The opinion
State of New York
Supreme Court, Appellate Division
Third Judicial Department
Decided and Entered: June 2, 2016 521853
________________________________
In the Matter of DERMODY,
BURKE & BROWN, CPAs, LLC,
Appellant,
v
MEMORANDUM AND ORDER
DEPARTMENT OF ECONOMIC
DEVELOPMENT, Also Known as
EMPIRE STATE DEVELOPMENT,
et al.,
Respondents.
________________________________
Calendar Date: April 19, 2016
Before: Peters, P.J., Garry, Rose, Clark and Aarons, JJ.
__________
Centolella Lynn D'Elia & Temes LLC, Syracuse (Timothy M.
Lynn of counsel), for appellant.
Eric T. Schneiderman, Attorney General, Albany (Owen W.
Demuth of counsel), for respondents.
__________
Garry, J.
Appeal from a judgment of the Supreme Court (Collins, J.),
entered October 6, 2014 in Albany County, which, among other
things, partially dismissed petitioner's application, in a
combined proceeding pursuant to CPLR article 78 and action for a
declaratory judgment, to review a determination of respondent
Empire Zone Designation Board revoking petitioner's certification
as an empire zone business enterprise.
Petitioner is an accounting firm that was certified as a
participant in the Empire Zones Program in July 2002 (see
-2- 521853
generally James Sq. Assoc. LP v Mullen, 21 NY3d 233, 240-241
[2013]). In 2009, statutory amendments to the program directed
respondent Commissioner of Economic Development to conduct a
review of all certified business enterprises to determine, as
pertinent here, whether any were "shirt-changers" – that is,
whether any program participant certified before August 1, 2002
had created what appeared to be new jobs or investments by
transferring employees or assets between related entities (see
General Municipal Law § 959 [a] [v] [5]; [w]; Matter of Lyell Mt.
Read Bus. Ctr. LLC v Empire Zone Designation Bd., 129 AD3d 137,
141 [2015]). In June 2009, respondent Department of Economic
Development notified petitioner that the Commissioner was
revoking its certification for failing the shirt-changer test.
Petitioner timely appealed the determination to respondent Empire
Zone Designation Board (hereinafter the Board), which upheld the
revocation. Petitioner commenced this combined proceeding
pursuant to CPLR article 78 and action for declaratory judgment,
which was marked off the calendar while the Board conducted a de
novo review. Thereafter, the Board again upheld the
determination, finding that petitioner had not demonstrated
extraordinary circumstances warranting continued certification
(see General Municipal Law § 959 [w]; 5 NYCRR 14.2 [b]).
Petitioner amended its application to include the de novo
determination. Following joinder of issue, and as pertinent
here, Supreme Court dismissed the petition/complaint.1
Petitioner appeals.
In evaluating the merits of petitioner's arguments, "this
Court is limited to determining whether the Board's
determination[] w[as] arbitrary and capricious and without a
rational basis" (Matter of Lyell Mt. Read Bus. Ctr. LLC v Empire
Zone Designation Bd., 129 AD3d at 143 [internal quotation marks,
brackets, ellipsis and citation omitted]). We reject
petitioner's contention that there was no factual basis for the
1
Supreme Court found that petitioner was entitled to a
declaration that the revocation of its certification could not be
made retroactive to 2008, and otherwise dismissed petitioner's
claims. Respondents did not cross-appeal from the retroactivity
determination.
-3- 521853
Commissioner's determination to revoke petitioner's
certification. As a participant in the Empire Zones Program,
petitioner was required to complete and submit business annual
reports (hereinafter BARs) that provided information about its
activities, employment and investments (see 5 NYCRR 11.7). The
BAR that petitioner completed for 2006 included a section
inquiring whether its business was subject to a recently-enacted
Tax Law provision that excluded certain firms from receiving tax
benefits unless they could establish that they had been formed
for a valid business purpose (see Tax Law § 14 [j] [4] [B]).
Petitioner responded affirmatively and, as required by the form,
attached a statement explaining that it had been formed by
combining two previously-existing accounting firms for various
valid business purposes. We find that petitioner's affirmative
response on the 2006 BAR, taken together with facts set forth in
the attached explanatory statement, provided a rational basis for
the Commissioner's decertification decision.
Petitioner's mere affirmative response to the question
whether the Tax Law provision was applicable to its business,
without more, would not have sufficed to provide a rational basis
for the determination that it was a shirt-changer. The Tax Law
provision, enacted in 2005, was a previous legislative attempt to
address abuses of the Empire Zones Program that retroactively
barred businesses from receiving benefits if they were certified
before August 1, 2002, "ha[d] a base period of zero years or zero
employment for its base period," were similar in ownership and
operation to an existing or previously existing business entity
and could not show that they had been formed for a valid business
purpose other than the avoidance or reduction of taxation (Tax
Law § 14 [j] [4] [B]).2 The 2009 legislation established new
standards that empire zone participants were required to satisfy
to retain their certification. Under the provision at issue
here, the Commissioner was directed to decertify participants
2
Businesses seeking certification after August 1, 2002
were subject to 2002 legislation that required them to
demonstrate that they were not substantially similar in operation
and ownership to existing or previously existing entities (see L
2002, ch 85, pt CC, § 10, adding Tax Law § 14 [j]).
-4- 521853
that had "caused individuals to transfer from existing employment
with another business enterprise with similar ownership . . . to
similar employment with the certified business enterprise or if
the enterprise acquired, purchased, leased, or had transferred to
it real property previously owned by an entity with similar
ownership, regardless of form of incorporation or organization"
(General Municipal Law § 959 [a] [v] [5]; see General Municipal
Law § 959 [w]). Such transfers of employees and real property
were not relevant to the 2005 Tax Law provision and, thus, were
not addressed in the question on the 2006 BAR. Thus, an
affirmative response to that question might suggest the
possibility of shirt-changing but, without more, could not form
the sole basis for a rational inference that a prohibited
transfer had occurred (see Matter of PG Erie Props., LLC v
Department of Economic Dev., ___ AD3d ___ [decided herewith]).
However, the statement that petitioner attached to the 2006
BAR to demonstrate that it was formed for a valid business
purpose contained factual information that was relevant to the
Commissioner's 2009 analysis. In the statement, petitioner
averred that it was formed in 2002 by combining two previously
existing accounting firms, one of which – then known as Dermody,
Burke & Brown, P.C. – had been engaged in the practice of public
accountancy for 50 years. According to the statement, the 14
shareholders of this firm joined with the seven partners of a
second accounting firm, Pasquale and Bowers, LLP, to become
members of a new entity, which subsequently carried on the
combined practices of the two previous firms. These factual
assertions were sufficient to give rise to the reasonable
inference that petitioner had caused individuals to transfer from
existing employment with the previous two accounting firms to
similar employment with petitioner, and that – as petitioner's
members were the same individuals who had been the members and
shareholders of its predecessors – its ownership was similar to
that of the prior firms. Accordingly, there was an evidentiary
basis for the determination that petitioner was a shirt-changer
within the meaning of the 2009 legislation (compare id.).3
3
Contrary to petitioner's contention, the Commissioner was
not required to specifically reference the 2006 BAR in its
-5- 521853
Upon petitioner's appeal, the Board was permitted to
reverse the Commissioner's decertification determination only if
it found unanimously that "extraordinary circumstances [had]
occurred which would justify the continued certification of the
business enterprise" (General Municipal Law § 959 [w]). It was
petitioner's burden to establish the existence of such
extraordinary circumstances by submitting "specific factual
information (along with documentation establishing that
information) and all legal arguments" (5 NYCRR 14.2 [b]). In its
de novo determination, the Board acknowledged that it had
previously found the existence of extraordinary circumstances
warranting continued certification when other companies had
proven that no prohibited transfers of employees or assets had
occurred. Here, however, the Board found that petitioner had not
set forth "facts that would allow the Board to conclude that
[petitioner's] employees and properties were not transferred from
related entities" and, thus, had not met its burden. The record
supports the Board's determination.
In support of its appeal to the Board, petitioner submitted
an affidavit from one of its members, who described petitioner's
formation in some detail and also asserted – in brief, conclusory
terms – that petitioner's affirmative response on the 2006 BAR
was made in error, that the company was not similar in ownership
or operation to an existing or previously existing entity, and
decertification letter or otherwise set out the factual basis for
its determination. The Commissioner provided sufficient
notification by advising petitioner that its certification was
being revoked due to its failure to satisfy the shirt-changer
requirement and that it had the right to appeal the
decertification determination to the Board (see General Municipal
Law § 959 [w]; Matter of WL, LLC v Department of Economic Dev.,
97 AD3d 24, 30-31 [2012], affd sub nom. James Sq. Assoc. LP v
Mullen, 21 NY3d 233 [2013]; Matter of Hague Corp. v Empire Zone
Designation Bd., 96 AD3d 1144, 1147 [2012], affd sub nom. James
Sq. Assoc. LP v Mullen, 21 NY3d 233 [2013]). Petitioner asserted
in its appeal to the Board that it had learned from public
accounts and its advisors that the Commissioner's decertification
was based upon its affirmative response in the 2006 BAR.
-6- 521853
that it had not caused any prohibited transfers of employment or
assets. The affidavit failed to state the specific factual basis
for the assertion that the response to the 2006 BAR was
erroneous. Further, it did not set forth any facts describing
the alleged differences in ownership between petitioner and its
predecessors, nor did it provide facts establishing that
petitioner's operation differed from its predecessors in any
substantial way. Significantly, instead of providing facts or
documentation revealing that no transfers of employment had
occurred between petitioner and its predecessors or that new jobs
that had not previously existed in either of the preceding firms
had been created when the new entity was formed, the affidavit
stated that petitioner was "formed by the joining together of two
major regional accounting firms, each bringing dozens of
employees and thousands of clients together" (emphasis added).
Accordingly, we cannot say that it was irrational, arbitrary or
capricious for the Board to determine that petitioner did not
demonstrate the existence of extraordinary circumstances (see
Matter of Lyell Mt. Read Bus. Ctr. LLC v Empire Zone Designation
Bd., 129 AD3d at 146-147).
We reject petitioner's contention that its due process
rights were violated in that the revocation of its certificate
was based upon actions that were not a basis for decertification
when they were taken. The fact that the 2009 statutory standards
for the prospective retention of empire zone certification are
applicable to actions taken before the statute took effect "does
not render that statute 'retroactive' in any true sense of that
term" and does not implicate petitioner's due process rights
(Forti v New York State Ethics Commn., 75 NY2d 596, 609 [1990];
accord Matter of Lyell Mt. Read Bus. Ctr. LLC v Empire Zone
Designation Bd., 129 AD3d at 147; compare James Sq. Assoc. LP v
Mullen, 21 NY3d 233, 250 [2013]). Further, the record does not
support petitioner's contention that the Board acted arbitrarily
and capriciously by denying relief to petitioner while granting
retention certificates as to other entities. Petitioner
submitted no proof that it was similarly situated to other
entities that the Board found had not violated the shirt-changer
provision. Thus, the Board did not act irrationally in denying
petitioner's appeal, and Supreme Court correctly dismissed the
petition.
-7- 521853
Peters, P.J., Rose, Clark and Aarons, JJ., concur.
ORDERED that the judgment is affirmed, without costs.
ENTER:
Robert D. Mayberger
Clerk of the Court