’s income, counting the joint income as Tenant’s does not violate that portion of CRL § 26-403.1(a) which states that the federal AGI of persons not primarily residing in an apartment shall not be counted. A. Courts Must Harmonize Perceived Conflicts Courts should harmonize apparently conflicting statutory provisions in a manner that preserves the essential purposes of both (see Sun Beach Real Estate Dev. Corp. v Anderson, 98 AD2d 367, 369-70 [2d Dept 1983], affd for reasons stated below 62 NY2d 965 [1984]; Burger King, Inc. v State Tax Commn., 51 NY2d 614, 620-21 [1980]). Similarly, courts must harmonize statutory provisions -21 - RE\49426\0001\2196527v4 and construe them in a way that renders them internally compatible (see Dutchess County Dept, of Social Servs. v Day, 96 NY2d 149, 153 [2001]). A court may not adopt a statutory construction resulting in the nullification of one part of the statute by another (see Rangolan v County of Nassau, 96 NY2d 42, 48 [2001]). Instead, courts should give effect to all parts of a statute (see Artibee v Home Place Corp., 28 NY3d 739, 749 [2017]). This must be done without one statutory provision becoming “the victor over another” (Foley v Bratton, 92 NY3d 781, 787 [1999]). B. All Reported Joint Income is Tenant’s Income as a Matter of Law Words of technical or special meaning in a statute are construed according to their technical sense, in the absence of anything to indicate a contrary legislative intent (see People v Duggins, 3 NY3d 522, 528 [2004]). Where a statute does not define a particular term, it is presumed that the term should be given its precise and well-settled legal meaning in the jurisprudence of the state (see Matter of Moran Towing & Transp. Co. vNew York State Tax Commn., 72 NY2d 166, 173 [1988]). The Legislature deliberately employed such a term in CRL § 26-403.1(a)(1) when it defined “annual income” as “federal AGI as reported.” It is well-settled under federal and New York State tax law that when married individuals elect to file a joint return, their federal AGI cannot be apportioned; instead it is fully ascribable to each joint filer. 26 USC § 6013(d)(3) states: “[I]f a joint return is made, the tax shall be computed on the aggregate income and the liability with respect to the tax shall be joint and several.” -22- RE\49426\0001\2196527v4 Treasury Regulations 26 CFR § 1.6013-4(b) similarly provides: “If a joint return is made, the gross income and adjusted gross income of husband and wife on the joint return are computed in an aggregate amount and the deductions allowed and the taxable income are likewise computed on an aggregate basis. Although there are two taxpayers on a joint return, there is only one taxable income. The tax on the joint return shall be computed on the aggregate income and the liability with respect to the tax shall be joint and several” (emphasis added). In Helvering v Janney (311 US 189, 192 [1940]), the United States Supreme Court held that “[i]f a single joint return is filed it is treated as the return of a taxable unit and the net income disclosed by the return is subject to both normal and surtax as though the return were that of a single individual” (see also Taft v Helvering, 311 US 195, 197 [1940]). A term used in the Tax Law has “the same meaning as when used in a comparable context in the laws of the United States relating to federal income taxes, unless a different meaning is clearly required” (Tax Law § 607[a]). This rule applies to the term “adjusted gross income” (see Matter of Webster v Tully, 82 AD2d 976, 976-77 [3d Dept 1981], ajf’d 56 NY2d 532 [1982]). Under New York -23- RE\49426\0001\2196527v4 law, spouses filing a joint return are a single taxable unit, and the return is treated as if it were filed by a single individual/ Accordingly, the federal AGI Tenant reported on the 2004 ($200,831) and 2005 ($228,823) joint returns is fully ascribable to Tenant as her income. Counting the joint income as Tenant’s income does not violate the primary residence provision in CRL § 26-403.1(a)(1) because the joint income is Tenant’s income. By filing a joint return, Tenant paid lower federal and state tax rates than if she had filed as a married person filing separately (26 USC § 1; Tax Law § 601). In addition, various credits are available to a married couple only if they file a joint return: (i) the credit for the elderly or permanently disabled (26 USC § 22); (ii) the earned income credit (26 USC § 32); and (iii) education credits (26 USC § 25A). Married individuals who file separately cannot claim any of these credits. The flip side of obtaining the financial benefits of filing jointly is that there is only one federal taxable income, and thus only one federal AGI as reported. Pursuant to CRL § 26-403.1(a)(1), it is that figure — single and indivisible — that determines if the subject apartment qualifies for high-income deregulation. As the Second Department held in Angelo v Angelo (74 AD2d 327, 331 [2d Dept 1980]): 5 Supreme Court acknowledged that “under federal and State tax law, neither the income, nor the resulting tax liability, listed on a joint return may be apportioned between the filers” (R. 10). -24- RE\49426\0001\2196527v4 “Doubtless the parties were swayed by the pecuniary advantage to the family as a whole to the decision to file a marital joint tax return, even though the plaintiff had earned no income. But where the advantages are taken, the burdens must also be accepted. authorizing the filing of the marital joint return provides that upon filing, the liability of each spouse is joint and several. Hence, the plaintiff in signing and filing the return became jointly liable with the defendant for the payment of the tax, which, in a sense, reflects the view of the Congress that the family should be considered as both a social and economic unit” (internal citations omitted; emphasis added). What Tenant, for a tax advantage, has chosen to join together, neither DHCR The statute nor the courts should put asunder. C. Owner’s Interpretation Harmonizes the Various Statutory Provisions Ascribing all of the 2004 and 2005 reported joint income to Tenant, in addition to complying with elementary tax principles, gives effect to the as reported provision in the first sentence of CRL § 26-403.1(a)(1), in that “annual income” is properly measured as federal AGI actually reported on the New York State tax returns in question. The second sentence of CRL § 26-403.1(a)(1) — the primary residence provision - is honored in that only Tenant’s income is being counted. Because joint income is indivisible, all of it is lawfully ascribed to either joint filer. Owner’s interpretation gives meaning and effect to both the as reported and primary residence provisions of CRL § 26-403.1(a)(1) without a “high wire -25- RE\49426\0001\2196527v4 statutory balancing act,” and without one statutory provision becoming “the victor over another” {Foley, 92 NY2d at 787). In those rare instances where spouses have filed a joint return, but one spouse no longer primarily resides in the apartment, Owner’s interpretation renders the two provisions “internally compatible” {Dutchess County Dept, of Social Servs., 96 NY2d at 153). Owner’s interpretation eliminates the need for DHCR to “violate” (R. 10), through extra-statutory apportionment, (i) CRL § 26-403.1(b), which states that DHCR “shall not require disclosure of any income information other than whether the aforementioned threshold has been exceeded; and (ii) Tax Law § 17l-b(3)(b), which states that DTF may only report to DHCR whether the income is above or below the threshold, and that “[n]o other information regarding the annual income of such person shall be provided” (the anti-audit provisions). If DHCR had understood that all of the reported joint income is Tenant’s income, DHCR would not have needed to demand Tenant’s IRS Transcripts, W-2s, or 1099s. The First Department rejected Owner’s proposed resolution of the perceived conflicts, citing three cases for the proposition that “[ijncome of spouses who vacate the premises prior to the ICF service date may not be included in the total annual income calculation” (R. 504) {see 315 E. 72nd St. Owners, Inc. v New York State Div. ofHous. & Community Renewal, 101 AD3d 647 [1st Dept 2012]; 103 E. 86th St. Realty Corp v New York State Div. of Hous. & Community Renewal, 12 -26- RE\49426\0001\2196527v4 AD3d 289 [1st Dept 2004]; A.J. Clarke Real Estate Corp. v New York State Div. of Hous. & Community Renewal, 307 AD2d 841 [1st Dept 2003]). These cases do not apply because in none of them did the absent family member file a joint return with the tenant in occupancy. Unlike here, those families did not report their income as a single economic unit. Without a joint return, there is no alleged statutory conflict and thus no need to apportion income. The cited cases thus stand for the unremarkable proposition that the federal AGI of an absent party, as actually reported on an individual New York State tax return, should not be counted. No one disputes this. Neither DHCR nor the courts below attempted to harmonize the various provisions of the statutory scheme. Instead, they interpreted the primary residence provision without regard to basic precepts of tax law, created conflicts were none existed, and nullified every statutory provision that ran afoul of apportionment. Owner’s interpretation of the statute offers a better way. -27- RE\49426\0001\2196527v4 POINT II IF THIS COURT FINDS THE STATUTORY PROVISIONS TO BE IN CONFLICT, IT SHOULD RESOLVE THAT CONFLICT AGAINST APPORTIONMENT A. The Governing Rules of Statutory Construction Where a court finds conflicting statutory provisions, it must determine whether the “legislative scheme, or the legislative history of [the] statutes suggests that one is to have primacy over the other” {Matter of Goodman, 95 NY2d 15, 21 [2000]). The preferred construction is the one that “best reconciles and harmonizes the legislative aims” of the conflicting provisions {Cintron v Calogero, 15 NY3d 347, 355 [2010]). “It is the duty of the court to harmonize conflicting provisions of a statute if possible, but if there is an irreconcilable conflict, the court must preserve the paramount intention although this may lead to the rejection of some subordinate and secondary provision” (McKinney’s Cons Laws of NY, Book 1, Statutes § 98[b]; accord Perosi v LiGreci, 98 AD3d 230, 234 [2d Dept 2012]; Pataki v Kiseda, 80 AD2d 100, 104 [2d Dept 1981], appeal dismissed 54 NY2d 606 [1981], Iv dismissed 54 NY2d 831 [1981]). As is relevant to this appeal, the legislative history establishes that the Legislature’s paramount intent was to (i) create a simple and easily administered income verification procedure relying on federal AGI as reported; (ii) in conjunction therewith, bar DHCR and DTF from demanding confidential income -28- RE\49426\0001\2196527v4 tax information from tenants; and (iii) vest DTF with the exclusive jurisdiction to determine income. Apportionment is antithetical to these goals. Conversely, the legislative history says nothing about the primary residence provision. B. Apportionment Defeats the Legislature’s Goal of Ease of Administration The Legislature enacted high-income deregulation because it determined that wealthy tenants did not deserve rent subsidies (Mem of Sen. Kemp Hannon, 1993 NY Legis Ann at 175). Because means testing was new to the statutory scheme, the Legislature was concerned about creating a workable system to measure and verify tenant wealth. The Legislature did so by (i) determining that deregulation would be a function of annual income (instead of, for example, the value of tenant-owned assets); and (ii) defining annual income as “federal adjusted gross income as reported on the New York state income tax return.” Thus, eligibility for rent regulatory benefits would be based on an easily discemable figure reported on New York State income tax returns and signed under penalty of perjury as true, correct, and complete. These tax returns are already on file with DTF. In the Senate debates relating to the RRRA-93, Senator Hannon stated that “[t]he idea in all of the proceedings that have been set forth is that they be administratively simple, administratively expeditious” (Senate Debate on NY -29- RE\49426\0001\2196527v4 Assembly Bill A8859, July 7, 1993 at 8191). The New York State Senate Introducer’s Memorandum in Support of the RRRA-93 describes the “administratively simple” income verification procedure as follows: “The income verification procedure prescribed by this bill is simple. It primarily relies on a voluntary certification process which places minimal burdens on the tenants and DHCR. To provide some inducement for high income tenants to comply with the certification provisions of this bill, the bill does provide for a simple and straight forward income verification process which must be accomplished by DHCR and Taxation and Finance. This verification process simply requires individual matches of tenant provided information against tax data on file with taxation and finance.” (1993 NY Legis Ann at 176). The courts have recognized that the Legislature wanted an income verification procedure that was, above all, easy to administer. In Nestor v New York State Div. ofHous. & Community Renewal (257 AD2d 395 [1st Dept 1999], Iv denied 93 NY2d 982 [1999]), the landlord in a luxury deregulation proceeding argued that DHCR should have taken into account the income of the tenant’s closely held corporation. The First Department rejected that argument, citing the Legislature’s stated intention of simplicity of administration: “It is the function of the court to enforce a statute in a manner that is consistent with legislative intent and, where that intent is clear upon its face, the court will not expand the scope of the legislation by judicial construction. While the criterion of household income does not take into account all income that might be imputed to the tenant, it has the advantage of affording a -30- RE\49426\0001\2196527v4 simple and consistent methodology. It is for the Legislature to decide whether public policy is better served by ease of administration or precision of measurement, and the courts will not intrude upon the legislative prerogative” (internal citations omitted, emphasis added). (257 AD2d at 396; see also 9 E. 10 LLC v New York State Div. of Hous. & Community Renewal, 2009 WL 229659 [Sup Ct, NY County, January 26, 2009, No. 109744/08] [“it was the Legislature’s decision to adopt adjusted gross income as the measure in defining ‘high income’”]; Leepson v Holland, 171 Misc2d at 87 [“[although the Legislature could have adopted a different measure to define high income tenants, petitioners fail to meet their burden of establishing that the Legislature’s decision to adopt adjusted gross income as the measure in defining ‘high income’ was arbitrary or capricious”]). DHCR has previously obeyed the Legislature’s command that income shall be based solely on federal AGI as actually reported, and has rejected tenant arguments as to why federal AGI as reported does not accurately measure a tenant’s income. Thus, DHCR has deregulated apartments notwithstanding tenant defenses of (i) senior citizen status, financial hardship, and “unique” circumstances brought on by the “liquidation of a family business” {Matter of Phelan, DHCR Adm. Rev. Dckt. No. CU-410028-RT, issued May 26, 2015); (ii) alleged “non¬ recurring income” and an anticipated “reduction of future earnings based on retirement” {Matter of Gore, DHCR Adm. Rev. Dckt. No. KC-410037-RT, issued -31 - RE\49426\0001\2196527v4 Oct. 1, 1996); and (iii) an unusually high income based on a large sale of stock, and an anticipated reduction of income based on disability {Matter of Woolley, DHCR Adm. Rev. Dckt. No. KE-410086-RT, issued Aug. 15, 1996). Because the legislative history establishes that ease of administration was of paramount importance, this Court should interpret the statute to effectuate that intent, as it has done with other statutes. For example, in Matter of Ferrara (10 NY2d 1 [1961]), the issue was whether, under Labor Law § 592(1), the claimants seeking unemployment benefits had lost their jobs due to a strike that had occurred in the “establishment” in which they worked. Relying on its internal corporate structure, the employer argued that its Manhattan offices (where the claimants worked) and its Idlewild hangar (where the strike originated) constituted the same establishment. The complainants asserted that the term should be construed in narrow or geographic terms {id. at 7). This Court has adopted the claimants’ interpretation, noting the Legislature’s focus on ease of administration: “[The Court’s] conclusion is confirmed by reference to the manifest design of the Legislature to provide a rule which may be expeditiously applied. Suspension under section 592 demands proof neither of individual participation in or financial aid to the industrial controversy nor interest in its outcome. Suspension may, perhaps, be invoked even though claimants be separately represented for bargaining purposes. The administrator is thereby spared the need for making either complex or abstract administrative determinations which reference to -32- RE\49426\0001\2196527v4 individual involvement, participation or interest would require. ‘establishment’, looking only to concrete facts, better fits the legislative purpose of simplicity of administration than does a concept which would require determinations regarding functional ‘interdependence,’ ‘integration’ or ‘entity.’” Moreover, the geographic concept of {Id. at 8-9). The Legislature’s focus on ease of administration is further established by the fact that the annual income being measured has already been reported on New York State tax returns on file with DTF. The obvious advantage of using income as reported is that such income does not need to be analyzed, manipulated, broken down, apportioned, or investigated. Instead, DTF need only compare the reported figure to the statutory deregulation threshold; it is either over or under that figure. Tenant’s apportioned income has never been “reported” anywhere. There is no tax return on file with DTF — or any other taxing authority — where Tenant has reported individual income or deductions. Apportioned income is a hypothetical, manufactured number that exists nowhere but in this proceeding, and is incompatible with the position Tenant took on her tax returns. Previously, DHCR acknowledged that the agency is not free to disregard the statute’s “as reported” provision: “[T]he enabling luxury decontrol law defines the relevant income amount as the income reported (emphasis added) on the New York state income tax return and not on some hypothetical amount of what the tenant’s income should have been” (boldface in original) (R. 324). -33- RE\49426\0001\2196527v4 (See Matter of 737 Park Avenue Acquisition, LLC, DHCR Adm. Rev. Dckt. No. AS-410026-RO, issued Jan. 20, 2013 (R. 330-31); see also Matter of S&P Associates of New York, LLC, DHCR Adm. Rev. Dckt. No. DQ-410044-RO, issued July 22, 2015; Matter of Kaplan, DHCR Adm. Rev. Dckt. No. BM-410017- RT, issued Apr. 10, 2014 (R. 340); Matter of Extell Belnord LLC, DHCR Adm. Rev. Dckt. No. XI-410040-RO, issued Nov. 13, 2009 (R. 336); Matter of Prominent Assets LLC, DHCR Adm. Rev. Dckt. No. WH-410034-RO, issued Dec. 22, 2008 (R. 349)). Apportionment does not further the Legislature’s paramount intention of an income verification procedure that is “administratively simple” and “administratively expeditious.” C. Apportionment Defeats the Legislature’s Goal of Prohibiting Invasive Investigations One of the Legislature’s primary concerns when enacting high-income luxury deregulation was that neither DHCR nor DTF could audit tenant finances, or compel tenants to surrender confidential tax information. CRL § 26-401.1(b) states that the verification process “shall not require disclosure of any income information other than whether the ... threshold has been exceeded.” Tax Law § 171-b(3)(b) states that DTF shall determine whether the tenant’s annual income exceeds the statutory threshold, and that “no other information regarding the annual income of such person shall be provided.” -34- RE\49426\0001\2196527v4 The legislative history is to the same effect. In the Senate debates, Senator Hannon stated that the statutory income verification procedure “mandates that all privacy conditions remain intact,” and that DHCR and DTF are “not to check anything else but whether or not the records of the state reflect an income that’s greater than the statutory limit” (Senate Debate on NY Assembly Bill A8859, July 7, 1993 at 8212). Senator Hannon added that the procedure was intended to work “in a way that can be done with the names and addresses alone” {id. at 8212-13). In a July 7, 1993 Memorandum to the Governor’s counsel, DHCR approved the pending legislation, favorably citing the income verification procedure and its limits on “intrusions on tenant privacy.” (Governor’s Bill Jacket, L 1993, ch 253). Apportionment, which required DHCR herein to demand IRS Transcripts, W-2s, and 1099s, is directly contrary to the Legislature’s intent. Courts have consistently recognized that the statute bars DHCR from asking tenants for confidential tax information. In Nestor v New York State Div. of Housing & Community Renewal (257 AD2d 395), the landlord asserted that the tenant was tunneling income to his corporation to evade high-income deregulation, and demanded that DHCR obtain and analyze the tenant’s corporate tax returns. The First Department rejected this argument, stating: “The Rent Regulation Reform Act of 1993 and the Rent Stabilization Law prohibit disclosure of any income other than the Federal adjusted gross income of an occupant of an apartment, as reported on the New York State income -35- RE\49426\0001\2196527v4 tax return, in determining whether the housing accommodation qualifies for deregulation” (citations omitted). (Id. at 396). In Matter of Giffuni Bros, v New York State Div. of Hous. & Community Renewal (293 AD2d 402 [1st Dept 2002], Iv denied 99 NY2d 505 [2003]), a landlord challenged DHCR’s refusal to deregulate an apartment, asserting that “DHCR should have obtained tenants’ actual income tax returns from 1996 and 1997 before it issued its denial” (293 AD2d at 403). The First Department disagreed: “the Reform Act as well as New York State Tax Law limit the income information to which DHCR is entitled. It would not be consistent with these statutory provisions to permit DHCR to request an actual tax return from a tenant” (emphasis added). (Id.). In Matter of Classic Realty v New York State Div. of Hous. & Community Renewal (309 AD2d 205 [1st Dept 2003], revd on other grounds 2 NY3d 142 [2004]), the First Department held that “[a]ctual income is not subject to disclosure” (309 AD2d at 209). In Langham Mansions, Co. v New York State Div. of Housing & Community Renewal (2004 WL 5488004 [Sup Ct, NY County, Nov. 12, 2004, No. 101442/04]), Justice Rosalyn H. Richter rejected a landlord’s argument that DHCR should have held a hearing to determine the veracity of the tenants’ 2001 tax return, holding that it would be -36- RE\49426\0001\2196527v4 “inconsistent with these statutory provisions to require DHCR to request an annual 2001 tax return or additional income information from the Tenants.” (See also London Terrace Gardens v New York State Div. of Hous. & Community Renewal, 6 Misc3d 1020[A] [Sup Ct, NY County 2005]; 9 E. 10 LLC, 2009 WL 229659; Parkview Assets LLC v New York State Div. of Hous. & Community Renewal, 26 Misc3d 1238[A] [Sup Ct, NY County 2010]). Before this case, DHCR disavowed any authority to demand, review, examine, or rely on actual tax documents for purposes of income verification. On January 3, 1994, DHCR promulgated Operational Bulletin 94-1 (OB 94-1) to provide guidance as to, inter alia, high-income deregulation. Section 1(B)(3) of OB-94-1, captioned “Privacy,” states in full: “The only information exchanged in the process of income verification among the owner, tenant, DHCR and the Department of Taxation and Finance is whether the income threshold has been met. Specific income figures will not be disclosed or exchanged” (emphasis added)6. Accordingly, any interpretation of the statute as authorizing apportionment defeats the Legislature’s intent that the income verification procedure should not be invasive, and should be based solely upon tax returns already on file with DTF. 6 OB 95-3, promulgated on December 18, 1995, superseded OB 94-1 and is to the same effect. -37- RE\49426\0001\2196527v4 D. Apportionment Defeats the Legislature’s Goal that DTF shall have Exclusive Jurisdiction to Determine Income Another intention of the Legislature is that DTF, rather than DHCR, shall exclusively determine whether a tenant’s income is in excess of the statutory limit. CRL § 26-403.1(b) states that the ICF must advise the tenant that “the income level certified to by the tenant may be subject to verification by the department of taxation and finance.” Tax Law § 171-b(3)(b) states that DTF, “when requested by the division of housing and community renewal, shall verify the total annual income.” This court and others have enforced the DTF exclusivity provisions (see Matter of Classic Realty, 2 NY3d at 145-46 [“DHCR must ... request the necessary information from the tenant to allow DTF to verify the household income”]; Katz 737 Corp v Cohen, 104 AD3d 144 150 [1st Dept 2012], Iv denied 21 NY3d 864 [2013] [“a court must enforce the statute consistent with the legislative intent expressed in the enactment - which, in this case, provides for a single expedient determination based on a household’s total adjusted gross income, as verified by the department of taxation and finance”]; Power v New York State Div. of Horn. & Community Renewal, 61 AD3d 544 [1st Dept 2009], Iv denied 13 NY3d 716 [2010] [DHCR shall “request that the department of taxation and finance verify the total annual income”]). -38- RE\49426\0001\2196527v4 DHCR has conceded that it “only requires the information necessary for the DTF to make a match with the tenants’ tax returns” (R. 291). DTF then provides DHCR with a “yes or no” answer as to whether the income exceeds the threshold {see Giffuni Bros., 293 AD2d at 403). DHCR has no independent investigative role, and “is required to rely on the findings reported by DTF in determining whether the subject apartment qualifies for high income rent deregulation” {Parkview Assets, 26 Misc3d 1238(A) at 3). As Justice Edmead wrote in 9 E. 10 LLC (2009 WL 229659): “the statute requires that the income determination be made solely by DTF and based solely on the adjusted gross income reported to DTF on income tax returns” (emphasis added). In Matter of Montgomery Trading LLC, DHCR Adm. Rev. Dckt. No. EM- 410017-RO, issued May 20, 2016, DHCR acknowledged DTF’s exclusive role in the income verification process: “DHCR is not authorized to make its own independent determination of what a tenant’s income is. The Administrator was required by statute to rely on the findings reported by DTF in determining whether the subject apartment qualified for high income rent deregulation.” (R. 322; see also Matter of S&P Associates of New York, LLC, DHCR Adm. Rev. Dckt. No. DQ-410044-RO, issued July 22, 2015; Matter of Kaplan, DHCR Adm. Rev. Dckt. No. BM-410017-RT, issued Apr. 10, 2014 (R. 340); Matter of 737 Park Avenue Acquisition, LLC, DHCR Adm. Rev. Dckt. No. AS-410026-RO, issued -39- RE\49426\0001\2196527v4 Jan. 20, 2013; Matter of Williamsburg Assets LLC, DHCR Adm. Rev. Dckt. No. XH-410008-RO, issued Feb. 16, 2010 (R. 329-30); Matter of Extell Belnord LLC, DHCR Adm. Rev. Dckt. No. XI-410040-RO, issued Nov. 13, 2009 (R. 336); Matter of Prominent Assets LLC, DHCR Adm. Rev. Dckt. No. WH-410034-RO, issued Dec. 22, 2008 (R. 349)). Here, DHCR usurped DTF’s exclusive role in the income verification process. DHCR obtained the Confidential Submission from Tenant directly (R. 24). DHCR purported to analyze the Confidential Submission and the IRS Transcripts, and determined that Tenant’s “apportioned” federal AGI as reported was below the statutory threshold (R. 48-49). Specifically, DHCR held that Tenant’s Confidential Submission constituted “credible” evidence as to “what income was hers” (R. 48), and that the IRS Transcripts, which Owner has never seen, “are not inconsistent with the credible evidence” set forth in the Confidential Submission (R. 49). DTF had no part in any of this. Putting aside DHCR’s usurpation of DTF’s exclusive jurisdiction, neither DHCR nor the courts below explained where DHCR obtained the expertise to examine, analyze, and interpret tax returns, 1099s, W-2s, and IRS Transcripts. DHCR’s newfound expertise in examining such documents as well as the relevant federal and New York State tax statutes and regulations, stands in sharp contrast to the agency’s past declarations of ignorance. In Matter of Montgomery Trading -40- RE\49426\0001\2196527v4 LLC, DHCR Adm. Rev. Dckt. No. EM-410017-RO, issued May 20, 2016, DHCR wrote: “The owner, in effect, is requesting DHCR to take a pro¬ active stance and conduct investigations to independently determine the amount of the household income before issuing an order. Such a requirement would create an unreasonable administrative hardship, would force the DHCR to conduct inquiries and make income and tax determinations which it is not qualified to make, and is not authorized by law. DHCR does not have the requisite technical expertise to independently investigate or determine a tenant’s income or to be able to interpret the myriad technical provisions of the federal and state tax code. This expertise lies with the federal and state tax authorities” (emphasis added). (See also Matter of Williamsburg Assets LLC, DHCR Adm. Rev. Dckt. No. XH- 410008-RO, issued Feb. 16, 2010 (R. 330); Matter of Extell Belnord LLC, DHCR Adm. Rev. Dckt. No. XI-410040-RO, issued Nov. 13, 2009 (R. 335-36)). E. The Legislative History Says Nothing about the Primary Residence Provision DHCR and the lower courts all deemed the primary residence provision to be so essential to CRL § 26-403.1(a) that they nullified the (i) as reported; (ii) anti¬ audit; and (iii) DTF exclusivity provisions. The primary residence provision, however, was not of paramount importance to the Legislature; indeed, the legislative history says nothing about it. -41 - RB49426\0001\2196527v4 A review of the entire primary residence provision establishes that the Legislature did not consider primary residence to be dispositive when determining whose income should be counted. The second sentence of CRL § 26-403.1(a) states in full: “Total annual income means the sum of the annual incomes of all persons who occupy the housing accommodation as their primary residence other than on a temporary basis, excluding bona fide employees of such occupants residing therein in connection with such employment and excluding bona fide subtenants in occupancy pursuant to the provisions of section two hundred twenty-six-b of the real property law” (emphasis added). There is ample reason why the statute does not count the incomes of a tenant’s employees or subtenants, even if they primarily reside in the apartment: The tenant in occupancy is not presumed to benefit from the income of an employee or a subtenant. In the primary residence provision, the Legislature considered whether the person in question is likely to be part of the tenant’s “social and economic unit” (Angelo v Angelo, 74 AD2d at 331), not merely whether that person occupies the apartment as a primary resident. All of this establishes that the Legislature considered joint filers to be a single economic unit (as did the joint filers themselves) for purposes of calculating income, and that even if they did not live together, the spouse in occupancy would benefit from the income of the absent spouse. The Legislature did not make a similar assumption with respect to spouses who lived apart and filed separately. -42- RE\49426\0001\2196527v4 Further, and compelling, proof of the Legislature’s intent is that the statute is silent as to apportionment. The Legislature must be presumed to have known when it enacted high-income deregulation that a large number of New York City rent regulated apartments are occupied by married couples, many of whom, if not most, file joint tax returns. The Legislature also must have known that in at least some high-income deregulation cases, one spouse on a joint return might no longer occupy the apartment as a primary residence. The statute cannot be interpreted to say what the Legislature could have easily said, but did not {see Matter of Diegelman v City of Buffalo, 28 NY3d 231, 237 [2016]; Matter of DaimlerChrysler Corp. v Spitzer, 7 NY3d 653, 662 [2006]). The error of exalting primary residence over income as reported is exemplified by DHCR’s recent decision in Matter of Grossman (DHCR Adm. Rev. Dckt. No. DV-410025-RT, issued Aug. 24, 2016). There, tenant Lynn Grossman and her husband (renowned actor Bob Balaban) filed joint returns for the years in question. Grossman lives in a luxury apartment in the Apthorp, one of the City’s most desirable apartment buildings. Grossman asserted that although Balaban lived in the apartment, it was not his primary residence. In response to the landlord’s petition for deregulation, Grossman alleged, without any proof, that her share of the joint income was 0% and .25% for the years in question. DHCR twice mistakenly believed that these percentages were -43- RE\49426\0001\2196527v4 those of Balaban, and deregulated the apartment. In its 2016 order, DHCR remanded the matter to its Rent Administrator to determine whether Grossman’s de minimis share of the income qualified the apartment for deregulation. The folly of apportionment is that it pretends that a spouse — purportedly with little or no income - can live in a luxury apartment, and that the non¬ occupying spouse has exclusive use of the considerable joint income. Joint filers elect to hold themselves out as a single economic unit with a single income. It makes little sense to treat them as strangers with separate incomes, lifestyles, and standards of living. As Supreme Court observed during oral argument of the article 78 petition: “I guess what’s troubling me is that I can conceive of a household where the person’s really living a lifestyle that’s quite up there in terms of economic ease, but can verify a form saying my percentage of the income is 10 percent, 20 percent, to fall below the guideline for purposes of staying rent controlled when, in fact, they are not really legitimately in that economic slice that should be protected. That’s...the kernel I am struggling with” (R. 494). Apportionment undermines, rather than preserves, the Legislature’s paramount intention when enacting the high-income luxury deregulation scheme. DHCR and the courts below thwarted that intent. This Court should rectify that error. -44- RE\49426\0001\2196527v4 POINT III DHCR’S MEMORANDUM OF UNDERSTANDING IS CONTRARY TO THE STATUTE AND LEGISLATIVE INTENT. AND LEADS TO ABSURD RESULTS DHCR (R. 48) and the First Department (R. 504) held that the MOU between DHCR and DTF (R. 400-06) constitutes a legal basis for DHCR to apportion joint income. In fact, DHCR abandoned the procedures set forth in the MOU, and adopted procedures - never mentioned in the MOU - that nullified the as reported, anti-audit, and DTF exclusivity provisions in the statute. DHCR did so because adhering to the MOU procedures would have led to even more absurd results. A. A Memorandum of Understanding Cannot Authorize an Administrative Agency to Violate a Statute Legal interpretation is the court’s responsibility; it cannot be delegated to the agency charged with the statute’s enforcement (see Moran Towing, 72 NY2d at 173). Thus, where, as here, “the question is one of pure statutory interpretation ‘dependent only on accurate apprehension of legislative intent, there is little basis to rely on any special competence or expertise of the administrative agency and its interpretive regulations are therefore to be accorded less weight’” (KSLM- Columbus Apts., Inc. v New York State Div. of Hous. and Community Renewal, 5 NY3d 303, 312 [2005]). -45- RE\49426\0001\2196527v4 An administrative agency cannot create a rule out of harmony with the governing statute (see Jones v Berman, 37 NY2d 42, 53 [1975]). Notably, the MOU does not constitute a regulation or a rule of either agency. The MOU was not adopted pursuant to public notice, and there was no opportunity for the public to comment. Naturally, its provisions have never been cited by any court in this state prior to the First Department decision below.7 Although the Legislature authorized DHCR to issue regulations to implement luxury deregulation (L 1993, ch 256, § 28), neither DHCR’s regulations (9 NYCRR Part 2211) nor DHCR’s Operational Bulletins (Nos. 94-1 and 95-3) say anything about apportionment. An MOU issued in contravention of law is of no force and effect. The point is illustrated by this Court’s ruling in Schumer v Holtzman (60 NY2d 46 [1983]). There, the Kings County District Attorney Elizabeth Holtzman, citing a potential conflict of interest, asked the Governor to appoint a special prosecutor to investigate then Congressman Charles Schumer. When the Governor declined to do so, the District Attorney appointed the Dean of Brooklyn Law School as a “Special Assistant District Attorney,” and issued a Memorandum of Understanding purporting to give him broad powers to control the investigation and prosecution. Congressman Schumer then commenced an article 78 proceeding in the nature of prohibition, asserting that the Memorandum of Understanding and the appointment 7 Indeed, the MOU may be found only in a partially legible form in the Record on Appeal. Apparently, the only copy of the MOU that DHCR could locate in its 22-year old files had the critical language obscured (R. 402). -46- RE\49426\0001\2196527v4 made thereunder were void because the delegation exceeded the District Attorney’s powers. This Court granted the article 78 petition, holding that the Memorandum of Understanding was unlawful: “The memorandum manifestly attempts to divest respondent Holtzman of her discretionary judgment to initiate, pursue and conclude investigations and prosecutions and to set up an independent prosecutor to handle all aspects of the Schumer matter. The powers of the District Attorney, however, are conferred upon her by statute. She may delegate duties to her assistants but she may not transfer the fundamental responsibilities of the office to them. Such a transfer may be accomplished only by executive or court order” (internal citations omitted). {Id. at 53). B. Apportionment Leads to Either “Blind Acceptance” or Multiple Violations of the Statute The apportionment methodology in the MOU provides that where a tenant has filed a joint tax return and the other joint filer is out of occupancy, the tenant shall set forth in the ICF his or her percentage of the joint income (R. 402). The tenant, at least in theory, calculates the percentage by using a DHCR worksheet (R. 75, 402). The instructions on the worksheet advise that the tenant shall not forward the completed worksheet to DHCR (R. 75). Moreover, the tenant is not required to submit documentation or corroborating evidence. Thus, when the tenant sets forth the percentages in the ICF, there is no way for DHCR to verify whether the tenant’s figures are accurate. -47- RE\49426\0001\2196527v4 DHCR thereafter directs DTF to multiply the tenant’s uncorroborated percentages by the joint federal AGI as reported (R. 188, 402). DTF then informs DHCR whether the “apportioned” joint income is above or below the statutory threshold (id.). At that point, DHCR will grant or deny the landlord’s petition for deregulation. This is what DHCR initially did in the instant case, although DHCR, in both its December 5, 2007 and April 30, 2008 orders herein, claimed that it had not apportioned income (R. 107, 109). These orders misleadingly stated that the joint income that Tenant and her husband reported was below $175,000 for the two years in question (id.). DHCR’s counsel admitted to the First Department in 2010 that DHCR had concealed the fact that “the Rent Administrator requested that the DTF make its income verification determination based on the percentages provided by Margaret Friedman” (R. 188). Following the First Department’s remand, DHCR was faced with a dilemma. As Supreme Court noted herein, once DHCR elected to apportion income, it had the choice of “accepting Ms. Friedman’s allocation without question, or violating its own rule limiting the information that it can demand from tenants” (R. 14). Because Owner had challenged the veracity of Tenant’s uncorroborated figures below (R. 204), DHCR realized that blindly accepting those percentages — as the MOU mandated - would not survive judicial review. The arbitrary and -48- RE\49426\0001\2196527v4 capricious test chiefly relates to whether administrative action is without foundation in fact (see Pell v Bd. ofEduc., 34 NY2d 222, 231 [1974]). Rationality is defined as being supported by proof sufficient to satisfy a reasonable person of all of the facts necessary to be proved in order to authorize the determination (see Weber v Town of Cheektowaga, 284 NY 377, 380 [1940]). Blind acceptance, without substantial verification or documentation, is irrational (see Franklin Apt. Assoc, v New York State Div. of Hous. & Community Renewal, 2007 WL 7289398 [Sup Ct, Westchester County, March 15, 2007, No. 16725/06]). This Court has invoked these principles in luxury deregulation proceedings. In Matter of Classic Realty (2 NY3d 142), DTF verified that the tenant’s income for the relevant years was above the deregulation threshold. When DHCR reported that information to the tenant, she promptly amended her returns, such that her federal AGI as reported was now below the statutory minimum. Based on the amended returns, DHCR denied the landlord’s petition for deregulation. This Court, reversing the First Department, annulled DHCR’s order: “DHCR’s ruling cannot stand as it invites abuse of the luxury decontrol procedures which contemplate a single verification, the result of which is binding on all parties unless it can be shown that DTF made an error. No such showing is present here, and deregulation is therefore required. As the Appellate Division dissent observed, DHCR’s ‘blind acceptance’ of the amended return was irrational. We agree and conclude that the order denying the Owner’s petition to annul the determination was both -49- RE\49426\0001\2196527v4 arbitrary and capricious and affected by error of law” (internal citations omitted). {Id. at 146-47; see also Lacker v New York State Div. of Hous. & Community Renewal, 25 AD3d 415, 416 [1st Dept 2006], Iv denied 7 NY3d 704 [2006]).8 Because Owner had challenged Tenant’s percentages, DHCR had to abandon the MOU’s “blind acceptance” methodology in favor of a new methodology that the MOU did not authorize: Requiring the tenant to submit IRS Transcripts, W-2s, and 1099s. DHCR’s attorney admitted this at oral argument before Supreme Court: “DHCR subsequently, because it felt a little squeamish, because it never did this before, actually asked the tenant to get the federal transcript... to verify. The landlord wouldn’t know, but what DHCR did was actually conduct the very verification that you are referring to. That’s when DHCR, and it isn’t provided by statute, it isn’t even provided by the memo of understanding, DHCR just felt compelled to verify the allocation, and that’s why they asked the tenant’s attorney to get this income in order to verify the allocation” (emphasis added) (R. 491, 493). 8 Notwithstanding the obvious infirmities of “blind acceptance,” DHCR will accept a tenant’s apportionment percentages at face value in those cases where the landlord does not challenge their accuracy, although it is unclear how an owner can “challenge” the percentages other than doing so pro forma {see Matter of 1-4 Management LLC, DHCR Adm. Rev. Dckt. No. BQ-410025-RO, issued May 3, 2016; Matter of Grossman, DHCR Adm. Rev. Dckt. No. DV- 410025-RT, issued Aug. 24, 2016). In neither of these “blind acceptance” orders did DHCR mention the MOU. -50- RE\49426\0001\2196527v4 As Owner has established, this procedure leads to nullification of the (i) as reported; (ii) anti-audit; and (iii) DTF exclusivity provisions in the governing statute. It requires DHCR to demand documents it has no right to demand, and interpret documents it is incompetent to interpret. DHCR’s Hobson’s choice is entirely of its own making. Had DHCR simply recognized that joint income is lawfully ascribed to each joint filer, DHCR could have rendered a just decision that honored all portions of the statute. -51 - RE\49426\0001\2196527v4 CONCLUSION The order of the First Department should be reversed, DHCR’s November 19, 2014 order should be annulled, and the matter should be remanded to Supreme Court with instructions to remand to DHCR for an order of deregulation. Dated: New York, New York July 19,2017 Respectfully submitted, DAVIS WRIGHTTREMAINE LLP Attorneys for Petitioner-Appellant By: VVictor A. Kovner 1251 Avenue of the Americas, 21st Floor New York, New York 10020-1104 (212)489-8230 victorkovner@dwt.com DUANE MORRIS LLP Attorneys for Petitioner-Appellant 1540 Broadway New York, New York 10036-4086 (212) 692-1028 tmewman@duanemorris.com ROSENBERG & ESTIS, P.C. Attorneys for Petitioner-Appellant 733 Third Avenue New York, New York 10017 (212) 867-6000 jturkel@rosenbergestis.com -52- RE\49426\0001\2196527v4 LAW OFFICES OF CAROL M. LUTTATI Attorneys for Petitioner-Appellant 150 East 58th Street New York, New York 10155 (212)829-0011 cluttati@aol.com VICTOR A. KOVNER THOMAS R. NEWMAN JEFFREY TURKEL CAROL M. LUTTATI Of Counsel -53- RE\49426\0001\2196527v4 CERTIFICATE OF COMPLIANCE I, Victor A. Kovner, an attorney for the Petitioner-Appellant, hereby certifies that this brief is in compliance with Rule 500.13(c)(1). The brief was prepared using Microsoft Word 2010. The typeface is Times New Roman. The main body of the brief is in 14 pt. Footnotes and Point Headings are in compliance with Rule 500.1. The brief contains 11,559 words as counted by the word processing program. Dated: New York, New York July 19,2017 Victor A. Kovner RE\49426\0001\21 96527v41
