MILAN — Domenico Dolce and Stefano Gabbana could be personally liable for more than a billion dollars in unpaid taxes and fines, following an investigation by Italian police, although the two designers deny any wrongdoing.

This story first appeared in the May 26, 2009 issue of WWD. Subscribe Today.

A spokeswoman for Italy’s excise and revenue police confirmed Monday it had recommended the country’s fiscal agency charge the designers with tax evasion and abuse of rights and fine them 800 million euros, or $1.12 billion. She declined to give more details.

Dollar figures were converted at average exchange rates for the periods to which they refer.

Dolce and Gabbana issued a vehement denial of the allegations, which relate to the 2004 sale of the Dolce & Gabbana and D&G brands to the designers’ Luxembourg-based holding company Gado Srl.

“It’s a paradox! Since when does one have to pay taxes on money one never actually collected?” the designers said in a personal statement. “It’s an absurd demand based on a completely abstract calculation. This higher taxable sum…is a virtual figure we have never received, the result of a theoretical accounting exercise.”

According to Dolce and Gabbana, the police claims are based on “the mistaken interpretation” of a regulation, which enables the tax authorities to replace the sum actually paid with a hypothetical market value.

“This claim, far from offering an opinion of the actual facts, describes only the interpretation of a guideline,” the statement read. “[The] said allegation constitutes only an invitation to the [tax office] to examine the legal basis of that thesis, and will translate in a payment request for Mr. Dolce and Mr. Gabbana only in case [the] said thesis is proven. If this happened, [the designers] would be facing a blatant violation of the principle of contributory capacity…as the request would then be for taxation of unearned income.”

Dolce and Gabbana explained they had “only actually received 360 million euros,” or $447.8 million, from the transaction and had declared and paid everything that was owed to the fiscal authorities. They said that if the police’s calculations were correct, their brands would have been worth 1.1 billion euros, or $1.37 billion, in 2004.

“We wish!” the designers scoffed. “We will tell the 3,800 employees of the companies, which compose the group, that we have paid all that was due and that we will strenuously defend ourselves to avoid being unjustly forced to pay for something that never existed in the first place.”

For the fiscal year ended Mar. 31, 2008, Dolce & Gabbana Holding Srl reported a 61 percent decline in net profits to 58.9 million euros, or $83.5 million, on revenues, which gained 21 percent to 1.27 billion euros, or $1.8 billion. The drop in earnings includes a 76 million euro, or $107.7 million, extraordinary payment at Gado.

The personal allegations follow a separate criminal probe into supposed tax irregularities at the Dolce & Gabbana group, which WWD understands is ongoing. As reported last year, fiscal authorities alleged in March the firm owed more than 125 million euros, or $175 million, in unpaid taxes and fines relating to Gado. The police are understood to consider Gado essentially a legal entity, allegedly used to avoid higher corporate taxes in Italy.

A spokesman for Dolce & Gabbana declined to comment on the matter.