After a contentious 12-year battle with the California Franchise Tax Board, culminating with a lopsided victory at trial, Reed Smith has now achieved total vindication for Orange County real estate entrepreneur Ron Lane in Daniel V, Inc. v. Franchise Tax Board (Case No. BC457301). As previously reported, on April 11, 2013, the court entered judgment in favor of Daniel V for almost $2.3 million, finding that it was commercially domiciled in Nevada for 1997 and 1998, so the income at issue was not taxable in California. As a result of the lopsided nature of the evidence presented, as well as questionable FTB conduct, Reed Smith filed a motion for attorneys’ fees. On June 14, 2013, Los Angeles County Superior Court Judge Mark V. Mooney heard oral argument on the motion and agreed—ruling that Daniel V was entitled to an award of roughly $1.2 million in fees and costs. Judge Mooney found that the FTB’s position was totally lacking in merit and expressed disappointment with FTB’s treatment of the taxpayer throughout the course of the controversy.
Reed Smith brought the motion under Revenue and Taxation Code section 19717, which authorizes an award of fees when the FTB takes positions in tax controversies that are not "substantially justified." The primary issues in the motion were whether the FTB’s position was in fact substantially justified, and if it was not, whether special factors existed to justify an award of fees at a rate in excess of the $160 statutory rate. First, the court found that the FTB’s position was not substantially justified based on the overwhelming evidence showing that Daniel V was commercially domiciled in Nevada. Although the FTB argued that the court was improperly weighing the evidence presented in this case, the court emphasized that it fully considered all of the evidence, but that the FTB’s evidence was very weak and led only to speculation that Daniel V was managed and directed from California, especially when compared with the voluminous documents and extensive witness testimony that Daniel V offered at trial. The court stated that, given the lack of evidence supporting the FTB’s position, this case should have been resolved years ago.
Moreover, Judge Mooney concluded that special factors existed in this case and thus, Daniel V was entitled to an award of fees at market rates for work performed at the administrative and trial court levels. The court agreed with Daniel V that this case required experienced counsel with expertise in the California corporate franchise tax, and stated that Reed Smith skillfully presented the issues to the court at trial. Marty Dakessian, who served as lead counsel for Daniel V, issued the following statement: "We are so thrilled to have vindicated our client’s rights and provided some measure of restitution. Daniel V’s shareholder, Ron Lane and corporate president David Hehn are both incredibly forthright individuals who deserved better from our tax agencies. These agencies failed them and we are ecstatic that the justice system has held the government accountable."
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 http://www.reedsmith.com/catax/.
Client Alert 2013-166