Lennane

Section 19717 of the Revenue and Taxation Code (unspecified section references are to that code) grants the court in a tax refund action the discretion to award taxpayers their reasonable litigation costs if they prevail and the position of the State of California in the proceeding was “not substantially justified” (subd. (c)(2)(A)(i)). We hold in this refund action against the Franchise Tax Board (FTB) that prevailing parties James P. and Susan K. Lennane (taxpayers) were properly denied litigation costs in appellate litigation because, as the superior court found, FTB’s position was substantially justified.

Background

The genesis of this appeal is recounted in the Supreme Court’s decision in Lennane v. Franchise Tax Bd. (1994) 9 Cal.4th 263 [ 36 Cal.Rptr.2d 563 , 885 P.2d 976 ] (Lennane). The underlying dispute was whether former section 17063.11, which exempted from income preference the capital gains from sales of certain small business stock, applied to stock acquired on or before September 16, 1981, the statute’s effective date. Taxpayers sold such stock in 1986 (before a 1987 repeal of the section), claiming the exemption. In October 1991, after a notice of…