After a contentious 12-year battle with the California Franchise Tax Board, which culminated in a Los Angeles Superior Court bench trial last November, Reed Smith attorneys Marty Dakessian, Brian Toman, Scott Jacobs, Shirley Wei, and Mike Shaikh secured a win for Orange County real estate entrepreneur Ron Lane in Daniel V, Inc. v. Franchise Tax Board (Case No. BC457301). On February 6, 2013, the court issued its tentative and proposed statement of decision and ordered the FTB to refund to Daniel V almost $2.3 million, representing all taxes, interest, and penalties paid for 1997 and 1998. The court found that Daniel V, a Nevada corporation, established that it was commercially domiciled in Nevada for 1997 and 1998, so the income at issue was not taxable in California. The court also ordered the FTB to pay interest on those amounts and awarded costs and fees to Daniel V.
The primary issue in the case was whether Daniel V was commercially domiciled in California or Nevada. At trial, Daniel V produced direct, uncontroverted evidence that it maintained its corporate office, bank accounts, brokerage accounts, and original books and records in Nevada. Furthermore, the court found that such evidence established that all Board of Directors meetings were held in Nevada and that Daniel V’s president, who was a resident of Nevada, signed all of Daniel V’s checks and handled all of its expenditures and business affairs from Nevada.
In addition, the court found that the FTB failed to produce any direct evidence to support its contention that Daniel V’s sole shareholder actually managed and directed Daniel V from California, and that the FTB’s case consisted entirely of circumstantial evidence. Although the FTB asked the court to draw the inference that the shareholder managed and directed Daniel V from California based solely on the questionable circumstantial evidence it presented, the court ultimately concluded that the "evidence was simply insufficient to draw any such inference, particularly in the face of the direct evidence to the contrary."
Marty Dakessian, lead counsel for the taxpayer, dedicated the win to the late Barbara Alby, member, State Board of Equalization, District 2, and Assembly member, District 5: "I spoke with Barbara about one month before she passed last December and I told her how much I appreciated her friendship and how much she meant to me. We spoke about this case and she said that she was absolutely certain we were going to win because the FTB had no evidence whatsoever to justify its position, while we had compelling evidence of Nevada domicile. I know she is smiling. This one’s for Barbara. Rest in peace, my friend."
For more information on the Daniel V case and other tax cases pending in California, contact the authors of this Alert or another member of the Reed Smith State Tax Group. For more information on Reed Smith’s California tax practice, visit www.reedsmith.com/catax.
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Client Alert 2013-040