Opinion
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
San Francisco County Super. Ct. No. CGC-06-456659
W. ROCKE GARCIA et al., Plaintiffs and Respondents,
FRANCHISE TAX BOARD, Defendant and Appellant.
Sepulveda, J.
The Franchise Tax Board of the State of California (FTB) appeals from a judgment entered in favor of taxpayers on their complaint for a refund of income taxes. The taxpayers owned an office building that was condemned in 1992 and they elected to defer taxation on the gain from that involuntary conversion by purchasing replacement property within three years. (26 U.S.C. § 1033; Rev. & Tax. Code, § 18031.) Taxpayers claimed they purchased replacement property from their wholly-owned corporation in 1994, within the prescribed time period. FTB denied that a timely, bona fide purchase was made. Following a bench trial, the court accepted taxpayers’ claim that they purchased replacement property in 1994, when taxpayers accepted delivery of a previously signed deed from their wholly-owned corporation and assumed the financial burdens of ownership of the property.
On appeal, FTB contends that the purchase of replacement property was not completed in 1994 but in 2000, after the prescribed time period. FTB also contends that taxpayers are judicially estopped from asserting that they purchased the property in 1994 because they continued to hold out their corporation as the owner of the property beyond 1994. Finally, FTB asserts that the court erred in awarding taxpayers attorney fees because FTB’s position in the litigation was substantially justified. (Rev. & Tax. Code, § 19717, subd. (c)(2)(B)(i).)
We conclude that there is sufficient evidence to support the trial court’s finding that taxpayers purchased replacement property in 1994, within the prescribed time period. We therefore affirm the judgment awarding a tax refund. However, we conclude that FTB’s dispute with taxpayers was reasonable and its position in the proceedings substantially justified given uncertainties in the evidence and credibility issues that were not resolved until trial. We therefore reverse the award of attorney fees.
I. facts
A. Involuntary conversion of office building
Taxpayers W. Rocke Garcia and his wife Glenda Garcia (Taxpayers) are experienced real estate developers who have built about 300 homes in the San Jose area over the last 35 years. Taxpayers operate their business, in part, through a corporation known as Garcia Development Company (GDC). Taxpayers are the sole shareholders of GDC.
Taxpayers have also owned property individually, including a commercial office building they built in downtown San Jose. In 1992, the city of San Jose condemned the office building. Taxpayers received over $3.7 million for the property, about $3.2 million of which represented a taxable gain. The tax liability on that gain was approximately $350,000.
B. Election to defer gain from involuntary conversion
On their 1992 individual tax return, Taxpayers stated their election not to recognize the gain from the involuntary conversion of their office building under Internal Revenue Code section 1033. (26 U.S.C. § 1033 (§ 1033).) Section 1033 allows a taxpayer to defer taxation on a gain from the condemnation of property provided the taxpayer purchases replacement property of a similar kind within a specified period of time. Taxpayers here had three years, or until the end of 1995, to purchase replacement property.
C. Taxpayers acquire replacement property
In the summer of 1993, Taxpayers began to consider the option of purchasing property owned by their wholly-owned corporation, GDC, as the replacement property. GDC owned a 202 acre parcel of land in Santa Clara County, known as the Mazzone property, that it intended to develop as a golf course. In 1993, GDC obtained a use permit for the development of a golf course on the Mazzone property. The proposed development of the Mazzone property triggered several lawsuits that were prosecuted from 1993 to 1997.
Section 1033 was amended in 1997 to preclude a taxpayer from purchasing replacement property from a related party, like a wholly-owned corporation, but that amendment was not operative at the time relevant here.
In November 1993, Taxpayers Rocke and Glenda Garcia “gave serious consideration” to purchasing the Mazzone property from GDC as section 1033 replacement property. Taxpayers asked a title company to prepare a grant deed transferring ownership of the Mazzone property from GDC to Taxpayers as individuals. On November 17, 1993, Rocke Garcia (Garcia), as president of GDC, signed the deed granting the property to himself and his wife for unspecified “valuable consideration.” The deed is notarized. On the line indicating the amount of documentary transfer tax, the following words are typed: “REALTY NOT SOLD—NONE DUE.” At trial, an escrow officer testified that the phrase was commonly used for purchases between related parties, which are exempt from transfer tax.
The deed was never recorded and, according to Garcia, not delivered in 1993. Garcia explained that his intention was to hold the signed deed until he consulted his professional advisors and, after doing so, decided against purchasing the Mazzone property, at least for the time being. A November 22, 1993 memorandum by Taxpayers’ accountant discusses the business structures that could be used to accomplish the purchase of the Mazzone property in the “near future.” After hearing from the accountant, Taxpayers decided to hold the November 1993 deed for a future time. At trial, Garcia testified that he maintained separate files in his office for personal and corporate matters. In November 1993, he placed the deed in GDC corporate files; he did not (as an individual) accept delivery of the deed from GDC.
A grant of real property does not take effect until it has been delivered. (Civ. Code, § 1054; Code Civ. Proc., § 1933; Miller v. Jansen (1943) 21 Cal.2d 473, 476.)
According to Garcia, the section 1033 transfer was consummated the following year, in December 1994. Taxpayers signed a promissory note dated December 31, 1994 promising to pay their wholly-owned corporation, GDC, almost $3.4 million for the Mazzone property. Interest on the purchase amount began to accrue immediately, but no payment of principal or interest was due until completion of the planned golf course. The note was secured with a deed of trust of the same date. Garcia testified that the purchase was completed when he transferred the real estate documents from himself as president of GDC to himself as an individual while alone in his office on New Year’s Eve 1994. As president of GDC, Garcia had signed the 1993 deed granting the Mazzone property from GDC to himself and his wife. On December 31, 1994, he took the deed from GDC’s corporate files and placed the deed in the couple’s personal files. Garcia then took the promissory note and deed of trust signed by himself and his wife as individuals, and placed the documents in GDC’s corporate files.
No payment was made on the note until 2007, over a decade later.
D. Record title is not transferred during land use litigation and property reassessment
The grant deed and deed of trust were not recorded, and GDC remained the record title owner of the Mazzone property. At trial, Garcia testified that he decided not to record any change of ownership in 1994 because of on-going litigation contesting development of the Mazzone property. He testified that a homeowners association, which opposed the development, was prosecuting a lawsuit that “was very ugly,” and the association “challenged everything.” A decision was made to continue the litigation in the name of GDC, and not to substitute Taxpayers as the real parties in interest who now owned the Mazzone property. Taxpayers’ attorney advised them not to amend the pleading to substitute themselves for GDC as property owners because ownership was immaterial to the use permit at issue in the litigation, and substitution would only lead to additional “depositions and examination or attempts to examine all the personal affairs of the Garcias and the workings of the Garcia Development Company.” When the land use litigation was eventually settled in May 1997, the agreement recited that GDC owned the Mazzone property. However, GDC and Garcia were both parties to the agreement, and bound by its terms concerning development of the golf course.
GDC was also the record owner of the Mazzone property during the land’s reassessment for property tax purposes. In 1997, Garcia pursued a property valuation appeal with the county assessor. He asked that the valuation be reassessed in light of land use restrictions during 1995 and 1996. As a result of that appeal, the assessed value of the Mazzone property was lowered from $1,607,404 to $707,000.
E. Financial statements and income tax returns concerning the replacement property
While record ownership of the Mazzone property remained in GDC, Taxpayers paid the property taxes and insurance on the property from their personal accounts from 1995 onward. Garcia testified that all expenses for the Mazzone property were paid personally by him and his wife after December 31, 1994. The financial statements of GDC and Taxpayers for 1995 show the Mazzone property to be an asset of Taxpayers individually, with a promissory note held by GDC.
Income tax returns filed by GDC and Taxpayers also, in large measure, reflect a 1994 transfer of the Mazzone property, but there are some discrepancies. GDC’s federal and state tax returns for 1993 and 1994 report its ownership of the Mazzone property, and the sale to Taxpayers during 1994. However, GDC reported that the sale occurred on January 1, 1994, not December 31, 1994 as Taxpayers claim. GDC accountants assert that the date listed on the tax return is wrong, and December 31, 1994 should have been listed as the date of sale. GDC’s tax return also lists the sale price as $3.1 million, which is less than the promissory note amount of almost $3.4 million. Garcia testified that his accountant put the wrong figure on the tax return. Taxpayers’ individual return for 1994 does not mention the acquisition of section 1033 replacement property, but their returns for 1995 and 1996 report expenses for the Mazzone property, which they farmed during the land use litigation. Yet, inconsistently, their 1996 return also stated that they planned to acquire section 1033 replacement property in the future, “within the next three years.”
F. Taxpayers are audited
FTB audited GDC in July 1997, and later expanded its audit to Taxpayers. In October 1997, GDC’s accountant provided the FTB with requested information on GDC’s installment sale of the Mazzone property, including the unrecorded grant deed of November 1993 and the December 1994 promissory note and deed of trust. The exact course of the audit is unclear on this record. But we do know that FTB issued a notice of proposed assessment to Taxpayers in December 1999, and later affirmed the proposed assessment for tax year 1992 in a notice of action for taxes and interest in October 2003. Taxpayers appealed the assessment to the State Board of Equalization (SBE).
G. A second grant deed is executed
Meanwhile, while the audit was in progress, another grant deed to the Mazzone property was executed, and this deed was recorded. In March 2000, Rocke Garcia, as president of GDC, signed a deed granting the Mazzone property to Taxpayers Rocke and Glenda Garcia. At trial, the parties stipulated that this grant deed was executed in order to facilitate a commercial loan to Taxpayers, with the Mazzone property as collateral for that loan. Garcia further explained in his trial testimony that the lender required that a deed be recorded, and the November 1993 deed could not be recorded because the title company would not insure an old deed executed years previously. The escrow officer with the title company likewise testified that recordation of a current deed was required for issuance of title insurance.
H. SBE appeal
In their November 2003 appeal of the income tax assessment, Taxpayers claimed that they purchased the Mazzone property from GDC as section 1033 replacement property on December 31, 1994. They asserted that they executed a grant deed (of some unstated date) but that the deed was unrecorded and could not be located. Taxpayers were represented on appeal by their accountant, Stephen Schwarz. Schwarz did not submit the November 1993 grant deed on Taxpayers’ appeal, as he did during the audit of GDC in 1997. Taxpayers later asserted (in their petition for rehearing) that Schwarz mistakenly thought that another deed had been executed in December 1994, and thus “looked in vain for a 1994 document that did not exist.” In January 2005, the SBE considered Taxpayers’ appeal and sustained the tax assessment. SBE concluded that Taxpayers “had not shown that they purchased replacement property for their involuntarily converted property within the three year period pursuant to Internal Revenue Code section 1033.”
I. Taxpayers’ SBE petition for rehearing
An attorney represented Taxpayers in their February 2005 petition for rehearing of SBE’s decision. In that petition, Taxpayers asserted essentially the same position they maintain today: that GDC signed a grant deed on November 17, 1993, and delivered the deed to Taxpayers on December 31, 1994 when the purchase was consummated. Taxpayers said Accountant Schwarz was mistaken in thinking that there was a 1994 deed used to convey the property, rather than a delayed delivery of the 1993 deed.
Accountant Schwarz died in 2004.
Taxpayers challenged FTB’s basis for concluding that they had not timely acquired replacement property. The record on appeal does not include the FTB’s statement of its conclusions, only Taxpayers’ summarization. According to Taxpayers, the FTB concluded that Taxpayers acquired the Mazzone property in November 1993 through a transfer without consideration, which therefore did not qualify as a purchase under section 1033. Taxpayers asserted that FTB was incorrect in this conclusion because the property was not transferred in 1993 since Taxpayers did not accept delivery of the deed at that time, only later when a promissory note was also executed.
FTB also reportedly asserted, as an alternative ground for its tax assessment, that even if GDC continued to own the Mazzone property after 1993, Taxpayers did not make a bona fide purchase of the property on December 31, 1994. FTB apparently questioned the sale because Taxpayers had not yet made any payments to GDC for the property; the 1993 deed included the statement “REALTY NOT SOLD”; and Taxpayers continued to hold out GDC as the true owner of the Mazzone property in the land use litigation and with the county assessor. Taxpayers attempted to refute each of these points as a basis for questioning the sale.
SBE denied the petition for rehearing in September 2005. SBE found “not credible” Taxpayers’ “new theory” that the 1993 deed was not delivered until 1994, a purported fact “unbeknownst to their former representative” who was accompanied by Garcia at the tax protest hearing. SBE also noted that Taxpayers “do not explain why the 1993 grant deed states “ ‘REALTY NOT SOLD’ ” if it is the deed transferring the Mazzone property to [Taxpayers] pursuant to their purported purchase of the property.”
J. Taxpayers pay the disputed tax and file suit for a refund
In early 2006, Taxpayers paid FTB the assessed tax of $357,009, plus interest and penalties of $824,672, and filed a claim for refund of those amounts. The claim was deemed denied as of September 30, 2006. On October 2, 2006, Taxpayers filed a complaint for refund of income taxes.
K. The trial court enters judgment in favor of Taxpayers
A bench trial was held over the course of several days in October and November 2007. In March 2008, the trial court issued its statement of decision in favor of Taxpayers. The court concluded that (1) Taxpayers purchased the Mazzone property as section 1033 replacement property on December 31, 1994, when they accepted delivery of a deed from GDC and assumed the benefits and burdens of ownership of the Mazzone property; and (2) Taxpayers were not judicially estopped from asserting ownership of the Mazzone property by their failure to declare their ownership during the land use litigation and property reassessment. The court awarded Taxpayers $1,181,186 as a refund of the taxes, interest, and penalties assessed.
Taxpayers filed a motion for attorney fees and the court granted the motion in June 2008. A prevailing taxpayer in a refund action may be awarded attorney fees. (Rev. & Tax. Code, § 19717.) However, a party will not be considered to have prevailed where “the State of California establishes that its position in the proceeding was substantially justified.” (Rev. & Tax. Code, § 19717, subd. (c)(2)(B)(i).) The court here found that FTB did not establish that its position was substantially justified. The court noted: “Plaintiffs [Taxpayers] presented strong evidence that they purchased like property. The grant deed was received in evidence and Plaintiffs demonstrated that they paid taxes on the property from the date of purchase as shown by their individual tax returns and those of the Garcia Development Corporation. For these reasons, Plaintiffs are entitled to attorneys’ fees as the prevailing party in this action.” The court awarded Taxpayers attorney fees in the sum of $222,000.
Judgment was filed on July 2, 2008, and FTB timely appealed. Briefing on appeal was completed in April 2009.
II. discussion
A. Taxpayers timely purchased replacement property
The trial court found that Taxpayers timely purchased section 1033 replacement property because there was delivery of a deed from GDC to Taxpayers on December 31, 1994 with the intent to transfer title of the Mazzone property, and Taxpayers thereafter assumed the benefits and burdens of ownership. FTB argues that this finding is not supported by substantial evidence.
“When a trial court’s factual determination is attacked on the ground that there is no substantial evidence to sustain it, the power of an appellate court begins and ends with the determination as to whether, on the entire record, there is substantial evidence, contradicted or uncontradicted, which will support the determination, and when two or more inferences can reasonably be deduced from the facts, a reviewing court is without power to substitute its deductions for those of the trial court. If such substantial evidence be found, it is of no consequence that the trial court believing other evidence, or drawing other reasonable inferences, might have reached a contrary conclusion.” (Bowers v. Bernards (1984) 150 Cal.App.3d 870, 873-874, italics omitted.)
Substantial evidence supports the trial court’s finding that Taxpayers purchased the Mazzone property on December 31, 1994: (1) Taxpayer Garcia testified that he, on that date, accepted delivery of a grant deed transferring the property from GDC and reciprocated with a secured promissory note; (2) Taxpayers paid the property taxes and insurance on the Mazzone property from their personal accounts from 1995 onward; (3) the 1995 financial statements of GDC and Taxpayers show the Mazzone property to be an asset of Taxpayers individually, with a promissory note held by GDC; (4) GDC’s federal and state tax returns for 1993 and 1994 report its ownership of the Mazzone property, and the sale to Taxpayers during 1994; and (5) Taxpayers’ individual returns for 1995 and 1996 reported business expenses for the Mazzone property.
FTB denies the sufficiency of this evidence. FTB begins by questioning the veracity of Garcia’s testimony that he accepted delivery of the grant deed while alone in his office on Saturday, December 31, 1994. FTB says it is difficult to know “when, if at all, ‘delivery’ actually took place” because the deed was signed in 1993 and Taxpayers “claim to have consummated the alleged December 31, 1994 ‘purchase,’ without any supervision, and without recording any documents.”
FTB was free to challenge Garcia’s credibility in the trial court, and did so. But the trial court believed Garcia and “an appellate court will not substitute its evaluation of the evidence or its opinion as to the credibility of the witnesses for that of the trial court.” (Romero v. Eustace (1950) 101 Cal.App.2d 253, 254.) “To warrant the rejection of the statements given by a witness who has been believed by a trial court, there must exist either a physical impossibility that they are true, or their falsity must be apparent without resorting to inferences or deductions. [Citations.] Conflicts and even testimony which is subject to justifiable suspicion do not justify the reversal of a judgment, for it is the exclusive province of the trial judge or jury to determine the credibility of a witness and the truth or falsity of the facts upon which a determination depends.” (People v. Huston (1943) 21 Cal.2d 690, 693.) Garcia’s testimony that the deed was delivered on December 31, 1994 is not physically impossible nor patently false.
Garcia’s testimony, accepted by the trial court, supports the conclusion that Taxpayers purchased the Mazzone property in 1994. As noted earlier, a deed to real property does not transfer title until it has been delivered. (Civ. Code, § 1054; Code Civ. Proc., § 1933; Miller v. Jansen, supra, 21 Cal.2d 473 at p. 476.) Delivery generally means a transfer of physical possession by the grantor accompanied by an intent to pass title. (Danenberg v. O’Connor (1961) 195 Cal.App.2d 194, 201.) Garcia testified that, on December 31, 1994, he transferred physical possession of the deed from GDC to Taxpayers with the requisite intent.
It is true, as FTB notes, that the deed was signed on November 17, 1993, and a delivered grant deed is presumed to have been delivered on the date it bears. (Civ. Code, § 1055; Miller v. Jansen, supra, 21 Cal.2d at p. 476.) Were that presumption conclusive, we would have to say that the property transfer occurred in November 1993, without any consideration, and thus without a bona fide section 1033 purchase. But the presumption is not conclusive. (Treadwell v. Reynolds (1873) 47 Cal. 171, 173-174; Sun Lumber Co. v. Bradfield (1932) 122 Cal.App. 391, 396-397.) There was contrary evidence here, which the trial court accepted. Garcia testified that he signed the grant deed in anticipation of a possible purchase of the Mazzone property in 1993 but delayed the purchase until 1994 on the advice of his professional advisors. That testimony was partially corroborated by a memorandum written by the accountant days after the grant deed was signed, discussing a “future” purchase of the Mazzone property.
FTB, in challenging evidence that a sale was consummated in 1994, notes that the deed and deed of trust were not recorded. But “[t]he failure to record does not destroy the validity of the conveyance as between the parties [citation]; and where it is explained, as it was herein, it alone has no controlling significance.” (Mecchi v. Picchi (1966) 245 Cal.App.2d 470, 485.) Garcia and his attorney testified that the deed was not recorded because Taxpayers did not want to publicly disclose a change of ownership for fear of protracting land use litigation over the property, which is a plausible explanation. The failure to record a deed, even if done deliberately to conceal its existence, does not make a deed ineffective. (Dimmick v. Dimmick (1892) 95 Cal. 323, 328.)
FTB argues that the grant deed, on its face, shows that there was no intent to sell the property because it states: “REALTY NOT SOLD.” The argument omits the complete statement as it appears on the deed, ignores the fact that the statement appears on the deed where there is a blank space on the form to indicate the amount of transfer tax due, and disregards testimony explaining the statement.
The form includes the line: “DOCUMENTARY TRANSFER TAX $______.” On this line, the following statement is typewritten: “REALTY NOT SOLD—NONE DUE.” Garcia testified that the deed was prepared by a title company. A title company escrow officer testified that the statement on the deed was commonly used in the early 1990s for purchases between related parties, which are exempt from transfer tax. The title officer said: “if the grantor and the grantee basically were comprised of the same parties, then that’s what we used to put at that time. Now we have to actually cite the R[evenue] and T[axation] code which exempts it from paying transfer tax” to the county. The escrow officer said the statement on the deed “did not reflect that this was not a true conveyance.” The trial court questioned the witness to further clarify the issue. “THE COURT: Well, so here you had a development company that was comprised of two individuals that were the purchasers, so in that factual situation, it would be common to use this language? [¶] THE WITNESS: Yes.” While the deed statement “REALTY NOT SOLD—NONE DUE” could reasonably be read to mean there was no bona fide sale, the testimony of the escrow officer sufficiently established that the statement meant that the sale was between related parties and thus exempt from county transfer tax.
One point remains unclear. The escrow officer indicated that no transfer tax would have been due on the 1993 deed because the sale was between related parties. Yet, a transfer tax was paid when the deed on the property was recorded in 2000. At trial, the escrow officer was asked why the 1993 deed recited that no transfer tax was due when transfer tax was paid on the 2000 deed. The response does not fully explain the distinction. The escrow officer said only that transfer tax was paid in 2000 because a deed and deed of trust were recorded concurrently.
Testimony from the escrow officer also refutes FTB’s argument that the execution of a second grant deed on the Mazzone property in 2000 demonstrates that no actual sale occurred in 1994. FTB asks on appeal, why is there a 2000 deed if the property was really sold in 1994? Taxpayer Garcia and the escrow officer both answered that question at trial. Garcia explained that the lender on new construction financing for the golf course required that a deed be recorded, and the November 1993 deed could not be recorded because the title company would not insure an old deed executed years previously. The escrow officer with the title company confirmed that recordation of a “current deed” was required for issuance of title insurance. At trial, FTB effectively admitted that the 2000 deed was for purposes of expediency alone. The parties stipulated to a series of undisputed facts, including the following fact: “In May[actually, March] of 2000, a Grant Deed to the Mazzone Property was executed by GDC, naming the Garcias as grantees. The Grant Deed was executed in order to facilitate a commercial loan to the Garcias, with the Mazzone Property as collateral for that loan.” There is no evidence that the deed was executed for any purpose other than to facilitate a loan.
Finally, FTB argues there is insufficient evidence that Taxpayers bought the Mazzone property in 1994 by delivering the 1993 deed because, during administrative proceedings, Taxpayers took the inconsistent position of “insist[ing]” that the sale was accomplished by a 1994 deed. FTB has not accurately portrayed the events as they appear in the record on appeal. Taxpayers always maintained, in administrative and court proceedings alike, that they bought the Mazzone property on December 31, 1994. In the SBE appeal, Taxpayers’ accountant produced the promissory note secured by a deed of trust but said he could not locate the grant deed. The accountant never said there was a 1994 deed, only that the executed deed (of an unspecified date) could not be located. In a petition for rehearing, Taxpayers’ attorney presented the 1993 deed as the operative deed and speculated as to the accountant’s failure to present it at the Taxpayers’ meeting with FTB. The attorney explained that the accountant “Mr. Schwarz was working with facts that had occurred roughly 7 ½ years prior to the meeting. He apparently recalled (incorrectly) that GDC had executed a new grant deed in favor of the [Taxpayers] in December of 1994. Mr. Schwarz looked in vain for a 1994 document that did not exist. A grant deed was delivered by GDC to the [Taxpayers] on December 31, 1994, but GDC did not execute a new grant deed. There was no need to execute a new grant deed. Rather, GDC delivered to [Taxpayers] the Deed that had been executed in 1993.” (Underlining in original.)
With this full account of the facts we see that Taxpayers did not “insist that there was a Grant Deed dated December 31, 1994 that supported the alleged ‘sale’ on that date,” as FTB argues. Taxpayers said only: (1) there was a deed of an unspecified date that supported the 1994 sale; and (2) Taxpayers’ accountant may have mistakenly thought the deed was from 1994 when it was really from 1993. These statements in administrative proceedings are not totally inconsistent with their position here. There are, however, some discrepancies revealed in the administrative proceedings. Notably, Garcia was at the 2002 FTB meeting when the deed was requested and he did not offer the 1993 deed, yet recalled the deed and the details of its delivery with perfect clarity at the 2007 trial. Of course, a witness’s recollection may be refreshed by subsequent events, and it is not our place to reweigh the evidence or evaluate credibility. (Romero v. Eustace, supra, 101 Cal.App.2d at p. 254.) Taxpayers’ failure to produce the 1993 deed until the SBE petition for rehearing raises no more than credibility issues within the province of the trial court.
B. Judicial estoppel is inapplicable
As we noted above in our statement of facts, the grant deed and deed of trust were not recorded, and GDC remained the record title owner of the Mazzone property until 2000. Land use litigation concerning the Mazzone property continued in the name of GDC, and GDC also remained the title owner during a property tax reassessment. On appeal, FTB argues: “Because [Taxpayers] asserted that GDC owned the Mazzone Property throughout the land use litigation, which ended in 1997, and in the reassessment proceedings in 1998, they are judicially estopped from now asserting that they purchased that property from GDC on December 31, 1994.”
“ ‘ “ ‘Judicial estoppel precludes a party from gaining an advantage by taking one position, and then seeking a second advantage by taking an incompatible position. [Citations.]...’ ” [Citation.] The doctrine [most appropriately] applies when: “(1) the same party has taken two positions; (2) the positions were taken in judicial or quasi-judicial administrative proceedings; (3) the party was successful in asserting the first position (i.e., the tribunal adopted the position or accepted it as true); (4) the two positions are totally inconsistent; and (5) the first position was not taken as a result of ignorance, fraud, or mistake.” ’ ” (MW Erectors, Inc. v. Niederhauser Ornamental & Metal Works Co., Inc. (2005) 36 Cal.4th 412, 422.) “[J]udicial estoppel is an equitable doctrine, and its application, even where all necessary elements are present, is discretionary.” (Ibid., italics omitted)
The trial court here found judicial estoppel inapplicable: “This court finds that the failure to change the caption of the ‘use litigation’ by [Taxpayers] to show that title changed on December 31, 1994 from GDC to [Taxpayers] was entirely unrelated to the issues presented in the Santa Clara County use litigation matter and therefore judicial estoppel does not apply. [¶] The court additionally finds that the failure to change the ‘record owner’ on the Santa Clara Assessor’s role by [Taxpayers] was simply the result of not recording the Grant Deed, which act was not required by law.... There was no fraud on, or prejudice to, the county and no advantage gained by [Taxpayers]. In fact, the evidence was uncontroverted that the ownership has nothing to do with determining assessed valuations and [Taxpayers] in fact paid the real property taxes individually on the Mazzone Property after December 31, 1994.”
Substantial evidence supports the trial court’s findings. Taxpayers’ attorney testified that he advised them not to amend the pleading to substitute themselves for GDC as property owners in the land use litigation because ownership was immaterial to the use permit at issue in the litigation, and substitution would only protract the litigation with additional depositions and attempts to examine the Taxpayers’ personal affairs. The attorney explained that substitution of the parties was unnecessary because ownership of the property was not an issue in the litigation; only the use of the property was at issue. The attorney testified that the case concerned a use permit and “use permit approval goes to the land. It examines the land. It extracts conditions. It imposes limitations.” In that respect, the attorney maintained, “it’s really not important if Garcia Development Company owns it, the individuals own it, some charitable organization owns it. We’re looking at the land.” Whether GDC or Taxpayers individually were listed as owners of the property in the litigation “was of no materiality.” The attorney said Taxpayers obtained no legal advantage from maintaining GDC as the litigation party and, when the time came to settle the case, both GDC and Garcia signed as parties to the agreement, and were bound by its terms concerning development of the golf course. On appeal, FTB offers no evidence that Taxpayers obtained any advantage in the land use litigation aside from avoiding “additional and costly litigation activity.” The trial court reasonably concluded that a collateral and incidental benefit of that nature does not constitute an unfair advantage sufficient to invoke judicial estoppel.
As to the reassessment process, there is no evidence that Taxpayers obtained any advantage by keeping GDC as the record owner during the property reassessment. In 1998, the assessed value of the Mazzone property was reduced from $1.6 million to $707,000 based on the limited use of the property during 1995 and 1996, when the property was subject to permit restrictions. The ownership of the property—whether owned by GDC or Taxpayers individually—was immaterial to the property reassessment.
On appeal FTB argues that “the issue of ownership is always material” in reassessment proceedings because a change of ownership “is an Assessor’s trigger for reassessment.” The argument is undercut by FTB’s later acknowledgement, in a footnote, that transfers of property between shareholders and their wholly-owned corporation are generally not deemed a change in ownership, and therefore do not trigger reassessment. (Rev. & Tax. Code, § 62, subd. (a)(2).) Despite that acknowledgement, FTB proceeds to boldly assert that GDC obtained a reduction in property taxes “[a]s a result” of Taxpayers’ “deception” in concealing their purchase of the property. But there is no evidence that the alleged deception had anything to do with the property tax reduction. The evidence shows that the reduction in property tax was a result of restricted use of the property, not a result of the undisclosed ownership of the property.
C. Taxpayers are not entitled to an award of attorney fees
In a lawsuit against the State of California for a tax refund, a prevailing taxpayer may be awarded attorney fees. (Rev. & Tax. Code, § 19717, subd. (a).) However, a taxpayer “shall not be treated as the prevailing party in a [tax refund] proceeding... if the State of California establishes that its position in the proceeding was substantially justified.” (Rev. & Tax. Code, § 19717, subd. (c)(2)(B)(i).)
“California cases have defined a ‘substantially justified’ position to mean one which is justified to a degree that would satisfy a reasonable person, or ‘ “has a ‘ “reasonable basis both in law and fact.” ’ ” ’ ” (Wertin v. Franchise Tax Bd. (1998) 68 Cal.App.4th 961, 977.) This District Court of Appeal has stressed that “the FTB’s position need not be the one accepted by the trier of fact. So long as the position is one that a reasonable person could think is correct, it may be substantially justified even in the face of conflicting evidence.” (Fujitsu IT Holdings, Inc. v. Franchise Tax Bd. (2004) 120 Cal.App.4th 459, 487.) If FTB’s position is one upon which “reasonable minds” can differ, its position is substantially justified. (Lennane v. Franchise Tax Bd. (1996) 51 Cal.App.4th 1180, 1189.)
A lack of substantial justification has been found where FTB acted hastily and carelessly in issuing a notice of proposed tax assessment without reviewing the taxpayer’s returns. (Wertin v. Franchise Tax Bd., supra, 68 Cal.App.4th at p. 978.) In another case, FTB’s position was held not to be substantially justified where “there was virtually no factual support for the legal theory advanced.” (Fujitsu IT Holdings, Inc. v. Franchise Tax Bd., supra, 120 Cal.App.4th at pp. 487-488.) In contrast, FTB’s position has been held to be substantially justified where there was a split of legal authority on the matter. (Lennane v. Franchise Tax Bd., supra, 51 Cal.App.4th at p. 1189; accord McDonnell Douglas Corp. v. Franchise Tax Bd. (1994) 26 Cal.App.4th 1789, 1798-1799 [interpreting an analogous fee provision].)
Federal courts, which operate under a similar attorney fee provision, have held that a tax agency’s position is substantially justified where there is documentary support for the agency’s position and resolution of the case rests upon oral explanations and the court’s determination of witness credibility. (Creske v. Commissioner of Internal Revenue (7th Cir. 1991) 946 F.2d 43, 45; In re Burch (Bankr. E.D.Okla. 1993) 163 B.R. 854, 856; see Wertin v. Franchise Tax Bd., supra, 68 Cal.App.4th at p. 978 [noting applicability of federal cases].)
The trial court here found that FTB’s position was not substantially justified, and awarded Taxpayers $222,000 in attorney fees. We conclude that the court abused its discretion in making that finding. (See Tetra Pak, Inc. v. State Bd. of Equalization (1991) 234 Cal.App.3d 1751, 1764 [review standard].) The court based its ruling on the following: FTB “did not establish that its position in this proceeding was substantially justified. [Taxpayers] presented strong evidence that they purchased like property. The grant deed was received in evidence and [Taxpayers] demonstrated that they paid taxes on the property from the date of purchase as shown by their individual tax returns and those of the Garcia Development Corporation. For these reasons, [Taxpayers] are entitled to attorneys’ fees as the prevailing party in this action.”
The trial court mistakenly viewed the case in hindsight. Having decided that Taxpayers presented strong evidence at trial that they purchased the Mazzone property, the court concluded FTB’s position in the proceeding was not substantially justified. But the relevant inquiry is not whether FTB ultimately prevailed in its position, but whether a reasonable person could think its position was correct at the outset of trial. (Fujitsu IT Holdings, Inc. v. Franchise Tax Bd., supra, 120 Cal.App.4th at p. 487.)
While the court’s fee order notes certain documentary evidence in Taxpayers’ favor (the grant deed and tax returns), that evidence was far from conclusive. The grant deed did not definitively show that the property was purchased on December 31, 1994. In fact, the deed is dated November 17, 1993, and delivered deeds are statutorily presumed to be delivered on the date they bear. (Civ. Code, § 1055.) It is only Garcia’s testimony, and the court’s acceptance of the veracity of that testimony, that establishes a 1994 purchase date. The grant deed, as evidence of a 1994 sale, is also confusing in stating on its face, “REALTY NOT SOLD.” The statement on the deed required the testimony of an escrow officer to clarify its meaning and the meaning remains less than crystal clear. The validity of the 1994 deed was also put into question by the execution of a 2000 deed making the same conveyance, a circumstance that was not fully explained until trial.
The tax returns were likewise open to differing interpretations. While GDC’s federal and state tax returns for 1993 and 1994 reported its ownership of the Mazzone property, and the sale to Taxpayers during 1994, GDC inconsistently reported that the sale occurred on January 1, 1994, not December 31, 1994 as Taxpayers claim, and the return listed a different sales price than does the deed of trust. There is also an inconsistency in the Taxpayers’ individual returns. The individual returns for 1995 and 1996 reported expenses for the Mazzone property, yet Taxpayers’ 1996 return also states that they had not yet acquired replacement property and planned to do so “within the next three years.”
There are other facts that made it reasonable for FTB to challenge Taxpayers’ claim of a 1994 purchase, including Taxpayers’ assertion in land use litigation that GDC remained the owner of the Mazzone property through 1997. We have outlined above the complicated series of facts that was presented to the trial court on the issue of whether Taxpayers acquired the Mazzone property in 1994, and will not repeat them here. It is enough to note that the facts are complicated, and Taxpayers’ claimed purchase a hotly contested matter.
We conclude that FTB’s dispute with Taxpayers was reasonable and its position in the proceedings substantially justified given uncertainties in the evidence and credibility issues that were not resolved until trial. Taxpayers are not entitled to any attorney fees. We therefore need not reach FTB’s claim that the trial court erred in awarding fees at an hourly rate in excess of the presumptive statutory maximum. (Rev. & Tax. Code, § 19717, subd. (c)(1)(B)(iii).)
III. disposition
The judgment is reversed on its award of attorney fees of $222,000. In all other respects, the judgment is affirmed The parties shall bear their own costs and attorney fees incurred on appeal.
We concur: Reardon, Acting P.J., Rivera, J.