In the Matter of Brookford, LLC, Appellant,v.New York State Division of Housing and Community Renewal, et al., Respondents.BriefN.Y.May 2, 2018Rosenberg & Estis, P.C. 733 Third Avenue New York, NY 10017 Jeffrey Turkel 212 867-6000 tel 212-551-8484 fax jturkel@rosenbergestis.com Mr. John P. Asiello Chief Clerk and Legal Counsel to the Court February 1, 2017 State ofNew York Court of Appeals Clerk's Office 20 Eagle Street Albany,~ 12207-1095 Davis Wright Tremaine LLP 21 st Floor 1251 Avenue of the Americas New York, NY 10020-1104 Victor A. Kovner 212-489-8230 tel 212-489-8340 fax victorkovner@dwt.com El FEB 0 2 2017 N.Y.S. COURT OF APPEALS Re: Matter .ofBrookford, LLC v. NYS DHCR; APL-2016-00211 Dear Mr. Asiello: As co-counsel to appellant Brookford, LLC, and pursuant to the agreed-upon extension, we respectfully submit this letter in response to your letter of December 5. Although the briefs below discussed the pertinent issues before the Appellate Division, in light of the various findings by the Appellate Division, its failure to address many of the issues, and its erroneous conclusions, we urge the Court to allow the appeal proceed in the normal course of full briefing or argument. Should the Court decide that review under Section 500.11 is more appropriate, we ask the Court to consider the arguments set forth below. Summary of Argument There are three points of statewide significance that warrant the normal course of full briefing and argument. Respondent, Margaret Shuette Friedman ("the tenant"), resides in apart.ment at Central Park West (R. 68). For each of the relevant years (2004 and John P. Asiello, NY Court of Appeals February 1, 2017 2005), the tenant actually reported income in excess of $200,000 on her New York State tax returns (R. 136, 137). The New York State Division of Housing and Community Renewal ("DHCR") violated the applicable statute, CRL 26.: 403.1 (a)( 1 ), by purporting to "apportion" the reported income between the tenant and her husband, and the Court below plainly erred in approving apportionment. CRL 26-403.1 (a )(1) provides, in no uncertain terms, that "for purposes of this section, annual income shall mean the federal adjusted gross income as reported on the New York state income tax return" (emphasis added). It is undisputed that the tenant actually reported for each of the relevant years federal adjusted gross income ("federal AGI") in excess of $200,000. Both the legislative history and the language of · the · statute establish that no apportionment of income is permitted where, as here, the tenant voluntarily chooses to report income jointly to the New York State Department of Taxation and Finance ("DTF"). Secondly, the Appellate Division expressly relied on a never previously made public Memorandum of Understanding ("MOU'') between DHCR and DTF, which purported to authorize the apportionment of income where a joint return is filed. The MOU was signed on November 1, 1994, shortly following the legislature's enactment of the relevant deregulation provisions. Prior to the proceedings below, the "apportionment" provisions of the MOU have never been reviewed by any court. No court in this state has considered the lawfulness of this hitherto nonpublic document that directly contravenes, on its face, the language of the statute. Thirdly, as set forth below, the many relevant authorities preclude the apportionment of income that is actually reported in a New York State tax return. For the reasons more fully set forth below, we respectfully urge that the Appellate Division's order warrants review in the normal course of full briefing 2 John P. Asiello, NY Court of Appeals February 1, 2017 and argument. Notably, the First Department unanimously granted leave to appeal from its own decision. I. Pursuant to CRL 26-403.1(a)(l}, the tenant's income, as actually reported to DTF, exceeded $200,000 in each of the years in question CRL 26-403 .1(a)(i) establishes that annual income shall be the federal AGI as actually reported to DTF. As a matter of federal and New York State tax law, federal AGI, if reported jointly, cannot be apportioned. See, 26 U.S.C. § 6013(d)(3). Married couples who file joint returns must report all of their income and deductions together, in contrast to the returns of married persons who file separately. The Treasury Regulations establish, moreover, that "although there are two taxpayers on a joint return, there is only one taxable income." Treasury Regulations, Section 1.613-4(b). CRL 26-403.l(a)(l) contains no provision allowing for apportionment of income jointly reported to DTF in a New York State tax return. Indeed, the law provides that only the income verified by DTF shall be determinative under the luxury deregulation statute, since it expressly states that DTF "shall not require disclosure of any income information other than whether the aforementioned threshold has been exceeded." Contrary to the express provision of the statute, the Appellate Division construed the term "as reported" to permit apportionment of the tenant's income, based upon extensive additional submissions by the tenant. In effect, the First Department interpreted "as reported" as a license to take the reported income and convert it into an amount that was never reported to any taxing authority. This is not the law, and undermines the legislature's settled intent. 3 John P. Asiello, NY Court of Appeals February 1, 2017 A. The legislative history ofCRL 26-403.1(a)(i) confirms that there is no provision for apportionment of federal AGI that has been jointly reported The adoption of the present structure of luxury deregulation took place in 1993. As the legislative history for L. 1993, ch. 253 reveals, there was much controversy as to whether to adopt deregulation provisions for apartments renting for over $2,000 per month for tenants whose income exceeded $250,000 (later changed to $175,000 in 1997 [L. 1997 ch. 116], and to $200,000 in 2003, [L. 2003, ch. 97, pt. B]). What is striking, however, is the lack of controversy regarding the income verification provisions of the law. Senator Hannon and Assemblyman Lasher were the sponsors in each house, and in the Sponsoring Memorandum, they wrote: "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." Governor's Bill Jacket, L. 1993, ch. 253 at 5. On its face, the statute precludes DHCR from seeking information beyond what DTF requires to locate a tenant's tax return. By seeking additional documentation from the tenant, DHCR plainly exceeded its sharply circumscribed jurisdiction and authority under the statute. The legislature made clear that it did not seek personal information from tenants, but simply wanted to make the 4 John P. Asiello, NY Court of Appeals February 1, 2017 implementation of the deregulation provision dependent on the amount of federal AGI that was actually reported to DTF. Notably, DHCR (under then Governor Mario M. Cuomo) wrote: "The Division also believes that the bill's luxury decontrol provisions, as limited and narrowed . . . represent a compromise that removes regulatory protection only from the wealthiest tenants, while preserving the affordable housing stock and limiting the intrusions on tenant privacy." Governor's Bill Jacket at 9. Thus, the procedure used in this case, whereby DHCR asked the tenant to supply 1 099s, W2s, and IRS transcripts (R. 240), was inconsistent with the legislature's stated intent that the income verification process be simple and non- intrusive. Indeed, the First Department in Classic Realty, LLC v. New York State DHCR, 309 A.D.2d 205 (1st Dept 2003), rev'd on other grounds, 2 N.Y.3d 142 (2004) made clear that: "Actual income is not subject to disclosure. To require the submission of additional information, aside from just the verification of annual income, would transgress the policy goal of ascertaining whether the monetary threshold is exceeded with a minimum intrusion of taxpayers' privacy." ld. at 209 (citations omitted). The only portions of the legislative debate that focused on the mcome verification procedure took place in the State Senate. There, Senator Hannon said in response to criticism of the income verification provisions: "Well, we have tried to do a very simple procedure, one that mandates all privacy considerations remain intact, one that, because this is directed towards level of income, seeks to reform this system ... one that can be done with 5 John P. Asiello, NY Court of Appeals February 1, 2017 simple verification ... " Governor's Bill Jacket, Senate Debate Transcript, at 8212-3. The fact that the tenant herein agreed to provide information beyond the bounds of the law does not excuse DHCR's actions, or allow DHCR to create unlawful procedures that may negatively impact the privacy of tenants statewide. II. The income apportionment provisions of the MOU between DTF and DHCR are unlawful on their face On November 1, 1994, DTF and DHCR entered into the MOU regarding the implementation of the new rent deregulation provisions of the statute. The MOU was neither a regulation nor a rule of either agency. It was not adopted pursuant to public notice. There was no opportunity for the public to comment. Until the proceedings below, the MOU was never made public. Naturally, its provisions have never been cited by any court in this state prior to the Appellate Division decision below. 1 The MOU contains provisions that plainly contradict the statute it purports to implement. While Appellant takes no position on the vanous purely administrative provisions in the MOU relating to communications between two state agencies, in dispute here are those which provide for apportionment of federal AGI as reported. Relying upon the MOU, the Appellate Division held, "as respondent and her husband filed a joint tax return, a calculation had to be made as to the income of the sole occupant of the apartment" (emphasis added). That holding plainly contravened the applicable statute. 1 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). 6 John P. Asiello, NY Court of Appeals February 1, 2017 Not only has no court previously considered the lawfulness of this MOU, the First Department chose to give it the force of law applicable statewide. At a bare minimum, its ·reasoning warrants full briefing and argument in the normal course. III. The applicable judicial authorities make clear that there is no basis in law for income apportionment This Court, in Mahoney-Buntzman v. Buntzman, 12 N.Y.3d 415 (2009), established that New York courts "cannot, as a matter of policy, permit parties to assert positions in legal proceedings that are contrary to declarations made under the penalty of perjury on income tax returns." I d. at 422. For the First Department . ' . to hold that the tenant here was "not asserting a position contrary to prior declarations" is belied by the fact that her declaration on the joint return that her income should be treated as indivisible was inconsistent with her later contention that she could at the same time be entitled to have her income treated as if she had filed as a married person filing separately. Notably, the First Department held that Matter of Ansonia Assoc. LP. v. Unwin, 130 A.D. 3d 453 (1st Dep't 2015) was inapplicable. In Ansonia, the Court noted that the tenant had deducted on her federal tax returns her entire rent as an expense of an S corporation, even though such deductions are specifically disallowed for dwellings occupied for personal use. The Ansonia Court concluded that the tenant's claim of primary residence was incompatible with the position asserted on her tax returns. Notwithstanding, the First Department herein purported to distinguish Ansonia on the grounds that "respondent is not asserting a position contrary to prior declarations." In the Matter of Brookford, LLC v. New York State DHCR, 142 A.D.3d 433, 435 (1st Dep't 2016). 7 John P. Asiello, NY Court of Appeals February 1, 2017 The undisputed facts show that the tenant, for the relevant years, chose to file joint tax returns, and not separate tax returns, and enjoyed tax savings as a result (R. 353-54, 355, 357-58, 359, 360-70). Ansonia, holds, inter alia, that principles relating to federal and New York State tax law apply in the context of rent regulatory proceedings. The tenanf s decision to seek the financial benefits of a joint income tax return precludes her from later contending that her income should be treated as if she and her husband and filed as married persons filing separately. Having accepted the financial benefit of the joint filing, she is barred from contending that her income should be apportioned as if there were separate tax returns. The 'issue ·of'iricome verification has come before the courts on a number of other occasions, and invariably the legislative insistence on procedural simplicity has been reaffirmed. In Nestor v. New York State DHCR, No. 113411/97, 1997 WL 34841413 (Sup. Ct. N.Y. Cty.), aff'd 257 A.D.2d 395 (1st Dep't 1999), lv to app. denied, 93 N.Y.2d 982 (1999), Supreme Court emphasized that in the context of income verification, DHCR is not permitted to ask the tenant for additional information, and DTF is not permitted to provide any. In affirming, the First Department wrote that the statutes "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 tax return in determining whether the housing accommodation qualifies for deregulation." Tellingly for the case at bar, the unanimous First Department wrote: "It should be observed that the terms of the law [there, the comparable provisions of the Rent Stabilization Law] are unambiguous. It is the function of the court to enforce a statute in a manner consistent with legislative intent and, where the intent is clear on its face, the court 8 John P. Asiello, NY Court of Appeals February 1, 2017 will not expand the scope of the legislation by judicial construction .... It is for the legislature to decide whether public policy is better served by ease of administration or precision of measurement, and the court will not intrude on the legislative prerogative" (material in brackets supplied, citation omitted). 257 A.D.2d at 396. Several authorities confirm that income "as reported" 1s the statutory mandate. In Giffuni Bros. v. New York State DHCR, 293 A.D.2d 402 (1st Dep't 2002), lv to app. denied, 99 N.Y.2d 505 (2003), the First Department, citing Nestor, supra, held "it would not be consistent with the statutory provisions to permit [DHCR] to request an actual tax return from a tenant." Id. at 402. The following year, in Classic Realty, LLC, citing Nestor and Giffuni supra, the First Department held that "[ w ]e have noted elsewhere the degree to which legislation has thus circumscribed DHCR (as well as judicial) review of the tax information to be included (citation omitted). Actual income is not subject to disclosure (citation omitted). To require the submission of additional information, aside from just the verification of annual income, would transgress the policy of ascertaining whether the monetary threshold is exceeded with a minimum of intrusion on taxpayers' privacy." 309 A.D.2d at 209. In 9 East 10 LLC v. New York State DHCR, No. 109744/2008, 2009 WL 229659, at *14 (Sup. Ct. N.Y. Cty. 2009), the Court held that the statutes "prohibit the 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 tax return in determining whether the housing accommodation qualifies for deregulation," citing Giffuni, supra. 9 John P. Asiello, NY Court of Appeals February 1, 20 17 Even DHCR acknowledged that "the enabling luxury decontrol law defines the relevant income amount as the income reported on the New York State income tax return and not on some hypothetical amount of what the tenant's income should have been." DHCR added that "the governing statutes and regulations explicitly designate DTF as the sole determiner of the amount of household income . . . DHCR is required by statute to rely on the findings reported by DTF" (emphasis added). Matter of 7 3 7 Park Avenue Acquisition, LLC, DHCR Administrative Review Docket No. AS-410026-RO (issued January 29, 2013)_2 No judicial authority has approved the kind of process affirmed below, with extensive submissions of materials by the tenant to DHCR as opposed to the simple income verification process mandated by the statute. Affirming the Appellate Division would undermine the legislative structure that defined income as that which is actually reported, as well as the administrative convenience the legislature wanted to insure. 2 The Commissioner of DHCR added that it "does not have the requisite technical expertise to independently investigate or determine a tenant's income or be able to interpret the myriad technical provisions of the federal and estate tax code." 10 John P. Asiello, NY Court of Appeals February 1, 2017 Conclusion The Court should consider the appeal in the nonnal course of full briefmg and argument, or in the alternative, reverse the Court below and order that the subject apartment be deregulated. Respectfully submitted, '1 A A AW>· -~-- .. - ........ -. __ o\-1--~-:>""d-~..__;_--~ ....... Rosenberg~ :ifs.~is, P :G;. Davis ri remaine LLC Jeffrey Tudcel \ j Victor A. Kovner ·. I cc: Daphna Zekaria, Esq. Mark F. Palomino, Esq. 11 CORPORATE DISCLOSURE STATEMENT I Victor A. Kovner, co-counsel for petitioner, appellant Brookford, LLC hereby certify that no parents, subsidiaries or affiliates of Brookford, LLC exist. Dated: In New York, New York February 1, 2017 12 CERTIFICATION I certify pursuant to 500.11 (m) that the total word count for all printed text in the body of the letter brief, exclusive of the corporate disclosure statement; required by subsection (a) of this section; is 2,576 words. Dated: February 1, 2017 New York, New York Davis Wright Tre Victor A. Kovner