In the Matter of Brookford, LLC, Appellant,v.New York State Division of Housing and Community Renewal, et al., Respondents.BriefN.Y.May 2, 2018-- To be Argued by: JEFFREY TURKEL New York County Clerk's Index No. 100065/15 N.ew Vnrk ~upr.em.e O!nurt App.ellat.e iliuisinn -1Jrirst il.epartm.ent -------.tt.------- In the Matter of the Application of BROOKFORD, LLC, Petitioner-Appellant, For a Judgment Pursuant to Article 78 of the Civil Practice Law and Rules, -against- NEW YORK STATE DIVISION OF HOUSING AND COMMUNITY DEVELOPMENT and MARGARET SCHUETTE FRIEDMAN, Responden~-Responden~. REPLY BRIEF FOR PETITIONER-APPELLANT BORAH, GOLDSTEIN, ALTSCHULER, NAHINS & GOIDEL, P.C. 377 Broadway New York, New York 10013 (212) 431-1300 dcabrera@borahgoldstein.com DUANE MORRIS LLP 1540 Broadway New York, New York 10036 (212) 692-1028 tmewman@duanemorris.com ROSENBERG & ESTIS, P.C. 733 Third Avenue New York, New York 10017 (212) 867-6000 jturkel@rosenbergestis.com LAW OFFICES OF CAROL M. LUTTATI 150 East 58th Street New York, New York 10155 (212) 829-0011 cluttati@aol.com Attorneys for Petitioner-Appellant Of Counsel: JEFFREY TURKEL CAROLM. LUTTATI DAVID B. CABRERA THOMAS R. NEWMAN Printed on Recycled Paper TABLE OF CONTENTS Page(s) PRELIMINARY STATEMENT ................................................................................ I POINT I BECAUSE JOINT INCOME IS FULLY ASCRIBABLE TO TENANT AS A MATTER OF LAW, APPORTIONMENT IS IMPERMISSIBLE, AND TENANT IS ESTOPPED FROM ARGUING OTHERWISE ..................................................................... 4 POINT II DHCR'S APPORTIONMENT OF TENANT'S INCOME VIOLATED CRL 26-403.1, AND LEADS TO ABSURD RESULTS .............................................................................................. 9 A. The Controlling Statutes Prohibit DHCR from Requesting or Reviewing Confidential Tax Documents ........................................... 10 B. CRL 26-403.1 and Tax Law 171-b Grant DTF Exclusive Jurisdiction to Verify Income ............................................................. 14 C. The Memorandum of Understanding does not Serve as a Basis for Apportionment .............................................................................. 16 1. DHCR' s Reliance on the MOU violates Ansonia and the Governing Statutes................................................................... 1 7 2. DHCR Initially Used, but then Abandoned, the Apportionment Methodology set forth in the MOU ................ 18 D. DHCR is not Competent to Analyze Tax Documents ........................ 20 CONCLUSION ....................................................................................................... 22 - 1 - RE\49426\000 1 \621132v3 ./ TABLE OF AUTHORITIES Page(s) Cases 103 East 86th St. Realty Corp. v New York State DHCR, 12 AD3d 289 (1st Dept 2004) .............................................................................. 8 Ill Realty Co. v Sulkowska, 21 Misc3d 53 (App Term 1st Dept 2008) ............................................................ 6 9 East 10 LLC v New York State DHCR, 2009 WL 229659 (Sup Ct NY Co) .................................................................... 15 Ansonia Assoc. Ltd. Partnership v. Unwin, 130 AD3d 453 (1st Dept 2015) ................................................................... passim Classic Realty LLC v New York State DHCR, 309 AD2d 205 (1st Dept 2003), revd on other grnds 2 NY3d 142 (2004) ..................................................... 11, 20 DaimlerChrysler Corp. v Spitzer, 7 NY 3d 653 (2006) ............................................................................................ 16 Giffimi Bros. v New York State DHCR, 293 AD2d 402 (1st Dept 2002), lv to app denied 99 NY2d 505 (2003) ......................................................... 11, 15 Glenbriar v Lipsman, 5 NY3d 388 (2005) .......................................................................................... 8, 9 Goldman v. Davis, 49 Misc3d 16 (App Term 1st Dept 2015) ............................................................ 6 Jones v Berman, 37 NY2d 42 (1975) ....................... , .................................................................... 18 KSLM- Columbus Apts., Inc. v. New York State DHCR, 5 NY3d 303 (2005) .............................................................................................. 3 Langham Mansions, Co. v New York State DHCR, 2004 WL 5488004 (Sup Ct NY Co) .................................................................. 11 - 11- RE\49426\000 1 \621132v3 Matter of737 Park Avenue Acquisition, LLC, DHCRAdm. Rev. Dckt. No. AS-410026-RO ....................................... ll, 15,20 Matter of Prominent Assets LLC, DHCR Adm. Rev. Dckt. No. WH-410034-RO ................................................. 12 Mayfield v Evans, 93 AD3d 98 (1st Dept 2012) .............................................................................. 18 Parkview Assets LLC v New York State DHCR, 26 Misc3d 1238(A) (Sup Ct NY Co 2010) ........................................................ 15 Pel! v Board ofEduc. of Union Free Dist., 34 NY2d 222 (1974) .......................................................................................... 19 Tze Chun Liao v New York State Banking Dept., 74 NY2d 505 (1989) .......................................................................................... 18 Weiss v City of New York, 95 NY2d 1 (2000) .............................................................................................. 18 Statutes and Regulations 26 U.S.C. § 6013(d)(3) .......................................................................................... 4, 7 9 NYCRR Part 2211 ................................................................................................ 17 CRL 26-403.1 ................................................................................................ 9, 14, 16 CRL 26-403.l(a)(l) ................................................................................................... 4 CRL 26-403.l(a)(2) ................................................................................................... 8 CRL 26-403.l(b) ..................................................................................................... 10 CRL 26-403.l(c)(2) ........................................................................................... 13, 14 L 1993, ch. 256, §28 ................................................................................................ 17 RSL 26-504.1 ............................................................................................................ 8 State Administrative Procedure Act.. ...................................................................... 17 Tax Law§ 6ll(b)(2) ................................................................................................. 4 - 111- RE\49426\000 1 \621132v3 / Tax Law 171-b ........................................................................................................ 14 Tax Law 171-b(3)(b) ............................................................................................... 10 Tax Law 171-b(6) .................................................................................................... 17 Treas. Reg.§ 1.6013-4(b) ..................................................................................... 2, 4 Other Authorities DHCR Operational Bulletin No. 95-3 ..................................................................... 17 Governor's Bill Jacket, L 1993, ch 253 .................................................................. 12 -IV- RE\49426\0001\621132v3 / SUPREME COURT OF THE STATE OF NEW YORK APPELLATE DIVISION- FIRST DEPARTMENT -------------------------- X In the Matter of the Application of BROOKFORD LLC, Petitioner-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-Respondents. X New York County Clerk's Index No.: 100065/15 REPLY BRIEF FOR PETITIONER-APPELLANT BROOKFORD LLC PRELIMINARY STATEMENT Petitioner-appellant Brookford LLC ("Owner") submits this brief in reply to the briefs submitted by respondent-respondents New York State Division of Housing and Community Renewal ("DHCR") and Margaret Schuette Friedman ("Tenant") (collectively, "Respondents").1 DHCR' s brief is more notable for what it ignores than what it says. In Ansonia Assoc. Ltd. Partnership v. Unwin, 130 AD3d 453 (1st Dept 2015) ("Ansonia ''), this Court held that where a tenant takes a legal position in a tax 1 Capitalized and abbreviated terms shall have the same meaning as in Owner's Main Brief. RE\49426\000 1 \621132v3 I return, the tenant is estopped from taking a logically incompatible position in a subsequent rent regulatory matter. Because Tenant elected to file a joint return, Tenant is estopped from asking DHCR to (i) pretend that Tenant and her husband reported their incomes as married persons filing separately; and (ii) deny Owner deregulation based on fictitious "apportioned" income that was never reported on any tax return. DHCR does not mention Ansonia, much less attempt to distinguish it. DHCR claims that the "unprecedented" circumstances of this case compelled DHCR to violate the statute by demanding and purporting to analyze Tenant's confidential tax documents, which purportedly allowed DHCR to "confirm DTF's finding that the Tenant's income was below" the deregulation threshold. DHCR Br., p. 26. DHCR never explains the source of its authority to oversee or "confirm" the findings of DTF, the agency granted exclusive jurisdiction over the income verification process. Nor does DHCR explain where it obtained the expertise to analyze tax returns, W-2 forms, 1099 forms, and IRS Transcripts. As a matter of law, "[a]lthough there are two taxpayers on a joint return, there is only one taxable income." Treas. Reg. § 1.6013-4(b). Even Supreme Court acknowledged herein that "under federal and State tax law, neither the income, nor the resulting tax liability, listed on a joint return may be apportioned - 2- RE\49426\000 1 \621132v3 r I between the filers" (10). This means that the income that Tenant elected to report jointly in 2004 and 2005 is fully ascribable to Tenant. Accordingly, counting the joint income as Tenant's income does not violate the statutory proscription against including the annual income of absent occupants. In short, there is no "Margaret's income" or "Si's income," and Si's absence from the apartment on the date Owner served the ICF is irrelevant. One other point should be made. Attempting to defend its order herein, DHCR argues that "Courts must defer to an administrative agency's rational interpretation of its own regulations in its area of expertise." DHCR Br., pp. 27- 28. DHCR does not identify the regulation in question, no doubt because there is no regulation at issue herein. Instead, this appeal presents a question of pure statutory interpretation, such that there is little basis to rely on any special competence or expertise of the administrative agency. See KSLM - Columbus Apts., Inc. v. New York State DHCR, 5 NY3d 303, 312 (2005). - 3- RE\49426\000 1 \621132v3 POINT I BECAUSE JOINT INCOME IS FULLY ASCRIBABLE TO TENANT AS A MATTER OF LAW, APPORTIONMENT IS IMPERMISSIBLE, AND TENANT IS ESTOPPED FROM ARGUING OTHERWISE As Owner established in Point I.B of its Main Brief, the Legislature defined "annual income" in CRL 26-403.1(a)(l) as "federal adjusted gross income as reported on the New York state income tax return" (italics supplied). One of the most fundamental concepts in federal and New York State tax law is that when a taxpayer reports income jointly, neither the income nor any resulting tax liability can be apportioned. See 26 U.S.C. § 6013(d)(3); Treas. Reg. § 1.6013-4(b); Tax Law§ 611(b)(2). Thus, the income Tenant jointly reported in 2004 ($200,831) and 2005 ($228,823) is Tenant's income as a matter of law, and her apartment should have been deregulated. Respondents ignore the statutory definition of "annual income" and instead focus on "total annual income," which CRL 26-403.l(a)(l) defines as "the sum of the annual incomes of all persons who occupy the housing accommodation as their primary residence .... " "Total annual income," thus, is the sum of the "annual incomes" of those persons who occupy the apartment. Because Tenant elected to report her income jointly and indivisibly, her "annual income" was over $200,000 in both 2004 and 2005, and the "total annual income" for the apartment could not have been less. -4- RE\49426\000 1 \621132v3 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" (10). Supreme Court, however, immediately added that such fact "does not bar such apportionment in connection with deregulation proceedings." Jd. Thus, Supreme Court held that fundamental rules, definitions, and terms of art under federal and New York State tax law do not apply in rent regulatory matters and can be ignored. Supreme Court's holding is no longer viable (if it ever was) in light of Ansonia. There, the rent stabilized tenant in a non-primary residence holdover proceeding deducted the entire rent for her apartment as a business expense on her tax returns, which deduction, under federal and New York State tax laws, is not permissible where the premises are used residentially. The landlord argued that the position the tenant took in her returns estopped her from alleging in the holdover . proceeding that she primarily resided in the apartment. The tenant asserted that the Court was bound by the Rent Stabilization Code, which provided that neither a tax return, nor any single factor, was dispositive as to a tenant's primary residence. This Court rejected the tenant's argument, holding that irrespective of anything in the rent laws or regulations, tenants -- like any other litigants -- are not permitted to disavow a position taken to gain a significant advantage (here, a - 5- RE\49426\000 1 \621132v3 reduced tax rate) simply because that position becomes inconvenient in subsequent litigation: "Respondent argues that her tax returns are not dispositive because the Rent Stabilization Code states that in determining primary residence, 'no single factor shall be solely determinative' (9 NYCRR 2520.6[u]). However, we conclude that respondent may not claim primacy residence because that claim is 'logically incompatible' with the position she asserted on her tax returns (see Katz Park Ave. Corp. v. Jagger, 11 NY3d 314, 317 [2008])." 130 AD3d at 454. See also Goldman v. Davis, 49 Misc3d 16 (App Term 1st Dept 2015). Ansonia marked a sea change from prior case law, wherein courts allowed tenants in rent regulatory matters to raise claims that were incompatible with positions they took in earlier tax filings. See e.g. 111 Realty Co. v Sulkowska, 21 Misc3d 53 (App Term 1st Dept 2008). Ansonia bars logically incompatible positions, and nothing in the rent regulatory statutes or regulations (or Respondents' imaginative interpretations thereof) will allow an opportunistic tenant to avoid the effect of this Court's ruling. Here, Tenant elected to report income jointly in 2004 and 2005. That position is logically incompatible with her current claim that she and her husband had separate and divisible incomes. Tenant, like the tenant in Ansonia, made a choice, and must accept the consequences of her actions. - 6- RE\49426\000 1 \621132v3 DHCR ignores Ansonia, tacitly conceding, as it must, that it applies herein. Tenant argues that Ansonia is distinguishable because "[h]ere, there is no declaration which Respondent has made that is inconsistent with any position she has taken in this proceeding." Tenant Br., p. 20. That is not so. By reporting her income jointly, Tenant necessarily declared that her "tax shall be computed on the aggregate income and the liability with respect to the tax shall be joint and several." 26 U.S.C. § 6013(d)(3). Thus, in exchange for paying tax at the lower rate afforded to joint filers -- and Tenant has not offered to pay back her tax savings -- Tenant agreed that the reported income and any related liability would be treated jointly and indivisibly for all purposes. Tenant's election to file jointly had significant legal and financial consequences, and such filing is logically incompatible with her present claim that her joint income is divisible and can be apportioned. Tenant criticizes Ansonia as demonstrating "the dangers of expanding landlord-tenant law to include, as dispositive, provisions of other laws that have nothing to do with New York's rent regulated housing laws." Tenant Br., p. 20. Tenant misses the point; Ansonia in fact demonstrates the dangers of taking one position when filing a tax return, and thereafter taking a logically incompatible position when attempting to preserve a luxury rent regulated apartment. - 7- RE\49426\000 I \621132v3 Respondents repeatedly cite to various cases wherein courts have held that the annual income of an occupant who did not live in the apartment on the date the ICF was served cannot be counted in luxury deregulation proceedings. DHCR Br., pp. 18, 28; Tenant Br., pp. 12-13. In each of those cases, however, the absent occupant filed an individual tax return; there was no joint income and thus no occasion for "apportionment." That is not the case herein. Although DHCR claims that the instant case is "unprecedented," DHCR Br., p. 26, DHCR elsewhere suggests that this Court approved DHCR's apportionment methodology in 103 East 86th St. Realty Corp. v New York State DHCR, 12 AD3d 289 (1st Dept 2004). Id. at p. 23. DHCR's claim is incorrect. As Owner established at pp. 32-33 of its Main Brief, the wife and her absent husband therein filed separate returns for at least one of the two years in question, and DTF determined that the annual incomes of the wife and her children for that year did not exceed the deregulation threshold. Because the absent husband filed his own return that year, there was no joint income and apportionment was not at issue? Equally without merit is DHCR's reliance on Glenbriar v Lipsman, 5 NY3d 388 (2005), a non-primary residence case wherein the husband and wife filed joint 2 For purposes of high-income luxury deregulation, the tenant's income must exceed the statutory threshold in "each of the two preceding calendar years." RSL 26-504.1; CRL 26- 403.l(a)(2). - 8 - RE\49426\0001\621132v3 tax returns but maintained separate primary residences. Glenbriar was not a luxury deregulation case, and there was thus no need to determine the Lipsmans' income, whether jointly, separately, or otherwise. POINT II DHCR'S APPORTIONMENT OF TENANT'S INCOME VIOLATED CRL 26-403.1, AND LEADS TO ABSURD RESULTS DHCR claims that the unusual facts of this case compelled DHCR "to violate its own rule which limits the information DHCR can demand from a tenant for income verification purposes .... " DHCR Br., p. 2. Needless to say, any instance where an administrative agency claims that it was forced to violate the law should give one pause. Owner will ignore for the moment that the limitations on DHCR's powers are found in the governing statutes, not in DHCR's "own rule." It is sufficient to note that DHCR could have avoided its statutory violation by acknowledging that the Legislature, by its use of the well-defined term of art "federal adjusted gross income as reported," understood that jointly reported income is indivisible and is fully ascribable to the joint filer in occupancy, irrespective of whether another joint filer has vacated the apartment. That is why neither the CRL nor the Tax Law mentions or authorizes apportionment. DHCR' s problem, as this case illustrates, is that one statutory violation leads to another. Thus, to avoid "blind acceptance" of Tenant's self-created - 9- RE\49426\000 1 \621132v3 apportionment percentages, DHCR Br., p. 2, (i) DHCR was forced to demand tax information that the statute prohibits it from demanding, which led to (ii) DHCR usurping DTF' s exclusive statutory role in the income verification process, which led to (iii) DHCR analyzing tax documents it was incompetent to review. All this led to egregious due process violations, whereby Owner and this Court are forbidden to see the tax returns, W-2 forms, 1099 forms, and IRS Transcripts that DHCR deemed to be "credible," and upon which DHCR based its determination (49). For the reasons set forth below, DHCR's order cannot stand. A. The Controlling Statutes Prohibit DHCR from Requesting or Reviewing Confidential Tax Documents CRL 26-403.1 (b) states that the income verification process "shall not require disclosure of any income tax information other than whether the aforementioned [deregulation] threshold has been exceeded" (material in brackets supplied). 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." Notwithstanding, DHCR admits that "[a]t DHCR's request," the "Tenant provided detailed information as to her annual income." DHCR Br., at pp. 5, 15. - 10- RE\49426\000 1 \621132v3 If there is one thing upon which Courts agree with respect to luxury deregulation, it is that "[i]t would not be consistent with these statutory provisions to permit DHCR to request an actual tax return from a tenant." Giffuni Bros. v New York State DHCR, 293 AD2d 402, 403 (lst Dept 2002), lv to app denied 99 NY2d 505 (2003). "Actual income is not subject to disclosure," and a DHCR demand for such information "would transgress the policy goal of ascertaining whether the monetary threshold is exceeded with a minimum of intrusion on taxpayers' privacy." Classic Realty LLC v New York State DHCR, 309 AD2d 205, 209 (1st Dept 2003), revd on other grnds 2 NY3d 142 (2004). As Justice Richter wrote in Langham Mansions, Co. v New York State DHCR, 2004 WL 5488004 (Sup Ct NY Co), "DHCR's entitlement to income information as to ... household income [is] limited by the Rent Stabilization Laws, as well as the New York State Tax Law," such that it is "inconsistent with the statutory provisions" for "DHCR to request an actual. .. tax return or additional income information" from a tenant. DHCR, at least in orders issued before its order herein, agreed. "DHCR is not authorized to make its own independent determination of what a tenant's income is." Matter of737 Park Avenue Acquisition, LLC, DHCR Adm. Rev. Dckt. No. AS-410026-RO, issued Jan. 29, 2013 (321). Nor is DHCR authorized to "take a pro-active stance and conduct investigations to independently determine the - 11- RE\49426\000 1 \621132v3 household income before issuing an order." Matter of Prominent Assets LLC, DHCR Adm. Rev. Dckt. No. WH-410034-RO, issued Dec. 22, 2008 (350). DHCR would have this Court believe that all of this goes out the window if two tenants file a joint tax return and one tenant no longer lives in the apartment. There is nothing in the relevant statutes, case law, or logic to support this conclusion. Tenant erroneously argues that DHCR' s authority to demand confidential tax information is not at issue because Tenant "voluntarily provided the back-up documents." Tenant Br., p. 17. The Legislature, not an individual tenant, determines what DHCR can demand or review. Here, the Legislature created an income verification procedure that "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" (material in brackets and italics supplied). Governor's Bill Jacket, L 1993, ch 253. The Legislature did not want the income verification process to tum into an invasive IRS-style audit, even if a tenant were willing to submit to such audit in order to avoid luxury deregulation of her apartment. Tenant undercuts her argument by admitting that the income verification process that the Legislature promulgated "was intended to be inexpensive, fast and user friendly." Tenant Br., p. 20. Owner agrees. Had DHCR recognized at the - 12- RE\49426\0001 \621132v3 outset that joint income is ascribable to each joint filer as a matter of federal and New York State tax law, this case would have ended in 2007, when DTF would have reported to DHCR that Tenant's federal AGI as actually reported exceeded the statutory threshold in both 2004 and 2005. Everything that Tenant defends herein -- apportionment, DHCR' s demand for sensitive tax documents, and DHCR's "analysis" of these documents -- lengthened and complicated this case. There is nothing "user friendly" about forcing a tenant to supply DHCR with tax returns, W-2 forms, 1099-forms, and IRS Transcripts. In its November 19, 2014 order herein, DHCR suggested that the comment period provided for in CRL 26-403.l(c)(2) implicitly authorized DHCR to demand and review confidential tax documents ( 48). Although Supreme Court ignored this argument, DHCR obliquely raises it on appeal. See DHCR Br., p. 23. As Owner established below, DHCR's argument is without merit. CRL 26-403.1(c)(2) states in relevant part: "If the department of taxation and finance determines that the total annual income is in excess of the deregulation threshold in each of the two preceding calendar years, the division shall, on or before November fifteenth of such year, notify the owner and tenants of the results of such verification. Both the owner and the tenants shall have thirty days within which to comment on such verification results." - 13- RE\49426\000 1 \621132v3 Plainly, the comment period in CRL 26-403.1(c)(2) was designed to ensure due process by giving landlords and tenants an opportunity to comment upon DTF's findings. It does not authorize DHCR to conduct intrusive investigations. Moreover, the "comments" upon which DHCR relied herein -- the Confidential Submission3 and the IRS Transcripts -- were not submitted as part of the comment period authorized by CRL 26-403.1(c)(2). Tenant submitted the Confidential Submission to DHCR months before the agency, on October 23, 2007, forwarded to the parties its "Notice of Verification of Income Information and Opportunity to Comment" (106). Tenant's submission of the IRS Transcript was made pursuant to DHCR's April 11, 2014 notice (240), and was in the nature of a mandatory submission, rather than a "comment" upon a DTF verification that had been made almost seven years before. B. CRL 26-403.1 and Tax Law 171-b Grant DTF Exclusive Jurisdiction to Verify Income DHCR asserts that Tenant's election to file a joint return compelled it to "confirm[ ] DTF's determination that Tenant's income was below the statutory deregulation threshold .... " DHCR Br., pp. 5-6. DHCR elsewhere asserts that it 3 Tenant forwarded the Confidential Submission to DHCR in 2007 (24-25). DHCR only forwarded a fraction of the Confidential Submission (the "Partial Confidential Submission") to Owner (27, 135-40). Although DHCR erroneously implies that it forwarded the entire Confidential Submission to Owner, DHCR Br., p. 26, Tenant admits that Owner only received the Partial Confidential Submission. Tenant Br., p. 9. - 14- RE\49426\000 1 \621132v3 "used the Tenant's IRS transcript only to confirm DTF's finding that the Tenant's income was below" the deregulation threshold. Id at p. 26. DHCR -- a rent agency - does not disclose the source of its authority to confirm or verify whether DTF properly fulfilled its exclusive statutory duty to determine income. To the contrary, the controlling statutes provide that DHCR can only demand from the tenant "information necessary for the DTF to make a match with the tenants' tax returns" (291 ), at which point DTF provides DHCR with a "yes or no" answer as to whether the income exceeds the threshold. See Giffuni Bros., supra, 293 AD2d at 403; see also DHCR Br., p. 4. DHCR has no 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 LLC v New York State DHCR, 26 Misc3d 1238(A) (Sup Ct NY Co 2010). See also 9 East 10 LLC v New York State DHCR, 2009 WL 229659 (Sup Ct NY Co) ("the statute requires that the income determination be made solely by DTF"). In Matter of 737 Park Avenue Acquisition, LLC, supra, DHCR acknowledged DTF's exclusive role in the income verification process: " ... the governing statutes and regulations explicitly designate DTF as the sole determiner of the amount of the household income for the purposes of determining whether an apartment qualifies for luxury decontrol" (322). - 15- RE\49426\000 1 \621132v3 DHCR's claim that it benignly "confirmed" or "verified" DTF's income determination is belied by the record, which establishes that DTF had no role in verifying tenant's income. DHCR (i) examined Tenant's actual returns for 2004 and 2005; (ii) examined the W-2 and 1099 forms annexed thereto; (iii) examined the IRS Transcripts; and then (iv) in its own words, determined "that the Tenant's income was below the statutory deregulation threshold ... and denied the Owner's Petition for deregulation." DHCR Br., pp. 5-6. DHCR did not double check DTF's determination; DHCR made its own independent determination. CRL 26- 403.1 does not authorize DHCR to do so. C. The Memorandum of Understanding does not Serve as a Basis for Apportionment Respondents repeatedly assert that the governing statutes authorize apportionment, although the statutes do not mention apportionment, and the Legislature could have easily provided for the apportionment of income had it so desired. See DaimlerChrysler Corp. v Spitzer, 7 NY3d 653, 662 (2006). Respondents are thus forced to argue that apportionment is a1:1thorized by the October 1994 Memorandum of Understanding ("MOU") ( 400-06), an argument that Supreme Court ignored. Respondents' reliance on the MOU is flawed in two respects. First, the MOU is contrary to Ansonia and the governing statutes. Second, DHCR abandoned the apportionment methodology set forth in the MOU, - 16- RE\49426\0001 \621132v3 and then embarked on a completely new and unauthorized methodology. Having disavowed the MOU, DHCR cannot rely on it now. 1. DHCR's Reliance on the MOU violates Ansonia and the Governing Statutes DHCR's reliance on the MOU fails because it purports to allow a tenant to take one position in his or her tax returns -- that joint income should be treated as aggregate and indivisible -- and then take a logically incompatible position in a subsequent luxury deregulation proceeding. Such gamesmanship, even if it might have been permitted in 1994, is now prohibited by Ansonia. Respondents attempt to prop up the MOU by claiming that it is lawful pursuant to Tax Law 171-b(6), which directed DTF to "l?romulgate rules and regulations to effect the provisions of this section." DTF, however, promulgated no rules or regulations mentioning, much less detailing, an apportionment methodology. Similarly, although the Legislature authorized DHCR to issue regulations to implement, inter alia, luxury deregulation, L 1993, ch. 256, §28, neither DHCR's regulations (9 NYCRR Part 2211) nor DHCR's Operational Bulletin (No. 95-3), says anything about apportionment. Rather than publish regulations subject to the State Administrative Procedure Act, DHCR and DTF created a sub rosa procedure memorialized in a non-public document that DHCR exhumed solely to defend its order herein. - 17- RE\49426\000 1 \621132v3 It is well settled that "an agency cannot promulgate rules or regulations that contravene the will of the Legislature," Weiss v City of New York, 95 NY2d 1, 4-5 (2000), or are "out of harmony with the statute." Jones v Berman, 37 NY2d 42, 53 (1975). An administrative agency "cannot create rules, through its own interstitial declaration, that were not contemplated or authorized by the Legislature and thus, in effect, empower themselves to rewrite or add substantially to the administrative charter itself." Tze Chun Liao v New York State Banking Dept., 74 NY2d 505, 510 (1989). Nor can interstitial rule-making be "'inconsistent with the statutory language or its underlying purposes."' Mayfield v Evans, 93 AD3d 98, 103 (1st Dept 2012). Here, the MOD purports to create a methodology that ignores the Legislature's deliberate use of the term of art "federal adjusted gross income as reported." The MOD allows a Tenant to report income jointly, pay a lower tax rate, and then have DHCR pretend that the joint filers filed separately. Ansonia and the governing statutes do not permit such an absurd result. 2. DHCR Initially Used, but then Abandoned, the Apportionment Methodology set forth in the MOU The apportionment methodology in the MOD 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. No documentation or corroborating evidence is required. DHCR then directs DTF to - 18- RE\49426\000 1 \621132v3 multiply the tenant's unverified percentages by the joint federal AGI as reported. DTF then informs DHCR whether the "apportioned" joint income is above or below the statutory threshold (402). At that point, DHCR will grant or deny the landlord's Petition for Deregulation accordingly. 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 (107, 109). These orders misleadingly stated that the joint income reported by both Tenant and her husband was below $175,000 for the two years in question. Id. As DHCR's counsel admitted in his affirmation to the Appellate Division in support of DHCR's 2008 motion to remit, DHCR initially concealed the fact that "the Rent Administrator requested that the DTF make its income verification determination based on the percentages provided by Margaret Friedman" (188). On remand from the Appellate Division (198), DHCR recognized that the "blind acceptance" procedure set forth in the MOU would not survive judicial review. Administrative action is arbitrary and capricious, as a matter of law, unless the agency's determination is supported "by proof sufficient to satisfy a reasonable [person]" (material in brackets supplied). Pel! v Board of Educ. of Union Free Dist., 34 NY2d 222, 231 (1974). A reasonable person would not be satisfied by a determination based on self-serving and uncorroborated "proof." - 19- RE\49426\000 1 \621132v3 More specifically, the Court of Appeals has held that DHCR cannot allow a tenant to evade luxury deregulation by virtue of DHCR's "blind acceptance" of tenant income claims. Classic Realty LLC, supra, 2 NY 3d at 146-4 7. To avoid such "blind acceptance," DHCR created a new procedure -- not authorized in the MOU -- whereby it would ask the tenant for confidential tax documents, analyze those documents, base its determination thereon, and then withhold those documents from the landlord. By doing so, DHCR disavowed the MOU upon which it now relies, and substituted new arbitrary and capricious procedures for the old. D. DHCR is not Competent to Analyze Tax Documents Unwilling to "blindly accept" the self-created allocation percentages Tenant entered on the ICF, DHCR was compelled to "confirm" DTF's prior finding by demanding confidential tax documents from Tenant. DHCR writes: "To further confirm the Tenant's allocation of income, DHCR requested the Tenant provide a transcript of items listed in section 8 of form 4506T which includes data from W-2 forms, 1099 forms, 1098 forms and 5498 forms." DHCR Br., p. 12. DHCR never explains when and where it obtained the necessary expertise to analyze these documents. Indeed, in Matter of 73 7 Park Avenue Acquisition, LLC, supra, DHCR expressly disavowed any such expertise: -20- RE\49426\000 I \621132v3 "The owner, in effect, is requesting DHCR to independently investigate and determine 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. * * * The Commissioner notes that 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" (italics supplied) (322). DHCR is a rent agency and is incompetent, as a matter of law, to analyze tax documents. DHCR's order, which is premised on DHCR's finding that Tenant's tax documents were "credible" ( 49), is arbitrary and capricious. As Owner has established, even an expert in taxation would be unable to apportion joint income based on an IRS Transcript, because the Transcript could only indicate the party that the payor of the income reported to the IRS as the recipient of the payment. The Transcript does not identify the legal owner of the payment, and recipients, in fact, can be nominees for payments that belong to another person. See Main Br., Point II.D. DHCR does not address this issue, perhaps because it lacks the expertise to refute it. Tenant argues that this argument was never raised before DHCR (Tenant Br., p. 3), but the record (253-54) establishes otherwise. -21 - RE\49426\000 1 \621132v3 CONCLUSION The decision, order and judgment appealed from should be reversed, and DHCR should be directed to issue an order of deregulation. Dated: New York, New York March 11, 2016 RE\49426\000 1 \621132v3 ROSENBERG & ESTIS, P.C. Attorneys for Petitioner-Appellant By: New York, New (212) 867-6000 BORAH, GOLDSTEIN, ALTSCHULER, NAHINS & GOIDEL, P.C. Co-Counsel for Petitioner-Appellant 3 77 Broadway New York, New York 10013 (212) 431-1300 LAW OFFICES OF CAROL M. LUTTATI Co-Counsel for Petitioner-Appellant 150 East 58th Street New York, New York 10155 (212) 829-0011 DUANE MORRIS LLP Co-Counsel for Petitioner-Appellant 1540 Broadway New York, New York 10036 (212) 692-1000 -22- PRINTING SPECIFICATIONS STATEMENT I, Jeffrey Turkel, an attorney for the Petitioner-Appellant, hereby certifies that this brief is in compliance with § 600.10(d)(1)(v). 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 § 600.10. The brief contains 4,660 words as counted by the word processing program. Dated: New York, New York March 11, 2016 RE\49426\000 l\621132v3