MILAN — Members of Italy’s tax police force and the Internal Revenue Agency took the stand Wednesday in a hearing in the trial of Domenico Dolce and Stefano Gabbana, who are charged with omitted and unfaithful earnings declarations. For the first time, Dolce’s brother and board member, Alfonso Dolce, and managing director and board member Cristiana Ruella, who are also defendants, attended the five-hour hearing.

This story first appeared in the January 31, 2013 issue of WWD.  Subscribe Today.

The defendants have denied the charges.

The morning session mainly revolved around the 2004 sale of the Dolce & Gabbana and D&G brands to the designers’ Luxembourg-based holding company, Gado Srl. Antonio Fusco, a marshal of the Guardia di Finanza, an Italian police force under the authority of the national minister of economy and finance, said the tax police considered Gado essentially a legal entity used to avoid higher corporate taxes in Italy. “We believe Gado was managed in Italy,” said Fusco, citing several e-mails — dating back as far as 2004 — that were found on Ruella’s computer in Dolce & Gabbana’s Milan headquarters in 2007. He compared the tax rate in Italy, at around 45 percent, with that of Luxembourg at 4 percent.

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Investigations also focused on the price tag of the brands, pegged at 360 million euros, or $484.4 million at current exchange, which tax police colonel Danilo Cardone believed to be “below market value,” which he estimated at 1.1 billion euros, or $1.4 billion. Cardone said the report by PricewaterhouseCoopers requested by the designers to set a price for the brands was believed to have “no foundations” by the police as it did not take into account the lower tax charges expected in Luxembourg and the potential increase in royalties over a 15-year period.

Cardone said the police based the 1.1 billion euro value on calculations determined by the leading consultancy Interbrand. He underscored that the police believed Gado was controlled by another Luxembourg-based company belonging to the designers. “The transaction took place within the same group and only apparently with a third party,” he said.

The designers’ lawyer, Massimo Dinoia, opposed the testimony and asked judge Antonella Brambilla to overrule the statements. He said Cardone and Fusco were acting as “witnesses and not consultants,” and also opposed the “interpretations” of the e-mails found on Ruella’s computer. Dinoia demanded to know whether the contract between Dolce & Gabbana Srl and Gado had been read and whether checks had been made on board meetings being held in Luxembourg. He pointed to “a verticalization” of the designers’ company initiated in 1999.

A former employee of the Internal Revenue Agency confirmed that the designers paid 90 million euros, or $121 million, in taxes and fines in 2007 for 2004-07 as part of a separate probe.

Two more hearings are scheduled for Feb. 6 and Feb. 20.

Prosecutor Gaetano Ruta said he was “quite confident” about a successful outcome. Asked if there was a possibility for the designers to come and take the stand, he said “they could be asked to, but doubt[ed] they would.”